The Financial Conduct Authority (FCA) announced its new open-ended fund specifically for investing in illiquid assets, but the industry is split on the launch.
The Financial Conduct Authority (FCA) has launched an open-ended investment fund structure to enable more access to long-term illiquid assets.
Long-term asset funds (LTAF) are specifically designed for investment into illiquid assets such as venture capital, private equity, private debt, real estate and infrastructure.
The LTAFs will come into force on November 15th and will initially be available to sophisticated and high-net-worth investors for use in their defined contribution (DC) pension schemes.
One of the key factors to these funds is that investors must give a minimum 90-day notice period for withdrawals. This addresses the mismatch between redemption terms and the liquidity of some of the funds’ assets, something that the Bank of England had previously identified could “create a potential systematic risk”.
This has been brought to light by the open-ended property sector, where most funds were forced to suspend dealing as withdrawals piled in quicker than the portfolios could sell their properties to realise cash and pay back their investors.
The FCA said in the report: “There will be a minimum 90-day notice period for withdrawals. Without it, some long-term projects with good potential returns may not happen.”
Reaction from the industry has been varied, however. Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said that investing in illiquid assets offered a “huge opportunity” for investors to boost their pension pots, but added if this structure was to work it was critical that investors fully understood what they were investing in and what their rights were.
Morrissey added that she welcomed the FCA’s decision to put some time between the initial rollout and expanding it to other retail investors, saying “it is important to take the time to get this right”.
Laith Khalaf, head of investment analysis at AJ Bell, said that he expected property funds would follow suit on the 90-day redemption period.
He noted that the FCA’s plans for the open-ended property sector were absent from the announcement, but that data from the Investment Association (IA) found that the UK Direct Property sector had more than halved in two years, from £20.1bn in September 2018 to £9.1bn today.
The product would address the institutional market primarily, but Khalaf noted that this is not a part of the market where long-notice periods have previously been an issue.
“It’s likely that mandatory notice periods would lead to further outflows, and seriously undermine the viability of the open-ended property sector going forward,” the analyst said.
“The FCA has now provided the regulatory framework for such funds, but the asset management industry still needs to build successful products at a reasonable price.”
Richard Stone, chief executive of the Association of Investment Companies (AIC), said his main fear was the 90-day redemption period not being long enough, particularly in periods of “stressed markets.
“If too short, this could threaten the long-term resilience of the LTAF,” he said, noting that it will be a tough challenge for managers to set suitable notice periods, especially if the structure itself incorporates leverage.
“It is difficult to see how investors can be assured there won’t be a run on an LTAF’s liquidity when market sentiment turns negative,” Stone said.
Kyle Caldwell, collectives specialist at interactive investor (II), agreed with Stone, noting that “90 days is no time at all in a liquidity crisis”.
The firm also questioned why wealthy investors were being warranted special treatment, while adding there were concerns that there were already talks of opening this out to wider retail investors.
Indeed Caldwell said that although the LTAF idea is sensible, it is untested and does not address how the new structure gets around the existing shortcomings of open-ended funds investing in illiquid assets.
He said it was a “halfway house between open-ended funds in their current form and an investment trust, as they are seeking to limit daily withdrawals, but without putting a limit on how much can be invested on a daily basis”.
He added that investment trusts remained a safer and more logical way for retail investors to gain access to illiquid assets.
Nikhil Rathi, chief executive of the FCA, said: “If this innovative fund structure, created by our rules, is taken up by the asset management industry, it may provide alternative routes to returns for investors, while supporting economic growth and the transition to a low carbon economy.”
While current market conditions look relatively benign, Anthony Luzio says this is the perfect time to think about your post-sell-off strategy.
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The Japanese equity market is set for blockbuster earnings in the coming few quarters thanks to its economic re-opening, says Comgest’s Richard Kaye.
Japan’s re-opening has already begun and the market is set for a series of blockbuster earnings over the next few quarters, according to FE Alpha Manager Richard Kaye.
Much like the UK stock market, which rallied as the economy re-opened and cash started flowing into businesses again, Japan could be on track to experience a similar phenomenon with a two-quarter delay.
At the end of September, Japan announced the end of its nationwide coronavirus emergency and lifted all restrictions. Before that, Japan’s vaccination rate lagged most of the other developed nations.
This has been somewhat reflected in the country’s stock market, which has lagged the other major regions year-to-date.
Performance of MSCI Japan v other major regions ytd
Source: FE Analytics
Kaye, who manages the £3.4bn Comgest Growth Japan fund, attributed the relative underperformance of Japan to other major regions to the lack of the re-opening benefit.
“That story ended roughly in the summer when Japan's vaccination rates started to accelerate,” he said.
As such, he expects the upcoming quarter in Japan will be “a monster quarter” for companies’ earnings.
“Physical traffic on the high street and the re-opening of restaurants, events and travel has started up again. What you experienced in the UK earlier this year, we're getting in Japan with a two-quarter lag.”
As such, he has positioned his fund to “disproportionately” benefit to the reopening.
He said: “We have a number of stocks that are directly geared to the story – Japan's largest stamp sushi restaurants, Japan's airport operator, Tokyo Disneyland and a number of other stores and operators that depend on physical traffic.”
However, many investors may still be about to miss out. Following the 1980s bull market burst, Japanese equities fell 82% over a span of 20 years and Kaye said investors have largely forgotten about the region as a whole, and favoured the growth of China and the rest of Asia instead.
But he argued that Japan is actually “the platform for investing in Asia”.
“The growth of Asia's economy, the growth of Asia’s consumer, Asia’s industry is supplied by Japan,” he said.
“It's Japanese consumer brands that Asian consumers increasingly are looking for, its Japanese technology that's powering a lot of the innovation of Asian industry.
“We’re called the Japan fund, maybe we should be called an Asia fund because a lot of our growth comes from Asia.”
Kaye also said the Japanese economy and the Japanese equity market are not as related to each other as most investors would perceive – meaning they don’t have the same baggage.
He said: “The GDP stories of Japan, the ageing society of Japan, even the political issues, don't really affect what Japanese companies if they are exposed outside of their own country.”
Investors who avoid Japan because they have negative perceptions over the country’s demographics or its sovereign debt situation, are ignoring the hidden opportunities that can lurk in Japanese markets, he added.
He contrasted this to the US equity market where investors don’t pay as much attention to the country’s GDP or demographic situation.
In Japan, investors are more actively concerned about these matters and can be discouraged by its poor demographics or GDP. However, he said this presents a "big opportunity" for investing in Japanese companies.
To add to this, Kaye said the Japanese stock market index captures “a lot of dinosaur industries”.
“The Japanese index has a large weighting in banks, which probably in a generation won't even exist as companies,” he said.
Mitsubishi UFJ Financial Group makes up one of the top-10 constituents of the MSCI Japan index. The largest constituent is car manufacturer Toyota Motor Corp.
Kaye continued: “It has a large weighting in automobile companies which have never covered their cost of capital. It has heavy machinery companies, real estate companies, shipping companies – which other advanced economies don't even have any more.
“Japan still has those and they are still big index weights.” This is why he believes the index is the “wrong thing to look at” when investing in Japan.
The Comgest Growth Japan fund has delivered a top-quartile total return of 71.7% over the past five years, compared to 37.8% from the average IA Japan peer and 29.7% from the TSE TOPIX index benchmark.
Performance of fund versus sector & benchmark over 5yrs
Source: FE Analytics
Richard Kaye manages the fund alongside FE Alpha Managers Chantana Ward and Makoto Egami.
It has an OCF of 0.9%.
The Link Dividend Monitor has also upgraded forecasts for the remainder of the year.
An improving economic picture, strong dividends from miners and a return to payouts from the banks will have been welcome news to income investors in the third quarter of 2021, according to the latest Link Dividend Monitor.
UK dividends rose to £34.9bn in the three months between July and September, up 89.2% year-on-year. Underlying payouts were 52.6% higher than a year ago at £27.7bn, while there was also an unexpected surge in special dividends at £7.2bn.
Double was paid out in specials during the third quarter than would typically be distributed over an entire year, the report said.
Link Group said that the “extremely strong” quarter meant the forecast for 2021 was upgraded, with headline dividends of £93.2bn now anticipated, up from £79.5bn in the second-quarter report.
Source: Link Dividend Monitor
As such, it has brought forward the timeline for dividends to return to their pre-pandemic highs by a year, suggesting they could be back by 2024, rather than the previously estimated 2025.
However, Ian Stokes, managing director of corporate markets UK and Europe at Link Group, warned that next year would be tougher for income investors banking on a UK dividend recovery.
“Commodity prices have come down sharply recently which makes it likely the big mining groups’ dividends will be lower next year. Special dividends will be much more normal in 2022 too,” he said.
This is compounded by the loss of two key dividend payers – mining group BHP, which is to de-list this year, and WM Morrisons, which is being taken private.
“With banks returning to strength and other sectors continuing to recover we still expect growth in 2022, but dividends will face headwinds rather than enjoy 2021’s strong, but blustery following breeze,” he added. According to link, dividends will be between £85bn and £89bn in 2022.
The latest third-quarter figure is yet to get back to 2019 levels – it is only slightly higher than in 2018 – but there were bright spots. Miners accounted for three quarters of the additional payouts as higher commodity prices led to record profits.
Companies from the sector paid out £12.8bn during the quarter, suggesting that by the end of the year £1 of every £4 of dividends will have been paid by the miners.
However the industry is cyclical and companies are no longer operating progressive dividend policies. The report noted that payouts will therefore “rise and fall with the commodity cycle”.
Stokes said that this raises an “amber warning” for 2022, highlighting that iron ore prices halved during the third quarter, while other metals were also lower.
Elsewhere, banking dividends made a large contribution as many that were still banned by the regulator from making payments last year have now returned.
The seven-year high for oil prices also boosted the oil giants. Royal Dutch Shell has already restored its dividend to half its former level, up from a third at the beginning on the year. The report suggested rising energy prices could add a further £800m in UK dividends as a result.
There was also a bounce in dividends from retailers. The main boost came from Kingfisher, although there are still a number of firms that have yet to return to paying an income.
At the other end of the spectrum, most companies in the travel and leisure sector continue to hold back their dividends, while BT – usually a large dividend payer – has yet to return, although has made plans to do so.
Some market commentators are backing Richard Watts’ mid-cap fund, while one has put it ‘on watch’ following a recent bad run of performance.
Fund pickers are mixed on the upcoming fortunes of the Jupiter UK Mid Cap fund after a recent run of poor performance, has plummeted it to the bottom of the rankings this year.
Indeed, after a strong 2020 in which the fund registered the 10th best returns in the IA UK All Companies sector, it has failed to replicate that form in 2021, dropping to the fourth quartile among its peers.
This combination means that one year returns look poor, with the portfolio ranked 205th out of 252 funds.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
The main root of this underperformance has been that some of the fund’s ‘Covid winners’ have come off the boil since lockdowns ended.
However, the portfolio has been one of the best performers in the sector over the long-term, coming through as fourth best among its 200 peers over 10 years.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
So is this a blip, or are there ongoing concerns? Laith Khalaf, head of investment analysis at AJ Bell, said that the fund had been hit by a handful of stocks, including fashion brands Boohoo and ASOS and e-commerce company The Hut Group.
The fund’s FE fundinfo Alpha Manager, Richard Watts confirmed that these names caused some of the main detractions from performance this year.
In Boohoo’s case he said that they had underestimated the impact of the global supply chain crisis on the business.
Watts said: “Whilst performance this year has been challenging it should be considered against a very strong performance in 2020 and the very strong long-term track record of the fund.”
He added that the fund has gone through periods of underperformance before, but that the most important thing is to maintain the process he has used for 20 years.
Watts added: “In my experience, difficult periods of performance can present opportunity. It’s important not to compound underperformance by making poor decisions and it’s very often the case that underperformance in share prices presents an opportunity to buy at more attractive levels.”
Fund pickers agreed that this short-term rut should not detract from the fund’s long-term performance or lead investors to question Watt’s management skills.
Khalaf said: “Occasional mishaps within a portfolio are commonplace though, and a one year investment horizon is too short to make any meaningful judgement around manager skill.”
“On that front Richard Watts and the Jupiter team have pedigree, which should provide reassurance to investors that the fund’s recent turn is simply a temporary dip in form.” The AJ Bell analyst made a ‘Buy’ recommendation.
Emma Wall, head of investment analysis at Hargreaves Lansdown, seconded the idea that this short-term underperformance should not deter investors from the fund, recommending that those already invested remain put.
The £3.5bn Jupiter UK Mid Cap fund has been run by Watts since its inception in 2008. At the time it was run under the Old Mutual brand, which became Merian Global Investors business, before being acquired by Jupiter Asset Management earlier this year.
The Jupiter UK Mid Cap fund and its manager “were one of the jewels in the crown of the acquisition,” Wall said.
The merger itself has thrown up some issues, however, according to Ben Yearsley, Fairview Consulting director. He said it was a “bit of a mess” noted that this was unlikely to have contributed to the fund’s poor returns.
“The fund has underperformed the index essentially since ‘Vaccine Monday’ last November – the fund is much more in the growth camp so that is unsurprising,” he said.
Yearsley pointed out that overt the past five years the fund has only had intermitted periods of sustained outperformance, which for a supposedly high-alpha fund “is not great”.
Specifically the fund has only outperformed the FTSE 250 significantly between October 2016 and August 2017 and March to September 2020. The rest of the time it has either performed in-line with, or fallen faster than, the index, shown in the graph below.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
“For a high alpha team that is not great as if the current trend continues all the additional performance could soon be lost,” Yearsley said.
The commentator also said that the launch of Chrysalis Investments Limited in 2018 could have taken up Watts attention.
“Being devil’s advocate, have they lost something since the launch of Chrysalis? Has that taken too much of their time and focus?,” Yearsley asked.
Chrysalis Investments is co-managed by Nick Williamson, who previously ran the Jupiter UK Smaller Companies fund but left after a round of planned promotions. He was added to the Chrysalis Investment trust earlier this year.
Yearsley said that, for now, he would continue to hold the fund “however it is definitely ‘on watch’ and I would probably sell after the next period of outperformance.”
Columbia Threadneedle manger James Thorne tells Trustnet why small-caps are better than bonds if investors can hold for the long term.
Smaller companies are the best place for investors with the ability to leave their cash alone for the long term. This may not be a ground-breaking statement, but is easily forgotten by the events of the past decade.
Indeed, over 10 years, the large North American technology stocks have dominated investors’ attention, as well as market returns. Since 2011, the S&P 500 has been the best-performing index, returning 387.8% while leading the MSCI World index higher. During this time it has beaten the Numis Smaller Companies excluding Investment Companies index of UK small-caps by 173 percentage points.
However, going back 20 years, the UK small-cap benchmark has beaten the North American index by more than 200 percentage points, as the below chart shows.
Total return of indices over 20yrs
Source: FE Analytics
“We aim for 15% returns per year, broken down by a long-run average 6% from equity markets each year, followed by a 4% small company effect and finally 5% from active management, which pretty much our fund has done over the past decade,” he said.
Indeed, the £260m portfolio has been a top-quartile performer among its IA UK Smaller Companies sector peers, returning 361.5% over the past decade, or an average of 16% per year.
Below, the manager explains how his fund has achieved this, why it tends to struggle during value rotations and why smaller companies funds are less risky than bonds.
Total return of fund vs sector and benchmark over 10yrs
Source: FE Analytics
How do you pick stocks?
We look for sustainable opportunities and put together a portfolio that is uncorrelated, with the lowest risk. To do this, we spend a lot of time looking at businesses and benchmarking what has worked in the past against what is working today.
We like businesses that have a proven business model, usually in the UK, that they can take to the rest of the world. Ultimately we want to buy quality growth companies before they become labelled as such. Sometimes we will be a bit early, but that is okay.
Why should investors pick your fund?
Columbia Threadneedle is a large business and there is a large resource here but we are still agile and disciplined in how we invest. We do not get too emotional and are still very driven and really enjoy the job, so are relentless at looking for new businesses.
Small-cap investing is mainly about the process, which I have explained above, and then having the energy to do the job.
What have been your best and worst calls this year?
Future plc has been the best. It is a content owner of consumer goods and we invested in it a long time ago, but over the past 12 months it is up 81%, going from £19.50 to £35.40 per share.
We think there is a long way to go in that business and are happy to run our winners. When we first invested it had a market capitalisation of £400m and it is now worth £4bn.
The worst was James Fisher – a specialist maritime engineering business. It fell from £12.50 to around £7.74 per share. It was primarily in the oil and gas sector, which has been out of favour, but is also one of the major players in offshore wind engineering and maintenance and has some interesting technology. We think it can reposition itself quickly.
The company has a lot of debt still and it is hard to know if the business model will perform well in the next six or 12 months, but I think there is still opportunity there.
What is the most exciting stock in the portfolio?
1Spatial is the second-largest holding in the portfolio and we own 20% of the shares, which is our limit. We have been committed to it for several years as it has gone through a restructuring.
Geospatial data has to be cleaned and put into the same format as it is moved around and 1Spatial has the technology to do that. It is unusual for a £50m company to have Google, the Ordinance Survey and a number of UK utility companies as customers.
How risky are smaller companies?
A lot of my pension is in my fund as I think bond funds are really risky. If the yield curve takes off and bonds were my pension, I could lose a large chunk of my money and not get it back. In my mind, that is incredibly risky.
Volatility is potentially higher in smaller companies, but it doesn’t matter if you have a longer than 18-month time horizon because that is the time during the past seven recessions that small-caps underperform the wider equity market. Then you recover all of that in the following five quarters, so the all-round trip is two years.
In terms of the fund, I structure it as if it is my own money, because partly it is. If a company doesn’t work, it will be kicked out of the portfolio, which means in reality the fund is not that high risk.
Do you incorporate environmental, social and governance (ESG) in the portfolio?
We do not formally have a set target, but I am the deputy manager of our UK sustainability fund, having previously run it for about three years.
Your fund as in the bottom quartile of its sector in 2018 and is below average this year. Does it not perform well in value recoveries?
In a value rotation we would hope to be slightly ahead of the benchmark, but we are not aiming for a first quartile return. We are in-line this year and I feel we are in a great position to kick on from here.
In 2018 there were other issues in there where we made a couple of errors as we thought some businesses were protected by regulation and it turned out to be the other way around. We have corrected some things since then.
Are there any sectors you avoid?
There are lots of areas that I don’t massively like investing in. It starts with financials because it is dominated by the incumbents and the cost of capital is very high. We also struggle to find companies within real estate.
Another area is mining and oil and gas, which used to be an exciting area. Historically junior companies proved up an asset and a major would either buy it or put in capital to develop it, but that is not happening anymore.
What do you do outside of fund management?
I studied oceanography at university so have always liked the water. I have a dingy boat and I am teaching my daughters to sail. I am not particularly good, but I enjoy it. I also surf and row.
Two fund managers share their thoughts on the ESG companies that sustainable investors have been flocking to.
The wave of ethical investing has bid up the prices of some companies to unsustainable valuations, according to some fund managers.
Governments around the world seem to be making every attempt to steer economies towards net zero greenhouse emissions to slow down global warming.
One way they have done this is by incentivising the adoption and use of clean energy as an alternative to fossil fuels, and investors have tried to position themselves ahead of this trend.
There are many products for investors to choose from, ranging from funds using simple environmental, social and governance (ESG) metrics to prevent them from buying into industries like fossil fuels – to funds that invest directly in ESG solutions such as clean energy exchange-traded-funds (ETFs).
One of the most popular and largest funds of this type is the £4.5bn iShares Global Clean Energy UCITS ETF managed by BlackRock, which invests in companies directly involved in clean energy technology companies.
It has attracted large inflows over the past few years alongside the rise in popularity of sustainable investing, but not all investors are as optimistic around the prospects of companies within the ETF.
Laure Negiar, manager of the Comgest Growth World fund, said the wind, solar and electric vehicle companies directly linked to the transition to net zero have “gone to valuation levels that in certain cases make no sense”.
She said: “People are willing to pour in a lot of money without knowing what the end profitability is. As such we think a number of plays in wind don't make much sense from a valuation perspective.”
The manager said that with many companies trying to consolidate their respective industries, valuing them all as market leaders, does not make sense.
“Some of them are going to lose,” she said. “Sometimes it will probably make sense for one of the players or two of the players, but not 10 other players.”
However, Jon Wallace, manager of the Jupiter Green Investment trust, said the market is under-appreciating how much growth certain clean energy companies have ahead of them.
As an example, he pointed to Vestas Wind Systems, a Danish wind turbine manufacturer and the largest stock in the £4.5bn clean energy fund.
Share price of Vestas Wind Systems over 5yrs
Source: Google Finance
The company has a relatively high market share in the US wind turbine market – an area of great focus for investors given US president Joe Biden’s push for clean energy infrastructure spending.
Wallace said: “There is a mismatch between the rate of growth of clean energy that the Biden administration is suggesting is going to happen and the rates of the market implied growth that is going to come through.”
He said that the current delay in getting the US infrastructure bill and budget settlement passed through congress efficiently is being reflected in the share price of the company and the wider clean energy sector.
“We don't expect the [US wind power] market to decline in the near term at the rate which industry specialists would say,” he added.
“Wood Mackenzie have the onshore wind power market in the US declining year over year for the next several years. I think if that is the case, then that would by consequence throw real question marks around whether the US can decarbonize its grid by 2035 or get close.”
Based on Wallace’s conversations with the Vestas and other companies in the sector, the market for wind turbines is waiting for some clarity from US lawmakers.
But given the long-term opportunity for companies aiding in decarbonising energy grids around the world with renewable energy, he suggested “there is a great opportunity now in the near term”.
Negiar on the other hand thinks that “it makes more sense” to be invested in the indirect exposures to the push to net zero.
She pointed to Ecolab, an American cleaning and sanitising company specialising in water treatment through their subsidiary Nalco – which Negiar described as a “global leader” in the space.
Similar to the push towards net zero, the sustainable use of water is crucial for global sustainability efforts.
Share price of Ecolab year-to-date
Source: Google Finance
Although the company primarily treats water hotels and hospitals, Negiar was most optimistic around its new data centre business.
“What's interesting also is you can get into a number of new sub segments with water treatment,” she said. “Most recently, Ecolab made an entry into the data centre market. Data centres pollute quite a bit and they use a tonne of water to cool down the servers.
“This is now a $100m business for Ecolab from zero a couple of years ago and they think the total addressable market is a billion dollars.”
Ecolab counts some of the biggest technology companies like Microsoft, Amazon and Facebook as customers.
Given that this is just one niche of Ecolab’s water division, Negiar said it could become an important factor in the overall company’s growth profile.
Value stocks from around the world are the way for risk-taking investors to build their portfolio, according to one fund picker.
High-risk investors should put all of their money in the stock market, ideally with a strong weighting to value companies, according to Kelly Prior, investment manager in the multi-manager people team at BMO Global Asset Management.
In the latest series in which we ask fund selectors to help investors build portfolios, here we tackle those with a penchant for risk. Trustnet previously looked at the ideal portfolio construction for cautious investors, which featured a blend of asset classes.
Although the wild ride of the past 18 months may have put some off investing, for others, it has been a chance to make good gains. Indeed, since the start of 2020, investors would have been better off riding the stock market wobbles, or could have made even bigger profits by buying during the March lows.
In 2021, the main call to get right has been to invest in value companies – those that are cheap but that can rebound. As vaccines have given a path out of the pandemic, stocks in sectors such as travel, leisure and retail have blossomed.
Prior said after years in the doldrums the value recovery has helped investors that were willing to take the chance on this style of investing and encouraged them to keep with it.
“An aggressive portfolio is one that nails its sail to the mast and is unwavering in its commitment to a process and way of investing and although market levels are at heady hights, this masks an opportunity set that has sat latent, awaiting a change of economic scenarios to bloom – value,” she said.
Prior noted there is a whole generation of investors that have never experienced inflation and rising interest rates, a reality they could soon face.
She said: “The winds of change are blowing and it may be time to ride the resulting wave. Bonds offer little in this scenario, with no need for ‘insurance’ even the binary nature of returns, particularly at the moment.”
For her model aggressive portfolio Prior suggested four equity funds, all with a value bias. The largest position was to the RWC UK Equity Income at 30%.
The UK stock market is synonymous with value investing, as it is made up of banks, miners and oil giants. The RWC UK Equity Income fund is a relatively new addition, Prior said, having launched in 2018.
The pair also run the Temple Bar investment trust, taking over from Alastair Mundy earlier this year.
“Regular rotation between sectors ensures the team avoid investment traps often associated with traditional deep-value investing,” Prior said.
Some of its biggest stocks include Royal Mail, NatWest Group, BP, Marks & Spencer and Royal Dutch Shell, giants of the UK equity space.
Over one year the fund has been the 12th best performer in the IA UK Equity Income sector, making 47.1%, reflecting the value rally. Since launch it has made 11%, just behind the FTSE All Share but still ahead of the sector average.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Next is Pzena US Large Cap Value, an Irish-domiciled fund run by its namesake Richard S Pzena, Benjamin Silver and John Flynn.
Pzena, the manager, is “synonymous with value investing,” Prior said, whose previous business, Bernstein, was financed by “famous value hedge fund manager Joel Greenblatt”.
“The team are looking for good business’ with temporary problems and an eye on the long-term prize. Patience is arguably their biggest fund management tool,” Prior said.
US large-caps are a somewhat ironic part of the market to hunt out value options, having become home the of some of the world’s biggest growth companies the past decade.
Names the fund holds include sensor developers Halliburton, automotive electrical and interiors firm Lear Corporation and financial services company Wells Fargo.
Since it launched in 2012 it has beaten the average fund in its sector but has lagged the Russell 1000 Value index. Prior gave the $14.3m (£10.5m) fund a 25% weighting of the overall portfolio.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Next is the Magallanes Value Investors European Equity fund, which Prior also gave a 25% weighting to in the portfolio.
Regarding the investment process she said that 95% of the team is deployed in stock research “with an owner investor mentality looking for high quality and low leverage.”
This has created a concentrated portfolio of 30 names, mainly invested in industrials and the Netherlands. The majority of the fund is in mega-cap stocks, over £5bn in market cap, a 66.2% allocation.
From when it launched in 2016 it has returned 86.5%, outperforming the MSCI Europe index and Off Mt Equity – Europe ex UK sector.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Last up is Schroder ISF Emerging Markets Value, which Prior assigned a 20% weighting. As a fund house Schroders Asset Management have been long-term investors in value.
Prior said: “They have been banging the drum on the global opportunity in mis-priced securities for some time, so it was a natural progression for them to launch a bespoke Emerging Markets (EM) product as part of this.”
Emerging markets are usually seen as one of the risker regions for investment as the fate of the sector is largely determined by China which dominates the MSCI Emerging Market index, accounting for almost 44%.
Prior said that unlike most emerging market funds, which invest in a number of names, the $45.7m fund invests in a “lean” 40 stocks.
Run by Juan Torres and Vera German, it has held up well since it launched just over a year ago, performing 8th best out of 529 funds in the IA Global Emerging Markets sector over the past 12 months.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
RWC UK Equity Income
Pzena US Large Cap Value
Magallanes Value Investors European Equity
Schroder ISF Emerging Markets Value
The latest Hirschel & Kramer Responsible Investment Brand Index (RIBI) reveals less than half of the 500+ fund groups surveyed are doing enough on ESG grounds.
Federated Hermes dethroned AXA Investment Managers (IM) as this year’s most genuinely committed asset manager to incorporating and emphasising environmental, social and governance (ESG), according to the Hirschel & Kramer’s Responsible Investment Brand Index (RIBI).
The RIBI evaluated more than 500 global asset managers on its abilities to legitimately incorporate ESG into their businesses via voting and governance and translating that externally to the public.
The latest report, which was the firm’s fourth edition, said that the asset management industry is “facing a paradox” where there is a strong drive to more the whole industry towards “societal responsibility and acting for a safer, fairer future,” but this is “disconnected from economic reality”.
Global markets and economies are emerging from the Covid pandemic faced with two major crises, a financial rebuild to pre-Covid levels and an impending environmental disaster. Balancing, or even combining the two, is the challenge industries are facing.
The growth of investment into ESG and sustainability accelerated during the pandemic as it shone a light on the social inequalities and environmental time bombs that needed addressing.
In the latest Calastone Fund Flow Index, while September saw record outflows from UK investors, they still sought out ESG-equity funds, adding £1.1bn in the month. This was the second highest monthly inflow on record.
Fund houses have responded to this with a wave of investment with new product launches, targeting these specific fund flows.
This has raised issues and concerns around greenwashing and how many of these funds have been genuinely set up to enable a social and environmental benefit, and how many have green badged an existing portfolio.
The RIBI considers this by looking at how much, and how well, companies are engaging with ESG internally (commitment) and how much of their external marketing focuses on it (branding).
Companies fall into one of four rankings: Avant-Gardist, the best ranking where companies displayed above average commitment rating and brand ratings. Next, Traditionalist, above average on commitment but below average on branding. Next, Aspirant, above average on brand and below average on commitment. Finally, the worst ranking is Laggard – below average on both fronts.
Source: Hirschel & Kramer’s Responsible Investment Brand Index (RIBI)
Breaking down the more than 500 companies, most rank at the bottom, the Laggard space, which accounted for 53% of all fund groups. There were 23% in Traditionalist, 16% in Avant-Gardist and 8% in Aspirants.
The report identified a trend that asset managers generally implement their responsible investment strategy first, then project that out into their brand, a trend Hirschel & Kramer welcomed, calling it the more “solidly anchored” approach to incorporating ESG.
At a global level Federated Hermes International ranked the highest on this, improving on its second place ranking last year.
Harriet Steel, head of business development at Federated Hermes, said: “While it is clear that the asset management industry is undergoing a fundamental shift to reshape its future, not all stakeholders are walking the talk.
Source: Hirschel & Kramer’s Responsible Investment Brand Index (RIBI)
The report noted that all of the top 10 companies were European , reflecting what Hirschel & Kramer called a broader trend of Europe “leading the way” on sustainable investment. They noted that North America was lagging, where less than two in 10 managers state an ESG purpose but failed to link it to an actual ‘societal goal’. The regional disparity on this topic was “worrying” they said.
Five of the top 10 were repeat appearances from last year: Federated Hermes International, AXA Investment Managers, Candriam, DPAM and Mirova.
Analysts give their take on whether investors should stick with the investment company, after a proposed joining with the JP Morgan Global Growth & Income trust.
The proposed merger between the Scottish Investment Trust and JPMorgan Global Growth & Income trust has been positively received by investment analysts, but some may wish to leave for a more appropriate alternative.
Yesterday the board of the £490m Scottish trust announced plans to merge with the JP Morgan portfolio, creating a £1.2bn company.
Simon Elliott, research analyst at Winterflood Securities Limited, said the JPMorgan investment company was a “highly suitable partner”, noting that the latter trust’s performance has been strong.
Indeed, over the past five years the trust has made investors 109.3% compared with a 74% gain for the MSCI All-Countries World index and a 19% return from the Scottish Investment Trust. It has also outperformed over 10 years.
Performance of trusts vs benchmark over 5yrs
Source: FE Analytics
“Furthermore, we believe that its enhanced dividend policy, which pays out 4% of net asset value (NAV) each year through quarterly dividends, allows shareholders to ‘have their cake and eat it’,” said Elliott.
He added that the new trust would have “broad appeal” and that the merger was a “positive development for shareholders in both Scottish Investment Trust and JPMorgan Global Growth & Income”.
Ewan Lovett-Turner, director at Numis Securities, agreed, noting that JPMorgan was a “safe pair of hands”, being an established manager in the investment companies sector with the resources to promote the fund.
The trust, managed by the team of Timothy Woodhouse, Helge Skibeli and Rajesh Tanna, is trading on a premium and has been issuing new shares to meet demand, reflecting that it is already popular with investors.
“In addition, both sets of investors will benefit from lower costs and we believe is vital for equity-focused strategies to be cost competitive given current investor sentiment towards fees,” he said, which are to reduce by 11 basis points.
The shares of the Scottish Investment Trust rose on the back of the news, up 6.2%, although this was still a wide discount to the underly value of its holdings, or NAV.
David Johnson, analyst at Kepler Trust Intelligence, said investors should “buy” the JP Morgan Growth & Income trust as a result.
“There are far worse places investors of Scottish Investment Trust (SCIN) could end up than JPMorgan Global Growth and Income,” he said.
However, he noted that the trusts are very different from one another. Under Alasdair McKinnon, the Scottish Investment Trust has had a strong value bias, buying unloved companies that he believed were ready to rebound.
Meanwhile, the JPMorgan Global Growth & Income trust is run with a broader remit, investing in companies that the managers believe are “best-ideas”, whether they be classed as value or growth.
Importantly, the team buy companies that can deliver long-term earnings growth and are in industries that are going through structural change. They also need to be trading on attractive valuations.
Mick Gilligan, head of managed portfolio services at Killik & Co, said it could be a “sad day” for some investors, as “another dividend hero bites the dust”. Indeed, Scottish IT had increased its dividend for 37 consecutive years.
He said that investors that have made money from the trust over the long-term will likely stick with the new trust rather than taking any potential tax hit from selling, but noted that for others, there is a real risk with the new mandate.
This is that, after a difficult past decade, a strong resurgence in value names could leave investors worse off in the new trust than they would have been under McKinnon.
“If you were in the trust for a value bias you are better off in something like Murray International, which has a similar progressive dividend policy,” said Gilligan.
Performance of trust vs benchmark over 5yrs
Source: FE Analytics
“It is hard to think of another global trust with a value bias that is also pretty liquid and that has a decent dividend yield. It ticks all of the boxes.”
As part of the deal, investors will also need to look for the costs of the current pension scheme and sale of the property as part of the liquidation, something that Lovett-Turner said will require “clarity”.
Trustnet asks which of the two trusts in the IT Royalties sector investors should hold.
Do you prefer pop or classic rock? This is one question investors need to ask themselves when choosing which trust to invest in from the IT Royalties sector.
Hipgnosis Songs and Round Hill Music Royalty Fund are the only two trusts in the sector, both investing in songs, or rather, the associated intellectual property rights of music.
Although it is a niche asset class some managers have invested in it as a way to benefit from rising inflation.
Paul Flood, manager of the BNY Mellon Multi-Asset Diversified Return fund, told Trustnet that generally, people are not going to cancel their music streaming subscriptions, even if the cost of living goes up.
“They won’t stop paying for their subscription, because if they do, they have no music,” he said.
Both trusts benefit from the convergence of two growing trends, one, the increasing adoption of technology and second, the widening demographics of people who stream songs.
This creates a potentially reliable stream of income, an attractive characteristic for investors.
Indeed James Carthew, head of investment companies at QuotedData, said that both of the trusts have been popular since their respective IPOs, with issues for both trusts becoming oversubscribed at launch, reflecting the popularity of this otherwise niche sector.
So which trust should investors hold?
Chris Salih, investment trust analyst at FundCalibre, said that although they are investing in the same asset, the trusts invest in different genres.
Hipgnosis Songs focuses on “newer songs”, he said, which are higher risk because you cannot know for sure which songs will become popular or whether they will be one hit wonders, petering out over the long-term.
The £1.5bn trust’s biggest allocation is pop music at 46.1%, with 8.3% in R&B, 5.5% in Dance and 4.2% in Hip Hop.
This perhaps reflects the music career of the trust’s founder, Merck Mercuriadis, who managed acts such as Beyoncé, Elton John, Mary J Blige and Guns N’ Roses to name a few.
The Round Hill portfolio on the other hand invests more in old, classic rock, which makes up 41% of its weighting. It has just 24% in pop and 13% in country music.
“Round Hill does have some newer songs as well, but the majority of the portfolio is from 1960 to 2000 with a bias towards to the 1960s,” Salih said.
“The revenues from these holdings are much more predictable and annuity-like.” This makes Round Hill the lower-risk option of the two.
For Salih his biggest concern “rightly or wrongly – is that because we believe Hipgnosis has a policy of wanting to grow aggressively, we wonder what price it is paying for its assets.”
Both trust’s invest in an artist acquiring the rights to their catalogues of music and the accompanying property rights.
Hipgnosis is invested across 138 catalogues, totalling over 64,000 songs already, investing in artists such as Shakira, Bon Jovi and Beyoncé.
In contrast Round Hill focuses on a smaller-sized catalogue, with around 100-1000 copyrights.
This aggressive push to acquire more asset combined with Hipgnosis' 3.2% premium meant that Round Hill got Salih’s vote. By comparison, the trust is on a 1.6% discount. Based on the discount and premium difference Carthew also picked the Round Hill portfolio.
It is worth noting that the Round Hill ordinary shares are on a discount but the C shares version of the trust is on a 3.6% premium.
Like Hipgnosis the Round Hill trust is run by a team of music industry veterans, who between them have worked at Atlantic Records, Sony/ATV, National Music Publishers Association and EMI Music Publishing, among others.
Since it launched in November last year the Round Hill trust has lagged Hipgnosis songs, making 0.9% versus 8.1%.
Trusts versus sector since Round Hill’s launch 13/11/2020
Source: FE Analytics
During 2021 so far however the rankings have reversed with Round Hill holding up the better of the two, making 3.8% versus Hipgnosis’ 2.9%.
The Hipgnosis trust is the senior by two years, and since it launched has made 34.3%.
Hipgnosis Songs versus sector launch
Source: FE Analytics
Carthew pointed out that both trusts favour US dollar revenue – the region the most popular songs are in – which makes the sterling returns look more volatile than they really are.
Trustnet looks at the impact an interest rate hike before the end of the year could have on markets.
The Bank of England’s governor Andrew Bailey signalled a possible interest rate hike this year, causing a wave of interest from investors and market commentators.
He highlighted rising energy chain prices and supply chain issues, which have caused higher inflation, to last longer than anticipated, creating a potential headache for the central bankers, who aim to keep the rate of rising prices around 2%.
Initially reported by the Financial Times, Bailey said that he will have to act to curb inflation, which is currently at 3.1%, well ahead of the central bank’s target.
Although no official rate hike can be expected before the next Bank of England Monetary Policy Committee meeting on November 4th, markets are taking Bailey’s comments as a promise, pricing in an 85% chance of an interest rates increase before Christmas, according to Refinitiv, financial market data company.
Laith Khalaf, head of investment analysis at AJ Bell, said this was a significant shift in the Bank’s rhetoric around rates but there was still room for the increase to be pushed back to next year as the Bank will want to see how the economy looks once the full impact of furlough had ended, as well as how long the energy price crunch will run for.
“The Bank may well be wary that rising energy costs will act as a brake on economic growth, which will do a similar job to an interest rate hike, thereby alleviating the need for tighter policy just yet,” Khalaf said.
But tighter financial policy will come, Khalaf said, meaning savers and investors should “take stock of their finances, because an environment of rising interest rates is going to be a shock to many.
“Indeed a whole generation of young adults won’t even remember a time when bank rate started with anything other than a zero,” he said.
Below, he looks at how the major asset classes could be affected by a rise in interest rates.
Starting with equities Khalaf said that stock markets could begrudge an interest rate hike but it would not be too damaging to the asset class, especially when compared to bonds or gold which would struggle with higher inflation.
Rising rates are usually a sign for a more robust economy, which should equal good corporate earnings. Equities would only therefore have major issues if stagflation occurred, a situation where prices and unemployment rise but economic growth stagnates.
However, he said that it would not be smooth sailing for all parts of the market. Some of the biggest losers could be the past decade’s biggest winners, with growth stocks that have benefited from low interest rates and loose monetary policy under pressure.
If both reversed, then companies with valuations based on future earnings could see these expectations immediately “clipped back,” Khalaf said.
Earlier this year when inflation expectations rose, bond yields increased, triggering a significant sell-off in growth-tech stocks.
Lower down the market-cap scale, Khalaf said smaller companies could also be in for a hard time if they have high debt.
They are generally more fragile to their blue-chip cousins, Khalaf explained, because of the less robust earnings streams and access to capital.
For small-caps with significant debt an interest rate increase could therefore be disastrous, although more solvent companies should be okay, he noted.
As mentioned above bonds or gilts would be the less desirable options versus equities.
Khalaf said government bonds especially would be “directly in the firing line if monetary policy tightens, either through interest rate rises or an unwinding of quantitative easing (QE).”
So far this year the average IA UK Gilt fund has lost 8%, FE Analytics found. Though it is not enough to “make most equity investors blush,” Khalaf said savers choose bonds as a ‘safe haven’ option, meaning any losses generally sting.
“But twelve years of ultra-loose monetary policy has driven gilt prices so high, they now carry an awful lot of valuation risk, and offer a desultory yield in return,” he said.
If investors are keen to hold bonds, corporates could be the lesser of two evils here. Although they’re also vulnerable to losses, Khalaf said that in a rising interest rate scenario these ‘riskier’ bonds would actually be better than the ‘safer’ gilts.
Investing in company debt rather than government bonds during a time when the economy is improving would make it easier for companies to service their debt.
Bonds would still be a better option than gold though, despite the latter being the classic ‘safe haven’ asset in markets.
Khalaf said that higher interest rates are not good for gold because it doesn’t pay an income.
“That’s much less of an issue when rates are close to zero, and so the opportunity cost of holding an asset with no yield is virtually nil. As interest rates rise, that cost becomes heavier to bear, and cash and bonds become more attractive as safe havens,” he said.
The gold price peaked in the summer at $2,000 (£1,448) and has now fallen to around $1,750. Khalaf said “market optimism has lessened demand for safe havens.”
Higher rates are likely but there are pockets of value.
“The outlook for bonds has moved from bleak to dire”. That was the headline of a recent article I read – on an asset class which has been on an almighty rollercoaster ride in the past couple of years.
Support from central banks, governments loans and the fact that companies are contractually obliged to pay an income through their bonds meant that fixed income – for the first time in a decade or so – became attractive to investors in mid-2020.
However, the asset class is now expensive again, having gone back to pre-pandemic levels, with yields at historic lows. Simply put, no one can expect the unprecedented amounts of fiscal and monetary stimulus in places like the US to not have an impact on yields at some point.
Interestingly, however, money continues to flow into fixed income at a reasonable pace. In the first eight months of 2021 we’ve seen net retail sales of £9.5bn – although they have started to slow more recently.
Then there is inflation, which is coming as bottlenecks appear in supply chains as global economies have opened up.
Liontrust head of global fixed income David Roberts said the recent sell off has been driven by investor nervousness over inflation, particularly as central banks have admitted that price rises do warrant some sort of action, with yields rising sharply as a result.
He cites the 3.8% fall in the Bank of America UK Gilt index in September as evidence of the uncertainty.
The steady grind towards higher rates
What is clear is the past decade of free money has created an economic imbalance. This, coupled with the successful re-opening of the global economy, has prompted the Bank of England, US Federal Reserve and European Central Bank to look at reducing monetary policy.
The challenge is that this is a bit like playing with a loaded gun – with markets ready to react sharply to any change.
Janus Henderson fixed income portfolio manager Jason England said the US central bank knows transparent messaging is essential if it wants to avoid “own goals” like 2013’s “taper tantrum” and being caught flat-footed early this year as the yield on the 10-year US note rose to 1.74%.
Tapering of the Fed’s $8.4trn balance sheet is expected to start at the end of this year – although it can change quickly – with reductions between $15-20bn a month touted. The second part of the equation is when (and how fast) rates are expected to rise.
My original view was that even if inflation surged in the US, the Fed would do nothing. However, half of the Federal Reserve members now see the first interest rate hike in 2022, according to the central bank’s so-called dot plot of projections. It’s a view echoed in the UK, where Bank of England chief Andrew Bailey has warned inflationary pressures could result in a rate rise before the end of this year.
As we know, any rate hikes will eat into capital – the last thing anyone wants at a time when income generated by bonds is at such low levels.
England said the high valuation on corporate spreads is exacerbating the problems. He noted that the spread between yields on corporate bonds and those of their risk-free benchmarks is presently 35% below their 10-year average – adding that any economic setback could lead to a widening of credit spreads and headaches for investors.
Some positives amid the negativity
There are positives to consider, not least that whatever action central banks do take will be done slowly to make sure they do not pull the rug out from underneath the bond market.
The other important note is that while inflation in the US has taken off, US 10-year treasuries have plateaued somewhat at around 1.5-1.6%, having threatened to surge past 2% amid inflation fears earlier this year.
We also must remember that the likes of demographics and the growth of technology/digitisation could easily re-assert themselves on the market and reign in some of these inflation fears.
We’re by no means positive on the outlook for the asset class, but we do feel there are pockets of value to be had. We’d still look to the likes of Jupiter Strategic Bond for diversification, as well as a high yield offering like Man GLG High Yield Opportunities, which continues to yield a reasonable 5.1%.
Bonds with a total return mentality, like Nomura Global Dynamic Bond, also interests us. Manager Dickie Hodges uses the entire range of bond sectors including government bonds, corporate bonds, emerging market bonds and inflation-linked bonds.
Another to consider is the Artemis Target Return Bond fund, managed by Stephen Snowden. This is a ‘steady eddie’ targeted absolute return fund, with a heavy emphasis on controlling risk. It targets an annual return of at least the Bank of England Base rate + 2.5% after fees.
Darius McDermott is the managing director, Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.
The latest Bank of America Global Fund Manager Survey shows that more fund managers think the global economy will deteriorate over the next 12 months.
Confidence in the health of the global economy is falling among fund managers but this is yet to stop them from keeping a pro-risk tilt to their portfolios, the latest Bank of America Global Fund Manager Survey has found.
Analysts at Bank of America said the October edition of the closely watched report is the “least bullish” survey since October 2020, as fund managers worry about the economy and rising inflation.
The survey polled 380 asset allocators running a total of $1.2trn between 8 and 14 October to gather their views on markets, the global economy and positioning. Below, we highlight five charts that show a bullish portfolio stance despite waning confidence in growth.
Net % of fund managers expecting stronger economy
Source: BofA Global Fund Manager Survey
More fund managers are now expecting the economy to weaken over the coming 12 months than are expecting it to strengthen.
During October, there was a 19 percentage point decrease in fund managers’ economic expectations, leaving a balance of 6% of asset allocators eyeing a weaker economy.
This is the first time economic expectations have turned negative since April 2020, when the world was in the early stages of the Covid-19 pandemic.
Net % of fund managers saying global profits will improve
Source: BofA Global Fund Manager Survey
Meanwhile, managers appear to be bearish on corporate profits with a net 15% saying they think profit growth will slow over the next 12 months.
This represents a 27 percentage point fall on last month’s survey and is the first time since May 2020 that more managers have forecasted a drop in profits rather than a rise.
Other signs that fund managers are becoming less bullish on the state of the economy include a fall in the number of investors expecting ‘boom’ conditions (above-trend growth and above-trend inflation), a rise in those anticipating ‘stagflation’ (below-trend growth and above-trend inflation) and a narrowing in the ‘transitory’ versus ‘permanent’ expectations for inflation.
Fund managers’ biggest tail risks
Source: BofA Global Fund Manager Survey
Indeed, inflation remains the biggest ‘tail risk’ cited by investors in October’s BofA Global Fund Manager Survey. Some 48% of managers said this was their main concern at the moment – a significant increase on the previous month.
Asset bubbles and the delta Covid variant were of less concern than in September, while China and a taper by the US Federal Reserve were the tail risks gaining more attention this month.
Net % of fund managers overweight equities vs net % predicting a stronger economy
Source: BofA Global Fund Manager Survey
However, while this paints fund managers as being in a pessimistic mood, this only appears to concern the economy at the moment – with many remaining bullish when it comes to markets.
The above chart highlights the growing disconnect between asset allocators’ confidence in the economy and their allocation to stocks.
A net 50% of the investors participating in the BofA Global Fund Manager Survey are currently overweight equities. While this is the lowest since November 2020, it remains bullish by long-term averages.
At the same time, the allocation to bonds has fallen to a net 80% underweight – which is the largest underweight ever recorded by Bank of America – while the pro-risk sentiment is further illustrated by a 10 percentage point jump in the allocation to commodities, taking it to a net 28% overweight.
% saying overweight - % saying underweight
Source: BofA Global Fund Manager Survey
A look at the allocations to the various equity sectors also shows how fund managers continue to be bullish on markets.
There has been a big rotation out of utilities, staples and discretionary and into banks, pharma and energy stocks.
This has led to banks becoming the most overweighted sector, with the highest overweight since May 2018. Energy is in third place, on the back of the surging oil price.
October’s edition of Trustnet Magazine finds out how to prepare for a major sell-off and asks if there is ever a time when buying in at the bottom doesn’t work.
While the idea of a market crash may seem like a long way away at the moment, it is in periods of relative calm when you should prepare your plan of action for when things take a turn for the worse.
This is why the cover feature in this month’s edition of Trustnet Magazine focuses on what to do in a major sell-off. Staying on this topic, Danielle Levy asks if there is ever a time when buying in after a crash doesn’t work, and Sam Shaw considers potential black swan events that could send share prices tumbling.
This month’s sector focus falls on emerging markets, which has already seen a major pullback following heavy-handed government intervention in China. Adam Lewis investigates if this is the shape of things to come.
In the magazine’s regular columns, a health scare teaches John Blowers the importance of building a margin of safety into his retirement plan, Temple Bar IT’s Ian Lance and Nick Purves name three “dog” stocks whose turnaround is being underappreciated by the market, and Liontrust’s John Husselbee reveals why he is a fan of convertible bonds, and which fund he is using to extract value from the asset class.
As always, Trustnet Magazine is free – you do not even have to enter any details. Simply click here to start reading, then click the arrow pointing down on the left-hand side of the screen if you want to download the PDF.
CPI inflation eased in September but this is expected to be just a temporary respite from rising prices, according to commentators.
UK inflation dropped slightly during September, the latest official figures show, although market experts have said this is a temporary pause and warned of more to come in the months ahead.
The consumer prices index (CPI) fell to 3.1% in the 12 months to September, according to the Office for National Statistics (ONS), down from 3.2% in the previous month. Inflation remains much higher than the Bank of England’s 2% target.
Higher prices for transport were the biggest contributor to September’s CPI. However, the dip from August is attributed to last year’s Eat Out to Help Out scheme – prices rose when the scheme ended in September 2020, meaning the new figures are slightly lower due to a temporary ‘base effect’.
Change in CPI over 12 months
Melanie Baker, senior economist at Royal London Asset Management, said: “UK inflation remains elevated and although we may not have seen another big jump in the CPI measure of inflation in September, there is more to come. Energy bills are among factors set to help push consumer price inflation further above the Bank of England’s target in the near term.”
Silvia Dall’Angelo, senior economist at the International business of Federated Hermes, noted that price gains tend to remain concentrated in the sectors mostly affected by supply constraints and high commodity prices, such as core goods, energy and food.
This suggests that inflation is still subject to “Covid-related distortions”, which would support the prevailing narrative that the recent spike in inflation is transitory.
Contributions to change in the CPIH 12-month inflation rate between Aug and Sep 2021
“That said, the inflation picture is set to get worse in the short term before it starts improving. The current gas crisis and recent increases in energy commodity prices more generally imply that inflation will continue to climb in the winter months, likely peaking at north of 4% between February and April of next year,” Dall’Angelo added.
However, base effects, moderation in commodity prices and a gradual easing of supply constraints should drive inflation down starting in the spring of next year, he noted.
“In general, cost-push inflationary pressures tend to be self-defeating and temporary, if they are not matched by demand-pull drivers, i.e. wage gains that are not justified by productivity improvements,” said Dall’Angelo.
“Developments in inflation expectations and the labour market – still hard to interpret due to Covid-related distortions – will ultimately determine the inflation picture.”
Rachel Winter, associate investment director at Killik & Co, agreed that September’s dip in inflation is likely to be “a blip”.
She pointed out that a number of contributory factors will likely cause inflation to climb higher again in October, especially the global increase in the price of fuel. Indeed, she argued that high fuel prices, pandemic-related supply chain issues, an ongoing skilled labour shortage and rising food prices have created “a perfect storm” for inflation.
“With so many economic obstacles in play, all eyes will be on the Bank of England to intervene,” Winter finished.
“While getting the Bank to agree to raise interest rates may feel like pulling blood from a stone, progress appears to be on the way, with [governor] Andrew Bailey suggesting that the central bank may soon be forced to act to curb inflation, though it is unclear when this will be.”
Unicorn Asset Management responds to the platform’s decision to drop the Unicorn Outstanding British Companies from its Wealth Shortlist over governance concerns.
Unicorn Asset Management has said it is “surprised” by the reasons that fund supermarket Hargreaves Lansdown has given for removing one of its funds from its recommended list.
Hargreaves Lansdown recently announced it had dropped the Unicorn Outstanding British Companies fund from its Wealth Shortlist, citing governance concerns as the major reason.
Offering its reasons, the fund platform said it thinks Unicorn’s current governance framework “could be better at managing investment activities and mitigating risk”.
It added that it sees a “a high degree of key-person risk, with one individual responsible for a number of the firm's important functions”.
Part of this is due to the smaller size of the company, which Hargreaves said will inevitably lead to some team members taking on a wider range of responsibilities and duties than they would have to at a larger firm.
This additional responsibility means that “governance processes may be less well-resourced”. But even with the Unicorn’s smaller size, the platform felt that the firm could still be doing more to manage governance-related issues.
Hargreaves said it had engaged with Unicorn on these governance concerns and that some progress was being made. Unicorn hired a new operations director and has plans for further hires in the year, which Hargreaves said is one step to reducing the “key person dependency” issues.
“While the team is moving in a positive direction, we do not currently have the required level of conviction in their approach to continue to include the Unicorn Outstanding British Companies fund on the Wealth Shortlist,” Hargreaves said.
It added that it will continue to monitor the fund’s ongoing governance improvements and will review its decision once changes have been fully implemented.
Unicorn Outstanding British Companies manager Chris Hutchinson told Trustnet that the operations director hire had already been made and others had been in the works for some time before Hargreaves made the decision to drop the fund.
He added that he himself had worked personally with Hargreaves long before and since the fund was added to the shortlist in 2019, making regular trips to the Bristol offices to work with the platform’s investment research and governance teams.
The fund platform highlighted that it still has conviction in longstanding manager Hutchinson, who has run the Unicorn Outstanding British Companies fund since launch in 2006.
The FE fundinfo Alpha Manager was joined by Mac Ormiston at the start of this year to help run the portfolio.
Responding to the fund being dropped, Unicorn said it was pleased that Hargreaves continues to back Hutchinson’s abilities and the broader Unicorn investment team, but it was “surprised by the reasons given for removing the Unicorn Outstanding British Companies fund from the Wealth List”.
The fund house said it “takes all aspects of governance and risk oversight extremely seriously” and has continued to strengthen both its resources and processes over the years.
Unicorn defended its governance process, saying it remains “confident” that it has the utmost focus on protecting the interests of its investors.
The fund house stressed its surprise at Hargreaves claims of governance issues and how a small company size could negatively impact them.
“We appreciate that recent events in the industry may have prompted firms to revisit their own standards and thresholds of due diligence. As has been the case since the current leadership team were appointed in 2008, Unicorn will continue to undertake our fiduciary responsibilities with the utmost care and respect for our investors,” it added.
It is worth noting that Hargreaves said it had not based this decision on the fund’s performance and stressed that this decision is not a recommendation for investors to change their portfolios in response.
Indeed, since it launched the Unicorn Outstanding British Companies fund has outperformed the average IA UK All Companies portfolio, and the FTSE All Shares by almost two-fold.
Performance of fund vs sector and index since launch
Source: FE Analytics
Though its long-term performance record has been strong it has struggled near term, falling to fourth quartile over one, three and five years.
Still, Hargreaves said this near decade of outperformance is down to the manager’s style and “ability to select great companies.” The fund’s process has not changed and Hargreaves believes the fund “still has the potential to perform well over the long term.”