Picking the right stocks is only half the battle; knowing when to run your winners and cut your losers can make all the difference to your eventual returns, as can learning from past investment mistakes.

Most equity managers have a similar hit ratio (the percentage of stock picks they get right) between the high forties and 60%, according to Stephen Anness, head of Invesco’s Henley-based global equity team.

The Invesco Global Equity Income fund falls within this realm, with a hit rate of 55-58%, yet it is the third-best performing strategy in the IA Global Equity Income sector over three and five years to 9 October 2024.

Performance of fund vs sector over 5yrs

Source: FE Analytics

Anness attributes his team’s track record to two things: the payoff, i.e. letting winners win big or cutting losses; and a forensic examination of failures and successes.

When mistakes are made, “as a portfolio manager, it’s really important to almost rub your nose in it”, he said. Otherwise, “you can easily just pretend that things didn't happen or they weren't your fault”.

“We spend a lot of time going back over 15 plus years of data and saying: right, what were we good at? What were we bad at?”

The global equity team conducts a performance review each year during its annual offsite, looking at what decisions proved to be right, what went wrong, and what lessons can be learned.

Then throughout the year, Anness continues to analyse performance. If a position is losing money, he endeavours to “disaggregate what we've got right versus bad luck”.

With Reckitt Benckiser, a poor performer he recently sold, “the mis-analysis of the growth rate of the business was on us” but the litigation challenges facing Abbott’s premature baby milk would have been impossible to forecast.

If something is underperforming, Anness asks an analyst who hasn’t looked at the stock before to do a ‘red hat analysis’. This is a technique originally developed by military forces to help them understand how their enemy is thinking. He asks the analyst to take the other side of the argument by looking for reasons to short the stock.

An open-minded team culture where people challenge ideas and listen to each other is also a crucial part of the investment process. “Team members have said ‘why do we own this? This is a really daft idea’,” he noted.

Anness also spends a lot of time looking at his fund’s payoff, i.e. “how much are you making when you're right and how much are you losing when you're wrong?”

If a stock is performing well and exceeding Invesco’s expectations every quarter, Anness said he doesn’t trim the position, take profits or rebalance. An example would be KKR, the private equity business, which has continued to positively surprise.

Share price performance of KKR over 5yrs

Source: Google Finance, data to 11 Oct 2024 in dollars

Conversely, if a position is losing money, “rather than lament the fact that you might be wrong”, it is more open-minded to recognise the situation as a mistake that is bound to happen.

“We’re going to be wrong 40% of the time and once you actually say that to yourself, that's really powerful because you don't then fret about being wrong as much; you're not as emotionally charged about it. You just say, well, okay, is this one of my 40%? So before I buy more and add to this problem, might I be better just killing it and moving on?”

Another thing Anness realised from looking at data was that “sometimes, it was death by a thousand cuts”. Every time an investee company made an announcement, it was a little worse than he expected, so Invesco was downgrading its views on the company by a few percent each time.

Over the years, that added up to a significant divergence from the team’s initial expectations. “Tracking our estimates of how the thesis is progressing over time has been really important,” he said.

After a long period in the doldrums, there are glimmers of hope that investors might start to favour UK small-caps once again. Small-caps tend to outperform large-caps over the long term and the UK market is still very much cheaper than the US.

With that in mind, investors might be interested to see which stocks the experts are backing for a UK recovery.

Three stocks are clear favourites amongst the ‘big six’ UK small-cap trusts: Aberforth Smaller Companies, BlackRock Smaller Companies, Henderson Smaller Companies, BlackRock Throgmorton, JPMorgan UK Small Cap Growth and Income and abrdn UK Smaller Companies Growth.

Hill & Smith, XPS Pensions and Gamma Communications each features amongst the top 10 holdings of three of these trusts.

Hill & Smith is one of BlackRock Smaller Companies’ largest holdings. The company makes both the permanent (galvanised steel) and temporary (concrete) barriers you would see at the side of the road, but its products are sold globally and into multiple sectors – from flood defences to fencing, and electrical transmission poles to fire doors.

It has grown its revenue by 34% and earnings per share by 41% over the past five years, helped by increased infrastructure spending in the US.

XPS Pensions is a big position for abrdn UK Smaller Companies Growth. It consults and helps with the administration of pension schemes in the UK and has over 1,400 clients. Again, it has seen good revenue and underlying earnings per share growth (up 21% and 24% respectively year-on-year). It has also been cutting its debt and hiking its dividend.

Gamma Communications is a significant position in BlackRock Throgmorton’s portfolio. It is a provider of technology-based communications and software services to businesses in western Europe. Its products range from strategic services like inbound call controls and cloud-based telephone networks to more conventional services like ethernet broadband and phone lines.

Its latest interim results demonstrate the strength of the business, with revenue up 10% and adjusted earnings per share up 16%. Dan Whitestone, who manages BlackRock Throgmorton, likes good quality businesses and Gamma’s high degree of recurring revenue (89% of total revenue) helps increase the predictability of its income.

The ‘big six’ UK small-cap trusts have also uncovered a wealth of other opportunities. The largest stocks in each portfolio that do not feature within the top 10 holdings of their peers are as follows.

BlackRock Smaller Companies has 2.2% in aerospace and defence business Chemring. Sadly, it is not hard to understand why defence businesses are doing well at the moment.

Henderson Smaller Companies has 3.4% in housebuilder Bellway. There is hope that the new government will do a better job of addressing the housing shortage in the UK than the last one did.

BlackRock Throgmorton has 2.9% in the UK and Irish building materials company Grafton, which could also benefit if the government can stimulate the construction sector. Whitestone has taken advantage of periods of weakness to top up his holding, feeling that market sentiment was unjustly against it. That stance has been rewarded over the past year.

JPMorgan UK Small Cap Growth and Income has 3.9% in Premier Foods, which owns well-known brands ranging from Oxo to Mr Kipling. It has been a beneficiary of food price inflation.

abrdn UK Smaller Companies Growth has 4% in fund administration business JTC. The managers have been trimming the position after a run of decent performance. Abby Glennie recently tipped it as a long-term investment, saying it boasts highly visible revenue streams, excellent execution and management, and benefits from both bolt-on acquisitions and organic growth.

Finally, Aberforth Smaller Companies has 3.2% in publisher Wilmington.

Amongst the ‘big six’ UK small-cap trusts, the most concentrated portfolio is that of abrdn UK Smaller Companies Growth, with over 35% in its top 10 holdings. At the other end of the scale is BlackRock Smaller Companies with just over 22%.

The two trusts that have the least in common with their peers are Aberforth Smaller Companies (which makes sense given its distinctive ‘value’ approach to investing) and JPMorgan UK Small Cap Growth and Income.

The contrast between these differentiated portfolios and those of large-cap global trusts that are increasingly reliant on the success of a narrow group of companies is stark. These six trusts could be the best way to play a resurgent UK stock market.

James Carthew is head of investment companies at QuotedData. The views expressed above should not be taken as investment advice.

Fidelity International has launched a first-of-its-kind blue transition bond fund to help improve ocean and freshwater health.

The Fidelity Funds 2 - Blue Transition Bond fund will be managed by Kris Atkinson and Shamil Gohil, and will invest 80% of its assets in bonds issued by sustainable and environmentally conscious businesses globally.

Atkinson said: “We are particularly focused on blue bonds, a sub-component of the green bond market, which finance ocean and freshwater-related projects. However, blue bonds alone are not sufficient for investors looking to support ocean and freshwater themes while aiming to generate attractive risk-adjusted returns.

“A broader, more holistic approach needs to start at the issuer level; investors should consider how a company operates, which products and services it offers, and how these align to the blue transition.”

Oceans and freshwater play a vital role in supporting diverse ecosystems, as well as providing food and livelihoods, yet ‘life below water’ is the least-funded of the United Nations’ Sustainable Development Goals, according to Fidelity.

Another sustainability-focussed global corporate bond strategy was launched today by Nuveen. Its new Global Credit impact strategy has already secured $170m from investors including Gjensidige Pensjonsforsikring, a subsidy of one of Norway’s largest insurance companies, and Nuveen’s parent company, TIAA.

Portfolio manager Jessica Zarzycki, who co-manages the strategy with head of fixed income Stephen Liberatore, said it will “aim to lower the cost of capital for environmental and social projects by funding initiatives through the easily accessible, liquid public fixed income markets”.

The majority of private investors do not take environmental, social and governance (ESG) considerations into account when making investment decisions, according to the Association of Investment Companies’ (AIC) annual ESG Attitudes Tracker.

Just 48% of respondents said they consider ESG when investing, down from 53% last year, 60% in 2022 and 66% in 2021.

However, almost as many investors (43%) told Research in Finance (which conducted the study) that they were “fans” of ESG investing. This cohort is also in decline, down from 50% in 2023, 51% in 2022 and 60% in 2021.

ESG strategies are more popular amongst younger investors. More than half (53%) of respondents under 45 consider ESG when investing, compared to 43% of people aged 65 or above.

Performance is one of the main reasons that sustainable investing is falling out of favour. A mere 17% of respondents believe that taking ESG considerations into account is likely to improve performance, down from 22% last year.

There is also a lot of scepticism about investment firms’ ESG credentials. Two-thirds of respondents (67%) said they were concerned about greenwashing and 61% are not convinced by ESG claims made by funds.

A quarter (26%) of all respondents – and 31% of people aged 65 or older – associate ESG with being “woke” but only 9% said they found it “pointless”.

Nick Britton, research director of the AIC, said most people who aren’t engaged with ESG are “sceptical, uninterested or prioritising investment performance over ESG issues”.

Meanwhile, governance issues have risen up the pecking order and, for the first time, are now as important to investors as the environment.

As one investor said: “If it hasn’t got good governance, you really shouldn't be investing in it. If the management [is] poor, then it's going to lead to a disaster.”

Britton added: “Almost all the governance issues have increased in importance. Investors are increasingly savvy and recognise that governance is the bedrock of ESG investing; put another way, you need the G before you can have the E and the S.”

The most critical ESG issues are transparency and disclosure; these are a concern for 60% of respondents, more than in any previous year. Climate change fell to second place and is important to 54% of investors, while pollution ranked third (47%).

A quarter of investors exclude tobacco from their portfolios, while a further 31% try to avoid it.

Megan Brennan has joined AXA Investment Managers’ (AXA IM) thematic equity team, following her departure from boutique firm Sarasin & Partners in July.

In her new role, she will work alongside portfolio manager Gregg Bridger on AXA IM’s $9bn thematic strategy range and will report to Tom Riley, head of global thematic strategies at AXA IM Core.

During her seven-year career at Sarasin, Brennan was an analyst and fund manager across a range of multi-asset and thematic equity strategies, including the £382.7m Sarasin Responsible Global Equity fund, which was a second-quartile performer in the IA Global peer group over the past year.  

Riley said he was impressed by Brennan’s experience running global thematic portfolios, her “detailed fundamental analysis” and her comprehensive understanding of “disruptive and changing themes”.

Separately, AXA is selling its asset management division to BNP Paribas in a deal worth around €5.4bn, which is expected to close in the second quarter of 2025.

The £962m M&G Recovery fund, managed by Michael Stiasny since 2020, has been a perennial laggard for much of the past decade but there are signs the fund may be on the road to its own recovery.

Formerly managed by veteran stockpicker Tom Dobell, the fund was a darling among investors, peaking with assets around £8bn in 2012. But a rough decade for the value style and poor choices by its managers meant performance suffered and outflow followed.

But has this recent rise been enough to redeem it in the eyes of the experts, and is now the right time to buy, expecting it to continue rallying?

Following surges in performance this year, James Yardley, senior research analyst at Chelsea Financial Services, noted that many investors hoped this was a sign that the portfolio would “recover its mojo”.

The fund is a top-quartile performer in the IA UK All Companies sector over the past six, three and one months. Year-to-date, the fund has enjoyed a top-quartile return of 11.2% compared to the peer group average of just 8.2%.

Performance of fund vs sector and benchmark year-to-date

Source: FE Analytics

More broadly, when the fund has performed well, it often enjoys supranormal returns. For example, over 10 years it had the eight-best maximum gain in the sector of 27.1%. The M&G strategy also had one of the widest maximum drawdowns of 41.3%, however.

For most experts, while the fund is improving it is too early to assume this will continue. Yardley said: “There have been some small green shoots following some asset allocation moves but long-term numbers remain hugely disappointing.”

By most metrics, performance remains well below trend, with a bottom-quartile effort over five and 10 years. With the fund up by 22.2% over 10 years, it had the second-worst returns in the peer group.

While the fund has improved under Stiasny, moving into the third quartile over one and three years, this surge is not enough to justify purchasing the portfolio in its current state, according to Yardley. “While some investors may sense an opportunity – for us, there are simply better alternatives out there.”

Paul Angell, head of investment research at AJ Bell, was another expert unimpressed by the resurgence of the portfolio.

Angell said: “As ever investors should assess several factors before buying an actively managed fund: these include the calibre of the management team, the team's investment philosophy and process, the fund's performance track record and its fees relative to peers.”

Even considering the recent progress, Angell noted that “the fund has underperformed the market each calendar year [prior to 2024], across both up and down markets” since Stiasny took over from Dobell.

So, what are the potential alternatives for investors looking for a value-focused strategy?

The most popular choice was the £894m Schroder Recovery fund, which both Yardley and Samir Shar, senior fund research analyst at Quilter Cheviot, selected. This is another value-focused strategy targeting unloved businesses, making it well-suited for investors with a higher risk tolerance.

Shah said: “The team has been adept at managing through periods in which its style is somewhat out of favour, with the past 10 years primarily favouring growth investors.”

Despite the poor run for value funds generally, the portfolio achieved top-quartile results in the IA UK All Companies sector over three and five years, up by 49.5% compared to a sector average of 28.7% over the past half a decade.

Performance of fund vs sector and benchmark over 10yrs

Source: FE Analytics

While the fund fell into the second quartile over the past year and 10 years, still beating the average peer, although it slightly underperformed the market over the decade, making a return of 88.1%. This was just below the FTSE All Share benchmark result of 89.1%.

The fund can be boom or bust depending on the whether the style is in favour however. Its highly concentrated approach has led to volatility, including in 2019, when it was up 9.8%, the fourth worst performance in the sector.

Analysts at Square Mile said: “One of the characteristics that stands this fund in good stead is that its managers have a sound appreciation of the dangers that this type of investment can entail.

“They truly invest with a style that the fund’s name would suggest, bringing both the potential for outsized returns and the accompanying elevated risk levels."

While the high-risk approach makes it unsuitable as a core holding, it is recommended by Square Mile as part of a broader portfolio.

For other alternatives suggested by the experts, Angell pointed to funds such as Man GLG Income, Fidelity Special Situations and Schroder Income. Yardley also identified Jupiter Special Situations as an interesting choice for the more value-focused investors.

Rob Burdett has joined Nedgroup Investments as head of its international multi-manager business, following his departure from Columbia Threadneedle Investments in April.

Burdett served as head of multi-manager solutions at Columbia Threadneedle for over 17 years, primarily responsible for portfolios such as the CT MM Navigator Distributor fund, which has an FE fundinfo Crown Rating of four. Under his leadership the £313.2m fund achieved top-quartile performance in the IA Mixed Investment 20-60% Shares peer group over the past three years.

Earlier in his career, he was a founding partner of Thames River and worked in Rothschild Asset Management’s multi-asset team.

Burdett said: “Joining Nedgroup Investments is an exciting opportunity. The firm’s ‘founder’s mentality’ and its investment-led, multi-boutique approach, truly resonates with my own values.”

This marks the latest in a string of appointments for Nedgroup, which brought in Alex Ralph and David Roberts from Artemis Investment Management and Aegon Asset Management in March.

Passive global equity funds should theoretically offer broadly diversified exposure to companies around the world, but at the moment, they appear to be putting most of their eggs in one star-spangled basket.

The MSCI All Country World Index had 64% in the US as of 30 September 2024, while the MSCI World, which focuses exclusively on developed markets, had a whopping 71.8% allocation to the American market. In a similar vein, Fidelity Index World, a popular £9bn passive developed markets fund, has 71.5% in the US.

Another dynamic to consider is how concentrated the US equity market – and by extension, global indices – has become. The S&P 500 has 34.6% in its top 10 holdings as of 30 September 2024 and 31.7% in technology.

Backing the US has been a phenomenally successful strategy for the past decade or so, but nothing lasts forever and today, investors have reasons to be hesitant.

Performance of US and global indices over 5yrs

Source: FE Analytics

The US election could trigger stock market volatility, some experts are questioning whether the Federal Reserve will successfully pull off a soft landing, US economic data has been somewhat mixed, valuations are looking stretched and fund managers are starting to question whether the ‘Magnificent Seven’ have become over-hyped.

Even the resilient US consumer appears to be under threat, with rising credit card delinquencies and depleted savings.

Should investors be concerned about excessive valuations?

James Norton, head of retirement and managed services at Vanguard, acknowledged that valuations are a concern. “We currently believe US equity valuations are towards the top of their range. We still have positive expectations for US equities, but believe prices in some other areas offer better value, such as the UK and emerging markets,” he explained.

US equity valuations vs other regions

Sources: J.P. Morgan Asset Management’s Guide to the Markets, FTSE, IBES, LSEG Datastream, MSCI, S&P Global, data as of 10 Oct 2024

That being said, it is extremely difficult to judge which other regions might outperform and when. “Tactically betting against the US is risky. It’s impossible to predict with certainty when valuations may normalise, and many investors have betted again the US for extended periods much to their regret,” Norton continued.

Gerrit Smit, who manages the $2.6bn Stonehage Fleming Global Best Ideas Equity fund, believes many US companies deserve their loftier price tags because they are high quality and lower risk.

Global capital markets are efficient at finding good companies and valuing them appropriately, he said, arguing that Microsoft would have a similar valuation wherever it was listed.

European indices look comparatively cheaper because their constituents are totally different to the US, said Smit, who has invested three-quarters of his fund in US stocks.

Rob Burgeman, an investment manager at RBC Brewin Dolphin, agreed. Many US tech companies are mature, highly profitable and extremely cash generative, with “deep moats around their businesses” and they are “investing prodigious sums to broaden their offerings and to deepen those moats even further”, he said. 

However, James Klempster, deputy head of the Liontrust multi-asset team, warned that sentiment – as well as fundamentals – has driven the valuations of US tech giants ever higher. Share prices could be vulnerable to a reversal if investors’ optimistic expectations are not appeased – as we saw briefly this summer.

“Investors in the US today must adjudge not only the earnings of these massive companies to be sustainable, but also to be able to grow in relatively short order so as to fit their optimistic multiples. If this does not happen there is a risk that the disappointment leads to multiple contraction and underperformance,” he cautioned.

So how much should private investors allocate to the US?

Although there are reasons to be cautious in the short term, Burgeman advised against underweighting the world’s largest market. “Betting against the US is rather like betting against the house in a casino”, he said. “You might win from time to time, but in the long run, there is only one result.”

A market-cap weighting, large though it is, may be justified because “the US hasn’t reached the weighting that it has in global indices by accident”, he continued.

Colin Reedie, head of active strategies at Legal & General Investment Management, concurred: “The US remains the dominant economy by far in the world. It’s got the industries of the future, especially in the context of tech and AI [artificial intelligence]. Its banks are the largest in the world. It’s the largest producer of oil and natural gas, and it has better demographics than any other developed economy.”

Although a 64% allocation to the US may appear “outrageous”, when investors consider that there are good grounds for global indices’ high US weighting, “it feels less scary”, Reedie concluded.

What are the pros doing?

Fund managers are divided on whether this is a good time to stay neutral in the US or even go overweight.

Mark Jackson, a multi-asset strategy investment specialist at JP Morgan Asset Management, has a favourable outlook on the US relative to other regions, “bolstered by our growing confidence in a cycle extension and trend-like growth, supported by the Federal Reserve's rate-cutting cycle”.

“Although valuations are stretched, we do foresee modest gains over the coming quarters, supported by high-quality earnings and robust cash flow generation,” he said.

Conversely, Aviva Investors, Liontrust Asset Management and Neuberger Berman have a more moderate view.

Aviva Investors’ multi-asset portfolio manager Baylee Wakefield recently decided to “take some risk off the table and reassess”. She has taken profits in light of the “uncertainty” surrounding the strength of the US economy and the election.

Meanwhile, Klempster said that “it does not feel right to overweight” the US at present because mega-caps look so expensive.

Neuberger Berman expects the technology sector to continue underperforming relative to the broader market, so has downgraded its US equity allocation from overweight to market weight.

Schroder Global Recovery has one of the lowest US allocations amongst all global funds at 35%. It sets a maximum country limit of 50% so a US underweight is baked in.  

Fund manager Simon Adler said: “Can you call a portfolio global if it has more than 50% in one country? We don’t think so.”

Equity income managers have to grapple with a dilemma. If their investable universe is limited to dividend payers, which tend to be stable, resilient companies that grow relatively slowly, how can they juice up returns?

Stephen Anness, head of Invesco’s Henley-based global equity team, said: “In income land, you might run the risk of having a lot of companies that look very similar. But what you miss is companies that grow a bit faster. You miss some companies which are going through some degree of market repair, such as Rolls-Royce. So we try to think differently about where dividends may be coming from in the future.”

The Invesco Global Equity Income fund navigates this issue by having a flexible mandate. Anness can invest up to 20% in stocks with higher growth potential, such as US tech, but a low dividend yield or no dividend at all. Then he can funnel up to 10% into companies he expects to resume paying dividends but which are going through challenges.

In the same vein, the fund pursues an all-weather approach, investing in companies at different points in their evolution, which are exposed to different market dynamics.

This philosophy has paid off. The fund is the third-best performing strategy in the IA Global Equity Income sector over both three and five years to 9 October 2024, according to FE Analytics. It is sixth over 12 months and seventh over 10 years.

Performance of fund vs sector over 5yrs

Source: FE Analytics

Below, Anness tells Trustnet why he recently invested in Coca-Cola Europacific Partners and London Stock Exchange Group and why he’s sticking with Norwegian oil and gas company, Aker BP despite its poor performance this year.

Please describe your investment process

At its simplest, we are trying to buy good companies on sale. They don't have to be the best companies, but there is a minimum quality threshold. A tailwind of growth is important to us, but we try to find companies whose valuations do not reflect their growth potential.

What is your approach to income?

The bulk of the portfolio is in dividend compounders, such as Coca-Cola. We're trying to find companies that have a reasonable starting yield, which can grow their dividends. That’s a powerful combination. We’re looking for high-single-digit to low-double-digit dividend growth.

We have some capacity in the portfolio to buy companies such as Nvidia or Microsoft with either a very low dividend yield or no dividend, if we think they can generate capital growth. We bought Nvidia in 2022 but we sold it a year later, which was too early.

Finally, we can invest in companies we expect to initiate a dividend, such as Rolls-Royce.

The pandemic was an absolute nightmare for Rolls-Royce but the new management team has done a phenomenal job. One of their key tasks was to restore the strength of the balance sheet.

Rolls-Royce did that partly through an equity raise and partly through cash generation, and that led to credit rating upgrades, enabling the business to announce that it will pay a dividend early next year.

Rolls-Royce vs FTSE 100 over 5yrs

Source: FE Analytics

Which are your best performing holdings?

The three top positions over the past year have been 3i, Broadcom and Rolls-Royce. For all of these companies, the market has been through a reappraisal of how good they really are.

3i Group is the fund’s largest position. It has grown its dividend by 16.5% for the past three years and at an average rate of 12% over five years. We initiated the position in the autumn of 2020 at a starting yield of 3.5%, then we added to it when the yield was about 4%.

3i Group vs other private equity trusts and FTSE 100 over 5yrs

Source: FE Analytics

People used to think Broadcom was a black box, but the new management team has done a wonderful job, not just in turning around the operations, but also explaining it to investors in a clearer fashion. There has been reappraisal in terms of how much profit and free cash flow that business can generate.

Share price performance of Broadcom over 1yr

Source: Google Finance, data to 10 Oct 2024 in US dollars

Which stocks have detracted from performance?

The three worst performers in the past year have been glass bottling company Verallia, Reckitt Benckiser and Aker BP, the Norwegian oil and gas company.

Glass bottling companies tend to enjoy local monopolies because the economics of transporting an empty glass bottle to a vineyard to be filled are not easy.

After Covid, there was a rebound in the consumption of wine and spirits, which led to further restocking at retailers, pubs and vineyards. In 2023 demand slowed from those high levels as there was already enough wine and spirits in the system, but the medium and long-term outlook for this business is good.

We exited Reckitt Benckiser because we lacked confidence in its long-term trajectory. Its brands do not have the same pricing power as Coca-Cola, for instance, and face stiffer competition.

Aker BP’s issue is the oil price. The whole energy sector has underperformed and we are significantly underweight. Aker has low-cost, low-carbon barrels and is one of the best-positioned oil companies from a cost perspective. It is reinvesting in new projects to offset the decline rate from mature oil fields.

Share price performance of Aker BP over 1yr

Source: Google Finance, data to 10 Oct 2024 in US dollars

Its dividend is 11.5%. Over the next five years, we will get half our money back via the dividend, and we will be left with a company that is roughly the same size as it is now, whereas many other oil companies are shrinking.

Have you added any stocks to the portfolio recently?

We bought Coca-Cola Europacific Partners this year. It has the bottling rights for Coca-Cola across large parts of Europe, Indonesia and the Philippines. The business has decent volume growth and good pricing power.

London Stock Exchange Group (LSEG) was another recent purchase. It's not really a stock exchange business anymore, it’s a data business providing valuable, critical infrastructure. For instance, it provides data feeds that asset managers like Invesco use for fixed income pricing and equity pricing.

Investors in LSEG sold £2bn of shares into the secondary market last year and we took advantage of that to bulk up our position substantially.

We also bought Old Dominion Freight Line, which is a less-than-truckload provider of transport. Because of the slowdown in the US economy and weaker consumer spending, there has been a bit of fear surrounding the stock, but it continues to grow market share and it has good pricing power.

What do you enjoy doing outside of fund management?

I spend time with my family – we have three kids and three dogs – and I enjoy cycling and tennis.

It is a proud day when your children overtake you in life, whether it be by getting better grades than you could, going to university, getting a better job or moving into a nicer first home than you could have afforded.

For me, I have realised my daughter is a better investor than I am. I should be thrilled. Clearly the lessons I have taught her over the years are paying off and she is really taking what I tell her to heart.

The only problem is she is two years old.

Having moved around my own portfolio about the same time as I set up her junior ISA, it is fair to compare both of our savings pots. While I invest more each month in my own ISA, the percentage returns highlight a stark reality that my daughter’s ISA is more successful.

There are reasons for this, I keep telling myself. First is that I have had to dip into my savings over the past two years for emergencies, often taking from the best-performing funds – something I believe is recommended by advisers (although I am happy to be told otherwise should any advisers get in touch).

My daughter is invested in just two funds – the Vanguard LifeStrategy 100% fund and WS Gresham House UK Smaller Companies. I drip feed £50 per month into her account, split between the two, although the Vanguard fund makes up around three-quarters of her portfolio.

This has performed slightly better than the UK smaller companies fund, but not by much. It was also the first fund I bought, giving it longer to make the returns.

The Vanguard fund has made her 15.7%, while the Gresham House portfolio is up 14.1% in a much shorter timeframe.

So successful was her investment in WS Gresham House UK Smaller Companies that I incorporated it into my own ISA. Unfortunately, since adding it to my portfolio the fund has made just 2.4%.

One consolation is that Rathbone Global Opportunities, my largest holding, has also been my best performing, up 17% over the past few years.

The same can’t be said for Fidelity Asia Pacific Opportunities, the other fund in my ISA, which has had a torrid time, but is at least finally out of the red.

I have owned this fund the longest. Most of this time it has been lossmaking, but with China’s resurgence in recent weeks the fund has launched into positive territory, albeit only by 5.4%. Still, a profit is a profit.

The thing I have learned from the above observations is the power of not touching your money. The only real difference between the two ISAs is I have had to dip into savings, which has eroded some of the gains I have made, while my daughter’s portfolio continues rising.

Timing is also important. Had I taken the same risk I did with her JISA and invested in WS Gresham House UK Smaller Companies earlier, I would have made much higher returns. As it is, waiting a few months before biting the bullet means I missed out on the early returns my daughter made.

Perhaps I should start asking whoever is running her portfolio for advice. He seems like a chap who knows what he is doing…

Multi-asset funds provide investors with a simple one-stop-shop solution but arguably, two shops are even better. A pair of multi-asset funds can complement each other, enhance diversification, reduce volatility and guard against the risk of one fund’s manager underperforming or getting their macroeconomic outlook wrong.

Investors must be mindful not to buy the same market twice and in doing so, double down on the same risks. For this reason, we asked experts which two multi-asset funds are different enough to be compatible as joint holdings in a portfolio.

Artemis Monthly Distribution and Baillie Gifford Managed

Isaac Stell, investment manager at Wealth Club, said he would be happy to own Artemis Monthly Distribution and Baillie Gifford Managed.

The Artemis fund provides “a solid foundation to build upon”, taking a typical 60/40 approach to equity and bond exposure but with a specific focus on high-yield bonds and equities that pay a higher income.

It is managed by “four experienced pair of hands”. Jack Holmes and David Ennett apply a “rigorous” bottom-up approach to high-yield bonds, looking for smaller issuers that are often overlooked by the wider market and have the potential to provide superior returns.

For the equity sleeve, Jacob De Tusch-Lec and James Davidson look for companies with modest valuations that are producing high or growing dividend streams, attractive free cashflows and have a track record of returning cash to shareholders.

“The two approaches produce a multi-asset fund that has demonstrated its ability to consistently compound over time, leading to performance that far outpaces its relevant IA Mixed Investment 20-60% Shares sector over 10 years,” Stell said.

“This straightforward approach to asset allocation, coupled with the separate specialist teams feeding into the strategy makes this a great foundation for a two multi-asset fund portfolio and deserves a 50% weighting.”

The Baillie Gifford Managed fund provides “an additional alpha boost” by selecting stocks with a growth bias, which “nicely offsets the more core, value-orientated approach taken by the Artemis managers”.

Baillie Gifford’s “very experienced” managers Steven Hay and Iain McCombie take views on the long-term attractiveness of the underlying asset classes and maintain a higher weighting to equities at around 80%.

“The portfolio will be likely more volatile over shorter time periods, but consequently this may also be coupled with periods of significant outperformance, which was experienced during 2020 and 2021,” Stell said.

“The 50% weighting to the Baillie Gifford fund adds additional fuel to help drive long-term returns, with the benefit of the consistency of compounding that the Artemis fund offers.”

Performance of portfolios against sector over 5yrs

Source: FE Analytics

Jupiter Merlin Balanced and M&G Episode Income

For investors seeking both growth and income, Jupiter Merlin Balanced is “an excellent core fund”, according to Chris Salih, senior research analyst at FundCalibre.

“Jupiter boasts one of the strongest multi-manager, multi-asset teams in the industry, adept at capitalising on short-term market opportunities while taking defensive actions when needed,” he said.

It was paired with the more differentiated M&G Episode Income. Episode refers to times when investors act irrationally.

The manager Steven Andrew leverages behavioural finance to identify value and invest against the herd, rather than following it, Salih explained.

“Andrew assesses global assets to determine whether under-pricing is due to valid reasons or market 'episodes', driven by human behaviour. In the latter case, the team takes advantage of these episodes to buy or sell holdings at attractive prices,” he said.

The fund invests directly in stocks and bonds for added liquidity and lower costs, while some property exposure comes via property funds.

CT Universal MAP range and a BlackRock or Vanguard fund

Taking a different tack, Ben Yearsley, investment consultant at Fairview Investing, suggested pairing an active fund range with some passive multi-asset options.

“Keep it simple and buy two in equal proportion. As long as they have different styles, investors shouldn't even need to rebalance, as they will naturally do that over time,” he said.

The actively managed CT Universal MAP range is one of his “favourites”. The funds invest directly in bonds and equities, and the range spans different risk levels, enabling investors to choose how much risk they are willing to take.

Yearsley said he would blend a CT fund with a passive fund from the BlackRock MyMap or Vanguard LifeStrategy range. 

Another option he gave was to pair BlackRock or Vanguard with the defensively-focused Troy Trojan fund, which has high allocations to index-linked government bonds, money markets and gold.

Source: FE Analytics

This article is part of a series on two-fund portfolios. In the previous instalment, we covered the core/satellite approach.

China and India may dominate the headlines but emerging markets boast a plethora of opportunities elsewhere, many of which are ignored or under-appreciated. Guinness Global Investors’ emerging markets team is particularly bullish about Indonesia, Mexico and Vietnam, all of which are beneficiaries of the near-shoring trends resulting from US-China tensions.

Mexico

Mexico is the US’ largest trading partner for both imports and exports, and the country is becoming an industrial hub, according to Guinness’ head of Asia and emerging markets, Edmund Harriss.

“You could think of Mexico as an industrial hinterland just as Eastern Europe has been for Germany and the Pearl River Delta for Hong Kong,” he said.

“The infrastructure is there, supplies are in close proximity. It's a very attractive place to do business.”

China sees Mexico as a “backdoor” into the US, according to analyst Valerie Huang. “The US/China trade has fallen significantly since tariffs have been introduced, but this has been offset by an increasing share from Mexico, among other countries,” she said.

“In 2023, Mexico had record Chinese foreign direct investment and at the same time, it overtook China as the biggest exporter to the US.”

A lot of this dynamic pans out in the solar and electric vehicle sectors, with a record new $3.5bn invested by Chinese automotive companies into Mexico.

But China is not the only one doing this. Global car manufacturers such Audi, BMW, General Motors, Ford and Nissan are all looking to Mexico for cheaper labour and access to the US, the top car importer worldwide.

This year, Guinness has added Arca Continental to its portfolios – one of the world’s top Coca Cola bottling companies and the second-largest in Latin America, said portfolio manager Mark Hammonds.

“As well as benefiting from higher incomes, Arca Continental is also the beneficiary of improved infrastructure spending over time. The better infrastructure, the more efficient the distribution and delivery,” he said.

Vietnam

Vietnamese imports into the US have doubled and the same happened from China into Vietnam.

Several international businesses are trying to gain access to Vietnam and its cheap labour. DHL plans to invest €350m over the next five years into building a Southeast Asia logistics business in Vietnam, Huang noted.

Other examples include Shenzhou International, which Guinness holds in some of its portfolios. The company is a knitwear garment manufacturer whose clients include Uniqlo, Nike, Adidas and Target.

“Historically, production has been in China, but costs there have become more expensive, so it expanded into Vietnam. Vietnamese labour is roughly half the cost now of what it is in China,” she said.

The Taiwanese have also entered Vietnam looking for cheaper labour and more cultural alignment than they might find elsewhere.

“Taiwan Semiconductors (TSMC) is building a plant in Arizona and delays are emerging because of the cultural difference in the approach to work, but also a lack of advanced knowledge needed from the local communities,” Huang explained.

“Experts moving from Taiwan into the States are creating even more tensions in those local areas. This is one reasons why they are more likely to go to countries where they share some of the values and it's easier to work with the local communities.”

As an example, South Korea is the source of 78% of foreign direct investment into Vietnam. Samsung is Vietnam's largest direct investor and also its largest exporter, worth $56bn last year.

Indonesia

Indonesia is benefitting from another mega-trend: greater consumption in emerging markets. The middle class has grown; in 2005, 68% of households earned less than $1,500, but by 2022 that had fallen to 19%.

“It's clear that the spending behaviour is changing,” said Hammonds, who is investing in consumer staples such as Unilever and Unilever Indonesia, one of the largest fast-moving consumer goods companies (FMCG) in Indonesia. “It has a top-three share within many of the product ranges in its key categories, with some of the brands including, Pepsodent and Vaseline.”

Consumption is also accelerating thanks to a boom in online advertising led by social media.

“One of the things Unilever had to handle was moving a lot of the advertising expenditure away from the traditional out-of-home billboards onto social media, as Indonesia is the second-largest user of TikTok in the world,” he explained.

“It’s an interesting market and if we continue to see strong GDP growth, then we could be potentially looking at repeating the first part of this millennia, when we saw FMCG companies grow at double-digit rates.”

If recent market volatility has taught us anything, it is the danger of focusing on hope over reality.

I cannot, for example, recall a corporate results announcement that was as eagerly anticipated as Nvidia’s at the end of August, when investors responded to an ostensibly positive set of results by wiping more than $200bn off Nvidia’s market value.

This provided a perfect example of the danger that the ‘reality gap’ – the gap between what we hope will happen and what is likely to actually happen – can pose to investors.

The reality is that Nvidia is a high-quality company at the cutting edge of a technology that could revolutionise our lives and it is growing at a spectacular rate. However, this lofty ambition simply wasn’t enough to meet the hopes of investors, analysts, traders and gamblers. We have got used to Nvidia smashing expectations and it didn’t. The share price fell as a result.

While short-term volatility does, of course, subside, there are trends which have emerged recently that can help investors extrapolate how markets will behave for the remainder of the year.

For example, interest rate expectations are top of mind for most investors at the moment. The reality is that inflation appears to be under control globally and rates have now fallen in the US, UK, European Union and many other countries. Predicting what happens next, however, is where things get more complicated.

The Federal Reserve will almost certainly cut rates further throughout the remainder of the year and more so next year, notwithstanding its bumper 50 basis points cut in September. But by how much and at what speed? This is where it’s essential for investors to pay attention to the gap between what we hope will happen, and how events will actually play out.

Investors hoping for rates to rapidly fall back to low levels over the next few months, and constructing their portfolios accordingly, need to be alert to the possibility that they will be disappointed.

In July, we sold out of Nvidia in our Diversified fund range because we understand that hopes can be dashed, and frequently are. It doesn’t mean it’s a bad company, we just didn’t feel it would meet the enormous expectations the market had set for it.

It will be the same if US rates don’t fall as quickly as expected, or indeed if they fall faster than expected, which would prompt fears about the strength of the US economy. Bonds, equities, gold, Bitcoin and most other asset classes will react.

So, what does the reality gap mean for asset allocation?

Firstly, we remain positive on equities, particularly medium and smaller companies globally. While equities undoubtedly look expensive relative to history, they are by no means extraordinarily overpriced, outside of the mega-cap US technology companies, which leaves less scope for downside surprises.

We also like the UK over the long term. The economic picture looks positive and we are consistently finding many exciting companies to invest in. But our home market is where the reality gap can be widest and it’s critical that hopes for the future performance of the UK do not cloud our understanding of the fundamental outlook for UK assets.

As we look ahead to the Autumn Budget, for example, we are paying close attention to the new government’s fiscal agenda. The government’s commitment to fiscal prudence is to be welcomed, particularly given how the mini budget in September 2022 affected the international perception of UK assets.

But we are also cognisant of the impact that tax rises might have upon the strength of UK consumers and by extension upon the health of UK companies and the broader economy. The backdrop is not conducive to attracting international and domestic or corporate and institutional buyers back to the UK equity market just yet. We remain confident, however, that value will out.

Despite this, our overall market outlook for the next three to five years is almost as positive as it has ever been and we feel there are attractive long-term returns on offer for investors within most asset classes.

For example, we continue to see great value property companies across the UK and Europe, and this is a sector where we expect to see a strong recovery over the medium term as rates come down. The returns available from sections of the bond market also provide a solid bedrock to our portfolio.

While there are reasons to be optimistic right now, things remain unclear in the short term, with volatility likely throughout the remainder of the year. If anything, the events of the past few months should bring home the fact that it is always worthwhile preparing to be disappointed.

Neil Birrell is lead manager of the Premier Miton Diversified fund range. The views expressed above should not be taken as investment advice.

It is rare for fund managers to admit they were completely wrong about big calls, but Talib Sheikh, multi-asset income portfolio manager at Fidelity, admits his backing of European equities in May was an incorrect call.

A few months ago he said the region was poised for a surge in value. At the time, he felt that “the next leg of the equity market move has to be driven by earnings” and had adjusted his portfolios accordingly to favour cheap European equities, expecting that Germany would recover and prompt a much more positive picture for Europe.

Fast forward to this month, however, and Sheikh’s attitude had changed significantly. “I’m laughing because that [Europe] was a bet that didn’t work out”, he admitted.

Earlier this year, he predicted slowing US growth would lead to a broadening in the global economy. He had expected the era of multiple expansion and US exceptionalism was at an end with cheaper, more cyclical, assets becoming more in demand. “That didn’t really happen,” he noted.

Betting on Europe therefore failed to pay off as the US declined less than expected and a surge of geopolitical tensions caused market volatility in the region, particularly in France.  

From the US perspective, fears over an economic slowdown or recession proved to be somewhat overemphasised. Between April and June, US GDP growth accelerated to 2.8%, above initial predictions.

Moreover, despite a fall in performance for some of the ‘Magnificent Seven’ stocks, others such as Nvidia have gone from strength to strength, rising by 194% over the past 12 months.

He added: “What you saw in this period was growth slope, not fall beneath trend, so what happened was that everyone just ran back to the US.”

Meanwhile, in Europe, France’s snap election resulted in a hung parliament, prompting a wave of political uncertainty. This caused a spike in volatility for Europe’s second largest economy.

While the CAC40 has still enjoyed an overall rise this year, between the announcement of the election in June and the appointment of a prime minister in September, the index slid 11.5%.

Performance of the index over the past year

Source: FE Analytics

“The French have now appointed a prime minister, but that political uncertainty meant that the trade didn’t really work”, he said. “As often happens in Europe, that optimism was cruelly snubbed out”.

Consequently, while European holdings are still a large part of his portfolios, Sheikh admitted that “Europe was not a great call, although it wasn’t a disastrous one either”.

With optimism around Europe failing to manifest, where does Sheikh see opportunities for the rest of the year? The big area of interest is in Asia, where markets started to do quite well.

For example, he has been optimistic about Japan this year, noting that investment in the region generated good results for Fidelity’s portfolios. Despite a spike in volatility due to the Bank of Japan’s decision to hike interest rates, the Nikkei 225 has enjoyed a rise of 17.8% over the past year.

Performance of China and Japan market indexes over 12 months

Source: FE Analytics

Additionally, eyes have increasingly turned towards China, which shot up by about 30% in one week following the promise of a new stimulus package from the government. While optimism around Europe was snubbed this year, Sheikh said that this new wave of interest in China had more of a “leg to stand on”.

Sheikh said: “The million-dollar question for us is, does the move we’ve seen in China mean that emerging market equities, which have been out of favour for years, come back to the fore?”

For Sheikh, the recent stimulus reflects a more proactive approach from the Chinese government and signals that they have become more willing to address the current market slowdown.

With new catalysts for growth, cheap valuations and momentum for further development, there is now more debate about whether it is time to be more optimistic about emerging markets.

“Is this round of stimulus the last? No, we don’t think so. If it doesn’t work, they’ll do some more, and then at some point, there will probably be fiscal support, so we do think this is a big change,” Sheikh added.

Nevertheless, Sheikh remains cautious on the emerging markets, with the region still facing several economic challenges. The most notable, Sheikh said, was the poor balance sheets and the massive inventory backlog, which he compared to the situation during the great financial crisis.

Additionally, excitement around the market has somewhat cooled in the past week as Beijing officials have held off on promising further stimulus. Consequently, the MSCI China fell in value to 15.6%, a decline of roughly 12% in just two days.

Commentators usually agree that opportunities in the UK market are broadly based, but there is one notable exception – resources, according to Alex Wright, FE fundinfo Alpha Manager of the Fidelity Special Values trust.

Among his main overweights are financials and defensive companies, but the only real underweights are resources and energy, as the chart below shows.

Fidelity Special Values portfolio cuts

Source: Fidelity International

“We are actually overweight in all areas except resources, which we’ve been selling for the past 18 months,” Wright said.

The sector has done well recently, which was one reason why the manager decided to take profits. Despite the cuts, the trust still maintains a “reasonable” 5% exposure to oil companies. Mining, however, remains “a structural underweight” – the manager does not own any of the three top UK miners Glencore, Rio Tinto and Anglo American.

Two examples of energy companies that he has sold in the past six months were Ithaca Energy and OMV AG. The former was bought at IPO in November 2023, as Wright told Trustnet, and since then, its share price dropped by almost 40%, as the chart below shows.

As for OMV, back in 2023, when Wright bought into it, he was “particularly excited” about its gas business, predicting that the price of the commodity would remain structurally higher following the Ukraine war. In the past year, its share price has fallen 11.9%.

Performance of stock since November 2023

Source: FE Analytics

Another area where the trust has been “very heavily weighted in” and that was recently cut was support services, with names such as the multinational Serco, engineering services provider Babcock and facilities manager Mitie.

“All three of those are still in the fund today, but all three have done very well, with a real improvement in the earnings and stock-specific turnarounds,” so the positions were cut throughout 2024, as the table below shows.

Fidelity Special Values' recent trades

Source: Fidelity International

Industrials remains a large weighting for the trust, but the manager highlighted how that encompasses lots of stocks – some more cyclical, such as Keller (the third-largest position, at 3.1%) and Coats Group; some non-cyclical, such as Serco, Babcock and Mitie.

Finally, with the bid to takeover Smart Metering Systems initiated last year by US giant KKR, Wright started selling out of the company – an operation that was completed in the second quarter of 2024.

As for where the manager is seeing the most value, the names he has been buying are predominantly mid-cap cyclicals, such as property developer Crescent Nicholson, online gift shop Moonpig and plastic piping systems manufacturer Genuit.

Some real estate companies were on the buying list too, including Empiric Student Property, as well as defensive names such as Tesco, which entered the portfolio as a new position in the second quarter.

National Grid was also bought “substantially” on the announcement of the rights issue in May 2024, when the company issued new shares equivalent to 29% of its share capital at a 35% discount to the ex-rights price.

Fidelity Special Values portfolio additions

Source: Fidelity International

The company is not the only large-cap in the trust, which he explained “isn't just about cyclical and mid-caps”. Another large utility in Fidelity Special Values is SSE, and in healthcare, Wright prefers Roche (the second-largest holding at 3.2%) over AstraZeneca, which he does not own “primarily on valuation grounds, as it is very well loved,” he said.

At 4.1%, the top holding in the trust is Imperial Brands (formerly Imperial Tobacco), a call that is “quite differentiated from the average fund”.

The fourth-largest holding is NatWest, as the manager “still sees a lot of value” in financials, which is also the largest sectorial position, making up about 28% of the fund.

Similarly to industrials, the allocation is diversified across multiple individual positions, including banks (beyond NatWest Barclays, Standard Chartered and the Irish bank AIB), insurance, (both life and non-life, motor, reinsurance) and a few real estate names.

Performance of fund against sector and index over 1yr

Source: FE Analytics

Over the past year, Fidelity Special Values has beaten the FTSE All Share index by six percentage points, but was below the average peer, as the chart above shows.

Over the longer term, the track record improves: over the past 10 and three years the trust was the top name among the seven-strong IT UK All Companies sector and came in third overall (second quartile) over the past five years.

Defensive funds have a crucial role to play in portfolios, particularly those with short time horizons or with a low tolerance for losses.

Volatility has increased this year, particularly in recent months, and uncertainty remains in many pockets of the market, whether it be due to the upcoming US election, potential central bank policy error or the ongoing wars in Europe and the Middle East.

In this new series, Trustnet looks at funds that have been the steadiest in their respective sectors, measured against the most common benchmark.

Here we look at the UK, taking all the constituents of the IA UK All Companies and IA UK Equity Income sectors, as well as the investment trust equivalent peer groups, to see which portfolios have been the most defensive.

We focused on three metrics over the past five years: maximum drawdown (the most an investor would have lost if buying and selling at the worst possible times); negative periods (how many months the portfolio lost money) and volatility (the most common measure of risk).

We benchmarked this against the FTSE All Share index, which is a lower hurdle rate than the FTSE 100, as evidenced by the numerous FTSE 100 tracker funds in the list below.

Source: FE Analytics

Aside from passive funds, only one active portfolio managed to tick all the boxes of a lower maximum drawdown, fewer negative months and lower volatility. No investment trusts were able to achieve the feat.

That was the Liontrust UK Growth fund, managed by FE fundinfo Alpha Managers Anthony Cross and Julian Fosh since 2009. They were joined by fellow co-managers Matthew Tonge and Victoria Stevens in 2023.

The £966m fund has spent 22 of the past 60 months in negative territory, with a five-year maximum drawdown of 22% and volatility of 13%.

This compares favourably to the FTSE All Share, which has made a loss in 23 months over the past five years, has a maximum drawdown of 25.1% and volatility of 14.1%.

However, Liontrust UK Growth has failed to beat the index on perhaps the most important metric of all – performance.

Over five years the fund has made 26.3%, which is ahead of the average fund in the IA UK All Companies sector (25.9%), but behind the FTSE All Share’s 32.2% gain.

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

The fund invests using the team’s ‘Economic Advantage’ principles, which include looking for companies with intangible assets that provide barriers to entry for competitors.

Analysts at FE Investments said: “Due to its focus on high quality, cash generative companies, the fund protects relatively better in weaker market conditions.”

They rated the fund, noting it provides “good core UK equity exposure” because of its large-cap exposure, which gives it less liquidity risk than other portfolios under the team’s management, such as Special Situations and UK Smaller Companies funds.

It was also given an ‘A’ rating by analysts David Holder and John Monaghan at Square Mile Investment Consulting and Research. “The team's ability to hunt out high quality and enduring companies is, in our eyes, one of the most compelling features of this strategy,” they said.

While Liontrust UK Growth was the only fund in the Investment Association universe to achieve the full list of criteria, three more had lower maximum drawdowns and volatility with the same number of negative periods relative to the FTSE All Share, as the below table highlights.

IFSL Evenlode Income was joined by a pair of Fidelity funds – Enhanced Income and Moneybuilder Dividend – in achieving this feat. All three have an income mandate, with the Fidelity funds sitting in the IA UK Equity Income sector, although IFSL Evenlode Income is in the IA UK All Companies peer group, having been ejected from the IA UK Equity Income sector in 2016 for failing to meet the Investment Association’s (IA) yield targets.

The best performing of the four active funds has been the Fidelity Moneybuilder Dividend, which made 31.5% over five years, 70 basis points behind the FTSE All share index.

Performance of funds over 5yrs

Source: FE Analytics

Both Fidelity Moneybuilder Dividend and Fidelity Enhanced Income have been given  ‘Positive Prospect’ ratings from analysts at Square Mile.

On the former, they said: “Manager Rupert Gifford is a conviction-based investor who constructs this portfolio with a clear focus on providing a premium yield over the UK market. To achieve this, he tends not to risk capital by chasing riskier, higher yielding and less income-reliable stocks. Consequently, this strategy may be better suited to the more risk-averse UK equity income investor and/or to complement a more aggressively managed proposition.

The latter is also run by Gifford, who manages the equity portion of the fund. Co-manager David Jehan is responsible for the derivatives part, which is an “options overlay strategy”.

“Whilst it is complex, it has proven successful at delivering additional income to help the fund meet its yield target over time. We think the combination of these two elements is an appealing proposition for investors who have an income requirement,” they said.

Of the active funds, the portfolio to lose the least in one go, however, was IFSL Evenlode Income, which had a maximum drawdown of just 19%, 2 percentage points less than the next-best on the list.

Recommended by analysts at AJ Bell, they said: “The fund benefits from the disciplined nature of the investment process, which the fund manager consistently adheres too.

“Additionally, the long-term nature of the approach is another likeable feature. The growth of the investment team provides us with reassurance in the resource behind the offering.”

Large parts of the US market will be affected by the looming presidential election but Hargreaves Lansdown thinks most investors are best off ignoring the noise and focusing on value and small-cap opportunities.

The US will go to the ballot box in less than a month, choosing either Democrat vice president Kamala Harris or Republican candidate Donald Trump as its next president. Harris remains the favourite with a national polling average of 49% compared with Trump’s 46%, according to the New York Times’ poll tracker.

However, Hargreaves Lansdown investment analyst Aidan Moyle said “all is still to play for” and noted that the policies of each candidate could create different opportunities and challenges for investors. He pointed to several key areas of interest, including regulation, taxes and tariffs.

“Continued focus on deregulation and lower taxes under Trump could bolster large banks and investment companies, while Harris could pursue stronger financial regulations, emphasising consumer protection and reducing systemic risk,” Moyle said.

Trump's policies are also likely to favour fossil fuels, promoting deregulation in the oil, gas, and coal industries. This could benefit companies in the traditional energy sector as it might lead to a surge in new drilling projects and infrastructure development.

On the other hand, Harris is expected to push for an aggressive transition to clean energy, which would benefit companies in the renewables sector and associated areas.

On taxes, Trump has said he will build on tax cuts he implemented when he held the Oval Office between 2017 and 2021, while cutting corporation tax to 15% (from today’s 21%).

“Trump believes these tax cuts can be funded from increasing tariffs. Economists have said that both tax cuts and tariffs could put upward pressure on inflation,” Moyle explained.

Harris wants to keep the tax cuts implemented by the Trump presidency for some taxpayers, although anyone earning over $400,000 a year will go back to a higher rate. She has also pledged child tax credits and support for first-time home buyers.

Tariffs have been another big topic for the Democrat and Republican nominees, with both Harris and Trump projecting a protectionist stance and trying to protect American jobs and manufacturing from overseas competitors.

Harris was part of a decision by the Biden administration to increase tariffs on $18bn worth of Chinese imports earlier this year.

Goods such as Chinese-made electric cars, solar panels, steel and aluminium were hit with higher tariffs after current US president Joe Bien said he would not let China "unfairly control the market" for electric vehicles and key goods such as computer chips, batteries and basic medical supplies.

Trump has said he wants to take this even further by imposing a 60% tariff on all Chinese goods entering the country and 10% for goods from the rest of the world. “While it might be a boost for US production, it could come with higher costs to the US consumers. This could have an impact on not just the US market, but global stocks too,” Moyle said.

But when it comes to investing around the US election, the Hargreaves Lansdown investment analyst said investors should ignore the political noise and focus on valuations.

As many investors will probably have plenty of exposure to US mega-caps – the largest and most expensive parts of the market – through a typical US or global strategy, they should consider adding to value-biased and smaller companies funds instead. Two that Hargreaves Lansdown likes are Artemis US Smaller Companies and FTF Royce US Smaller Companies.

Performance of funds vs sector and S&P 500 over 5yrs

Source: FE Analytics

The £851m Artemis US Smaller Companies fund has been run by Cormac Weldon since launch in 2017, with Olivia Micklem becoming co-manager in 2022. The process behind the fund combines top-down and bottom-up analysis, with a bias to companies that the managers think can grow in any economic environment.

“We like his disciplined approach to investing which leans towards growth-orientated companies,” Moyle said. “Weldon sees many quality smaller companies in the industrials sector, where he invests around 30% of the fund.”

The £271m FTF Royce US Smaller Companies fund, on the other hand, is managed by Lauren Romeo and uses a value approach. A key element of this is minimising downside risk.

Romeo has close to 30 years of experience, with Moyle saying: “She has a strong support network of analysts and we like her disciplined approach focussing on quality companies trading at attractive valuations.”

The weather is on the turn and investor sentiment may just be following suit. After a barnstorming run, the so-called Magnificent Seven have hit somewhat of a rocky patch as the lack of tangible returns from the billions of dollars poured into artificial intelligence (AI) have started to test investor patience.

While tech funds have dominated buy lists this year, August’s turbulence saw a retreat to safer pastures, with Kepler Trust Intelligence’s analysis of the most bought shares by UK investors in August (across four of the mainstream platforms) throwing up some interesting results.

Yes, Nvidia topped the list as investors with severe FOMO from its stellar year-to-date gains pounced on the near-15% dip, but FTSE 100 behemoths accounted for eight of the 10 most popular shares. With the base rate heading downwards, it’s perhaps no surprise that investors are starting to look elsewhere for income and flocking to the 9%-plus yields offered by the likes of Vodafone, Legal & General and M&G (with BP, BAT and Aviva not too far behind).

But it’s not just about the income: with UK equities staging a comeback from the doldrums of the past few years, there’s potential for some capital upside as well. In fact, a year-to-date total return of 9% puts the IA UK Equity Income sector in the top six returning sectors for 2024, only a whisker behind the 10% return for the top-placed IA North America sector.

One of the key catalysts driving the interest in UK equities is the improving macroeconomic environment, with the Consumer Price Index finally hitting its 2% target (ahead of Europe and the US) and the base rate heading downwards. The UK economy has returned to growth (after slipping into the shallowest recession in history), unemployment is at a 50-year low, and business and consumer confidence indices are at their highest level in two years.

With a more supportive domestic backdrop, is it perhaps conceivable that the FTSE 100 ‘tortoises’ might be about to steal a march on the mega-cap technology ‘hares’? While broker share price forecasts should be taken with a healthy (or unhealthy) pinch of salt, there are undoubtedly some appetising numbers on display.

The chart below shows the upper end of the seven highest broker share price forecasts among the Magnificent Seven and our list of the top 10 most-bought shares by UK investors. BP and Vodafone take top honours for the highest share price forecasts and, indeed, UK large caps account for all but two of the seven highest forecasts.

Sources: Financial Times and Kepler Trust Intelligence, data to 16 Sep 2024

Or taking the more conservative view of the mid-range forecasts, the eight UK large-caps on the most-bought list (being Vodafone, L&G, BP, BAT, Rolls-Royce, Glencore, M&G and Aviva) have an average 12-month share price forecast of 19%, compared to 17% for the Magnificent Seven. Food for thought when you also factor in the chunky dividend yields.

It’s fair to say that the investment trust structure lends itself particularly well to the UK equity income sector, given the flexibility to dip into reserves to pay dividends in leaner years. As well as being one of the largest AIC sectors, the UK Equity Income sector also dominates the list of AIC dividend heroes (trusts increasing their dividends for more than 20 consecutive years) which helps to explain its popularity among income-seeking investors.

The positive outlook for UK equities is supported by Imran Sattar, the new manager of Edinburgh Investment Trust. The trust’s current exposure to overseas businesses is one of the lowest allocations in his career, which Imran attributes to the easing of headwinds in the UK and historically-low valuations, with Autotrader and Rotork among recent additions to the portfolio.

Edinburgh has delivered a five-year net asset return of 55%, one of the highest in the sector, and is currently trading on a discount of 10%, almost double the AIC sector average.

Another trust in the sector, Temple Bar, takes a value-oriented strategy to equity income, focusing on quality large and mid-cap companies from the FTSE 350 (including BP and Aviva from our most bought list) and currently trades on a dividend yield of just under 4%.

The focus on value has proved a strong driver of returns over the past few years, and the past 12 months in particular, with Temple Bar achieving a one-year net asset value (NAV) return of 17%. Its differentiated portfolio of undervalued UK businesses with significant upside potential could be a useful diversifier for growth-heavy portfolios.

And finally, they may not command the column inches of Nvidia, but the UK small-cap sector boasts more than a few hares of its own. Small business lender Funding Circle and communications specialist Filtronic have chalked up year-to-date share price increases of 220% and 255% respectively, helping to power small-cap specialist Rockwood Strategic to a one-year NAV return of almost 50% (as of 16 September 2024).

Looking ahead, it will be interesting to see if UK equities gain from the recent outflows from US technology funds and end the year with a flourish.

Jo Groves is an investment specialist at Kepler Partners. The views expressed above should not be taken as investment advice.

Wide discounts persist across the investment trust sector, not just in out-of-favour areas such as battery storage but also among trusts investing in plain vanilla equities.

Yet amidst the swathe of for-sale signs lurk some comparatively expensive companies. Mergers amongst real estate investment trusts (REITs) in particular have caused discounts to narrow sharply and other REITs to re-rate.

Below, Peel Hunt analysts Anthony Leatham and Markuz Jaffe identify some of the cheapest investment companies on the market, as well as pointing out which areas no longer offer such compelling value.

Bargains

Four equity trusts look like bargains, according to the analysts: Baillie Gifford European Growth is on a 16% discount; UK small-cap specialist BlackRock Throgmorton (-12%); and Schroder Oriental Income (-7%).

Finally, BlackRock World Mining is trading on a 10% discount despite a recent surge in popularity. It was the most-bought investment trust on interactive investor’s platform in September as investors sought to take advantage of the surging gold price by gaining exposure to miners.

In the flexible sector, Caledonia Investments' shares are on a 38% discount, with RIT Capital Partners hot on its heels at -30%. Alastair Laing, who manages Capital Gearing, recently added RIT Cap to his portfolio after the Financial Conduct Authority exempted trusts from having to disclose ongoing charges. RIT Cap’s charges were 4.5%, which Laing believes is why its discount had widened so far.

The trust has also begun to buy back its own shares. “Buying shares at a 30% discount is very powerful,” Laing said.

Leatham and Jaffe noted “holders of both JPMorgan Multi-Asset Growth & Income and JPMorgan Global Core Real Assets might want to look at other flexible strategies to rotate into”, after the former merged with JPMorgan Global Growth & Income earlier this year, while the latter failed a continuation vote, which triggered a strategic review.

Elsewhere, Impax Environmental Markets is trading on a 13% discount and could potentially benefit from money shifting out of two peers that are undergoing strategic reviews: Menhaden Resource Efficiency and Jupiter Green.

Turning to alternative assets, battery storage specialists are out of favour. Gresham House Energy Storage is on the largest discount at 53%, followed by Harmony Energy Income (-47%) and Gore Street Energy Storage (-46%). All were listed as bargains by the Peel hunt analysts.

Private equity also suffers from negative sentiment and the hangover from high fee disclosures. HarbourVest Global Private Equity has a 43% discount, while Augmentum Fintech is on -39% and Oakley Capital Investments has a 28% discount.

Trusts with ongoing charges greater than 1.5% (including performance fees) should benefit the most from changes to cost disclosure rules and several private equity trusts fall into this category, said Leatham and Jaffe.

Within the infrastructure sector, Octopus Renewables Infrastructure stands out for its 26% discount, while Sequoia Economic Infrastructure Income is also cheap, on an 18% discount.

Meanwhile, Riverstone Energy, which invests in listed equities, unquoted holdings and decarbonisation assets, is on a 41% discount. This looks “generous” given that geopolitical tensions are putting pressure on the oil price, said Leatham and Jaffe, even taking into account the trust’s illiquid private assets. “The company has committed to repurchasing shares or paying dividends equal to 20% of net gains on realisations,” they added.

Stablemate Riverstone Credit Opportunities has been in realisation mode since May 2024 and is trading on a 24% discount, with a portfolio of seven positions.

Expensive trusts and narrower discounts

The most expensive investment trust, 3i Group, is on a c. 47% premium to the end of June 2024, although it has rewarded its investors with a year-to-date NAV total return of 11% and a share price total return of 37%.

Leatham and Jaffe believe the premium looks “stretched”, especially given the trust’s portfolio is heavily concentrated into one successful business, the discount retailer Action.

Although few trusts are trading on a premium, several investment companies' discounts have narrowed substantially over the past year, often as a result of corporate action.

For instance, JPMorgan UK Small Cap Growth & Income had a 12-month average discount of 9% and a 12-month low of 17%, but following its merger with JPMorgan Mid Cap, its discount has narrowed to 4%.  

Balanced Commercial Property and Tritax EuroBox have narrowed following a cash offer from Starwood and an all-share offer from Segro, respectively.

Elsewhere, shareholder activism at PRS REIT led to the appointment of two new board members and a new chair, as well as the discount narrowing.

After a “deluge of corporate activity in the real estate sector”, other trusts in the space have narrowed; Schroder REIT has gone from a 12-month average discount of 23% to 13%, the analysts noted.

Away from real estate, global equity trust Brunner has achieved top-quartile total returns over one, three and five years and its shareholders have also benefitted from the discount narrowing to 2% compared to a 12-month average of 8%. However, Leatham and Jaffe warned that “given the lack of discount control policy or buybacks and the sizeable (30%) family shareholding, the discount could re-emerge.”

Total return performance of trust vs benchmarks and sector over 5yrs

Source: FE Analytics

Not all are trusts that have narrowed their discounts are expensive however, and Peel Hunt believes that several trusts which have benefitted already from substantial narrowing have further to go, including Pantheon Infrastructure and Cordiant Digital Infrastructure.

Pantheon Infrastructure has committed up to £18m in buybacks and has achieved “robust” NAV performance, said Leatham and Jaffe. Cordiant has a high-quality portfolio and a positive outlook that “bodes well for future growth”. Their discounts have already narrowed from 25% to 18% for Pantheon and from 39% to 28% for Cordiant.

Both trusts have achieved strong 12-month total returns (to 8 October 2024), with Cordiant up 39.5% and Pantheon delivering 21.8%, but that follows on from a tough five years, as the chart below shows.

Total return performance of trusts vs sector over 5yrs

Source: FE Analytics

Chrysalis (-37%) and HBM Global Healthcare (-18%) could also benefit from further narrowing, the analysts argued.

The Bank of England’s financial policy committee (FPC) struck a dour tone last week when minutes from its September meeting were released. It warned that global equity markets were facing significant structural vulnerabilities, prompting fears of a wider market sell-off.

In the FPC meeting, which took place on 19 September, members noted the “significant spike in volatility” on 5 August, which was based on “relatively limited economic news”, and highlighted the “potential for vulnerabilities in market-based finance to amplify shocks”.

“Markets remain susceptible to a sharp correction, which could affect the cost and availability of credit to UK households and businesses, with investors sensitive to short-term developments in a challenging global risk environment,” the FPC report noted.

The report added that the sell-off did not spill over to markets for long, with valuations quickly returning to previous “stretched levels”.

Indeed, even after periods of market volatility such as the 5 August sell-off, leading global market indices have been on the rise in 2024. The S&P 500 has particularly stood out, with the index up 17.3% so far in 2024, despite the market sell-off and poor results from some of the ‘Magnificent Seven’ firms in July.

Performance of market indexes YTD

Source: FE Analytics

There are also signs of turnarounds elsewhere, with the MSCI China index up 21.4% last month, taking its year-to-date returns to 37.1%. Domestically, the FTSE All Share index has made 10.5%, while the laggards of the domestic markets (Europe and Japan) are both still up 7% in sterling terms.

But some experts believe these fears are overemphasised. Talib Sheikh, multi-asset portfolio manager at Fidelity, disagreed with the FPC, taking a more optimistic outlook on global markets.

He said: “Are equities on a historic basis, globally expensive? Yes. Are they religiously overvalued? No. We’re much more sanguine than that.”

While global growth is slowing (the International Monetary Fund’s (IMF) latest projections in July suggest global GDP growth to drop from 3.3% in 2023 to 3.2% in 2024), this is occurring in line with recent trends.

Sheikh concluded: “It’s very easy for the Cassandras of the world to bang the drum and say the world’s about to end, but when you look at the details, it’s difficult to buy into such a pessimistic outlook”.

David Harrison, manager of the Rathbone Greenbank Global Sustainability fund, was another unconcerned by valuations pointed to by the Bank of England.

“Whilst some corners of the equity market are trading on more elevated valuations, in many cases (such as the UK, US mid-cap stocks, China and Europe) valuations are not overly stretched by historical standards,” he said.

Turning to the increased volatility that could cause tensions in the global equity market, Shaniel Ramjee co-head of multi-asset at Pictet Asset Management, did not believe this indicated any systematic weaknesses in the market.

He said: “We see far fewer imbalances in financial markets today than when we were participating in this analysis before the global financial crisis (GFC). Certainly, we assess the degree of leverage employed to be far less.”

Nevertheless, some experts do have their reservations, noting that, while the BoE may be overemphasising the challenges facing the market, its warnings are certainly valid.

As Trevor Greetham, head of multi-assets at Royal London Asset Management, said: “The Bank of England is paid to worry when it comes to financial stability.”

Indeed, there is significant room for market volatility to rise over the next 12 months. The VIX, one of the most followed measures of market volatility for the US has increased by 8.8% year-to-date. While this is still well below its peaks during the global financial crisis and Covid-19 pandemic, it does indicate rising volatility in global equity markets.

Performance of the VIX YTD

Source: Google Finance

Moreover, as we move into the end of the year, geopolitics is a hot topic, with an outbreak of war in the Middle East and – perhaps more crucial for markets at this current moment in time – an impending US election.

Indeed, despite big spending commitments from both presidential candidates, the US still faces a total federal debt of more than $35.7trn. Failure to address this from either candidate could kickstart global volatility.

Ramjee said: “One area which does concern us remains the level of debt accumulated by governments and the volatility of government bond markets is certainly the ‘Achilles heel’ of financial markets.”

Additionally, there are some concerns surrounding the rate at which central banks can ease interest rates, which could reverse into a rate hiking cycle given sufficient economic impetus.

Greetham said: “It's not beyond the realms of possibility that the Federal Reserve is hiking again next year in a parallel with 1998-2000 when tighter monetary policy ultimately burst the tech bubble.”

Absolute return funds have gone through the mire in recent years. Once populated by behemoths such as the abrdn Global Absolute Return Strategy (GARS) and Invesco Global Targeted Returns funds, both were closed in 2023 after prolonged periods of underperformance.

Now, only one strategy of a similar ilk remains: Aviva Investors Multi Strategy Target Return. But the sector is still home to myriad strategies, perhaps the most common being those that are long/short portfolios like the Janus Henderson Absolute Return fund. Both of the funds named above are included in Barclays’ Smart Investor best-buy list.

Performance of fund against sector and index over 5yrs

Source: FE Analytics

The Aviva vehicle takes a top-down approach, investing in multiple asset classes based on the team’s view of the global macroeconomic landscape, with a target return of cash plus 5%.

Barclays analysts highlighted it for its relatively low cost in comparison to its peers, its “well-resourced team” and the fact that it is a flagship product for Aviva Investors, which gave them “comfort that Aviva will continue to invest in the resources and talent required to continuously drive performance”.

This fund is more similar to the once-popular GARS, in that it blends a variety of uncorrelated strategies and trades together.

The Janus Henderson option meanwhile is a long/short fund, meaning that the two lead managers, FE fundinfo Alpha Managers Ben Wallace and Luke Newman, can make money not only by selecting winning stocks but also by “shorting” those that they think will fall in value.

“Wallace and Newman effectively run two strategies: The first is a ‘core’ portfolio, where they invest in companies they believe have good long-term growth prospects; and the second is a ‘tactical’ portfolio, which aims to take advantage of short-term market anomalies,” Barclays analysts said.

“What we also like is their distinct styles, which complement each other very well. Together, the duo has fostered a strong team culture as well as a successful performance track record.”

But for investors that only want to add one absolute return fund, which is best? For Rob Morgan, chief analyst at Charles Stanley, Aviva’s approach makes its fund “a little more difficult to understand than a long/short fund, where the approach is more prescriptive”.

Aviva also relies primarily on the managers’ macroeconomic judgments rather than stock selection alpha, both of which can be “ephemeral”, so investors need to bear that in mind.

Janus Henderson Absolute Return has a lower performance target than the Aviva fund and is therefore seen as the more cautious of the two, which also means it has lower volatility and could be of more interest to investors wishing to populate the cautious part of their portfolio. In turn, the Aviva fund is “more of a watered-down equity level of risk”.

Between the two, Morgan opted for Janus Henderson Absolute Return, as the managers have “a good record of [adding] value through stock selection” and the strategy is “straightforward”. However, the charges on the product are “at the upper end” and include a performance fee.

“It’s difficult to pick funds in this sector. Ultimately, investors must weigh up whether it is worth allocating to it versus more predictable sources of return, such as cash and fixed interest in the pursuit of diversification,” he said. “Overall, a small amount is okay, but not necessarily as a structural allocation.”

Morgan’s choice would rather veer towards the capital preservation approaches offered by the Ruffer Investment Company and Personal Assets or their open-ended equivalents Ruffer Total Return and Troy Trojan.

Ben Yearsley, director of Fairview Investing, had a more extreme view – that the whole concept of GARS-style products has been “totally discredited” and he “wouldn't go anywhere near the Aviva product”, which was launched by Colin Monroe, who had previously worked on GARS at abrdn.

“The whole concept of GARS-style products, involving multiple pairs of supposedly uncorrelated trades is flawed and far too complicated,” he said. “Though ironically, in an era where asset classes aren't nearly so correlated, they might do better.”

So, he suggested keeping things simple with absolute return – meaning buying long/short equity funds “and nothing more”.

There were three he was prepared to suggest for investors – Janus Henderson Absolute Return, Argonaut Absolute Return and Tellworth UK Select, two of which he owns in his self-invested personal pension (SIPP).

“All these look for individual equities to go up and individual equities to go down, and that's it. Tellworth is perhaps the lowest risk and Argonaut the highest.”

For Darius McDermott, managing director of Fundcalibre, the absolute return sector should be part of the all-weather section of a portfolio. These funds should give up less on the downside and provide consistent, if more modest returns, on the upside.

GARS did not do that – it initially wowed investors with outsized returns, but when these turned into losses, the complicated investment approach became difficult to explain.

He said: “I want to know exactly what is under the bonnet of any strategy. I believe funds like Janus Henderson Absolute Return are far easier to understand than the GARS-inspired wave of absolute return funds.”

McDermott also highlighted BlackRock European Absolute Alpha as another potential option for investors looking for inspiration in the sector.