Trustnet asks which funds the experts recommend holding if the UK market continues to rally.
The past few months have seen a turnaround in the UK market’s performance and popularity, so Trustnet asked investment experts which portfolios would be ideal if this UK surge continued.
The UK market is weighted more towards the value and cyclical industries that lagged global peers during the years of low interest rates and loose monetary policy. These also saw some of the biggest hits during the immediate Covid-19 sell-off.
Performance of UK vs global indices in 2020
Source: FE Analytics
All of this was overcast by lingering Brexit concerns, which kept some international investors away from the UK.
But the rollout of several effective Covid-19 vaccines last year triggered a rotation into value, as investors priced in an economic recovery. When combined with a Brexit trade deal, this meant the UK entered 2021 on a positive note.
Indeed since ‘Pfizer Monday’, UK indices have outpaced other markets, indicant of the pro-cyclical rally occurring.
Performance of UK vs global indices since November 9 2020
Source: FE Analytics
Looking at the latest fund flow data and the positive sentiment from investors towards the UK is clear, according to the Calastone Fund Flows Index (FFI).
Calastone found that while the majority of April’s fund flows went into global equity portfolios (£576m), UK equity funds enjoyed £303m worth of inflows, making it the third consecutively positive month for the UK.
“In the last three months, a turnaround in sentiment towards the UK means UK equity funds have recouped all the outflows from the previous six,” Calastone added.
Below, market experts provided their UK portfolio recommendations.
Ninety One UK Special Situations is well placed to take advantage of the reopening trade and benefit from the a strong macroeconomic bounce back, according to Juliet Schooling Latter, FundCalibre’s research director.
It invests in businesses which took some of the biggest hits in the pandemic, such as housebuilders, airlines/holiday companies, autos, builders’ merchants and banks. These are also the assets Schooling Latter thinks could be ideal for the economic reopening.
She said the Ninety One UK Special Situations fund “is one of the true value funds left”.
Managers Alessandro Dicorrado and Steve Woolley believe out of favour companies are rarely out of favour permanently and can still generate strong returns when they’re rehabilitated, Schooling Latter explained.
The fund made a total return of 39.42 per cent over five years, underperforming the IA UK All Companies sector (44.60 per cent) and the FTSE All Share index (42.62 per cent).
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.87 per cent.
Next is the River and Mercantile UK Recovery fund.
Run by Hugh Sergeant since launch in 2008, the fund has made top quartile returns over several time frames: year-to-date, three months, six months, one year, five years and 10 years.
Dzmitry Lipski, head of funds research at interactive investor, explained that Sergeant has achieved this by focusing on good businesses that are currently experiencing below-normal profit levels, which are depressing their valuations.
“To warrant inclusion in the portfolio, a company must have capabilities to help itself out of this predicament,” Lipski said.
Over five years it’s made a total return of 79.03 per cent, outperforming both the IA UK All Companies sector and MSCI United Kingdom index (39.38 per cent).
It has an OCF of 1.14 per cent.
“If you think the UK recovery will continue – and there are certainly some encouraging signs given the success of the vaccine roll out – then you will probably want to target small and medium-sized companies as these tend to be more domestically-exposed,” said Rob Morgan, Charles Stanley Direct’s pension and investment analyst.
His pick is the £207.23m Aberdeen Standard Equity Income investment trust, which can ‘nimbly’ invest across the multi-cap space.
The trust has undergone “an exceptionally difficult period” as UK domestic companies struggled in comparison to international earners and then suffered the massive economic impact of Covid.
“But it’s well placed to capture any sustained rotation into UK earners that takes place. […] It’s already had a decent turnaround since the start of the year, but there could be further to go if economic data continues to improve,” Morgan added.
Indeed year-to-date it’s the sixth best performer in the IT UK Equity Income sector.
Over five years the trust made a total return of 14.64 per cent, underperforming both the IT UK Equity Income sector (44.69 per cent) and the FTSE All Share index (42.62 per cent).
It has a 5.6 per cent dividend, running at a 5.1 per cent discount with 9 per cent gearing. It has ongoing charges of 0.87 per cent.
The next pick comes from Fairview Investing co-founder and director Ben Yearsley, who said that if an investor is looking for a UK portfolio now “it’s got to be a recovery or undervalued assets fund of which there are several worthy candidates to choose from.
“My suggestion is Man GLG UK Undervalued Assets managed by Henry Dixon,” he said.
“I spoke to Henry Dixon a month or so ago and he said the current situation was the most optimistic he had been and that the backdrop was ridiculously good. He’s been buying companies that haven’t wasted the crisis.”
Managers Dixon and Jack Barrat focus on two types of companies, ones which are cheap on an asset basis and those undervalued on P/E metrics.
The £1.3bn fund outperformed both the IA UK All Companies sector and the FTSE All Share over five years with a total return of 42.62 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Man GLG UK Undervalued Assets has an OCF 0.90 per cent.
Next up is the £2.9bn Fidelity Special Situations fund, which Jason Hollands of Tilney Investment Management Services said is one of his “top picks” for the current UK environment.
Run by FE fundinfo Alpha Manager Alex Wright and Jonathan Winton, the fund’s investment opportunities typically fit into four categories: companies that have performed poorly but are implementing turnarounds; growth companies on relatively low valuations; companies that have divisions that are hidden jewels whose potential is not fully recognised by the market; and businesses with an above average chance of being involved in takeovers.
“Wright looks for stocks that are below the radar of the wider market and are somewhat unloved but with the scope to be re-rated,” Hollands said.
The Fidelity Special Situations fund made a return of 43.46 per cent over five years, outperforming its FTSE All Share benchmark but underperformed the IA UK All Companies peers.
It has an OCF of 0.91 per cent.
The final fund pick focuses on areas the UK market is most known for - mining, energy and industrials - but could “remain the key beneficiaries of the latest post-Covid recovery,” according to Peter Toogood, chief investment officer at The Adviser Centre.
He highlighted the £1.2bn Artemis UK Select fund as “a more value-orientated tilt [that] would fit the bill.”
Managers Ambrose Faulks and Ed Legget used the March sell-off to buy into new opportunities “and it bore significant fruit in the recovery”, Toogood said.
“[They] remains pro-recovery and value-orientated in his stock selection but is alive to the multiple economic paths in front of us and will reflect that in the portfolio as the year progresses.”
The fund is currently top quartile over all time frames: year-to-date, three months, six months, one year, three years, five years and 10 years.
Over five years Artemis UK Select made a total return of 73.17 per cent, outperforming both the sector and benchmark.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has an OCF of 0.94 per cent.
Janus Henderson’s Matt Culley explains why China is well positioned to lead in electric vehicle manufacturing.
A focus on software as opposed to hardware could well position China as the leader in electric vehicles, according to Janus Henderson Investors’ Matt Culley.
Culley, an emerging markets assistant portfolio manager, explained that most prior seismic shifts in technology over the past 50 years have been precipitated by the commoditisation of what were uniquely hardware-oriented products toward software-oriented solutions.
“The pace of change during these shifts feels glacial, then sudden,” said Culley.
He said while electric vehicles are no doubt the future, the electric component is just an enabling technology commoditising the hardware cost of transport.
The winners in the electric vehicle space will therefore be defined by software, which is no different from the previous technological revolutions in personal computers and mobile phones.
“China has the opportunity to be a leader in not only the design and production of the next generation of vehicles, but also to leverage the power of software and big data to reimagine the entire automobile industry,” he added.
Total estimated EV fleet size
Source: CAAM, CEIC, Morgan Stanley Research
Indeed, the two previous seismic shifts in technology – the personal computer and the smartphone – provide a useful allegory for what is happening in the electric vehicle industry.
Market share went to the companies with expensive hardware and microcomputer memory boards provided the arena in which companies could display their value.
“What made these companies special was their relentless innovation to solve distinctly physical problems,” said Culley. “The winners in the race to reduce hardware costs historically won the marginal profit pool.”
He went on to outline that, during these shifts, software began to completely redefine what the hardware could do.
“When the cost-per-bit of computer power fell far enough, it gave way to the rise of Microsoft’s Windows,” he said. “The same happened with bandwidth and we saw the rise of Apple’s iPhone.
“In much the same vein, we believe EVs are not special because they are electric, but because of what electric can enable.”
One of the most important results from an emerging markets perspective stemming from these seismic shifts was the geographic move in manufacturing from West to East.
“As software began to define the value add of the personal computer, both assembly and component manufacturing shifted to Asia, primarily China,” Culley added.
Historically, however, automotive production has come from developed markets given how much weight is given to employment in the sector, union presence and intellectual property in manufacturing.
However, the number of parts in an electric vehicle engine is considerably less than its combustion counterpart and this low barrier to entry has given rise to many start-ups coming out of China.
“China has the unique capability of being able to leverage their low-cost manufacturing base and support innovative start-ups to focus on a software architecture from the outset,” he said.
Culley explained that perhaps the most important aspects of electric vehicles are that they offer a better value proposition to the end user.
He added that Chinese start-ups like Nio, Xpeng, and Lixiang have designed their vehicles with a unified software architecture that is capable of being dynamically updated over-the-air down to the firmware and component level.
“Existing products are built upon hundreds of outsourced vendors using broadly incompatible software code,” he said. “By developing a unified software stack these innovators can continually improve the vehicle after the initial sale.”
This fundamental shift has the potential to slow the natural depreciation of vehicles.
“Consumers now have access to the most modern technology for longer and are embracing smart electric vehicles much faster than expected.”
Expected revenue contribution from software services
Source: CAAM, CEIC, Morgan Stanley Research
With software at the centre of the consumer experience, data emerges as the key.
Culley noted that Chinese start-ups are collecting more data every day and improving their products at an accelerating rate, requiring fewer models and less hardware investment.
“They have built their business from the standpoint of engagement to build the flywheel around data and it is no surprise that the three current listed manufacturers are all backed by the Chinese Internet giants,” he said.
Indeed, Nio is backed by Tencent, Xpeng is backed by Alibaba and Lixiang is backed by Bytedance, owner of TikTok and its Chinese counterpart Douyin.
However, this would not be the first time that China has capitalised on innovation to meet a future trend - becoming a first-mover in 5G technology and adopting digital payments before the West.
The central government also appears to back rapid advancement of electric vehicles as it aligns with its goals of dominating select advanced technologies and achieving carbon neutrality by 2060.
“By providing an accommodative home market, Chinese manufacturers will be able compound these natural data scale advantages and export globally,” he said.
“China has the unique opportunity to win on both the manufacturing and technology fronts and surpass the Western incumbents who have dominated the industry for the last century.”
Chawton Global Investors’ Michael Crawford explains why he favours companies that have a long history of returns on capital and a certain culture.
Michael Crawford, manager of the TB Chawton Global Equity Income fund, questions how much investment managers can accurately predict the future path of a company.
“It's not possible to predict as much as most people think,” he said. “That's why we tend to focus a bit more on areas and companies which are well established have almost sort of won their battle within their industry and we regard that degree of predictability as more favourable.
“This is in contrast to many of the narratives you hear at the moment about companies where it has a great story - but you don't actually know whether they're going to make it or not.”
Indeed, TB Chawton Global Equity Income’s largest positions are in some of the most well-known global brands in in the world, spread across different industries.
These include global consumer goods firm Procter & Gamble, semiconductor foundry giant Taiwan Semiconductor Manufacturing Company and pharmaceutical, medical device and consumer health multinational Johnson & Johnson.
This is because one crucial aspect of Crawford’s investment philosophy is finding established companies with a history of high returns on capital as well as a mechanism of ‘alignment’ within them.
He said: “We are looking for companies that can achieve high and sustainable returns on top of current capital invested.”
These companies will have a historic record of sustained higher returns, as well as a “chain of alignment”.
“We also really want to see some mechanism within the company - or the management of that company - being aligned with our interests and our investors interests, and by that, I mean focused on the long term,” he explained.
“I think the most effective ways that’s achieved is through having a significant shareholder - which might be a family, the founder himself or herself - who acts as a sort of agent to ensure that long-termism is maintained.
“Obviously, there are many companies where the founding family has moved on and, in those cases, and in other cases, it is actually a function of the culture. This is where a culture develops within the company which causes that long-termism to persist.”
One example of a company Crawford highlighted that has both an influential shareholder and a great culture is Swedish industrial firm Atlas Copco.
Share price performance of Atlas Copco over 5 yrs
Source: Google Finance
“They have a very long history of great longevity,” he said.
“Since about just after the Second World War, they've had a significant shareholder called investor AB. They are extremely long term.”
Investor AB has board representation at Atlas Copco and is controlled by the Wallenberg family through their Foundation Asset Management company FAM.
Crawford praised Atlas Copco’s “extremely distinct culture”, which he said is very focused on decentralisation.
“They believe that the most successful organisational structure is the one where as much power as possible is devolved to individual operating units operating at a low level,” he explained.
One outcome from this was the company’s decision to invest heavily into vacuum technology for the semiconductor industry where a lot of the manufacturing process is done in a vacuum chamber.
“They realised that this was going to become a very important part of the semiconductor industry because as you make smaller and smaller semiconductors, you need to have a very clean environment,” Crawford said.
“What it shows is that this culture generates this ability to sort of almost become future proof as they see new ideas and new opportunities.
“If you had a central management, the head office is not going to see all that, and they might miss that.”
Crawford added: “We’re looking for this chain of alignment from the investor all the way into the company and its employees.
“The more that can be so that everyone is facing in the same direction, I think the better.”
From the perspective of a global equity income investor, Crawford believes there is a trade-off between growth and income.
“I think capital growth leads income growth,” he said. “There’s sometimes a threshold where the level of income or the yield becomes a warning sign as much as a positive factor.
“Companies that are paying high yield -particularly if they're in industries which are more cyclical - I think often are on perhaps on the way down, they've reached maturity and they're starting to either be disrupted or more competition is coming in.
“With the companies that I'd say are the backbone of this fund are very stable, long lived companies like Nestle which have been around for 100 years and have a stable demand that in my view, is not particularly at risk from disruption or anything like that.”
When it comes to valuation of these companies, much like famed value investor Warren Buffett, Crawford looks for margin of safety to ensure that there is protection if his analysis is not correct.
However, he said: “I do think that that concept has been moved on now by particularly by James Anderson at Baillie Gifford into this concept of margin of potential.
“What can this company actually achieve if things go as you expect? What is the upside? We think about it in both those ways.”
TB Chawton Global Equity Income has made 30.10 per cent since launch in May 2019, compared with gains of 19.96 per cent from its IA Global Equity Income sector and 30.51 per cent from the MSCI World index.
Performance of the fund since launch
Source: FE Analytics
The £12m fund is yielding 1.7 per cent and has ongoing charges of 1.15 per cent.
Michael Ulrich, manager of the JOHCM UK Opportunities fund, explains the portfolio changes he’s made in Q1 in reaction to “the big inflation debate”.
As markets move out the Covid crisis environment, JOHCM UK Opportunities fund manager Michael Ulrich has positioned his fund to be on the right side of the new market environment.
The UK market entered 2021 on a positive, according to Ulrich, as global businesses and investment returned to the UK after years of animosity towards the market.
“The UK market is alive and kicking,” he said.
“IPOs are back and it’s clear to us that global businesses still want that UK listing. We’ve got a really great breadth of choice here, UK market remains full of global companies, full of market leading companies.
“The good news is that we’ve got Brexit out of the way, we’ve got vaccinations we’re starting to see investor flows come back into the UK after what’s been a really long period of outflows.”
Ulrich said there have been times in the past when there were few attractive opportunities in the UK market, but that isn’t the case today with better growth and valuation upside than he’s seen for over a decade.
Ulrich manages the five FE fundinfo Crown-rated JOHCM UK Opportunities fund alongside Rachel Reutter. It is run with a growth style bias to large-caps and bigger mid-cap companies. It is unconstrained from benchmarks with a strong focus on growth and valuation upside.
“The investment process is really simple: we start with the tailwinds. It’s not about macroeconomic forecasts, it’s just about identifying those persistent, long-term changes in business and society and government and about making sure that we stay the right side of these tailwinds,” Ulrich said.
At the moment the biggest tailwind in markets is inflation.
Part of the fund’s process is shifting to algin itself with changing market conditions.
“We change when the facts change. That’s really allowed us to do well in different market environments,” Ulrich said.
Applying that to inflation entering markets, Ulrich said: “How we’re responding is making sure we’ve got this portfolio which has this mix of companies that are direct beneficiaries to the rising cost environment.
“Companies that have got the right supply and demand characteristics and companies with pricing powers and inflation linked contracts.”
JOHCM UK Opportunities added four “strategic” new positions during Q1 in response to the increased inflationary environment markets are moving into.
Two of the new positions were mining companies: Anglo American and Antofagasta.
According to Ulrich both companies have the “right commodity mix” of metals such as copper and nickel.
These stocks also benefit from other tailwinds, such as the rise of renewable energy and electric vehicles, which use these metals in production, as well as supply and demand shortages.
According to Ulrich, there is currently a shortage of the metals these companies mine. But these stocks have invested in new long-term mining projects that could address this increasing supply deficit.
“So for those two we’ve got this supply and demand tension that we’re really looking for,” he said.
Another holding added in Q1 was paper and packaging company Mondi.
Again, this is a beneficiary of the supply and demand tail wind and the trend for businesses to transition to a more “closed looped economy” as a part of environmental and sustainability efforts.
“The limited supply [theme] carrying on and already seeing that improved pricing come through to a company whose margins we really like and has a cash profit,” Ulrich said.
The final stock is one that the JOHCM UK Opportunities fund has invested in before, Bodycote, which provides thermal treatments to metals. It has a strong market in the electric vehicle production theme, Ulrich said.
“The real message I want to get across here is we’ve always had this focus on pricing power. We’ve moved and tilted the portfolio and not just [because] we’re protective of cost savings but is it make sure that we’ve got the exposure that actually benefits from more inflationary environments that we’re starting to see,” the manager said.
With the changing tail winds, this has also caused the fund to sell out of several holdings in Q1. These decisions were also driven by valuation concerns, which is a core part of the JOHCM UK Opportunities fund’s process.
“You simply can’t make money if you ignore valuations,” Ulrich said.
“We use our valuation control to manage downside risk and we use it in an absolute not a relative way and we implement, as I said, that sell discipline.”
Two stocks the fund sold out of were Bunzl and Compass, both due to valuations rising to levels which would require higher price margins but Ulrich felt they would struggle to deliver. Concerns over cost inflation concerns were also a factor.
The three other stocks, Rio Tinto, Vodaphone and GlaxoSmithKline, were sold in reaction to the shifting tail winds as well as valuation control.
For Rio Tinto, another mining group, Ulrich said that the company was using 70 per cent of its profits to payout shareholders dividends “starving its business of investment growth”.
“That’s in contrast to the two mining companies we bought in the quarter, they’re both using their cash to reinvest for the long term,” he said.
Rio Tinto has also had significant governance issues after destroying an ancient Aboriginal heritage site for its new iron ore project.
This incident “is a direct example of the financial impact of poor social governance”, Ulrich said.
On GlaxoSmithKline, the manager explained this sell decision was part of upgrading the portfolio for better growth prospects.
“Stocks where our investment thesis simply wasn’t playing out and a key part of sell discipline is about cutting positions where we think we’ve got it wrong,” he said.
The company underwent a management change three years ago and since then the research and development elements “simply hasn’t worked”.
“It hasn’t produced enough new products to mitigate the patent expiries that are coming over the next few years. I think that there’s an increased risk that management are going to use expenses to plug that gap, so we sold GlaxoSmithKline,” Ulrich said.
All of the activity over Q1 2021 has been to “improve both the quality and the growth prospects of the portfolio but it also gives us better valuation upside”, Ulrich said.
“If you look at the top of that portfolio it’s definitely full of growth potential but importantly it’s not full of over valuation,” he added.
“It’s very deliberately been actively managed. It’s been shaped not into a portfolio of stocks that did well over the last decade tried to build a portfolio of stocks which are going to do well over the next decade.”
Over the past five years JOHCM UK Opportunities has made a total return of 34.91 per cent, underperforming against the IA UK All Companies sector (48.60 per cent) and the FTSE All Share index (44.33 per cent).
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
It has an ongoing charges figure (OCF) of 0.89 per cent.
JPMorgan Claverhouse IT’s William Meadon says the best opportunities are now in value stocks, but this doesn’t mean you should turn your back on growth names.
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Comgest Global Growth manager Laure Negiar looks beyond the ‘usual suspects’ in the tech sector to find companies in the increasingly popular semiconductors space.
Despite recent hiccups, tech stocks have experienced sharp rallies in the past 12 months, as investors have sought out companies benefiting from the digital transformation of the global economy. 
In a crowded and expensive tech space, looking beyond the ‘usual suspects’ can make all the difference. Indeed, global equity investors have sometimes overlooked the fact that companies not operating primarily in the digital space can still benefit hugely from the digital transformation, while also enjoying some protection against sudden downturns in tech stocks by virtue of their diversification. This is especially notable in the increasingly popular semiconductors space.
Two Japanese semiconductor plays not classified as technology stocks are Hoya Corporation, a healthcare company, and Shin-Etsu Chemical, a materials producer.
These companies have built dominant positions in targeted areas of the semiconductor value chain while also offering investors diversification benefits should the digital trend reverse temporarily. Yet, because they are not properly understood as tech plays, these companies trade at lower multiples than their better-known peers despite enjoying earnings growth and margins that are at least as high as the rest of the sector’s.
ESG criteria should be integrated in all stock selection and companies in the semiconductor arena can pose challenges especially when it comes to environmental concerns. Therefore a thorough review and careful screening is needed to ensure that the companies are in line with ESG standards. It’s always of paramount importance for active investors to engage with portfolio companies and where necessary engage with them to improve their ESG performance.
Hoya Corporation began operations as a glassware company, and it has parried its core strength in glass processing into near dominance in disc substrates and semiconductor imaging materials. Although Hoya derives over 60 per cent of its sales from its lifecare business, approximately 20 per cent of its profits come from its role in the semiconductor supply chain.
The company is the global leader in photoblanks and photomasks, a niche but highly profitable area – operating margins are over 50 per cent. Hoya’s sales of Extreme Ultraviolet (EUV) components for the latest generation of semiconductor chips have increased by more than 50 per cent annually over the past couple of years. Hoya should continue to grow dynamically over the next several years, led by the company’s clear leadership in blanks and masks for the leading edge.
In terms of ESG Hoya stands out among Japanese companies for its corporate governance structure. The company has three board committees (audit, nomination, compensation) which are fully independent. Moreover, the board is majority independent as it comprises five independent outside directors and only one executive officer, who is actually the CEO/chairman.
As regards environmental risks, producing glass is not only a highly energy-intensive activity, but water intensive as well (and comes with the risk of water pollution). As such Hoya is vulnerable to risks from high water consumption (i.e. droughts), as well as climate change-related risks like massive flooding in Thailand and the Philippines where some Hoya plants are located.
In 2019 and 2020, we led a collaborative investor initiative (CDP Non-Disclosure Campaign) to encourage the company to increase its environmental disclosure, which has since then been implemented: Hoya decided to report on CDP Climate Change and Water Security questionnaires. We continue to engage with them with positive results and Hoya now provides more disclosure on ESG matters and metrics.
Shin-Etsu Chemical has also built an almost unassailable position supplying essential components to the semiconductor industry. It is not well known outside Japan and even less well known as a tech play. Yet it is the global leader in the manufacture of semiconductor wafers (on which circuits are printed) with a 30 per cent market share, a highly attractive business with returns on invested capital (ROIC) of over 20 per cent and double-digit earnings growth.
The company is protected by significant barriers to entry, meaning that its returns are sustainable: it is a scale business as it takes at least two to three years to build a greenfield plant and even longer to build client trust. Demand for 300-millimetre wafers for use in smartphones, data centres and other applications is set to rise faster than supply for some time, boosting both volumes and pricing at Shin-Etsu. Shin-Etsu should be able to generate double-digit annualized earnings growth over the next 5 years, bolstered by a continuation of these trends.
Although Shin-Etsu faces significant environmental issues it provides a good level of ESG information disclosure. Sustainable development is visibly embedded into their corporate strategy and they are actively addressing the 10 most prioritised Sustainable Development Goals (SDGs) for the chemical sector. Their ESG Promotion Committee is chaired by the company’s president and has identified key issues for the company to address and established targets. The firm has also been included in various CSR indices such as: MSCI ESG Leaders, MSCI Japan ESG Select Leaders, FTSE4Good and FTSE Blossom Japan among others.
Of course, this is not to say investors ought to avoid better known companies.
In the semiconductor space Taiwan Semiconductor Manufacturing Company (TSMC), a multinational semiconductor contract manufacturing and design company, remains a strong quality growth stock.
However, investors should not lose sight of the fact that the secular growth trends underpinning tech plays are actually supporting a diverse range of companies, not all of them well known or understood as technology stocks. It is always worth casting the net wide and looking to see who stands to benefit from digital transformation, even if their main line of business is elsewhere.
Laure Negiar is portfolio manager of the Comgest Global Growth strategy. The views expressed above are her own and should not be taken as investment advice.James Anderson shares his blunt views on the investment management industry in his final review as manager of the Scottish Mortgage Investment Trust.
James Anderson has used his final managers’ review for the £15.3bn Scottish Mortgage Investment Trust to argue that conventional investment management is broken and needs to be reinvented from first principles.
The manager of Baillie Gifford’s flagship closed-ended fund claimed that his greatest failing has been to be “insufficiently radical”.
“To be blunt: the world of conventional investment management is irretrievably broken,” he said.
Anderson - who is set to retire in April 2022 – said the investment world changed profoundly in the mid 1980s.
“It resembles that most famously described by Ben Graham, the apostle of value investing, paid homage to by Warren Buffett and perpetually embraced by the media, as little as Alice's rabbit hole described the reality of the late 19th century,” he said.
Last year he called out Warren Buffett’s “extraordinary grip” on the investing world and said it was partly to blame for many missing out on the rise growth stocks such as Tesla, Amazon and Netflix.
The strategy of rebalancing towards value with a “blind conviction” that it would outperform was, in his view, “an investment tragedy”.
To illustrate the change “from the world in which a growth stock was defined by Graham as one able to double earnings in a single decade”, Anderson highlighted the earnings of Amazon over the last 23 years.
Source: Scottish Mortgage Investment Trust
Despite the massive growth in earnings, he said Amazon still understates their progress due to conservative accounting of third-party fulfilment.
“But we still have a compound growth rate of 41 per cent per annum for over two decades,” he added.
“This pattern of sustained growth at extreme pace and with increasing returns to scale has become more and more evident since the emergence of digital technologies as first exemplified by Microsoft (still growing after 35 years as a public company).
“It is in these extremes that investing resides.”
He believes that investors cannot afford to choose a level of risk and return along a classic bell-curve because it doesn’t account for “the deep uncertainty of the world” or acknowledge that “the skew of returns is so extreme”.
Anderson argued that instead, the search for companies with “the characteristics that might enable extreme and compounding success” is central to investing.
He added: “Distraction through seeking minor opportunities in banal companies over short periods is the perennial temptation.
“It must be resisted. This requires conviction. The share price drawdowns will be regular and severe. 40 per cent is common.
“The stock charts that look like remorseless bottom left to top right graphs are never as smooth and easy as they subsequently appear.”
Indeed, in recent months investors have been favouring value stocks over growth stocks as inflation fears continue to grip financial markets.
This has weighed on the performance of Scottish Mortgage, which has fallen 23 per cent from its peak in mid-February.
Performance of Scottish Mortgage Investment Trust year-to-date
Source: FE Analytics
Despite this, Anderson believes investors shouldn’t be distracted by short-term noise and instead be “obsessed” with long-term decision making.
“It is inherent to the notion of efficient markets that all available information is incorporated in share prices. Only new information matters,” he said.
“This is used to justify the near pornographic allure of news such as earnings announcements and macroeconomic headlines. In turn this is reinforced by the power of near-term financial incentives.”
If investors believe that all information is accurately reflected in share prices and near-term investment outcomes matter, he said it implies there is no apparent rationale for deciphering the future.
As an example, he highlighted Scottish Mortgage’s initial investment in Tesla seven years ago after observing the pace of improvement in battery performance and of learning in building electric vehicles which was “clear in practice” and “well-elucidated in academic study”.
“This made it as close to inevitable as investing allows that at some point electric vehicles were going to be better and cheaper than the internal combustion engine - quite aside from environmental issues,” he said. “That's simply what happens when a 15 per cent plus improvement rate meets a 2-3 per cent snail.
“We just had to listen to experts and wait. But most investors do not listen to experts. Instead they listen to brokers and the media, besotted as it is by fear mongering and the many short sellers.”
Since making multiples from its initial investment, Scottish Mortgage has trimmed roughly 80 per cent of its holding in Tesla over the last 12 months, which at one point was its largest position accounting for over 10 per cent of its portfolio, now its fifth largest stake at 4.6 per cent.
Anderson continued: “To us it is bizarre that brokers, hedge fund mavens and commentators can claim to be able to decipher the future and assign a precise numerical target to the value of Tesla.
“Perhaps they are all geniuses. We are not. We should respect and endure uncertainty, try to identify where extreme upside might occur and observe patiently.”
He believes that Tesla was a crucial example of the “central issue” for investing in our times.
“It isn't growth versus value, it isn't the level of markets, it isn't the economic growth rate in 2021 or the progress of the pandemic but it is understanding change, how it happens, how much happens and its implications,” he explained.
“The refusal to embrace this is probably a reflection of the doomed desire for security but it is also emblematic of a broader crisis in economic thought that is preoccupied with the mathematics of equilibrium.”
He finished by quoting Noubar Afeyan, founder of Flagship Health Investors and chair of Moderna: “Let me say maybe something stark…which is that we have to be willing to embrace unreasonable propositions and unreasonable people in order to make extraordinary findings because the notion that utterly reasonable people doing utterly reasonable things will produce massive breakthroughs doesn't compute to me”.
Anderson added: “There is no industry more suspicious of the unconventional than fund management.
“We need to reinvest from first principles. We need to help create great companies that embrace the extraordinary.”
Under Anderson’s tenure as manager, Scottish Mortgage has made a total return of 1,586.47 per cent, compared with 394.88 per cent from the IT Global sector and 348.93 per cent from the FTSE All World index.
Performance of trust vs sector and index under Anderson
Source: FE Analytics
As of 11 May 2021, it was trading at a 5.3 per cent discount to net asset value (NAV) and yielded 0.3 per cent. It is 7 per cent geared and has an ongoing charges figure (OCF) of 0.36 per cent.
Emerging bond markets are increasingly moving into the focus of investors. But not all of them will benefit equally from the recovery after the corona crisis. A differentiated analysis is indispensable, says Vanguard’s Nick Eisinger.
Emerging markets seem to be inundated with too much positive news. This sounds like an odd complaint for a risky asset class. After all, emerging markets should in principle respond positively to factors such as a stronger global economy, the gradual opening up to tourism and the firming of commodity prices. 
The problem, however, lies in the starting position. At the beginning of the year, emerging markets were an asset class that offered decent returns against a backdrop of low global interest rates and where risk premiums were expected to fall as the global macroeconomic picture improved. This largely came true in January and February: spreads on emerging market investment grade (IG) and high yield (HY) sovereign bonds narrowed by about 10 and 30 basis points, respectively, by the end of February.
The background to this was the approaching end of the lockdown and the associated return to an economic growth path. This development has put further pressure on US government bonds. Although the US Federal Reserve and the ECB reaffirm their strategy of maintaining the low interest rate policy and general support measures for the foreseeable future. But the market is increasingly doubtful about this and is struggling to understand how policy (fiscal and monetary) can remain so loose on the eve of the lockdown exit and the associated economic recovery.
Breakeven inflation rates have anticipated this move for some time, but more recently we can observe a shift in nominal interest rates and - in the face of virtually unchanged actual inflation rates - a rise in real interest rates.
The key is to be aware of the impact of such a rise in US Treasury yields on emerging market fixed income assets. This is especially true for some of the higher quality emerging markets. In this sector, spreads are no longer sufficient to compensate for the losses associated with a sell-off in US Treasuries. Riskier emerging markets with higher yields are currently in a better position to overcome these challenges.
Thus, the aforementioned spread tightening in HY was sufficient to offset much of the negative impact from the widening of yields on Treasuries and, to a lesser extent, German bunds and other G7 risk-free rates. IG government bonds, on the other hand, could not escape the pull to the same extent.
These current developments need to be taken into account when assessing the medium-term potential of emerging market bonds as a whole as well as individual sub-segments. Like any asset class, they will be significantly affected by the corona pandemic and related containment measures. Overall, global vaccination programmes are having a positive impact on human health and emerging market growth. However, individual country fundamentals will continue to diverge depending on how successful governments are in implementing their support and vaccination programmes - and how much of a burden they place on government budgets.
Fundamentally, the fight against the pandemic has put a strain on public budgets in all parts of the world. Spending on medical care and stimulus programmes has increased, while tax revenues have declined with the economic slump. Although the public debt of the emerging countries already reached its highest level since 2002 at the beginning of 2020, the low interest rates make this debt burden appear sustainable overall.
It should be noted, however, that the credit quality of individual emerging markets varies greatly - with corresponding consequences for the financing of the crisis measures and the national budgets. This in turn has an impact on the outlook for the respective bonds. An analysis according to risk segments or credit ratings provides some insight.
Solvent emerging markets remain solid
Among the solvent emerging markets, Chile and Poland stood out with exceptionally large stimulus packages. In both countries, these included tax cuts as well as direct investments in their health care and social security programmes.
According to the IMF Fiscal Monitor of October, these stimulus packages amounted to six to eight percent of economic output. This put both countries comparatively close behind the large economies, which spent an average of 9 per cent of their gross domestic product, while the emerging economies as a whole only came to 3 per cent.
Chile and Poland were not only able to borrow abroad at historically low interest rates, but also on their own highly developed bond markets. This is because their central banks have gained a lot of credibility in the markets through years of successful inflation management. They also belong to the group of solid countries where central banks have been able to launch government bond purchase programmes.
These countries will, on average, take on more debt to overcome the corona crisis, but they will also recover faster than less solvent countries, as they are also likely to suffer fewer deep recession scars. They will also be able to continue to support their economies thanks to high financing flexibility and good market access. The debt of these countries will rise, but their debt sustainability should not be at risk.
However, even within the group of solvent emerging markets, investors need to keep an eye on debt, as debt ratios could exceed certain rating thresholds. Malaysia and India, for example, are at risk of downgrades due to rising debt ratios. Careful differentiation of the more solvent emerging markets according to their credit profile therefore remains indispensable in this segment as well.
A dichotomy in emerging market middle quality
The middle quality segment has a wide range of very different credit profiles. On the one hand, the mid-range includes larger countries with higher debt ratios but functioning capital markets through which governments can finance themselves. South Africa and Brazil, for example, have borrowed large sums domestically. To keep borrowing costs as low as possible, many of the bonds have only short maturities. By financing domestically, the risk premiums have not increased too drastically, but the refinancing risks on the domestic bond markets are rising. In the medium term, these countries will have to seek debt sustainability. They can still borrow abroad; however, risk premiums will increasingly diverge - depending on the market's assessment of the plans for medium-term consolidation and the ability and willingness to implement these plans.
Other countries in the spectrum, while not extremely indebted, have few reserves of their own or efficient bond markets, limiting their flexibility in budget financing. These include countries such as Paraguay, Jordan and Mongolia, which have so far financed themselves through external debt and subsidised loans from multilateral institutions such as the International Monetary Fund and the World Bank. These countries also receive support from the USA and other developed countries.
Poorer countries will need additional aid
Particularly affected by the pandemic were countries with weak credit ratings and crisis countries that had already found it difficult to finance themselves. Countries like Bahrain and El Salvador could only borrow abroad at high interest rates.
Most of these countries are heavily dependent on subsidised multilateral loans and bilateral debt relief such as the G20's Debt Service Suspension Initiative. Others, including Ecuador, Argentina and Lebanon, have had to restructure their market-raised debt. Fiscal problems existed in many cases before the pandemic, but were further exacerbated by the crisis.
Overall, the sovereign debt of the countries with weak credit ratings shows considerable differences. An important differentiator for emerging market debt funds will therefore be the ability of their fund managers to correctly predict the development of the public budgets of these countries. Governments face a difficult balancing act: on the one hand, they need to consolidate their budgets; on the other, they continue to rely on multilateral financing and bilateral debt relief - especially from China, in many cases a major creditor. Among the countries on the threshold of over-indebtedness and facing difficult choices is Sri Lanka.
There will be more defaults and restructurings in this group in the coming years. For active emerging debt managers with a high level of fundamental analysis competence, however, this will certainly result in strategic opportunities.
At present, however, countries from the creditworthiness midfield are often to be preferred. In this segment, too, a careful and differentiated analysis of fundamental data and the corresponding selection of securities are gaining in importance. In many cases, however, they should benefit from a recovery of the global economy. At the same time, they offer greater protection against interest rates in the USA, which may continue to rise, than countries in the upper end of the quality spectrum can offer. In view of the historically low risk premiums, caution is advisable in this segment - an assessment that has already been impressively underpinned by developments at the beginning of the year.
Nick Eisinger is a fund manager for emerging markets fixed income at Vanguard. The views expressed above are his own and should not be taken as investment advice.
Trustnet discovers which investment trusts are currently trading at significant discounts to net asset value (NAV).
UK smaller companies trusts are collectively trading at the widest discount as some areas of the UK, long hit by Brexit and by more recently Covid, slowly start to enjoy the global recovery.
Discounted investment trusts can offer investors a useful entry point at gaining exposure to companies at a lower rate than the net asset value (NAV).
Trusts can trade at a discount for a multitude of reasons, but it can be a buy signal because if sentiment improves the discount can narrow and investors can realise enhanced gains.
Conversely, if a trust trades on a premium it can be an indication the trust is expensive and there is a risk the premium could fall.
Using data from FE Analytics, Trustnet has looked across the main AIC sectors to discover which trusts are currently trading on the widest discounts. Those without recent discount figures have been excluded – although most updated on 7 May.
Investment trusts trading at the widest discount in 2021
Source: FE Analytics
The biggest discount appears to be on the £62.5m Marwyn Value Investors trust, which was trading at a discount of 36.79 per cent as at 23 April. As of 11 May, it had barely moved with a discount of 36.1 per cent, according to the AIC website.
The trust, which sits in the IT UK Smaller Companies sector, has consistently traded on a discount wider than 20 per cent discount over the last five years; it went as low as near 50 per cent discount after the coronavirus sell-off in March 2020.
This can perhaps be explained by the highly concentrated nature of the holdings, with Zegona Communications occupying a 36.09 per cent stake in the portfolio.
The share price of Zegona Communications hit a high in 2017 and has since struggled with fluctuations.
Marwyn Value Investors’ discount over 5yrs
Source: FE Analytics
In second is the $760.4m Canadian General Investments trust, which was trading on a 32.3 per cent discount to NAV as of 7 May. Its discount has hovered around a 30 per cent average for the past five years, according to Shore Capital.
The trust – which is domiciled in Canada, has outperformed the IT North America sector over the past one, three and five years. Over the past 12 months, its 79.07 per cent total return is significantly ahead of the 49.38 per cent made by its average peer.
Analysts at Shore Capital explained why the discount remains high: “One of the key discount management tools used by most funds, a buy-back or tender offer, is not a possibility for Canadian General Investments given the fund’s investment corp status, which eliminates a layer of taxation, with capital gains only being taxed at the shareholder level.
“We believe that a steady/growing dividend should boost the attractiveness of the shares and could lead to some contraction in the discount.”
From the IT Environmental sector, the Menhaden Plc Trust has the third highest discount at 29.06 per cent.
The £82.4m trust is managed by Luciano Suana, Ben Goldsmith and Graham Thomas invests in businesses that are demonstrably delivering or benefiting significantly, from the efficient use of energy and resources, irrespective of their size, location or stage of development.
Within UK equities, another two smaller companies trusts on the list are £68.2m Crystal Amber Fund Limited and £6m SVM UK Emerging, trading at discounts of 27.1 and 25.25 per cent respectively.
SVM UK Emerging has significant exposure to industrials and consumer discretionaries which are expected to perform strongly in the UK recovery.
Additionally, the fund holds venture capital firm Draper Espirit, a favourite of the UK small-cap space.
Draper Espirit has invested in companies such as Graphcore, TransferWise and Trustpilot and offers exposure to unlisted names.
Manager Margaret Lawson said: “The fund focuses on businesses with pricing power which we believe will be able to pay up for their inputs and raise wages.”
Furthermore, the global shift towards electric vehicles and renewables is likely to bring a structural increase in demand for copper and other commodities, and this is reflected in its investments in clean energy, including Ceres Power and ITM Power.
Performance of UK Smaller Companies trusts vs sector over 5yrs
Source: FE Analytics
There are three other IT UK Smaller Companies trusts that are trading on a significant discount to NAV.
The £1.8m Chelverton Growth Trust, run by David Horner and David Taylor, published a discount of 20.29 per cent on 31 March.
The trust invests in companies which are believed to be at a “point of change”.
Manny Phol’s £5m Athelney Trust and £39.8m Downing Strategic Micro-Cap are trading on discounts of 19.77 and 14.61 per cent respectively.
Of all of those UK smaller companies trusts, only SVM UK Emerging has managed keep up with its sector and until recently was outperforming its average peer.
Over five years, three of the trusts made a loss and Crystal Amber Fund posted a loss of 53.78 per cent.
SVM UK Emerging has performed well over five years despite being in an unloved and undervalued market, but is now as trading on one its widest discount in three years.
Finally, the trust with the highest level of gearing in the list is the £111m Middlefield Canadian Income Trust, which is currently 23.85 per cent geared.
This marks quite an increase from 15.3 per cent in January and perhaps speaks to the level of opportunity the manager has seen in Canada by adding capital to the current holdings.
It is trading at a discount of 14.19 per cent to NAV and has a yield of 4.8 per cent.
After an extended period of outperformance from growth-orientated equity strategies, only 19 UK equity funds have managed to beat their peer group both year-to-date as well as the five years prior.
Only 19 of 254 UK equity funds have managed to deliver top-quartile performance in the growth-led market of 2015 to 2020 as well as over 2021 so far, when markets favoured the value and recovery trades.
During the last five years or so, UK equity investors have had a particularly difficult time as they grappled a Brexit referendum in 2016 and four years of economic uncertainty as the country negotiated its withdrawal from the European Union.
The coronavirus pandemic also hit the nation very hard and caused economic activity grind to a halt for most of 2020. However, in 2021, after the country finalised Brexit and the economy opens as vaccines are administered nationwide, it appears the worst could be over.
In a similar shift to that on the global stage, this has sparked a market rotation out of previously in-favour growth stocks towards the value stocks which appear cheap and more cyclically exposed to the real economy.
As such, this has dragged down many of the top performing growth funds that have benefited from years of record low interest rates combined with weak (and in 2020 negative) economic growth.
Below are the 19 funds with top-quartile performance between 2015 and 2020 that have managed to maintain a top-quartile rank in 2021-to-date.
Source: FE Analytics
The top performing name on the list is the £1.4bn MI Chelverton UK Equity Growth fund. The five FE fundinfo Crown-rated fund was the highest returning strategy year-to-date and over the 2015 to 2020 period.
This UK small- and mid-cap fund invests in highly cash generative companies with strong market positions that are expected to grow faster than UK GDP.
Managed by James Baker and Edward Booth, the top three positions in the fund are media company Future, investment firm Brooks MacDonald and building materials group Volution Group.
In their latest commentary, the managers said that the UK equity market looks “increasingly attractive for investment, given the likely pace of recovery relative to what is available elsewhere”.
They added that whilst fund performance has benefitted from its recently increased exposure to cyclical names, it is still geared more towards growth.
Despite being more growth focused in a seemingly value-orientated market, measured against all the funds in the sector - including those with third and fourth quartile 2015 to 2020 performance – MI Chelverton UK Equity Growth was the third highest performing fund year-to-date after the Consistent Opportunities Unit Trust and the VT Cape Wrath Focus fund.
Two other notable top performing funds in the list were £1.1bn Slater Growth and £238 Slater Recovery funds, both managed by FE fundinfo Alpha Manager Mark Slater.
Slater’s smaller Recovery fund has managed to deliver slightly higher performance year-to-date as well as over the 2015 to 2020 period.
While the two funds may have slightly different strategies – one focuses on turnaround situations and the other focuses on high earnings growth – they both have a few common holdings.
For example, the top three positions for both strategies are in media company Future, online gaming operator Gamesys Group and insurance firm Prudential.
The £121m Unicorn UK Growth fund, run by FE fundinfo Alpha Manager Fraser Mackersie and Alex Game, was another notable name in the list of top performers.
This fund invests across the market capitalisation spectrum, with over a third of the portfolio invested in mid-sized companies between £250m and £1bn in size, a quarter invested in small-cap firms between £50m and £250m, and the remainder in firms above £1bn.
Its top three holdings are in foreign exchange broker Alpha FX, video game developer Frontier Developments and Scottish IT firm Iomart.
Elsewhere in the list, Premier Miton UK Growth run by Benji Dawes and Jon Hudson and Premier Miton UK Value Opportunities run by FE fundinfo Alpha Manager Andrew Jackson both delivered top-quartile performance during both periods.
As the rotation out of growth into value took hold of markets, Jackson’s value strategy delivered a higher return of 16.28 per cent compared to the growth fund’s 12.79 per cent year-to-date.
Whilst for the 2015 to 2020 period, Dawes’ and Hudson’s growth strategy had a higher return of 71.79 per cent compared to 39.55 per cent from the value strategy.
Another notable strategy was MFM UK Primary Opportunities, which invests almost exclusively into UK companies raising money through primary placings, secondary placings, initial public offerings (IPOs) and rights issues.
The strategy is unique in its focus on institutional fundraises which are often priced at a discount to prevailing market prices and not available to retail investors.
One notable fund absent from the table was the £6.3bn LF Lindsell Train UK Equity fund – the sector’s largest active strategy.
Whilst the top performing growth fund run by Nick Train delivered top quartile between 2015 and 2020, it has suffered in recent months with bottom quartile performance of 5.56 per cent year-to-date.
With most funds in the IA Targeted Absolute Return sector failing to hold up in last year’s crash, Adam Lewis asks, why hold them?
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Invesco’s Christopher Mellor examines the investment opportunities being created as the world moves towards a clean energy future.
An unprecedented combination of political, economic and financial factors has brought clean energy to the forefront of ESG agendas and to the attention of investors. In the fight against climate change, reducing emissions from the energy sector – which accounts for nearly three-quarters of greenhouse gas emissions – has become mission critical. 
Major advances in the field of clean energy has been one of the most significant industrial developments of the past decade. These are energy sources that are naturally replenished and produce renewable energy such as wind and solar power as well as carbon dioxide and methane capture technologies that aim to eliminate greenhouse gases.
A game changer for the renewable energy industry has been a profound improvement in economics. Once considered expensive to produce, 56 per cent of additional renewable power in 2019 achieved a lower electricity cost than the cheapest new coal plant.
The days when governments could only encourage the adoption of clean energy by subsidising it seem to be over. Solar energy is a case in point, with the cost of solar energy falling by 82 per cent between 2010 and 20191. According to the International Agency for Renewable Energies (IRENA), over the long term, renewable energy like solar and wind will become even cheaper than oil, natural gas and coal thermal power well before 2040.
There is an unprecedented consensus among the vast majority of countries, including the most polluting, China and the US, which account for 28 per cent and 15 per cent of emissions, respectively. They are all working on action plans that they will present in November at the UN Climate Change Conference (COP26), plans that will translate the commitments made in 2015 at COP21 in Paris to limit global warming by 2050.
40% increase in the share of clean energy in Europe
The European Union has led the way with its Green Deal launched at the end of 2019, which has made carbon neutrality by 2050 a priority, with an intermediate target of reducing CO2 emissions by 55 per cent from 2030 (compared to the 40 per cent initially planned). This target implies a 40 per cent increase in the share of clean energy in the European energy mix (compared to 32 per cent initially).
China, for its part, is aiming for carbon neutrality by 2060, an objective included in the 14th five-year plan (2021-25) which was presented on 5 March and provides for an 18 per cent reduction in carbon intensity as well as a growth in the share of non-fossil fuels in the energy mix from 16 per cent in 2020 to around 20 per cent in 2025.
As for the US, which rejoined the Paris Agreement on 20 January 2021, it has committed to having a 100 per cent clean energy and zero CO2 emission economy by 2050 at the latest, with an intermediate target of decarbonising all energy production plants by 2035. Symbolic of this shift in US policy were the halting of the Keystone XL pipeline extension to bring crude oil from North Dakota and the cancellation of the Alaskan Arctic drilling project.
Compelling opportunities for investors
This growth in clean energy will require substantial investment and innovation both from governments and the private sector, opening up compelling opportunities for investors.
According to the IRENA, cumulative investment in the energy system between 2015 and 2050 will need to increase around 30 per cent, from $93trn according to current and planned policies, to $120trn to meet globally agreed targets.
Under its Green Deal, the EU will need to invest €350bn more annually between 2021-2030 than it did between 2011-2020. This is an increase of around €90bn per annum compared to the investments needed to achieve current 2030 climate and energy targets. A lot of investment will go into technologies and companies that contribute to at least one of six pre-defined environmental objectives as defined by the EU.
Investors attracted to the clean energy theme have an increasingly wide choice of funds and ETFs to invest in, from highly concentrated approaches to broader strategies that capture a more diversified set of opportunities. As the clean energy space is rapidly evolving, it is important for investors to understand whether the fund or ETF they are considering is able to adapt effectively to the changing landscape.
In March this year, Invesco launched its low-cost Invesco Global Clean Energy UCITS ETF, for instance, which, by aiming to track the WilderHill New Energy Global Innovation Index, follows the performance of companies focused on the generation and use of cleaner energy, energy conservation, efficiency and the advancement of renewable energy. It currently has well over 100 stocks, providing exposure to large, medium and smaller companies focussed on one of seven clean energy sectors.
Climate policy around the world is driving an accelerating shift to clean energy with very ambitious targets: over the past year we’ve seen unprecedented commitments from major economies to reach for carbon neutrality. These targets will require significant investment in renewable energy, leading to potential very strong growth opportunities for the clean energy sector across the entire supply chain.
Christopher Mellor is head of EMEA equity and commodity ETF product management at Invesco. The views expressed above are his own and should not be taken as investment advice.
Trustnet gauges the reaction to the recent equity sell-off as investors become more concerned about rising levels of inflation.
Tech stocks have borne the brunt of investors’ growing concerns around inflation as US and European equity markets, with seeing a significant sell-off in the past few days.
The S&P 500 index fell 2.17 per cent during Monday’s session, with its tech stocks posting a loss of 3.65 per cent. The tech-heavy Nasdaq 100 also shed 3.74 per cent that day.
This prompted the FTSE 100 to drop of 2.47 per cent yesterday. This is despite the UK being on a strong run since the start of 2021 due to the rotation into value stocks and period of economic recovery favouring more cyclically biased indices.
But the FTSE 100 did open on more of a positive today, with the index currently up 33 points in the first hours of trading, following on from an easing of the US sell-off in Tuesday’s session.
Performance of indices since the start of May 2021
Source: FE Analytics
This recent sell-off is the latest part of a market shift away from growth stocks and into value and cyclical areas of the market following the rollout of several effective Covid-19 vaccines.
November’s announcement of several vaccines catalysed the style rotation as investors began to price in a period of economic restart and growth from the pandemic, an environment cyclical stocks tend to do well in.
This is a polarisation to the low interest rate, low inflation and loose monetary policy conditions that have been in place for the past decade and enabled growth stocks to dominate.
Increased inflation expectations have been the ultimate driving force behind the recent sell-off.
Ben Laidler, global markets strategist at investment platform eToro, says: “We are in the midst of an accelerating reflation investment environment, with both rising economic growth and inflation expectations.
“This has panicked investors, which is why we have seen a major sell-off in both US and European stocks … with high-growth technology stocks suffering most.
“Rising inflation will continue to drive an investor rotation from the heavily-favoured, more expensive technology sector, as well as other sectors that outperformed in 2020, towards the cheaper and more cyclical sectors, such as financials, commodities and industrials, that are most benefited by this growth recovery.”
Laidler added that this could benefit the UK and European equity markets in particular as these economies could lead the re-opening trade.
“The region's economies now lead the re-opening, against a backdrop of cheap valuations when compared to the US, and markets more focused on the cyclical sectors most benefitting from the growth rebound,” he said.
But as mentioned above, it’s not the case that the UK, a cyclically dominant and tech light market, has been unaffected by the equity sell-off.
Nick Hyett, equity analyst at Hargreaves Lansdown, said: “When it comes to stocks and shares, if the US sneezes the world catches a cold. But it should be no surprise that [the] inflation-driven market sell-off started across the pond.”
Performance of S&P 500 sectors over 2021
Source: FE Analytics
That being said, Hyett added that rising inflation expectation are likely to have the biggest negative impact on US tech stocks overall.
“All things being equal higher inflation implies higher interest rates, and higher interest rates are particularly toxic for companies that promise little in the way of profits today, but rapid growth in the years to come,” he said.
“That’s a pretty accurate description of many tech stocks, and the US market is increasingly dominated by US tech names.”
The analyst added that even with the market concerns investors should not completely abandon the tech sector yet.
“This time last year the oil price had just plummeted into negative territory for the first time ever, and that alone means costs are going to be higher now than they were a year ago, in turn driving goods prices higher. A temporary boost in inflation was inevitable. What matters is whether inflationary pressure is sustained – there’s no convincing evidence that’s the case yet,” he said.
Indeed Nigel Green, chief executive and founder of deVere Group, added that the more “savvy” investors could use this as an opportunity to buy into the popular growth tech names.
“Nobody seriously believes the future isn’t online,” he said.
One of the main debates surrounding this market activity has been whether the US Federal Reserve will react to growing inflation concerns.
Currently the Fed’s stance is that inflation is ‘transitory’. It plans to keep interest rates low and continue its bond buying programme, suggesting it’s a long way off withdrawing support for the US economy as it focuses on the recovering labour market.
Thomas Wells, who runs the four FE fundinfo Crown-rated Sanlam Global Inflation Linked Bond fund, said this rhetoric indicated that the Fed is effectively giving inflation the go-ahead to run higher.
He said: “I’m painting a picture here of rising input prices and rising consumer prices over the last few months and I’m describing a future where higher prices will ultimately feed back into the economy.
“Now that is a really nice environment for inflation linked assets but what makes this especially attractive right now is that the usual mechanism to choke off inflation is raising interest rates and the Fed have explicitly gone out and emphasised that that is not going to happen for some time. They are focused on the labour market which is, as we saw last Friday, miles away from where it needs to be.
“So consequently we have inflation expectations rising, to and above the levels that central banks are targeting and it’s being greeted with a blessing from central banks.”
JPMorgan American manager Jonathan Simon examines three sectors that look like beneficiaries of the market rotation towards value stocks.
Looking at US equity returns over the past 12 months, it would be easy to think that it was all smooth sailing with no rough seas: the US stock market has rallied over 50 per cent for the 12 month period through 31 March 2021.
But the reality is that the events of the past year have been anything but typical. Many of us are still working from home and waiting for our economy to fully reopen. For the first seven months of the recovery, it was a narrow market and not a traditional recovery: it did not lift all boats. While high-growth technology soared, energy stocks sold off and financials remained unloved. This landscape offers a huge opportunity for stock pickers looking for quality companies, well placed to benefit in the next stage of US recovery through 2021 and beyond.
This recovery goes beyond the growth stocks which have rallied in recent years. Since early November, when Pfizer announced that its vaccine had strong efficacy against Covid-19, we have seen the start of an interesting shift as the US market rotated towards value names.
This movement, which has continued ever since, shows a surge of optimism towards a broad US economic recovery. So with the strong market returns over the last year for US equities, where are the opportunities today?
Could 2021 be the year of the banks?
2020 was a challenging year for investors in US banks as they navigated a recessionary environment, lower interest rates and the pressure to build credit loss reserves alongside an inability to buy back shares or increase dividends.
Yet today, the sector is in a much stronger position: buyback programmes have recommenced and credit loss reserves are being released. Furthermore, positive economic indicators reinforce the overall market conviction in favour of a strong US recovery, with many strategists predicting 2021 US GDP growth to be the strongest in over 35 years. Of course with such strong growth expectations, the 10 year has started to move higher as well which has had a positive impact on the share price of the banking segment.
A strong economic environment should offer a period of growth for the banking sector, particularly Bank of America - the second largest bank in the US. During 2020 the bank prepared for the worst, setting aside billions for potential losses. Yet when this scenario thankfully didn’t materialise, Bank of America ended 2020 in a stronger financial position than it started.
As a result, the bank is expected to return £4.8bn in capital to shareholders in the form of share buybacks and dividends in Q1 2021. Trading at 1.4x book value and a forward price-to-earnings of 14x, as of the end of March, combined with a dividend yield of 1.8 per cent, we believe Bank of America looks very attractive on a risk vs reward basis and should, we believe, trade at a much higher multiple.
Looking for gems in travel and hospitality
The travel and hospitality sector presents an interesting opportunity for value investors, particularly for capital light, nimble business models like Booking.com. As the world’s leading provider of online travel and related services, Booking.com services consumers and local partners in more than 220 countries and territories through six primary brands including: Booking.com, Priceline, Agoda, Rentalcars.com, KAYAK and OpenTable.
In March 2020, Booking.com was in the eye of the storm, however the company has responded to the challenges of Covid-19 effectively, adjusting its cost structure to the new reality and keeping up with the rapid pace of technological and market changes. With the strong rollout of the vaccine in the US, air travel has surged to over 1 million travellers per day in March, the highest level since the pandemic began. We believe that the company’s strong fundamentals and unique proposition leave it well prepared to emerge on the front-foot in 2021 and it will continue to expand its global business.
Exploring wider opportunities in healthcare
Many big names in the US healthcare sector enjoyed strong investor support over the year on the back of increased research and development, however a number of interesting value plays in this sector remain. AbbVie is a healthcare company aiming to deliver medicines that solve serious health issues today and address the medical challenges of tomorrow. Through its competitive portfolio of products, AbbVie is generating a strong flow of cash, which supports its generous dividend alongside continued investment in future growth.
With an attractive valuation, a healthy balance sheet and a dividend yield of over 4 per cent, we believe this stock has long-term potential. This is further supported by the fact that since the company's inception in 2013, AbbVie has increased its dividend by 225 per cent. Looking forward, we are confident in AbbVie's long-term growth, driven by its impressive pipeline and expanding product portfolio.
Overall, when looking at the US, investors should continue to focus on the long term and avoid becoming distracted by short-term noise. In our view, value stocks have room to run, but it pays to be selective and to do your homework. While we are optimistic about the US economic recovery, the market is still healing. Therefore, we remain focused on individual quality and high conviction companies which have the potential to be sustainable market winners.
Jonathan Simon is portfolio manager of the JPMorgan American Investment Trust. The views expressed above are his own and should not be taken as investment advice.
With ETFs recently being included in Investment Association sectors, Trustnet finds out which have generated the most outperformance of their average peer in 2021’s rallying market.
Exchange-traded funds (ETFs) that concentrate on parts of the market that are surging have generated returns far higher than their active rivals in 2021’s re-opening rally, Trustnet research shows. 
Strong progress in the Covid-19 vaccination programmes in the likes of the US and the UK, combined with massive amounts of fiscal and monetary stimulus, have created the conditions for a strong bull run in recent months.
FE Analytics shows the MSCI AC World index has gained 6.27 per cent over 2021 so far, with the FTSE All Share rising close to 12 per cent. Analysts expect markets to continue making ground as economies around the world open up from their coronavirus lockdowns and normal activity resumes.
However, some areas of the stock market have been favoured more than others in these conditions. As the chart below shows, cyclical sectors like energy, financials and materials have surged in 2021 on the promise of a jump in activity, while growth and defensive sectors such as tech, utilities and consumer staples have struggled.
Performance of global sectors over 2021
Source: FE Analytics
The Investment Association (IA) recently admitted more than 500 ETFs into its fund sectors and as some ETFs take a more focused approach to industries and countries than most active funds, Trustnet ran the numbers to see if any were outpacing their average peer by a wide margin.
We found that several ETFs have flown past the average return of their Investment Association sector. Our data shows that five ETFs are ahead of their average peer by more than 20 percentage points while another 11 are outperforming by over 10 percentage points.
The ETF that has beaten its average Investment Association peer by the biggest margin is iShares Oil & Gas Exploration & Production.
Its total return of 38.82 per cent over 2021 so far is 31.83 percentage points higher than the 7 per cent gain made by the average fund in the IA Global sector.
Tracking the S&P Commodity Producers Oil and Gas Exploration & Production index, the ETF offers exposure to stocks that have surged in the re-opening trade as investors anticipated a jump in economic activity.
Top holdings include EOG Resources, Canadian Natural Resources and ConocoPhillips. Close to 60 per cent of the portfolio is in US stocks, with 18.7 per cent in in Canada and 9.1 per cent in Australia.
The table below reveals the 36 ETFs that have outperformed their average Investment Association peer by 7.5 percentage points or more in 2021 so far.
Source: FinXL
As noted, strategies tracking energy indices have had a strong run thanks to the reopening trade and rising commodity prices.
Indeed, the top three ETFs on that list – iShares Oil & Gas Exploration & Production, iShares S&P 500 Energy Sector and Xtrackers MSCI USA Energy – have posted the highest outperformance of any fund – active or passive – in the Investment Association universe.
But energy isn’t the only cyclical sector that has allowed ETFs to outperform their active peers, with banks rallying hard in the re-opening trade.
Banks tend to make more money in a strong economy as consumers and businesses feel more comfortable borrowing money. In addition, they benefit from longer-term interest rates rising faster than shorter-term ones, which has been happening as the market anticipates higher inflation.
ETFs that offer exposure to this and have outperformed strongly in 2021 to date include Lyxor EURO STOXX Banks, iShares S&P 500 Financials Sector, Xtrackers MSCI USA Financials and Xtrackers MSCI World Financials.
Other cyclical ETFs with strong year-to-date outperformance include Xtrackers MSCI World Materials, iShares S&P 500 Materials Sector, Xtrackers MSCI Canada, iShares MSCI Canada, HSBC MSCI Canada and Xtrackers MSCI World Value.
Source: FinXL
Of course, a focus on certain sectors or countries also means that ETFs can underperform by a wide margin so the above table shows all the ETFs that are lagging behind their average Investment Association peer by 7.5 percentage points or more in 2021.
Clean energy ETFs have put in the worst showing, with two ETFs concentrating on this space falling more than 30 percentage behind their average peer.
Other themes in the weakest performing ETFs include information technology, healthcare & biotechnology, government bonds and specific countries like Turkey, the Philippines and Malaysia.
The latest GDP data reveals the impact of the UK’s winter lockdown in 2021’s opening quarter.
The UK economy shrank by 1.5 per cent in the first three months of 2021 in the wake of the country’s extended winter lockdown, according to the Office for National Statistics (ONS).
However, this was a smaller decline than the initial impact of the Covid-19 outbreak in Q1 2020, which saw UK GDP fall by 6.1 per cent.
Overall, the UK economy is now 8.7 per cent smaller than it was prior to the Covid-19 pandemic.
The Q1 slump was somewhat expected due to the winter lockdown causing schools, retail and consumer facing industries to close.
There was however some resilience in March, which saw GDP growth of 2.1 per cent. This is the fastest monthly growth rate since last August, a positive shift in line with the easing lockdown restrictions.
AJ Bell financial analyst Danni Hewson said that the latest GDP figures demonstrated the “resilience of the British public”.
“Despite the reopening of schools, the lockdown for many sectors was still very much in place and yet the economy was blossoming. Buoyed by the vaccine rollout houses were being built, cars and motorcycles repaired, and goods being produced in Covid-secure facilities,” she said.
“Recovery with a capital R and this growth has particular significance because it shows how the economy can function if future lockdowns arise.
“That’s further evidenced by the extent of the first quarter contraction, 1.5 per cent is significantly lower than the 4 per cent that had been predicted. There is still a lot of ground to be made up, but March’s figures suggest a quick recovery is within reach.”
Looking at the data for March specifically, GAM Investments investment director Charles Hepworth said this indicates the UK economy might now be headed in.
He said: “This shows the more important rate of change at the back end of the first quarter which is giving direction to where the UK economy might be now – powering back into a strong recovery and getting the justified reward for fast vaccine distribution.
“A faster recovery changes the dynamic of central bank rate decisions and gilt yields are seeing a drift higher this morning as the prospect of negative rates is further removed from their outlook.”
Investors looking ahead should be focusing on the eventual recovery, according to Derrick Dunne, chief executive of Beaufort Investment.
He said: “GDP slumped by 1.5 per cent in the first quarter, which is no huge surprise with the country spending most of the period locked down, leaving the UK economy 8.7 per cent lower than its pre-Covid level.
“Government expenditure is also being used to prop up the economy, with household consumption and business investment declining amid coronavirus.
“None of this makes for enjoyable reading, but we have to take comfort in how much brighter things look when compared with the start of the year. GDP is estimated to have rebounded in March, rising by 2.1 per cent, the fastest monthly growth since August 2020. Shops are also opening, beer gardens are buzzing and many companies are cautiously bringing staff back to work.
“There will almost certainly be some bumps in the road ahead but, more than ever, it’s important for investors to focus on the eventual recovery and keep that level-head they should be well-accustomed to by now.”
But it’s important for investors to bear in mind that this data is backwards looking, according to Rachel Winter, associate investment director at Killik & Co, and should factor this into their investment outlook.
“We hope that the figures for the second quarter will illustrate the reopening of the economy that began at the end of the first quarter. The Bank of England has predicted an economic expansion of 7.5 per cent for the full year 2021.
“This morning’s GDP was not all negative, and it was pleasing to see growth in construction due to the high levels of activity in the housing market and the recommencement of large building projects. This has been reflected in strong share price performances from the housebuilding and materials sectors.”
Chris Elliott, co-manager of the TB Evenlode Global Equity fund, explains why Australian rabbits and compounding interest have more in common than you might think.
It’s claimed that Albert Einstein called compound interest “the eighth wonder of the world”, reportedly saying: “He who understands it, earns it; he who doesn’t, pays it.”
Compound interest, or compounding, is the process in which earnings from either interest or capital gains are reinvested to generate additional earnings over time. It’s seen as a key component of successful long-term investing.
Chris Elliott, co-manager of the TB Evenlode Global Equity fund, is one of those that ascribe to this view. When running through the fund’s investment checklist, he brought up compounding by referring to Thomas Austin, remembered for one of the greatest ecological disasters in Australia – the introduction of rabbits.
Austin, a first-generation British migrant, settled in Australia in the mid-19th century. His unfortunate legacy was cemented when he released 24 non-native rabbits for hunting onto his Victoria estate.
“With no natural predators and plenty of food, the population grew rapidly,” said Elliott. “Austin’s rabbits showed the raw power of exponential growth.”
Indeed, eight years after they were released, there were some 14,000 rabbits on his estate. By 1898 the Australian rabbit population was estimated at 300 million.
Elliot outlined that a single pound invested at an annual return of 8 per cent will double in nine years, quadruple in 18 and increase eight-fold in 27.
“As with the Australian rabbits, many would scarcely believe the consequences of compounding an initial investment until the mathematics are laid bare,” he said.
“An investor that can achieve consistently high returns will reap rewards over time, but the challenge is not just in finding the rates of return but maintaining them.”
10% simple interest versus 10% compounding interest
Source: Finance Strategies
TB Evenlode Global Equity, which launched this month, has a focus on attributes shared by serial outperformers within a checklist of three factors.
“To consistently compound, a company must have structural market growth, a durable competitive advantage, and the ability to sustainably invest,” said Elliott.
The manager asked whether companies in a declining industry can outperform the market over the long term, even with a strong competitive advantage and resources to invest.
Even with a strong product and falling competition in the industry, a declining industry means that capital returns and business performance will eventually decline.
“A structural growth driver can allay this by providing continued demand,” he said. “Mastercard, for example, benefits from the society’s move to a cashless economy.
“Alternatively, companies can pivot to adjacent markets and Microsoft’s transition to cloud provided a growth opportunity beyond operating systems and business software.”
To express the competitive advantage factor, Elliott imagined DisadvantageCo, a fictional company that competes with several stronger peers and has few barriers to entry.
The company operates in a structurally growing industry and invests sustainably. While it does well at first, competition is weak as there are plenty of new customers to share.
However as DisadvantageCo invests and enters new geographies, earning attractive returns on investment, these high returns attract new entrants.
“As customer churn increases, price competition intensifies and returns on investment fall,” he said. “It becomes harder for DisadvantageCo to compete and returns on capital to converge with the cost of capital.”
When demonstrating sustainable investment, Elliott envisaged DrainCo, a ‘cash cow’ company that cannot sustainably invest.
Initially, the company has a structural growth opportunity and a competitive advantage. DrainCo wins share and uses its ample free cash flow to boost shareholder returns.
The manager said: “Low investment prevents DrainCo from creating new revenue opportunities, but the existing market position is secure as barriers prevent new entrants.
“DrainCo fails to innovate and the distance between the product served and the potential product grows and this innovation gap is the primary ingredient for disruption.”
He added that ultimately companies with a focus on immediate returns are not acting in the interests of long-term shareholders.
“Microsoft came close to falling into the disruption trap in the noughties after failing to invest initially in cloud technologies, but redirection of the R&D budget and improvements to the development culture enabled a recovery,” he said.
“The lesson for investors who seek to leverage the power of compounding is that understanding the factors that are driving growth is an absolute necessity and the returns on careful analysis are significant,” said Elliott.
Therefore, how does this relate to the rabbit comparison?
Elliott outlined that Australia was undergoing a period of agricultural market growth in the late 19th century, with increased farming providing additional food.
He added that without any natural predators, the rabbits had a material competitive advantage over native species and therefore the rabbits had the ability to multiply, or sustainably invest.
Apparently when Austin requested the rabbits to be sent from England, he wrote: “The introduction of a few rabbits could do little harm and might provide a touch of home.”
“The estimated population of rabbits in Australia peaked at 10 billion,” said Elliott.
TB Evenlode Global Equity launched in May and has an ongoing charges figure (OCF) of 0.85 per cent.
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Rize ETF co-founder Rahul Bhushan looks at the strong growth in the cybersecurity sector and looks at recent results in earnings season.
The cybersecurity and data privacy sectors have continued to boom throughout the last year as cyberattacks amid the pandemic hit record-breaking numbers. From an investment standpoint, reporting season has so far not disappointed and whilst the Covid-19 pandemic certainly accelerated growth in the cybersecurity sector, growth is showing no signs of abating any time soon. 
As cloud technologies and many other digital solutions, as well as digital devices continue to emerge and develop, we are increasingly becoming connected with accelerating 5G deployments, the expanded scope of connected devices and the internet of things, all of which will fuel demand for cybersecurity solutions.
The benefit of digitalisation is clear to most but there are drawbacks – cybercriminals are now able to nefariously obtain our data via more access points than ever before and the attacks are becoming ever-more sophisticated. For these criminals, the pay-off can often be huge, for individuals and companies, it can be devastating and, in the case of corporations, can cost them dearly both in terms of reputation and financially.
Major attacks in 2021
The Covid-19 pandemic accelerated the digital transformation that was already underway for many companies as the adoption of work and learn from home, greater interconnectivity of their workforce, and the shift to the cloud, all led to a surge in cyberattacks.
Findings from Forrester consulting revealed that since the start of the pandemic total cyber losses among affected firms rose to $1.8bn, a 50 per cent increase compared to the prior year. A separate report from Hiscox found companies in the UK and Europe doubled cybersecurity spending to combat the increase in cyberattacks during 2020 .
There were a number of high-profile attacks that occurred during the first quarter of 2021 alone. Notably, Microsoft’s Exchange Server was hacked resulting in at least nine government agencies and 60,000 private companies in the US alone being affected.
Computer giant Acer Inc., suffered a ransomware attack and was asked to pay a ransom of $50m.
Australian broadcaster Channel Nine was attacked too, leaving the company unable to air its Sunday news bulletin and several other shows.
Cybercriminals also engineered an attack on a Florida water treatment facility seeking to poison the plant’s water supply by increasing the amount of sodium hydroxide to a potentially dangerous level.
In 2020, 30,000 websites were hacked per day and every 39 seconds there is a new attack somewhere on the web. To combat the ‘growing cyber challenge’ as the scale of the problem continues to both change and grow, businesses are allocating more resources, including a 39 per cent increase in cybersecurity spending.
That increase is leading to favorable year-over-year revenue and earnings metrics that have already reported in many of the quarterly results so far and is poised to look similar for those who are yet to report.
Bumper earnings season
According to Zacks Investment Research, during the month of April, more than 1,500 companies reported their quarterly results and a few key themes emerged across the reports:
• Revenue and earnings per share (EPS) for the year ending March came in ahead of consensus expectations
• Upward revisions were made to earnings guidance
• Warnings that the number of attacks continue to grow even as ‘bad actors’ (cybercriminals) continue to innovate new attack strategies
Here are some of the highlights from earnings season so far:
Check Point Technologies – the UK-based leading provider of cyber security solutions to governments and corporate enterprises across the world, reported revenues up 5 per cent year-on-year to $508m, while EPS for the quarter rose 9 per cent to $1.54. Deferred revenue for the quarter climbed 8 per cent compared to the March 2020 quarter, reaching $1.458bn.
F5 Networks – the US firm, which specialises in app delivery networking and app security, topped expectations with their results reporting revenue for the quarter up 10 per cent year-on-year to $645m. According to the company, it is seeing stronger than anticipated demand across the board as “business and consumers increasing reliance on applications has accelerated all prior expectations about the pace of digital transformation”.
FireEye – another US-based company, offering a single platform that blends innovative security technologies and nation-state grade threat intelligence, beat consensus expectations with $246.3m in revenue - a 10 per cent increase year-to-date. It increased its 2021 earnings guidance to $1.01-$1.03bn from $941 million in 2020 and $889m in 2019.
Fortinet – as a provider of firewalls, software and services such as anti-virus protection and intrusion prevention systems, the firm reported quarter revenue that climbed 23.1 per cent compared to last year. Revenue for the year was $710.3m, well ahead of the consensus forecast. EPS for the quarter cruised past consensus expectations as well hitting $0.81 per share.
We can clearly see a pattern emerging here. Growth expectations for the cybersecurity sector are being smashed. We continue to see consensus growth expectations moving higher over the coming quarters too as the increasingly pervasive nature of attacks is once again realized, while the combination of new technologies, new business models and sadly new types of attacks expands the addressable market even further.
Rahul Bhushan is a co-founder of Rize ETF. The views expressed above are his own and should not be taken as investment advice.
With the global economic recovery on track, Pictet Asset Management reviews its asset allocation for the next phase in markets, which includes a reduction on its equity exposure.
The economic recovery from Covid-19 is going well, according to, Pictet chief strategist Luca Paolini, such that the asset management house has reduced the equity exposure in its multi-asset range.
Following a torrid year in markets and a massive economic hit, the recovery from the Covid-19 pandemic does appear underway, as a global vaccine rollout allows lockdowns to ease and economies to reopen.
Equities in particular have seen a strong rally following the initial sell-off in March last year.
Indeed, Paolini said that global equity markets hit Pictet’s return targets for the whole year – 10 per cent - in the opening four months of 2021 alone.
He added to that much of the recovery is already being priced in, leading to a shift in the multi-asset allocation. Paolini explained: “Tentative signs that economic and corporate earnings growth may be peaking has led us to take some profits.
“We therefore downgrade equities to neutral and trim our exposure to cyclical stocks.”
According to Pictet’s business cycle indicators, the global economic recovery from Covid is going well but growth momentum has slowed slightly. This was clearly seen in China, according to Paolini, which had produced weaker than expected Q1 data.
“[This] prompted us to trim our 2021 GDP growth forecast there to 10.0 per cent from 10.5 per cent,” he said.
Moving onto the eurozone and Paolini said the recovery was not “self-sustaining yet”, relying on the successful control of the pandemic and ongoing vaccination rollout as well as the continuance of accommodative monetary and fiscal policies.
It was the opposite story in the US, however, where economic activity “continues to beat expectations”.
The US has been one of the strongest equity markets over the past 12 months since the Covid sell-off. But it has started to lose momentum compared to other more cyclical and value-biased markets, such as the UK, since the Covid-19 vaccines were confirmed and the recovery began.
Performance of S&P 500 vs UK indices
Source: FE Analytics
Paolini he expects US growth to peak in Q2 this year and continue to slow throughout the rest of 2021 as the $1.9trn fiscal boost starts to fade.
The state of equity valuations, especially in the US, was another reason for downgrading Pictet’s equity allocation.
Paolini said that while equities have delivered strong returns year-to-date the valuations are at a decade high and will require “unusually healthy conditions” to continue their rise.
“In our view, though, the favourable environment for risky assets may not last much longer,” he said.
The US equity stock market looks especially vulnerable to a pullback as the Federal Reserve may shift its policies around easing and possible headwinds may arise from president Biden’s proposed corporate tax policies.
But not everyone agrees that now is the time to pull back on equities.
BlackRock recently said that it is maintaining its pro-risk stance in portfolios through an equities overweight as it’s factoring in a strong economic rebound and greater willingness from central banks to tolerate higher inflation. It is also taking a pro-cyclical stance on stocks.
The BlackRock Investment Institute – which provides insight into the company’s long-term asset allocation and the global economy, markets and geopolitics outlook – said investors are currently grappling with how to interpret the “unusual” growth in markets and central bank shifting polices.
Allocating for this economic restart BlackRock said: “The broadening restart – coupled with our belief that this will not translate into significantly higher rates – underpins our pro-risk stance. We remain overweight equities, neutral credit and underweight government bonds on a tactical basis. Yet we have tweaked some of our tactical views given significant moves in market pricing.”
Going back to Pictet’s asset allocation and the fund house remains bullish on some areas of the market, namely emerging market currencies, US government bonds, Chinese government debt and real estate.
Pictet’s current asset allocation – May 2021
Source: Pictet Asset Management
On US bonds, Paolini explained that although there are more problems facing equity markets he continues to think that “US Treasury bonds offer the best returns within developed sovereign bond markets”.
The market appears to have priced in a Fed interest rate hike, despite no announcement in the central bank’s forecast. But he feels that the Fed will begin tapering its quantitative easing programme of asset purchases in order to give itself more breathing room on interest rates. “In other words the central bank does not wish to be forced into premature rate hikes,” he added.
Another area Pictet remains bullish on is sovereign Chinese bonds due to attractive valuations and diversification benefit.
In currencies the multi-asset team has an overweight to emerging market currencies while remaining neutral on the US dollar.
Paolini said: “Strategically though we remain bullish on EM [emerging market] currencies and expect the US dollar to resume its gradual shift lower when the growth outperformance of the US economy comes to an end.”
Ninety One’s Jason Borbora-Sheen offers up a three-point checklist to allow investors make sure their pension pot is enough to see them through retirement.
With the average UK life expectancy being 82, one of the greatest challenges facing people living in the UK is the ability to fund a 30+ year retirement, whilst ensuring that their pension pot can support their expected standard of living.
Future retirees need income solutions that can provide spending confidence through retirement. It is important to avoid not only drawing down assets at an unsustainable rate, but also underspending out of fear of outliving the pension pot.
Decumulation strategies are steadily attracting attention; they delay the need to fully annuitise savings, but still provide an income stream whilst remaining invested, allowing the best chance of retaining some capital to eventually purchase an annuity or leave a legacy to loved ones.
Understanding the relationship between assets, income and retirement goals is key. As we are living longer, in what is a historically low interest rate environment, flexibility is also required in the decumulation stage.
To ensure a successful decumulation strategy in retirement, we encourage investors to consider three core elements as detailed in this article.
During the decumulation phase of retirement, investors effectively convert a portion of their assets into income based on a ‘withdrawal rate’. It is important to determine a sustainable withdrawal rate (SWR) which prevents any income taken from fully exhausting the pension pot, thereby retaining the ability to purchase an annuity during a later stage of retirement.
Whilst there is no uniform solution to finding the correct SWR for an individual investor, we would argue that a sufficient income can be best achieved by investing across a diverse range of asset classes. In order to achieve a sustainable income, we believe investors should avoid aggressively chasing yields which can put capital at risk, and instead focus on resilient and natural yields that are backed by robust business models.
Contrary to conventional wisdom, if an investor wants to take income withdrawals, we believe decumulation strategies require a strong growth engine to avoid the pension pot running dry. To us, growth assets include all those which have a positive correlation with equities such as high yield corporate bonds, emerging market debt and listed property.
Traditional fixed income assets, such as developed market sovereign bonds, can no longer be relied upon to provide the decent levels of sustainable income achieved historically. The policy response to the coronavirus pandemic has seen absolute yields on government bonds plummet, dragging down yields on other defensive assets. Even though yields have recently increased on the prospect of a post-pandemic economic recovery and the perceived threat of rising inflation, they remain at historically low levels.
Nevertheless, compelling returns can still be earned across a range of asset markets and securities, and most notably from those assets classified as growth. Whilst we think it is important to always have a balance, by having a growth engine and accessing the relatively higher income and capital growth potential available from growth assets, a retiree could expect to receive a higher level of income over 10 years than if they relied on defensive assets alone. It is however paramount to acknowledge that growth assets are not without risk and investors may wish to consider a strategy which strikes a balance between achieving compelling total returns and portfolio volatility.
Sequencing risk refers to the danger associated with the ‘sequence’ in which returns are generated and withdrawals are made from a portfolio. The risk is highest in early years of decumulation when the portfolio value and time horizon are at their greatest. Unsurprisingly, withdrawals in bear markets are worse than in bull markets given the retiree takes a proportionally bigger bite out of a shrinking balance.
Thus, sequencing risk is to a certain extent a matter of luck, but it threatens the preservation of capital and its ability to underpin a sustainable income drawdown. Sharp drawdowns can be particularly harmful to investors with nearer-term horizons such as retirees.
Inherently lower portfolio volatility is key for decumulation strategies. We believe it effectively acts as ‘hidden alpha’ as it can help generate greater levels of income because it allows sequencing risk to be managed more effectively.
We view active management as a crucial factor in dynamically adapting risk within an investment portfolio to account for changing market conditions, but without sacrificing income – a necessity for those in retirement. Such versatility is important given that retirees need to withdraw income irrespective of the market environment.
Whilst investors approaching retirement have significant freedom and choice, coupled with a plethora of potential headwinds to consider – this can be hugely overwhelming.
By considering this three point checklist – determine and source a sustainable withdrawal rate; use ‘growth’ assets to avoid the pot running dry; focus on lower volatility to avoid the worst of market drawdowns - we believe investors will be better placed to enjoy, rather than endure, their retirement.
Jason Borbora-Sheen is a co-portfolio manager on the Ninety One Diversified Income and Ninety One Cautious Managed funds. The views expressed above are his own and should not be taken as investment advice.
James Sullivan, head of multi-asset and partnerships at Tyndall Investment Management, explains why investors should be revisiting their UK equity income exposure.
The death of the UK equity income sector has been greatly exaggerated, according to James Sullivan, head of multi-asset and partnerships at Tyndall Investment Management.
After suffering from years of weak performance followed by a devastating blow caused by the coronavirus pandemic, the IA UK Equity Income sector has had a revival in performance in the last several months.
But aside from a recent uptick in performance, there is another reason why investors should be reconsidering their exposure to the asset class.
Sullivan said: “Coming off a low base and with UK equity income being priced at a significant discount to global equities, now is probably the time to be brave and start collecting exposures to UK equity income to complement those more growth biases that many people find to become embedded within their portfolio.”
Indeed, investors who have benefitted from the last few years of great performance from growth-heavy portfolios may be more exposed to growth than they realise as the size of these position swell relative to weaker performers.
Over the last 10 years, there has been a divergence in performance between the average IA UK Equity Income fund and growth assets, as measured by the MSCI World Growth index.
MSCI World Growth versus IA UK Equity Income over 10yrs
Source: FE Analytics
“I think facing in only one direction obviously leaves the danger of a very binary outcome,” Sullivan said.
This could mean that if growth assets were to become out of favour due to inflation or a reversion to the mean, investors overly weighted towards growth will be left facing the brunt of the damage.
Sullivan continued: “I think the diversification within equities is grossly overlooked at times and if we are in a period of re inflation - whether it's transitory or prolonged - it doesn't really matter.”
He argued that UK equity income is well placed for a reinflationary environment – if it did occur.
“Having taken the pain throughout 2020 with a raft of dividend suspensions, perversely companies that have reset their dividends now stand a good chance of being able to grow dividends in line with or above inflation,” he explained.
“On forward earnings, pay-out ratios don’t look stretched, offering scope to dial up dividends as the macro environment develops.
“Paired with the ability to re rate from a low base, such companies will be much in demand during an inflationary backdrop.”
As inflation fears have grown over the last six months, the IA UK Equity Income sector is up 26.99 per cent compared to just 5.23 per cent from the MSCI World Growth index.
Performance of IA UK Equity Income v MSCI World Growth over 6 months
Source: FE Analytics
As investors continue down the ‘reinflation’ path, unsure as to whether it is truly transitory or something more sinister, Sullivan believes diversification can be beneficial.
“UK equity income, once the darling of the investment community, has been banished to the archives for the past decade or so. QE and suppression of bond yields has catalysed a move towards growth investing, a shift away from the more cyclically-sensitive, at times income-orientated, areas of the market,” he said.
“Yet during the past quarter or so, there are signs that the death of value investing has been exaggerated. Investors have sought solace in defensive and cyclical areas of the market as the economic data shows signs of life and the avalanche of loose money finds leaks out of financial assets and into the real economy.”
Whilst he admits there is no denying that technology companies carry great momentum and will likely “remain the leading lights of innovation”, he argued that UK dividend energy giant BP ought to be reconsidered.
In recent months, BP has benefitted from the rotation towards value with its share price is up 60 per cent over six months versus the FTSE All Share of 22 per cent.
Performance of BP versus FTSE All Share over 6 months
Source: FE Analytics
Sullivan explained: “Investing in ‘greening’ companies carries the optionality of making a tangible contribution towards a more sustainable future whilst benefitting from a material re-rating of the company, and that can only be achieved in a meaningful fashion by giving consideration to the UK equity income sector.”
He highlighted how BP has committed to cut its oil production and aims to reach 50 gigawatts of renewable energy by 2030 - more than the total of the renewable capacity in the UK at present.
As part of its drive towards renewable energy, it has recently been selected as preferred bidders for two significant sites in the Irish Sea with the potential generating capacity of 3 gigawatts.
“A good business moves to ‘where the puck is going’ and BP is displaying such traits,” Sullivan said, but despite this, BP is company that is unlikely to be found in many ‘growth’ portfolios or indeed given any credence by the ESG community.
However, not all UK equity income exposure will give investors the same benefits of diversification. Alex Odd, former M&G equity income manager turned founder and Tyndall Investment Management chief executive, said the sector has become “mind-bendingly homogenous”.
“What used to be an exercise in trying to generate returns for clients has become increasingly a marginalised process with ever greater emphasis on risk mitigation, indexation and all the portfolios were getting increasingly homogenised,” he said.
“It's been this long-standing argument that UK equity income doesn't provide much income and it doesn't generate any returns. I think that we've shown over the course of the last sort of 12 to 15 months that it doesn't have to be the case.”
Odd pointed to the performance of the VT Tyndall Real Income fund, which has delivered top-quartile performance since Simon Murphy took over in February 2020.
Over the last year, it has returned 57.51 per cent versus 31.42 per cent from the average IA UK Equity Income fund.
Performance of VT Tyndall Real Income versus sector over 1yr
Source: FE Analytics
“To have a fund that is effectively doubled the return of the sector over the last year speaks very powerfully to what we're trying to achieve,” Odd continued.
“What investors in our funds get out of it is a differentiated return profile.”
Conversely, in his view, managers that are index and benchmark aware and insist on buying high yielding UK stocks probably won’t generate good returns.
“We're not going to turn around and say ‘well our risk-adjusted returns are absolutely fantastic’ -we're trying to genuinely generate proper alpha for people,” Odd said.
“Active share is an important element of that, and then that feeds through to performance which is ultimately proof in the pudding.”
Baillie Gifford’s Iain McCombie says even if value does have “its day in the sun”, he will still be sticking to finding the few exceptional companies with strong fundamentals that drive stock market returns.
While investing in growth stocks would have been the correct decision a decade ago, some investors fear the emergence of inflation could bring value stocks back into favour.
Iain McCombie, manager of the £8.5bn Baillie Gifford Managed fund said: “Obviously growth has had a very good decade relative to value, so the question on everybody’s mind is: what's going to happen over the next 10 years?
“I think the honest answer is we don't know.
“You have to assume at some point value will have its day in the sun, the question then is: well what are you going to do about that?”
McCombie, who has been managing the fund alongside Steven Hay since 2012, said: “We're growth managers, we're not going to chase value stocks, we're going to continue to do what we've always done.
“It’s the same as we've done for the last 34 years - we're going to find companies with good strong fundamentals and we think in the long run share prices follow fundamentals.”
He believes growth against value debate is a an “overly simplistic” way of thinking about investing.
“When you look at the data, a very small number of stocks actually contributed most of the market return,” he said.
“So growth or value doesn't really capture what you're trying to do - which is to find those exceptional, small number of businesses that actually have the outsized returns you can get from investing in equities.”
McCombie emphasized that Ballie Gifford’s investment philosophy is to deploy long-term capital to support these select businesses with the potential to generate outsized returns.
“We're not into short-term speculation,” he said. “So we're going to have periods like the first quarter of this year where we underperform the index. But we don't really care about that because what we're trying to do is to position the fund for the next five or 10 years.
“I'm afraid we're not going to outperform every quarter, and if that’s what you want from us, don't invest with us because that's not our style.”
The Baillie Gifford Managed fund has slightly lagged its peers in recent months, with its year-to-date total returns of 1.13 per cent versus 4.4 per cent from the average IA Mixed Investment 40-85% Shares peer.
Performance of Baillie Gifford Managed vs sector year-to-date
Source: FE Analytics
The lagging performance has come off the back of growing fears surrounding inflation and a rotation from many investors out of growth stocks into value stocks.
Yet despite this, co-manager Steven Hay isn’t worried about inflation, if it ever does materialise.
“There are reasons why the probability of inflation picking up is a bit greater than it's been in the past,” he said.
“We’ve had three decades of inflation really falling and supporting bond yields and asset prices, but there are a number of things in the mix now, which might lead to higher inflation in the future.”
He believes that, for a balanced fund, Baillie Gifford Managed is “exceptionally well positioned” for an inflationary scenario, if it did come.
“We run with a very high strategic weight in equities - 75 per cent - which puts us in a really good position relative to a fund that perhaps had a lot more in bonds typically,” he explained.
“Within the equity part, we are looking for companies that will shape the future that will be in good competitive positions. Those are companies that will have pricing power in that inflationary future and that's really the key - then the revenues can keep up with inflation.
“We don't really worry too much about that inflationary future. The companies that we like anyway, should do reasonably well in that in that future.”
Hay said that he doesn’t necessarily have a strong view that interest rates will rise, but acknowledged that it is possible.
“I would say it's not a slam dunk that inflation is high in the future,” he added. “Yields have already risen a bit we've seen a few false dawns in terms of inflation picking up.
“While it's true that we think bonds are less attractive at the moment, it is by no means certain that they don't deserve a place in the portfolio.”
He argued that within a fixed income part of a fund, investors can protect against inflation because some bonds can do quite well in an inflation scenario.
“High yield bonds in particular - where you’ve got your more highly indebted companies - a little bit of inflation can be really quite good for them,” Hay explained.
“You can also keep the maturity or duration of the bonds very low so that they don't really respond much to interest rate picking up and that can help you as well.
“So I think bonds can still play a useful part in inflation. We think we're well positioned for an inflationary scenario if it were to happen.”
Baillie Gifford Managed has delivered a total return of 114.87 per cent over the last five years, compared to 49.45 per cent from its peer group average.
Performance of the fund versus sector over the last 5 yrs
It currently yields 0.73 per cent and has an ongoing charges figure (OCF) of 0.42 per cent.
This month’s Data Hub reveals why a spike in inflation may be fleeting and shows what assets to buy if it becomes more persistent.
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