The Argonaut manager explains why he is backing energy and the reopening trade this year, warning that growth investors could get left behind.
Argonaut’s Barry Norris has backed energy to be the best performing sector – again – this year and Russia as the best market, while taking a negative view on growth and speculative technology.
Norris, who manages the VT Argonaut Absolute Return fund, predicted that bond and equity markets would deliver negative real returns this year, that the 10-year treasury note would hit 2.5%, the oil price would go above $100, energy would be the best performing sector in 2022 and technology would be crushed by hawkish Federal Reserve policy.
“A lot of them are already coming true,” he said, noting that the “market dynamic has already moved on from the leaders of the previous bull market”.
Norris runs a combination of long and shorts in his VT Argonaut Absolute Return fund and, based on these outlooks, was long on reopening trades and energy this year, while taking his biggest shorts on what he called “speculative tech”.
On his long holdings, Norris said that he was more bullish on the reopening trade in markets after being hesitant about them in 2021.
“Back then we, controversially said the vaccines wouldn't stop infections, and obviously we've been 100% right on that,” he said, referring to the outbreak of Omicron at the end of the year which put Covid risks firmly back on the table for investors.
This variant has proven to be less lethal, albeit more contagious, meaning that the “hardest parts of the pandemic are probably behind us,” Norris said. This will allow for reopening trades in travel and leisure that faded out last year to build momentum and returns this year.
This feeds into Norris’ second bullish position, energy. As the demand for transportation fuel increases, the oil demand and price will go up.
The global oil supply is facing a years-long bottleneck caused by the world’s goal of transitioning away from fossil fuels and oil to renewable energy in the coming decades, putting a definite expiration date on the product.
Western oil companies, in particular, have not invested in new long-term oil mining projects “meaning they’re not replenishing their reserves and, as a result, you'll get much higher oil prices for a longer period of time,” Norris said.
But until that transition is made oil and other fossil fuel energy sources are still going to be required. To capitalise on this Norris has taken long positions on Russian energy companies, including Gazprom, the country’s biggest business.
“Even if you think that current gas spot prices are unsustainably high, they could fall by half and Gazprom would still be on three times earnings with a 15% dividend,” Norris said.
He added that president Vladimir Putin’s potential invasion of the Ukraine is a risk to this view, “but I think that’s pretty unlikely to happen”, he said.
Meanwhile, an end to the pandemic could be “bad for markets”. The pandemic has kept interest rates down and validated a lot of extreme fiscal policy, which will normalise post-Covid. If this were to happen, it would push the investment case even further away from growth stocks, which have led equity markets when vast amounts of liquidity has been available.
“We've had 10 years where all the managers that did fantastically well were growth and all the managers that did anything else did fantastically badly. And I don't think that was just because suddenly all the good stock pickers became growth managers and vice versa,” Norris said.
Most managers describe themselves as bottom-up investors but Norris said that many underestimate the impact that the macro can have. If that changes “the growth managers that have done the best from that macro set are inevitably going to be the most vulnerable to a change in investment styles when the music changes”.
Already this year, growth has endured some significant sell-offs catalysed by expected fiscal policy changes – fears carried over from 2021. Over the past 12 months MSC ACWI Growth index made 9.2%, behind the MSCI ACWI Value index (17.3%) and in the opening weeks of this year the former was down almost 7%.
Some investors might argue that this could be a good entry point into those funds who have a great 10-year track record, but Norris said if inflation becomes more structural, interest rates rise and valuation “actually becomes important again”, this will go against growth.
“I think that we’re in a multi-year period of not just growth underperforming value, but of a 1970s redux where bond and equity markets underperform inflation for several years,” Norris said.
The Argonaut manager is therefore avoiding unproven parts of the growth space, such as crypto, which he described as “the poster child of speculation”.
The digital currency phenomenon has been popular with retail and individual investors but with the changing fiscal environment currency is becoming a better store of value “and we’re still waiting for a use case for crypto”, Norris said.
The biggest short in the fund is US electric truck manufacturing firm, Rivian, which has a market capitalization of $75bn. It is larger than the well-known German rival Volkswagen Group, despite not selling nearly as many vehicles.
“That’s exactly the sort of thing that we’re talking about in terms of speculative tech. It’s late to the party in terms of electric vehicles (EV). It has production problems and even if management execute on their business plan, which I think is highly unlikely, I still think that the stock is 95% overvalued,” Norris said.
Rivian declined to comment.
As growth stocks come under pressure and value funds shine, Trustnet asks market experts for their top contrarian picks.
Financial markets have been rattled over the past month by rising bond yields and inflationary fears, coupled with the prospect of rising interest rates and a withdrawal of monetary stimulus.
This backdrop has hurt the performance of many growth stocks, which have fallen sharply in recent weeks, pushing the relative performance of value stocks higher.
This has been borne out in the figures, which show over the past year that the MSCI World Value index has made 18.3% while the MSCI World Growth index is up 10.9%.
Performance of MSCI World Value vs MSCI World Growth over 1yr
Source: FE Analytics
For investors who might be worried about their exposure to growth and searching for a way to gain exposure to value, Trustnet asked market experts for their funds of choice.
LF Havelock Global Select
James Sullivan, head of partnerships at Tyndall Investment Management, picked the LF Havelock Global Select fund.
“The fund was launched in 2018 with a philosophy underpinned by a ‘valuation matters’ approach to investing, incorporating one of ‘the’ great value stocks, Berkshire Hathaway, in its top holdings as testimony to what it stands for,” Sullivan said.
“Its ‘quality value’ approach has rewarded investors since inception and notably so during the rotations towards value in the first quarter of 2021 and again more recently.”
He pointed to the fund’s track record: it has ranked it consistently in the first or second quartile of the IA Flexible Investment sector over the past three years.
Performance of fund over 1yr
Source: FE Analytics
Sullivan added: “The policy response to inflationary pressure is likely to perpetuate a prolonged re-rating of some very unloved value orientated stocks and Havelock is well positioned for this.
“Betting the family silver on an extreme binary outcome of the growth versus value trade, at this junction, could result in a feast or famine outcome, whereas Havelock maintain a focus on quality despite being bluntly categorised as value.”
Prusik Asian Equity Income
Ben Mackie, fund manager at Hawksmoor Investment Management, selected Prusik Asian Equity Income fund, managed by Tom Naughton.
Mackie noted that although Naughton “probably doesn’t even regard himself as a value manager”, he has “managed to construct an idiosyncratic portfolio which, on 8x price-to-earnings, trades on a 44% discount to the market, and crucially, is cheap versus its own history”.
Performance of fund over 1yr
Source: FE Analytics
Mackie also noted the portfolio’s “decent” earnings growth, where in 2021 it increased dividends by 6% on 2020 and 14% ahead of its payout in 2019 – equal to a yield of 6.4%.
“Dividends are paid from cashflow so speak to the fundamental strength of the underlying companies, which in turn helps assuage value investing’s classic concerns around avoiding companies in secular decline,” he explained.
Although it has improved in performance during 2021, Mackie places a greater weight on “the presence of a disciplined process” and “the ability to generate alpha over longer time periods”.
“Sometimes the best time to buy a fund is after a period of underperformance, particularly when the margin of safety on offer is so considerable,” he added.
Ninety One Global Special Situations
Darius McDermott, managing director of Chelsea Financial Services selected the Ninety One Global Special Situations fund, managed by Steve Woolley and Alessandro Dicorrado.
“Rising interest rates are not just a UK thing,” McDermott said. “It’s going to happen in the US and other countries too – some have already started raising them. So this fund covers that wider remit and gives investors more opportunities.”
Performance of fund over 1yr
Source: FE Analytics
McDermott also said that this fund was “one of the purest versions of deep value available” and pointed out that, as one of a number of value funds run by the same team, there was a lot of historic data to back up the managers’ track record.
However, he noted: “The fund will underperform if growth comes back, but if value to continues to do well or we go through a period of sharp swings, I think it’s the fund to hold in your portfolio.”
Since the vaccine bounce in November 2020, the fund is up 47.6% vs 28% for the MSCI Value index and 16.9% for the IA Global peer group average.
Jupiter UK Special Situations
John Monaghan, head of research at Square Mile Investment Consulting and Research picked the Jupiter UK Special Situations fund as his preferred value-exposure.
The fund is managed by renowned UK value manager Ben Whitmore, who has a high conviction, long term, contrarian approach to investing.
“Whitmore has managed money using this approach for the vast majority of his career, which spans over 20 years, and is prepared to persevere with investments despite the potential for continued short-term underperformance,” Monaghan said.
Performance of fund over 1yr
Source: FE Analytics
One difference between Whitmore and his peers is that the manager is “dispassionate about companies and investments” and does not need to meet managers before investing.
“Instead, a stock’s positioning is determined by Mr Whitmore’s view of the quality of the company’s underlying business and the attractiveness of its valuation,” Monaghan said.
He added the resulting portfolio is consistently a “true representation” of this “tried and tested philosophy and processes”.
Monaghan also warned that over shorter time frames the fund can lag the FTSE All Share benchmark and its peers, making it better suited for investors with a longer-term investment horizon.
Dimensional Targeted Value Fund
Nicki Hinton-Jones, chief investment officer at Betafolio, picked the Dimensional Global Targeted Value fund, as her preferred vehicle to gain exposure to value.
The company employs factor tilts within its model portfolios, holding Dimensional funds across its Classic and ESG fund ranges to gain exposure to the value and small premium.
Performance of fund over 1yr
Source: FE Analytics
“Dimensional’s data-driven and systematic approach to capturing premiums continues to impress us. In our Classic range, we use the Dimensional Targeted Value fund, allowing us to double down on the two premiums, small and value, which have been proven to deliver superior returns to investors over the long term.”
The Dimensional Targeted Value fund delivered 18.4% over the past year, compared to 16.6% from the MSCI World Small Cap Value Weighted index.
|Fund||Sector||Fund Size(m)||Fund Manager||Yield (%)||OCF (%)||Launch Date|
|Dimensional Global Targeted Value Acc||FO Equity - International||2790.6||Dimensional Portfolio Management Team||0.49||06/02/2008|
|Jupiter UK Special Situations I Acc||IA UK All Companies||2103.4||Ben Whitmore||2.4||0.76||03/06/1996|
|LF Havelock Global Select A Acc||IA Flexible Investment||29||0.99||21/08/2018|
|Ninety One Global Special Situations I Acc||IA Global||156.4||Steve Woolley, Alessandro Dicorrado||0.16||0.87||17/12/2007|
|Prusik Asian Equity Income 2Y||FO Equity - Asia Pacific ex Japan||461.8||Tom Naughton||30/03/2012|
The Fundsmith Equity manager accused Unilever of using “corporate gobbledegook as a substitute for effective action”.
In his annual letter to shareholders, published earlier this month, the manager of the £26bn fund said Unilever’s management team were “obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business”.
“A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot,” he said.
Since then it has been revealed that Unilever embarked on a failed bid to buy Glaxo Consumer Healthcare for £50bn. Yet rather than applauding the proactive approach of Unilever’s management team, Smith suggested it was playing what Warren Buffett called ‘gin rummy’ management: “Like a player in the eponymous card game, throwing away their least promising card(s) each round in the hope they will turn over better ones. They should maybe consider whether the problem may not be with the hand/business, but with the player/management.
“The irony is that food and refreshment, the business they planned to sell if they were to buy GSK Consumer, outperformed the rest of the business, the one they wanted to materially expand, two to one.”
Unilever has been a holding in Fundsmith Equity since the fund opened in 2010. While Smith continues to hold the company, he noted it has been the worst-performing fast-moving consumer goods (FMCG) company in his portfolio “by a considerable margin” over this time.
Smith said he became concerned about Unilever’s management team following a previous takeover bid involving the company – although on that occasion the company was the target, rather than the bidder.
“Kraft Heinz bid $50 (£36.50) per share for Unilever five years ago,” he said. “Whilst we have never been Kraft Heinz shareholders and are not fans of their business model, Unilever surely needs to address the fact that five years later the share price is only at the level of that bid.”
The MSCI World index has made 67.7% over the same period, and even the FTSE All Share has made 28.6%.
Performance of stock vs indices since Feb 2017
Source: FE Analytics
“Why then should we trust this management and board with preserving value for shareholders? This seems to have been largely forgotten and when it is raised, we are told that we would have fared worse with Kraft Heinz,” Smith added. “We will never know, but what is a fact is that we did not get the chance to choose.”
The manager said this bid raised questions about Unilever’s operational capability, but these were never addressed publicly because former chief executive Paul Polman turned it down without any discussion of the fundamentals.
“There was much talk of 20% operating margins and other targets in response,” Smith continued.
“We are not fans of such targets, which are produced like a rabbit out of a hat in response to a bid – if you think you can achieve 20% operating margins, why aren’t you doing so anyway or at least disclosing that as an aim?
“Unilever’s current operating margins? 16%. We did not ask for 20% operating margins, nor do we require them, but we dislike it when spurious targets are produced like a magician to thwart a bid and then conveniently forgotten.”
Turning to the bid for GSK Consumer Healthcare, Smith noted it made £2.2bn of earnings before interest and tax (EBIT) in 2020. While 2021’s results have yet to be released, he has assumed a figure of about £2.5bn.
This meant Unilever’s offer of £50bn implied a return on capital employed (ROCE) of just 5%, and it would need to significantly improve the performance of the business to make a return anywhere near its own cost of capital, “without which this acquisition would have destroyed value”.
The only way to improve the performance of the business to a level that justified the proposed bid price would have been to raise profit margins and/or increase revenue growth. However, profit margins at GSK Consumer Healthcare were already above those of competitors, leaving little scope for improvement.
Meanwhile, Barclays estimated that the global over-the-counter (OTC) healthcare market is growing at just 2% to 3% annually, which was in line with figures produced by Reckitt Benckiser and Johnson & Johnson.
“Surely Unilever should have explicitly addressed those points before asking to be allowed to proceed with a bid?” Smith said.
“Instead we were faced with a statement that the bid worked based on financial metrics including the all-important return on capital. However, getting management to discuss what that number was was like a dentist pulling a back tooth. This was all the more puzzling given that GSK is a listed company and the profits and cashflow of the consumer division can be established from its segmental reporting.”
Worse still, Smith said management has responded to poor performance in the past by uttering “meaningless platitudes”, and accused it of having a penchant for “corporate gobbledegook as a substitute for effective action”.
He finished by saying: “They have already sold the spreads and tea businesses. They have been pursuing a £50bn acquisition and we could have expected further disposals and further major acquisitions if they had acquired GSK Consumer Healthcare, taking them out of familiar businesses and into a new area where they have very limited expertise (beauty, oral care and OTC health).
“We believe the Unilever management – or someone else if they don’t want the job – should surely focus on getting the operating performance of the existing business to the level it should be before taking on any more challenges.”
Unilever was approached for comment.
Covid, inflation and interest rates are on the horizon, but there are pockets of opportunity.
It is Blue Monday as I write – supposedly the most depressing day of the year. In the US they are having a public holiday – not to drown their sorrows but to mark the birthday of Martin Luther King.
If you are reading this later in the week then it will no doubt still be gloomy. The days lengthen by just three minutes every 24 hours at this time of year, and it is dark by 5pm.
Looking at the markets, there is also plenty to be bleak about. The S&P 500 is close to a record high – if you are of a pessimistic disposition then you will be saying there is little upside left and point to the volatile and disappointing start to the year. And then there is inflation and Covid.
You might have been similarly bleak on Blue Monday in 2020. But, hey, two months later it got worse! The impact of Covid sent the S&P 500 down 30% in three weeks. In February 2020 the World Health Organisation said it did not expect to see a vaccine in under 18 months. The Pfizer vaccine arrived nine months later.
Markets have recovered. They have gone past where they were on that bleak Monday in 2020 (before its tumble) and past where they were on the same day in 2021 – up 40% in two years. Pessimism can be costly for investors.
As the data on the Omicron variant emerges, it looks like we are in the latter stages of the coronavirus crisis. The lack of hospitalisations and the uptake in vaccinations suggest we can think once more about life returning to a version of normality. We are looking at companies that will benefit from this.
A theme we like is “survival of the fittest” – one of our holdings, Planet Fitness, is a perfect example. With its basic and affordable offering, it is close to becoming a US national gym brand. Its facilities are for the everyday exerciser, not for meatheads pumping iron. There are no spas or fancy extras. Around 20% of its competition have shut their doors permanently during the pandemic. Planet Fitness has muscled in on their territory. It is profiting and highly profitable.
Another sector likely to benefit from a return to normality is healthcare. As hospitalisations due to coronavirus decrease significantly, hospitals can offer more treatments and operations to those whose beds have been taken up by Covid cases during the past two years. Another holding, Intuitive Surgical, is a market leader in robotic surgery.
A surgeon sits behind a console and directs the arms on the company’s Da Vinci robot to make incisions and perform operations such as appendectomies and gall bladder surgery. It makes procedures less invasive and faster and also speeds recovery, cutting costs and increasing efficiency. We expect its business to grow this year.
Many people are worried about inflation. In the US CPI inflation is running at 7% year-on-year. We are probably close to peak, but will it endure at high levels? Inflation is being driven by several factors, not least supply chain shortages.
The industry most obviously impacted is the second-hand car market: few new cars have been available. As a result, average second-hand car prices were 28.6% higher in November 2021 than they were 12 months earlier.
Prices need to rise by 7% every year to have consistent 7% aggregate inflation. This level of increase is unlikely to continue. As the production of new cars catches up, we would expect used car prices to fall – that is a deflationary impact. The same downward force on prices will be seen in other sectors as supply chain issues are resolved.
Of course, the labour market is tight – and we have to address wage inflation, too. We have experienced what some are calling the Great Retirement, with large numbers of baby boomers retiring earlier than they may have planned due to the pandemic.
A considerable number, mainly women, also left the workforce to provide childcare during the Covid crisis. Others have resigned to set up their own companies.
The US hospitality industry, which is disproportionately female, has seen an average of 700,000 employees leave each month during the past year. If we look back at the peak of the 2009 recession, there were seven unemployed people for each available job opening. Today there is only one.
We think this will be a more persistent source of inflation, but higher wages – and higher costs – will bring people back into the workforce and encourage others to retrain for better-paid jobs. This will take time, but it should help.
The bigger concern is perhaps how the Fed responds. Will it accelerate into quantitative easing too quickly? Will it raise interest rates too sharply? Hopefully not, but we do expect interest rates to rise – which will help bring down inflation, too.
Higher interest rates may hurt high-growth technology stocks that are in the process of building their customer bases, growing revenues rapidly but not yet profitable. As interest rates fell during the pandemic the valuation of these companies increased considerably.
Investors are now questioning the multiples applied to these stocks. Close to 40% of companies in the Nasdaq, home to many tech stocks, have at least halved from their peak, even though the index itself is only down 7%.
Not having much exposure to these companies hurt us in the past two years. Now we hope to benefit. We own an eclectic mix of businesses. To those I have mentioned you might add Pool Corporation, the world’s largest wholesale distributor of swimming-pool products; Advanced Drainage Systems, the biggest manufacturer of pipes in the US; and the Norfolk Southern Railroad.
These companies are all profitable parts of the world’s biggest economy, which is moving from pandemic to endemic and getting back to work. It may be gloomy out there, but you do not have to look too hard to find reasons to be cheerful.
Private equity and trusts with a flexible mandate dominate the list from the analyst group.
HG Capital, Ruffer and Capital Gearing are some of the top alternative options available to investors that do not require income from their portfolio, according to Anthony Leatham and Markuz Jaffe, research analysts at Peel Hunt.
Alternative investments – defined by Peel Hunt as trusts that do not buy traditional equities – have become popular in recent years and now account for around £111bn in assets under management.
Half of this money (£56bn) is allocated to trusts with a yield of more than 3%, while the rest is in investment companies that yield less than 3%.
Below, the analysts looked at those with a lower yield that can make strong risk-adjusted returns, either by investing in unlisted companies or across a range of asset classes to limit risk and volatility.
For those that want dedicated exposure to the asset class, Hg Capital* has been the most-consistent performer over three, five and 10 years, making a top-quartile return over each period.
Leatham and Jaffe said: “We have confidence in Hg’s domain expertise and we think its position in the market makes it a trusted partner for successful unquoted software businesses.”
The trust is split into “clusters” such as tax and accounting (31% of net asset value), payroll (23%), legal (10%), tech services (8%) and healthcare (9%), among others.
Leatham and Jaffe said there were concerns that private equity valuations could come under pressure if inflation continued to rise – as has happened to listed technology companies in recent months.
However, they noted that the “healthy pipeline of realisations and refinancings” planned for the next 12 months should make any short-term discount volatility “a buying opportunity”.
Total return of funds over three years
Source: FE Analytics
Next up is HarbourVest Global Private Equity, which provides investors with access to a highly diversified global private equity portfolio. It does so by investing in more than 50 HarbourVest managed funds, which in turn make investments into leading private equity funds – the rare fund-of-fund-of-funds.
“The end result is a portfolio that is well diversified by geography, sector and strategy. The portfolio has exposure to more than 10,000 underlying companies, with the top 10 representing less than 10% of the total assets and the top 1,000 representing 83%,” the analysts said.
Another differentiator to its peers is that the trust invests in venture and growth-stage businesses, which have been a key source of value creation over time.
“We see HarbourVest Global Private Equity as an attractive way to allocate to private equity, which helps to minimise manager selection and company-specific risks,” Leatham and Jaffe said.
Third on the list was NB Private Equity Partners, which is in a “sweet spot” currently, according to the analysts. On average, the trust has held its underlying positions for 3.5 years – the highest in its recent history – which should lead to exits and realisations in the near future. Last year, the firm made 14 transactions, partial sales or full exits, netting an average profit of 83%.
“Given the mix of investments, the maturity profile of the portfolio, and the dividend, we see both NAV appreciation and discount narrowing from here,” the analysts said.
Fourth is Augmentum Fintech, which invests in unlisted companies in the financial technology sector, including digital banking, asset managers and infrastructure. The key thing in common is disruptive technology and the prospects for higher growth, which all of its underlying companies must have.
The trust’s largest holding is interactive investor (ii), which asset manager Abrdn is set to buy for £1.5bn. This is expected to net the investment company an 87% profit on its original stake.
Since its launch in 2018, the trust has grown from £94m in assets under management to £267m, but with more than £250m of active pipeline.
“We expect the trust to deploy the proceeds of the interactive investor exit into exciting, high-growth fintech companies (although we do not rule out the possibility of a one-time return of capital),” the analysts said.
“We also see multiple potential near-term net asset value drivers from portfolio-holding exits and realisations, setting up what should be a positive next 12 to 18 months for the trust.”
Turning away from private equity, for the more cautious investor the analysts suggested three trusts that had the flexibility to make reasonable growth while protecting from market falls.
First up was Ruffer, the multi-asset portfolio that captured headlines in 2021 for investing in Bitcoin, although it has subsequently sold out.
“The focus is on avoiding capital loss and the core of the portfolio is formed of index-linked bonds, gold, and equities, which reflects the balance of defensive and growth assets,” Leatham and Jaffe said.
Recently, the management team has tilted the portfolio to hedge the risk of rising inflation and interest rates, with more than a third (38%) invested in inflation-linked bonds.
Total return of funds over 10 years
Source: FE Analytics
Next up is Capital Gearing, which aims to avoid losses over a 12-month period while making stock market-like returns over the course of an economic cycle.
It is currently defensively positioned and, like Ruffer, is focusing on inflation protection, with 34% of the portfolio invested in inflation-linked bonds, with 45% in risk assets.
Last up is RIT Capital Partners which, at a current 4% share price discount to its net asset value, is good value, according to the analysts. It has, historically, captured 38% of market downside, the analysts said, while participating in 70% of the market gains.
At present, the trust’s net equity exposure of 43% reflects its cautious view, with 30% in hedge or absolute return positions.
“We continue to place emphasis on the 35% in private investments, which benefits from the strength of the manager’s network and was boosted in 2021 by the IPO of Coupang,” said Leatham and Jaffe.
|Fund||Sector||Fund size||Fund managers (s)||Yield||OCF||Gearing||Discount|
|Capital Gearing Trust||IT Flexible Investment||£993m||Peter Spiller, Alastair Laing, Chris Clothier||0.89%||0.58%||0.0%||2.3%|
|Augmentum Fintech||IT Technology & Media||£261m||Frostrow Capital LLP, Richard Matthews, Tim Levene||0.00%||1.90%||0.0%||-2.5%|
|HarbourVest Global Private Equity||IT Private Equity||£2,203m||HarbourVest Advisers L.P.||0.00%||0.60%||0.0%||-20.8%|
|HgCapital Trust||IT Private Equity||£1,912m||HgCapital||1.19%||1.80%||1.2%||12.5%|
|NB Private Equity Partners||IT Private Equity||£920m||NB Alternatives Advisers||3.66%||2.24%||12.6%||-22.7%|
|RIT Capital Partners plc||IT Flexible Investment||£4,074m||
RIT Capital Partners
|Ruffer Investment Company||IT Flexible Investment||£722m||Hamish Baillie, Duncan MacInnes||1.06%||1.08%||0.0%||2.6%|
*Hg Capital is the owner of FE Fundinfo.
Dividend cover is also expected to improve, according to the report.
Global dividends are expected to exceed pre-pandemic levels in 2022 as profits recover, according to research from Janus Henderson.
The report by the Henderson International Income Trust showed that global profits were expected to reach £2.2trn this year, due in large part to a 14% increase in North America, Emerging Markets and Asia Pacific ex Japan. This would represent a new record for global firms.
As well as higher pay outs, dividends would also be safer, with cover of 2.4 times in 2022 – the highest margin since 2013.
The only damp squib is the UK, where dividend cover is expected to recover to 1.1x, below the global average but still an improvement on last year. Despite the improvement, share prices of some high-yielding UK companies have not risen to reflect this.
Ben Lofthouse, fund manager of Henderson International Income Trust said that “dividends are a good indicator” of a business’s performance, something that is not always reflected in share value.
Companies paying high dividends could become increasingly appealing to investors looking for consistent returns, especially as UK inflation reached a 30-year high of 5.4% in December 2021.
Lofthouse said: “Dividends fulfil a critical role as a bear-market protector in bad times, and a return enhancer when markets are stagnant at times of high valuations – like today.”
Many analysts, such as Guy Foster, chief strategist at Brewin Dolphin, predict inflation will continue to escalate for most of the year, making high dividends an ever more stable option for investors.
Lofthouse also described the rising cultural shift towards dividend pay-outs in Asia, which have historically remained low, as “a welcome trend.”
However, dividend cover in the market declined as Covid and government intervention disrupted the economy and trusts such as Aberdeen Asian Income ate into their revenue reserves to support pay outs to shareholders.
January’s issue examines the impact of fund size on performance, asking whether more assets under management automatically equal lower returns.
The first edition of Trustnet Magazine in 2022 focuses on a risk that has been front of investors’ minds since the fall of Woodford Investment Management – fund size, and the potential impact it can have on liquidity. In this month’s cover feature, Anthony Luzio looks at whether the past gives any clues as to whether rocketing inflows are an automatic ‘kiss of death’ for fund performance. Meanwhile, Danielle Levy asks if fund pickers are being overly cautious when it comes to size, and Cherry Reynard considers the advantages of investing in boutiques.
This month’s sector focus falls on IA Europe ex UK, as Adam Lewis asks if last year’s strong performance was a blip or the start of a long-term turnaround in fortunes for a market dominated by unfashionable industries.
In the magazine’s regular columns, James Henderson of the Henderson Opportunities Trust names three stocks that can provide balance as well as growth potential when held together in a portfolio, and Zach Ryan of FE Investments reveals which fund he is using to help him navigate the uncertain conditions in emerging markets.
Finally, John Blowers uses his first column back to debunk some of the most common myths that stop people from beginning their investment journey.
As always, Trustnet Magazine is free – you do not even have to enter any details. Simply click here to start reading, then click the arrow pointing down on the left-hand side of the screen if you want to download the PDF.
Experts share their thoughts on this top-performing trust that has struggled over the past 12 months.
The Keystone Positive Change Investment Trust is suffering from a rough year since Baillie Gifford took over the trust but investors thinking of selling should stay the course, according to experts.
In February last year, Baillie Gifford took over the Keystone investment trust from Invesco and switched it from a UK equity income strategy to an all-cap global equity strategy.
The trust is run in-line with the £2.8bn Baillie Gifford Positive Change fund, managed by Kate Fox and Lee Qian. One of the main differences between Keystone and its open-ended peer is that it can use gearing, as well as invest in unlisted, small-cap companies.
However, since 10 February – when Baillie Gifford officially took over the reins – the trust is down 22%, compared to a 10.6% return from the wider global equity market. This has pushed it to the bottom of the IT Global sector.
Performance of trust vs since Baillie Gifford took over
Source: FE Analytics
Despite the recent drawdown, Ewan Lovett-Turner, head of investment companies research at Numis, said that the best time to back a manager can be after a period of underperformance.
“It has been an undeniably difficult time for the fund since Baillie Gifford took over in February last year, which would be expected given the rotation from ‘growth’ into ‘value’ stocks,” he said.
“Shareholders familiar with the Baillie Gifford approach should know to expect periods of short-term volatility and deviation from market indices. Over the long-term we still believe the fund has the potential to outperform.”
He rated the management team highly and pointed to its strong track record managing the open-ended sister fund.
Lovett-Turner also suggested that, purely from a price perspective, the trust represented potential value as it currently trades at a 6% discount to its net asset value (NAV).
Many of the high-growth stocks that the trust invests in have been weighed down by the prospect of rising interest rates and a rotation into value stocks driven by inflation fears.
Its largest holding in Moderna is down more than 60% from its highs as its vaccination program decelerates amidst a potential end to the global coronavirus pandemic.
Moderna’s co-founder Noubar Afeyan recently said that the Covid-19 pandemic could start moving into an endemic phase in 2022, which could spell the end for widespread booster vaccinations.
Patrick Thomas, head of ESG portfolio management at Canaccord Genuity Wealth Management, also backed the Keystone trust and noted that its open-ended peer also launched during a period of rising interest rates, but still managed to outperform.
“It’s the right strategy managed by the right team, but launched at an unfortunate time,” he said. “Essentially this is an out-and-out growth strategy with a very concentrated approach that will suffer during very significant value rotations.
“This problem is exacerbated by the fact it is a relatively small investment trust so volatility can be higher.”
He also said the trust is more of a healthcare story than a big-tech play, which has made its shorter-term performance more challenging.
Roughly 34% of the trust’s portfolio is invested in the healthcare sector, which is almost triple the MSCI World Index’s weighting of 12.6%.
“The team are coming up to a five-year anniversary on their flagship open-ended fund and, despite a tough year, it is still one of the top performing global funds anywhere,” he added.
Performance of Baillie Gifford Positive Change since inception
Source: FE Analytics
Managers of the trust Kate Fox and Lee Qian have been running the open-ended Baillie Gifford Positive Change fund since 2017.
Despite the open-ended Baillie Gifford Positive Change fund’s recent drawdown in performance, it ranks as the second best performing fund in the IA Global sector on a five-year basis. It is also the third highest performer on a three-year basis.
Thomas thinks that the long-term drivers that the trust is targeting – such as the climate transition and inclusive growth – are trends that will give the trust a favourable long term structural backdrop.
He said: “Given the opportunity set in slightly smaller companies and unlisted unicorns, we see the investment trust as an appropriate vehicle to access a high-quality investment team.
“When the open-ended fund launched five years ago there was scepticism that a relatively inexperienced team could generate returns in excess of its peers. We would also note it launched during a period of rising interest rates.
“We think the fears over the trust today should be seen in this context – investors with a long-term horizon could be well served by this vehicle.”
Trustnet looks at the funds launched in 2018 that have made a strong start.
Multi-asset funds run by JO Hamro Capital Management, Premier Miton and AJ Bell are among the funds launched in 2018 that have made top-quartile returns over the past three years, according to data from FE Analytics.
Investors typically wait for a fund to prove its mettle before buying in, which usually involves hanging on until the portfolio has three years of track record to evaluate.
Those that do this will avoid some of the funds that never live up to their potential, but will also miss out on some of those that get off to a storming start.
Having previously looked at the young US funds, this time around Trustnet examines at the multi-asset portfolios that have made strong gains in their first three years.
Two funds from the IA Flexible Investment sector made the list. First up is the MI Hawksmoor Global Opportunities fund, which has returned 43.5% over three years.
The £39.5m fund-of-funds is 52.1% invested in portfolios that buy stocks, but has 21.3% in real assets and 12.9% in private equity with a further 9.8% in resources such as precious metals.
Private equity investment trust Oakley Capital Investments is its largest holding at 5.6%, while Polar Capital UK Value Opportunities and Jupiter Gold & Silver are second and third respectively. In total, these funds account for 14.6% of the total portfolio.
Performance of funds vs sector over three years
Source: FE Analytics
Also from the IA Flexible Investment sector, VT AJ Bell Global Growth came in just behind its Hawksmoor peer, making 42.7% over three years.
Launched in June 2018, the £123.8m fund has made its returns by investing in a range of low-cost passives, with Lyxor Morningstar UK ETF its largest weighting at almost 19% of the portfolio.
More typical with funds in the flexible sector, the portfolio has a 91.5% weighting to equities with 3% in fixed income and 3% in alternatives.
Further down the risk scale, in the IA Mixed Investment 40-85% Shares sector Premier Miton Balanced Multi Asset, which is to be renamed the Diversified Sustainable Growth fund as of 1 March, has started strong.
Since its launch in January 2018, the £6.4m fund has made 40.3%, a top-quartile effort among its peer group. The portfolio is 63.5% weighted to equities – in the middle of its allowed range – with around 10% in property, 10% in fixed income and 9% in alternatives. It also has a higher cash weighting of 7.3%.
The fund is already invested with environmental, social and governance practices in mind, with its top holdings including Vestas Wind Systems and SolarEdge Technologies.
Among non-equity investments, BH Macro, the long-short investment trust, is the portfolio’s biggest weighting at 3.6%.
Neil Birrell, manager of the fund, said: “The fund’s portfolio will not change as a result of this and so there will be no costs involved.
“The investment strategy of the fund has always been to identify long-term structural changes or themes that are taking place in economies or society and to build a directly invested multi asset portfolio around those.”
Performance of funds vs their sectors over three years
Source: FE Analytics
Last up is the £128.6m JOHCM Global Income Builder fund, which launched in May 2018 and has made 27.9% over three years – a top-quartile ranking in the IA Mixed Investment 20-60% Shares sector.
Despite the limit on equities, currently the fund has 70.3% invested in stocks, split 32.7% among US equities and 37.6% among those from elsewhere. It has 19.7% in fixed income and 6.4% in cash, with 3.5% in gold.
The fund, which aims to provide a “persistent stream of income” alongside capital growth, holds 101 equity positions, with technology and financials the two largest sector weightings, alongside 34 fixed income positions.
|JOHCM Global Income Builder||IA Mixed Investment 20-60% Shares||£129m||Giorgio Caputo, Lale Topcuoglu, Robert Hordon||0.88%|
|MI Hawksmoor Global Opportunities||IA Flexible Investment||£40m||Daniel Lockyer, Ben Conway||0.69%||1.46%|
|Premier Miton Balanced Multi Asset||IA Mixed Investment 40-85% Shares||£6m||Neil Birrell||0.95%||1.00%|
|VT AJ Bell Global Growth||IA Flexible Investment||£124m||AJ Bell Asset Management Limited||1.47%||0.31%|
Fund inflows rose 140% in 2021 as investors piled cash into asset managers on the back of vaccine-fuelled optimism and rising markets.
Investors bet on a strong global economic recovery in 2021 as fund inflows rose by 140% to $150.5bn (£110.4bn), according to a report from Calastone.
This rise in inflows came on the back of a strong year in 2020, when investors ploughed in $62.6bn of new money into funds despite a rocky first quarter in which investors withdrew $9.7bn in net outflows. They poured $72.3bn back into funds over the following three quarters.
The 2020 figures were 20% higher than 2019, despite the world fighting a global pandemic and many economies suffering widespread lockdowns throughout the year.
Savers were heartened in 2021 by a potential end to the pandemic. Economies rebounded in the aftermath of Covid-19 as the end of lockdowns signalled a path back to normality.
Of the $88bn increase in overall net inflows between 2020 and 2021, equity funds and mixed assets accounted for two thirds, according to the report.
The chart below shows the difference in inflows seen over 2019, 2020 and 2021, where equity inflows in 2020 and 2021 dwarf the figures in 2019.
Source: Calastone Global Fund Flows Report
According to Calastone’s data, the first half of 2021 was when the most money flowed into equity funds, peaking at $8bn in March.
These funds enjoyed average monthly inflows of $5.5bn between January and July, which then tailed off markedly in the latter half of the year. By October, the net inflow had fallen to just $863m, the lowest level in more than 12 months.
The report said that the slowdown was driven by lower buying activity, not by increased selling, indicating that this was not a wholesale reappraisal of equities, but rather a reluctance to commit new capital to this riskier asset class at a time of high prices and rising concerns over inflation.
At the end of the year, however, optimism returned, as it became clear that the Omicron variant was unlikely to cause the same disruption as previous mutations. As a result, December inflows jumped back to $4.2bn, putting it in line with the full-year average.
Within the equity inflows, there was a divergence between tech funds and value funds during the year. Technology funds experienced net outflows from June to September for four consecutive months, which is the longest run in the three years Calastone has been tracking figures.
And between October and November, no net new cash flowed into tech funds, although December was more positive, driven in particular by buying among Asian investors, the report found.
Value strategies on the other hand, had a good 2021 after being out of favour for years. Not only did investors return all the capital they had taken out of value funds in the previous two years, a third more was added.
Environmental, social and governance (ESG) funds were the big winners of 2021, taking in $32.1bn in new capital in 2021, equivalent to $3 in every $5 of new cash committed to equity funds of all kinds, the report found.
Although this ESG shift has particularly favoured active funds, even excluding ESG funds active funds enjoyed inflows around 2.5 times greater than passives in 2021.
This broke the trend of the past several years where index funds garnered more inflows than active funds.
Source: Calastone Global Fund Flows Report
Conversely, fixed income flows also slowed as 2021 progressed Calastone found. In November bond fund inflows of $731m were just a third of the January to October monthly average. The surge in inflation was seen as negative for bond funds due to the associated rise in yields and downward pressure on prices.
However by December, there was also a marked reversal, with fixed income flows recovering to $2.2bn.
The report suggested that the fund flows indicate a split opinion among investors, where some dismissed Omicron concerns to buy equity funds, while others favoured fixed income, judging that the virus was bad for global growth, temporarily at least, putting inflation fears on the back burner.
In contrast, mixed asset funds saw fairly stable inflows during the year, reflecting their diversified nature. According to the International Investment Funds Association (IIFA), assets under management are more than 25% higher than the pre-pandemic peak.
Real estate funds were the only asset class that suffered from outflows in 2021, according to the report. Investors in Europe and the UK were especially negative, while Australians continued to add cash, though at a much slower rate by the end of 2021.
By the end of the third quarter of 2021, open-ended funds were worth $68.3trn, with more than nine tenths of this capital owned by retail investors and the rest owned by institutions.
Edward Glyn, head of global markets at Calastone, said: “Confidence and cash combined in 2021 to drive investors on a fund-buying spree. Savings ratios jumped around the world in 2020, in many cases to record levels, leaving households flush with cash in 2021.
“A little of this cash found its way immediately into funds in 2020, but many investors held fire until they had greater clarity on how long the disruption would last. 2021 was the main beneficiary.”
He said that as savings ratios drop back to more normal levels, he expected fund flows to diminish this year as investors have less pent-up cash to deploy.
New measures, targeted at crypto assets, aim to provide investors with more information on financial risks.
Tougher regulation on high-risk investments such as crypto will be introduced as part of the Financial Conduct Authority’s (FCA) Consumer Investments Strategy, the City watchdog announced on Wednesday.
The proposed rules are aimed to make consumers more aware of investment risks and to prevent them from buying into risky ventures through misinformation.
Regulations will include a ban on incentives, such as bonuses for new customers and people who refer new clients, as well as additional risk warnings on financial advertisements.
Now, companies will have to disclose more information on the volatility of their product to new customers to ensure they are not rushed into a misinformed decision.
Kat Mann, savings and investment specialist at Nutmeg said: “Crypto-asset advertisements promising sky-high returns quickly, when the truth is that returns are never guaranteed and the investments are likely to be volatile.”
With the responsibility to regulate crypto assets soon to be handed over from the government to the FCA, it has drawn up plans to safeguard investors’ capital.
Around £140m was lost to crypto fraud between January to October last year, including the high-profile Squid scam. Based on the Netflix show Squid Games, the cryptocurrency disappeared after accumulating $3.4m (£2.5m).
Laura Suter, head of personal finance at AJ Bell, said: "The FCA wants to curb this trend and make it harder for novice investors to sleepwalk into buying high-risk investments.”
A recent abrdn study revealed that 55% of UK adults want to invest the money they have sat on throughout the pandemic in 2022, making it all the more important that they are aware of the investment risks.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown warned investors in crypto, 39% of whom are aged 18-24, of the unregulated nature of the market, describing it as a “wild west.”
We think inflation will begin to fall back from the spring and fears of slowing growth look overdone.
Global equity and bond markets had a bumpy end to 2021 as investors began to fear the worst of both worlds — stagnating output and persistently rising inflation, that nasty combination called stagflation.
While we do think inflation will begin to fall back from the spring, there is considerable uncertainty around its outlook. However, fears of stagnating growth look overdone.
We see encouraging signs for equity investors in purchasing managers indices (PMIs) of global business activity and other leading economic indicators. In general, they remain strong and consistent with continued momentum in company earnings growth.
These indicators are moderating from their extreme highs as economies initially roared back to life from pandemic-related shutdowns. But we are a long way from stagnating growth, much less a contraction.
As the post-Covid recovery enters its next phase of expansion, we think business investment is likely to be a driving force. Both in the US and worldwide there is evidence of a strong pick-up in business capital spending (capex) plans. As well as preventing stagnation, this factor is also likely to ease inflationary pressures.
More and better tools lead to enhanced productivity growth; better productivity puts downward pressure on unit labour costs; and unit labour costs tend to correlate with core inflation.
Minutes from the latest meeting by the US Federal Reserve (Fed) have also noted anecdotal evidence of the increased use of automation by many businesses in the face of ongoing labour market shortages.
Equity investors can also appeal to history for some level of comfort. Profit margins nearly always expand during periods of economic growth (with sales going up by more than costs). In addition, since the turn of the past century, profit growth has only failed to beat inflation during the great depression of the 1930s and in 1910.
Looking for the right signal
The yield curve has started to flatten again (financial market shorthand for a narrowing difference between the yields on longer versus shorter-dated US Treasury bonds) and some investors are citing this as a reason to be negative. That’s because it’s seen as signalling rate rises in the short term and slowing growth further down the line. However, a flattening yield curve is not on its own cause for alarm.
The relationship between yield curves and the business cycle — or GDP growth or stock market returns, for that matter — is not linear. After the yield curve flattened over the summer, an argument was floated along the following lines —the yield curve is flattening, it may invert next.
While an inverted curve (when longer-dated yields fall below short-dated yields) tends to be associated with impending recession, that doesn’t mean that a flattening but still upwardly sloping yield curve denotes a sub-par environment that should cause investors concern.
Since the relationship is not a linear one, many analysts (including us) transform the signal sent by the yield curve into a probability of recession using what we call a non-linear model. Even in September, after a summer of flattening, the yield curve still suggested a 0% chance of recession according to this model.
In fact, because yield curves start to flatten mid-cycle, a recent study in the Journal of Investment Management (JoIM) found that flattening is actually associated with a more stable growth environment — that’s good news for investors, not bad.
Another crucial lesson to heed is that the window between inversion and recession tends to be long, 14 to 15 months on average, and has been getting longer with time. This makes it harder for investors to use the yield curve as a signal, as equity markets only lead recessions by three to six months.
Selling equities as soon as the curve inverts could cause you to miss out on rising stock prices for rather a long time, let alone selling them when the curve starts to flatten.
Regaining some balance
The big worry for 2022 is the potential trade-off between growth and inflation, for a corollary of 2021’s growth bonanza has been steeply rising prices. US inflation has reached a three-decade high — UK inflation is likely to do the same in the spring — and there is an unusually wide fan of possible outcomes from here for investors to be alert to.
Overall, excess inflation is primarily about the unusual composition of spending. Consumer goods inflation rose in line with spending on goods. Demand here has fallen sharply and it is difficult to see how consumer goods inflation could stay elevated for too long without the demand.
High inflation in consumer goods is unlikely to fully pass over to high inflation in services as spending normalises. Our base case is for global inflation to fade meaningfully from the spring, but to remain elevated until at least 2023. Much depends, however, on a resumption of normal spending patterns, which could be stalled by Omicron.
Central bankers have been clear that there is little they can do to stem the unique causes of today’s inflation, but that they are more mindful to tighten policy as output and employment are strong.
Rising rates would ordinarily be a headwind to valuations, but markets are already pricing for a substantial number of rate hikes in the US, UK and Europe. Both the Bank of England and the Fed made surprisingly hawkish changes to policy in December and bond and equity markets were unperturbed.
Keeping an eye on earnings
Still, our relative optimism shouldn’t lead us to be complacent about the many challenges facing investors in the year ahead — after the blistering gains in equity markets coming out of the worst of the pandemic, it’s likely to be a difficult year by comparison.
One major challenge will be to work out where the next leg of growth is going to come from, while also navigating the supply chain and labour market disruptions and government debt burdens that the pandemic is leaving in its wake.
We would be cautious about having any significant bias toward a particular style, especially highly valued ‘growth’ companies or ‘cyclical’ shares that are more sensitive to broader economic conditions.
Both could come under pressure if bond yields resume their rise or the economy stutters. There has been relatively little differentiation between these and other investment styles this year, which is typical in the middle of the economic cycle when the initial spurt of growth has peaked.
We think a ‘bottom-up’ focus on companies with persistent momentum in generating good-quality, growing profits makes sense, irrespective of styles. Strong earnings momentum can be found in both value and growth, cyclicality and defensiveness, and these more ‘top-down’ macro factors are likely to be a less relevant source of differentiation.
In the US and other major markets, average earnings continued their streak of comfortably beating expectations in the latest quarterly results, though guidance on future earnings was more cautious than expected.
Supply chain disruptions and labour supply shortages could also continue to weigh on profit margins and need to be watched carefully on a case-by-case basis. Still, though caution in the face of uncertainty is warranted, the bar for earnings expectations in 2022 may now be set sufficiently low to limit the risk of disappointment.
Ed Smith is co-chief investment officer at Rathbone Investment Management. The views expressed above are his own and should not be taken as investment advice.
Experts are predicting a further interest rate rise in February after the latest figures were announced.
UK inflation hit a 30-year high of 5.4% in December, according to new data from the Office for National Statistics (ONS), putting pressure on the Bank of England (BofE) to raise rates more aggressively than planned, experts have said.
The huge consumer prices index (CPI) spike in the final month of 2021 was driven by an increase in the cost of food, following higher commodity prices and supply chain disruptions, as well as from the struggling restaurant and hotel sector.
Elsewhere, prices in the transport sector rose significantly as fuel supplies remained low and staggered car production drove up the cost of second-hand vehicles.
The consumer prices index including owner occupiers’ housing costs (CPIH) rose 4.8% in December as house prices soared. The average house price in the UK now stands at £271,000.
December’s overall inflation figures were stronger than expected, up 0.3 percentage points on the month before and the highest since 1992.
Modupe Adegbembo, G7 economist at AXA Investment Managers, said that inflation was “set to rise further still”, although in the short term, headline CPI should dip from December’s figure.
“Today’s print will increase the pressures on the Bank of England to increase interest rates to quell potential second-round effects of price increases,” he said.
Ben Laidler, global markets strategist at eToro, said the latest data made an interest rate rise next month “inevitable”, a view backed up by Invesco’s global head of asset allocation research Paul Jackson, who said the market had implied a 98% probability of a rate hike in February.
“The BofE has already started to tighten policy and we expect this to continue over the coming months and quarters. We think it will raise its policy rate to at least 1% by the end of 2022 (from the current 0.25%), with more to come thereafter,” said Jackson.
He noted that, taking into context the balance sheet expansion that has taken place during the pandemic, the Bank’s stance was “very accommodative” and that the tightening cycle would take “a number of years”, although it would be more aggressive than the US Federal Reserve’s, or Europe’s ECB.
Yet when the Monetary Policy Committee meets on 3 February, it will not have the output data for December and January, which Adegbembo expected would show the economy contracting.
The Omicron variant of the coronavirus led to falls in economic activity, and there have recently been reports of falling labour market strength, he said, which may suggest the Bank will hold off until there is a clearer picture.
“Given the uncertainty over activity, combined with the fact that the MPC has already taken a first step in raising interest rates, we expect the Bank to follow a more cautious path and leave the rate unchanged at 0.25% in February, pencilling in the next hike only in May,” said Adegbembo.
US midterms and the potential resignation of UK prime minister Boris Johnson could have big impacts on markets.
Politics is one of the biggest risks that investors will face this year, both in the UK and abroad, according to Quilter Investors portfolio manager Stuart Clark, who warned that the Downing Street parties held during lockdown had merely “fired the starting gun”.
While the world is currently dealing with supply chain issues – which have led to rampant inflation – and the potential for central bank mismanagement, one potential pitfall not explored enough is political risk.
As we have seen in the past with events such as Brexit and the presidency of Donald Trump, these decisions can impact markets drastically. For example, immediately after the Brexit referendum in June 2016, the FTSE All Share index fell 7%.
“This year was already going to be an intriguing one from a political perspective given we are likely to see the return of Donald Trump ahead of the US midterms and the number of elections that are ongoing. With the UK now facing potential political upheaval, it is key investors don’t rest on their laurels,” Clark said.
However, the reaction to these events is often short-lived – the FTSE All Share index ended 2016 up 16.8% despite the shock fall – making it difficult to make know when and where to invest.
Total return of FTSE All Share index in 2016
Source: FE Analytics
“Around any political event there will be short-term noise, but it is important that you keep focused on the long term and instead look through at what could be implemented and how that may affect your portfolio,” Clark added.
Below, we look at the three major political risks investors will need to watch out for in 2022, both domestically and further afield.
Starting at home, prime minister Boris Johnson has come under increasing pressure from members of both his own and the opposition parties for hosting work events during the lockdowns in 2020 and 2021 – a time when this was against the government’s rules.
“It remains to be seen if he can survive this latest scandal. Politicians on both sides of the divide have called for him to resign and this has ratcheted up the political ambiguity the UK faces,” Clark said.
If there were a Conservative party leadership change this year, or even a general election, markets would likely react, although the impact should be minimal, he added, as there is no “extreme ideological move” between Johnson and Labour leader Keir Starmer.
The issue for investors, however, is that the UK market is cheap, but for good reason. Brexit has already hampered the market, causing foreign investors to stay away, and uncertainty in Westminster would do little to bring them back, keeping the domestic market undervalued versus its peers.
“We instead see Europe as a more attractive region, as it has the same undervalued qualities, relative to the rest of the world, without so much political uncertainty,” said Clark.
Over in America, president Joe Biden will face his first big test since his election in 2021 with the midterm elections, which are expected to include a watered-down version of his ‘Build Back Better’ infrastructure plan and a pause on any potential tax increase, according to Clark.
“One point potentially being missed by investors, however, is the fact that the Federal Reserve will likely not make many, if any, moves to its signalled interest rate policy in the run up to the elections to preserve its impartiality,” he said.
Currently, markets are pricing in three or four rate hikes this year as well as a shift from tapering to quantitative tightening, yet it will have to move sooner rather than later if this is to be done in time before the midterms.
“With markets at such high valuations and a backdrop of swift monetary policy tightening, it is difficult to see US equities marching much higher. As such being diversified globally and across investment styles will help investors avoid the large repercussions of any taper tantrum that comes about from Fed tightening,” Clark noted.
The big red flag on the horizon in Europe is the French elections, although Clark said this was “unlikely to upset markets too much”.
President Emmanuel Macron is expected to stand again, but populist movements on the continent remain strong and although Macron should win, “it would be no surprise to see his share of vote reduce in the face of increased far-right challenges”, he said.
If this were to happen, it could cause European markets to wobble, although they should settle down shortly after, providing the status quo prevails.
“This is one instance where investors must look past the short-term noise and instead focus on what changes are likely down the line. If it is more of the same then there will be little to worry about,” Clark said.
Trustnet asks one of the top European investment trust managers of 2021 what changes investors need to make to come out on top in 2022.
Investors need to leave the habit of investing in reaction to potential macro changes behind in 2021 if they want to succeed this year, according to Stefan Gries, manager of BlackRock Greater Europe Investment Trust.
The chopping and changing and knee-jerk reactions to expected changes in fiscal policy and interest rates drove a lot of the markets’ rotations last year, stirring up a lot of volatility. This year investors need to look through the “macro noise” and determine which events will actually impact their portfolios.
For example, in the opening days of 2022 there was a significant rotation out of growth and into value, which was “driven by the – in our view well understood – prospect of rate hikes in the US this year,” Gries said.
European equities were down along with the US market after many interpreted the Federal Reserve’s discussion on cutting back on its bond buying as a sign that the central bank was gearing up to raise interest rates.
The US market is so expansive it plays a dominant role in the fortunes of global equites – when the US sneezes everywhere else gets a cold is a well-worn investment phrase – but Gries said that not every part of its’ fiscal policies will have a domino effect elsewhere.
“We believe it is important for investors to analyse whether a slightly higher US 10-year yield actually has any real impact on earnings and cashflows of assets held in their portfolios. Very often, investors will find that this might not be the case,” he said.
Outside of the US there were a lot of domestic, macroeconomic headwinds facing European investors last year besides Covid, including a cyclical rebound as well as broad-based positive earnings revisions which were hard to ignore.
But Gries said “we believe some of these macro tailwinds are likely to fade out,” in 2022, with the exception of “accommodative fiscal policy”.
Gries said he was “encouraged” by the central banks fiscal policies, which will be particularly supportive for companies involved in the ‘green theme’, such as the energy efficiency of buildings, renewable fuels or companies or adoption of electric vehicles, all of which Gries is investing in.
“The EU wants 30 million electric vehicles by 2030. That looked ambitious a year ago, but today it looks a little tame. Growth is much faster than people expected.
“We focus on opportunities amid the technology companies that supply into the electric car industry – semiconductors, chips and sensors,” he said
The European bloc launched a sizeable €800bn (£669bn) post-pandemic recovery fund – called NextGenerationEU – to help finance its transition to a greener and digital economy and repair the immediate economic and social damage Covid has caused. The aim is to build a European economy which has environmental and social sustainability at is core.
As these dominant, macroeconomic factors lessen this is likely to have two main consequences.
First, would be a greater dispersion between sector and stock outcomes “and, with that comes an increased need for greater selectivity,” Gries said.
The BlackRock Greater Europe Investment Trust made the second-best returns out of all European focused trusts last year (32.2%). This was driven by key stock selection rather than an overt bias to one sector, Gries said, though some of the best performers were in technology and healthcare areas.
Performance of trust vs sector and index in 2021
Source: FE Analytics
Second, would be a continuation or even increase in volatility. In his outlook for the year, Gries said: “Over the next 12 months, the journey from A to B may be more volatile but we believe that quality companies will still create wealth for shareholders.”
The FE fundinfo Alpha Manager said that volatility is not always an inherently bad thing for investors and can be an opportunity to test companies’ ability to deliver reliable income and “whether they lend themselves to high and sustainable growth at attractive returns”.
Three funds beat the most common benchmark in the sector in eight of the past 10 calendar years, but only one managed to outperform regularly against its peers, too.
Threadneedle UK Equity Income is the most consistent IA UK Equity Income fund of the past decade, beating the FTSE All Share – the most common benchmark in the sector – in eight of the past 10 calendar years, while also besting its peers over the same number of periods, Trustnet has found.
Two other funds – LF Montanaro UK Income and BMO Responsible UK Income – also beat the FTSE All Share in eight of the past 10 years. However, they weren’t quite as consistent when it came to outperforming their sector average: LF Montanaro UK Income managed the feat in seven of the past 10 years, while BMO Responsible UK Income managed it in six.
Performance of funds vs sector and index
Source: FE Analytics
Of the 69 funds with a track record long enough to be included in the study, another eight funds beat the FTSE All Share in seven of the past 10 calendar years.
Threadneedle UK Equity Income is headed up by Richard Colwell, whose process is based on the belief that valuations are too susceptible to short-term news flow, creating opportunities for investors who take a long-term approach.
His process aims to answer three questions about a business: can it continue to grow? Can it successfully convert earnings streams into cash flows? And finally, does the firm have good management in place who can allocate capital efficiently?
Bestinvest described Threadneedle UK Equity Income as an “excellent fund for income investors”, with the manager’s portfolio construction making it suitable for all market conditions.
“Colwell has been generally cautious more recently and has built his portfolio around an ‘engine room’ of solid businesses offering resilient dividends,” it said.
“He supplements this with selected recovery names – poorly performing businesses such as Morrisons and BT that might be riskier but offer greater potential returns.”
In a recent note to investors, Colwell likened the global market to what economist John Kenneth Galbraith termed the “bezzle” in the 1920s: “An as-yet-unrevealed inventory of nasty shocks built up in the good times, which only reveal themselves when tougher times arrive. When tougher times arrive, this crowded capital could be exposed to bezzle assets that quickly plummet.”
In contrast, he said the UK was quietly going about its business: “The volatility of the post-Brexit deal seems to have settled, JP Morgan recently turned bullish on UK equities for the first time since the referendum, and in the summer Bloomberg was hailing ‘the City’s IPO renaissance’ as new listings during the first six months of 2021 rose by 467% with a valuation of $20bn (£14.7bn).
“All the while the UK retains its valuation arbitrage and remains cheap.”
Data from FE Analytics shows Threadneedle UK Equity Income made 156.4% over the past decade, compared with gains of 115.1% from its sector and 110.7% from its benchmark.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
Although LF Montanaro UK Income hasn’t beaten its sector quite as often as Threadneedle UK Equity Income, it has more than made up for this in terms of total returns – 231.3% over the past decade.
This fund differs from most of its peers through a high weighting to mid and small caps and the integration of environmental, social and governance (ESG) considerations into its process.
On the one hand, this means it may lag behind its peers if there is a rally in oil & gas stocks, for example; however, it also means it can add diversification to a portfolio by avoiding some of the largest dividend-paying industries.
The team at Square Mile Investment Consulting & Research said Charles Montanaro and Guido Dacie-Lombardo, who head up the fund, were “sensible managers who appear to successfully blend youth and experience, as well as genuine humility and a passion for investing”.
“This is further bolstered by the wealth of knowledge provided to the managers by the specialist small- and mid-cap analyst team, and the highly collegiate approach, which we have a high regard for,” it said.
“The process has been designed to highlight high-quality growth companies that can grow sustainably over the long term.”
BMO Responsible UK Income also takes ESG considerations into account, which manager Catherine Stanley said leads her towards the lower end of the market-cap spectrum.
Stocks eligible for inclusion in her portfolio must have a positive impact on society and the environment. After that, the focus is on longevity and reducing risk. Stanley said these initial screens leave her with an investable list of about 220 UK stocks.
“The list doesn’t change hugely one year to the next, but all names and policies are reviewed on a regular basis,” she said.
“It almost, by default, gives us an above-average quality set of names, as there is, in my mind, a clear correlation between high-quality businesses and those with strong ESG standards.”
While there is a growing trend for companies to boost their ESG credentials, some of them are capable of going backwards in this regard, leading them to drop off the list.
HSBC is one example, with Stanley saying: “It was not able to give satisfactory answers on questions around human rights management in Hong Kong and its approach to climate change and financing of that. HSBC has now exited the portfolio.”
BMO Responsible UK Income made 138.5% over the 10-year period in question.
|Name||Fund size (£m)||Yield (%)||OCF (%)|
|BMO Responsible UK Income||463.3||2.9||0.81|
|LF Montanaro UK Income||70.6||2.67||0.8|
|Threadneedle UK Equity Income||4035.1||3.08||0.82|
BMO Global Asset Management’s latest data shows finding funds that can perform every year has been a struggle.
Europe and the UK are the places to invest for consistent returns, according to the latest BMO market study, while emerging market and Japan funds have struggled to make returns year-in and year-out.
In its latest report to the fourth quarter of 2021, the firm found that markets once again fluctuated between growth and value stocks.
The fourth quarter was dominated by worries of how Omicron and inflation could affect the recovery. The economic implications of this created an about-turn in markets, which were led by the stalwart growth stocks that are used as safe havens in recent fearful times.
This contrasts with much of the year, when unloved value companies had rebounded as investors began to forecast life outside of the pandemic.
It means that very few funds have managed to consistently beat their peers or the market on a three-year view, the study found. To do this, BMO looked at the 12 main Investment Association sectors (1,087 funds in total), filtering down to only those that have consistently been in the top quartile of their peer group in each of the past three 12-month periods.
The number of portfolios that qualified rose to 2.9% from 1% in the third quarter report, with 31 of the 1,087 funds achieving the feat.
The IA Europe Excluding UK sector was the most consistent for top-quartile returns with 8.1% of funds making the cut, followed by the IA UK All Companies and IA UK Equity Income sectors, with 4.2% and 3.8% respectively.
Kelly Prior, investment manager in BMO Global Asset Management’s multi-manager team, said: “The fourth quarter brought with it a continuation of the trend that started in the second quarter of 2021: Europe ex UK being the most-consistent in rolling top-quartile terms and the US being among the least.”
For the five quarters before this the reverse had been true, she added, but said “increasingly bifurcated markets” had increased the need for active management.
“Europe has always been a rich hunting ground for active managers, who have historically been less stylistically skewed than their US counterparts, where there is a longer history of manager specialisation,” she noted.
At the other end of the spectrum, the IA Global Emerging Markets and IA Japan sectors failed to deliver any funds that achieved this level consistently.
When lowering the hurdle rate to the funds that have been consistently above average in each of the past three 12-month periods, 159 of the 1,087 funds (or 14.6%) made the grade, up from 10.2% the previous quarter.
Here, the most-consistent sector was the IA UK All Companies peer group with 19.8% of funds performing above the median for three consecutive years.
Next came the IA Europe ex UK and IA Sterling Strategic Bond sectors with 18.6% and 16.9% respectively. Again, the IA Global Emerging Markets sector was the least consistent with 5.4% of funds beating the median.
Prior said: “Consistency improved in the fourth quarter from the third, though only back to historical norms. A possible cause being the reversion back to growth as a style, though the list of names was less dominated by certain houses that specialise in this style than has previously been the case.”
Over the past three years, the report found that investors could not “have their cake and eat it”, with no funds able to achieve top-ranked three-year returns with bottom-ranked (lowest) volatility.
“The Royal London Sustainable Leaders Trust came close, achieving 100th percentile risk, but ‘only’ 8th percentile return,” Prior said.
Total return of fund vs sector over three years
Source: FE Analytics
“A simplistic observation could be that you have been able to make good returns in these years, but you may have had to weather more volatile performance to achieve it. The middle ground is becoming a crowded place – to achieve long-term excellence patience is a necessity.”
Looking ahead, the report found that the new year is looking “a little different” to 2021, with central bankers withdrawing quantitative easing, while fiscal policies such as “build back better” in the US facing challenges.
Inflation is also a “wildcard” with many differing views. All of which this myriad opportunities but also potential pitfalls.
According to Lipper, there are 2,779 funds in the IA universe with 184 of these being index trackers. This masks a huge variety of funds within sectors.
“The largest sectors such as global equities and the UK have 9.2% and 17.2% trackers respectively with a variety of indices being followed in each sector in most cases,” the report said.“As we see this universe change, as it has done in recent years, with more passive offerings and managers increasingly specialising, it becomes increasingly important to know and understand what you are investing in. Remember – you cannot buy the average fund
Larry Fink also added that ESG funds are “the greatest investment opportunity of our lifetime”.
Stakeholder capitalism was top of the agenda in the annual letter penned by BlackRock chair Larry Fink to the chief executives (CEOs) of companies the firm has a stake in, as he stressed the importance of considering shareholder values when taking action.
He said investors deserved more involvement in company decision making, especially on environmental, social and governance (ESG) issues, which have become increasingly important to how people invest.
BlackRock set up the industry’s largest stewardship team in 2017 to allow shareholders to vote on how the committee advises companies on ESG matters.
However, Fink said investors need to “participate in voting more directly” and encouraged CEOs to open up avenues for stakeholders to have additional involvement in company affairs.
He said: “We are committed to a future where every investor – even individual investors – can have the option to participate in the proxy voting process.”
The Centre for Stakeholder Capitalism – forum of industry experts – has been set up by BlackRock to promote the idea.
Sustainability was also highlighted as a crucial area of improvement for companies, with ESG investments now reaching $4trn (£3trn).
A rapid rise in ESG funds was boosted by agreements made at COP26 in October last year and many corporations have since rushed to add sustainable mandates to their company policies.
Fink noted that global business is accelerating towards net-zero emissions one way or another and companies that fail to adapt to sustainability demands risk being left behind.
He said: “Every company and every industry will be transformed by the transition to a net-zero world. The question is, will you lead, or will you be led?”
Despite this, firm will continue to invest in oil and gas companies. BlackRock’s £133m Energy and Resources Income trust, for example, has 33.6% of assets in traditional energy. However, it also has 24.1% holdings in energy transition.
Fink suggested that rather than abandoning the sector, it would benefit more from innovation in carbon-reducing technologies.
Excess capital floating around the system – global financial assets are at around $400trn – should be directed towards developing solutions to these sustainability issues, he said.
Fink added: “I believe the decarbonising of the global economy is going to create the greatest investment opportunity of our lifetime.”
Innovation is also needed within the internal structure of corporations, Fink said. Covid has redefined the workplace by reducing contact hours in office and brought the mental health of employees to the forefront.
BlackRock research found that companies with a strong relationship with their staff had lower levels of turnover and higher returns throughout the pandemic.
Therefore, Fink urged companies to “show humility and stay grounded” not just for their employees wellbeing, but for the corporation’s own success.
Bank of America has found that fund managers piled into cyclical assets at the start of the year, eyeing strong global growth as the pandemic recedes.
Investors’ optimism on the post-pandemic reopening is overcoming their worries about higher interest rates, the latest Bank of America Global Fund Manager Survey shows.
The closely watched survey – which polled 239 fund managers running at total of £810bn about their positioning – found investors have been increasing exposure to stocks and commodities while avoiding bonds and other defensive assets at the start of 2022.
‘Hawkish central banks’ raising interest rates is the main risk that fund managers are worried about at present with 44% citing this as their leading concern, followed by inflation (21%). Just 6% said a resurgence in Covid-19 is the biggest risk.
What fund managers consider to be the market’s biggest ‘tail risk’
Source: BofA Global Fund Manager Survey
The fund managers polled by the bank now expect an average of three interest rate hikes from the Federal Reserve in 2022, up from two last month. They think the first one will come in April, pulled forward from their previous expectation of July.
But these concerns have been overset by the confidence that inflation will prove transitory (only 36% think inflation is permanent) and global economic growth will improve over the coming year.
Just 7% of investors are worried about a recession in the near term and 71% are expecting ‘boom’ conditions of above-trend growth and inflation.
The data shows that fund managers have taken more cyclical positioning recently, reflecting their confidence that the economy will rebound as Covid restrictions continue to be eased.
Bank of America’s analysts said: “Investors are very long equities, particular in the EU, as well as cyclical banks, commodities and industrials while they shun bonds, defensives (utilities, staples) and emerging markets.”
Fund managers’ net % overweights – Jan 2022
Source: BofA Global Fund Manager Survey
In January, there was a 21 percentage-point jump in the allocation to banks; investors now have a net overweight of 41% to them, close to the all-time high set in October 2017. Meanwhile, fund managers’ net overweight to commodities is at its highest ever.
In keeping with this pro-cyclical stance, there has been a significant increase in the number of fund managers who expect the value style of investing – which tends to perform better when the economy is stronger – will beat the growth style in the coming 12 months. A net 50% of investors now say value will outperform growth, up 39 percentage points in the space of a month.
At the same time, they are “very underweight” assets that a vulnerable to interest rate hikes, such as tech stocks, consumer staples businesses and bonds. Fund managers’ underweight to bonds stands at 77%.
The net overweight to tech stocks – which have been the darlings of the stock market for much of the past decade – was “drastically” cut to 1% in January. This is down 20 percentage points from December and takes the allocation to tech to its lowest since December 2008.
Trustnet asks the managers of last year’s best performing Japan funds and trusts for their outlooks on the next 12 months.
Japan’s story of corporate reform might be an ongoing one but it remains as relevant today as it has for the past five years, according to 2021’s top performing Japan managers.
The big investment story for Japan has been the reforms to corporate governance, according to several managers, which have been going on since prime minister Shinzo Abe began his ‘Abenomics’ programme in 2013. These changes were brought in to salvage the market and economy from its steep crash in the 1990s.
Although it has been a long-term aspect of Japanese investing, Jeff Atherton, manager of the £1.2bn Man GLG Japan CoreAlpha fund, said it has picked up with noticeable ferocity over the past couple of years.
“It's no exaggeration to say that there has been more change in Japan over the past two years than in the last 29 years of my career,” he said.
“Japanese markets always had a terrific treasure trove of assets investors have never been able to access. But now companies that have been sat on assets worth more than their entire market cap are selling them off and presenting investors with the kind of opportunities that remind me of the UK in the 1980s and 1990s, when there was a big improvement in corporate governance and financial returns.”
Source: FE Analytics
He said that Japan has historically been viewed as a cyclical market – its returns driven largely by interest rates and the global economy – but this “sea of change” among companies “has begun to present opportunities never seen before by foreign equity investors”.
Carl Vine, manager of M&G Japan Smaller Companies, the highest-returning Japan fund in 2021, seconded this, noting that while investors might be bored of hearing about Japan’s restructuring story, it was still a very important one.
“At the coalface, it’s incredibly exciting, especially for a stock picker,” he said, as more and more companies “are having the lightbulbs go off” in regard to corporate governance, which will only help build returns and share price.
This pace of change was unlikely to slow down in 2022, Vine added, as the market moved further on with its Covid recovery.
The continuation of this would enable Japan to challenge the “monster” US market in the coming years, Vine said, as companies rinse and repeat this cycle of raising returns on invested capital to then raise productivity, “which has just factually worked”.
The managers added that there has been no threat that new prime minister, Fumio Kishida, would seriously alter the course of this reform.
The market initially had mixed reactions when Kishisda took office last year, selling off as fears that Japan was restarting a bad habit of short, disruptive prime ministerial runs was restarting, but this quickly resolved itself when Kishisda’s optimistic and supportive monetary plans were revealed.
Yoshihiro Miyazaki, manager of the Nomura Japan Strategic Value fund, said that he fully expects the new administration to continue to announce policies to support the economy and build approval rating.
Outside of the government’s influence Nicholas Price, portfolio manager of Fidelity Japan trust, said that several headwinds had been removed, including supply chain constraints and higher raw material and freight rates.
“As these fall away and start to reverse, we could see a decent uplift to earnings in the first half of 2022,” Price said.
These issues have largely resolved because of the brighter Covid picture and global trading routes normalising after lockdowns, tackling the imbalance between supply and demand.
However, he advised staying away from directly consumer facing and manufacturers, which will face pricing pressures once the supply bottlenecks are resolved.
There were some lingering threats though, mainly a resurgence of Covid forcing another economic shut down.
The Tokyo governors were requested permission from the central government to implement tighter Covid measures this week, including shorter opening hours for bars and restaurants in an attempt to deal with the rising rate of infections, which are near record levels currently.
If another State of Emergency was announced, Miyazaki said it would rerate the economic recovery expectations downwards, “impacting companies that would benefit from the reopening”.
A resolution to Covid, or at least getting it under control, is one thing Atherton is hopeful for this year, not just in Japan but globally.
“We hope to see a period of economic stability in 2022 compared to the disruption of 2021,” he said.
This is the second in a series of articles asking the top-performing fund managers in their sectors over 2021 for their views on the coming year. Previously we have tackled the UK.
|Fund/trust||Sector||Fund Size(m)||Fund Manager||Yield||OCF||IT Net Gearing||IT Pub. NAV Discount|
|Man GLG Japan Core Alpha||IA Japan||£1,090.20||Jeff Atherton, Adrian Edwards||1.64%||0.90%|
|Nomura Japan Strategic Value||IA Japan||£576.50||Kentaro Takayangi||1.28%||0.88%|
|M&G Japan Smaller Companies||IA Japanese Smaller Companies||£114||Carl Vine, Dave Perrett||0.83%||0.90%|
|Fidelity Japan Trust||IT Japan||£262.40||Nicholas Price||0.00%||0.94%||0.00%||-6.86%|
Trustnet looks at the global equity funds that have struggled over the past three years but outperformed in 2021.
Dimensional International Value, Invesco Global Equity (UK) and Schroder ISF Global Energy are among the global equity strategies that have turned their performance around in 2021, according to data from FE Analytics.
The three years prior to 2021 were difficult years for value, energy and financials as the outperformance of growth stocks dominated the global equity sector.
But as investors started to digest record-breaking levels of inflation in 2021, growth has started to lag the performance of value, energy and financials.
Below, Trustnet looks at all 480 funds in the Investment Association’s global sector and determined which delivered bottom quartile performance for the calendar years 2018, 2019 and 2020, but made a comeback to deliver sector-topping performance in 2021.
Source: FE Analytics
The highest performing funds in the list were the Schroder ISF Global Energy fund and the State Street Global Advisors SPDR MSCI World Energy ICITS ETF, which tracks the MSCI World Energy 35/20 Capped Index.
The actively managed Schroder energy fund beat the energy index tracker by delivering 48.8% in 2021, compared to 41.8%.
It takes a balanced approach to investing between independent exploration and production companies versus integrated oil companies and oil services providers.
This allowed the fund to benefit from its relative overweight positioning in oilfield service companies like H&P, Halliburton and Schlumberger last year.
By contrast, the MSCI World Energy 35/20 Capped Index has less than 5% invested in energy equipment & services stocks, and the remaining 95% invested in the likes of large oil & gas firms Exxon Mobil and Chevron.
Further down the list the Denker Global Financial fund was another strategy that made a big comeback in 2021, with a return of 29% over the year.
Managed by Kokkie Kooyman, it actively invests in the financial sector, focusing on companies with a good track record of growing their business.
It has benefitted from its investments in well-known financial giants such as Citigroup, JP Morgan and Legal & General, however it has also invested in more specialist financial firms such as reinsurance house Renaissance Re and Indian mortgage firm LIC Housing Finance.
It has almost half of its entire portfolio invested in banks, with the remaining in in financial services, nonlife insurance and credit services.
Investors started to price in higher interest rates last year, benefiting financial firms as it should lead to higher profit margins on their loans.
Elsewhere on the list, two Invesco-managed global equity funds featured. First up, was the Invesco Global Equity fund, managed by Andrew Hall.
This strategy has benefited from its roughly 25% exposure to information technology through its positions in companies such as Microsoft, Alphabet and Amazon, which performed well in 2021 on the back of strong earnings momentum after the pandemic.
However, Hall has also benefitted from his 17% exposure to the financial sector, which also performed well last year. Here the fund owns JP Morgan and MasterCard among others.
The other Invesco fund that made the list was the Invesco Global Ex UK Core Equity Index, run by Alexander Uhlmann and Georg Elsäesser – who use a systematic, factor-driven investment strategy.
Although it is actively managed, the fund aims to mimic the broad risk characteristics of the MSCI World ex UK Index.
The managers invest the portfolio around four concepts: earnings expectations, market sentiment, management & quality and value. The fund is highly diversified, investing in roughly 260 stocks that the managers deem attractively valued, with good earnings and price momentum.
Finally, the last fund that featured in the list was the Dimensional International Value fund, managed by the systematic investment firm Dimensional Fund Advisors.
Similar to the previous strategy, this fund is a highly diversified all-cap value fund that is overweight smaller, value and more profitable companies, with more than 500 holdings.
A spokesperson from Dimensional said: “Research has shown that securities offering higher expected returns share certain characteristics, which we call dimensions.
“In equities these are size, value and profitability (or quality). We structure broadly diversified portfolios that emphasise these dimensions, while addressing the trade-offs that arise when executing portfolios.”
The firm has published a list of out-of-consensus ideas for this year that it says have at least a 30% chance of occurring.
Invesco’s global head of asset allocation Paul Jackson said that the biggest returns are earned, and the biggest losses avoided, by successfully taking out-of-consensus positions.
As a result, he has put together a document of out-of-consensus ideas for 2022 that have at least a 30% chance of occurring.
“These hypothetical predictions are our views of what could happen even if they do not necessarily form part of our central scenario,” said Jackson.
“Market sentiment is now mixed (thanks to the Fed), so our list of surprises contains something for everybody.”
1. S&P 500 closes the year lower than where it started
The S&P 500 has generated total returns of 28.1%, 17.8% and 30.7% in dollar terms in the past three years respectively. There have only been nine occasions since 1915 when real total returns have exceeded 15% for three years in a row.
These were grouped into four separate episodes, with three successive years going on to become four or even five years in three of those four episodes (1926 to 1928, 1951 to 52 and 1997 to 98).
“That may give hope for 2022, but with a Shiller P/E [price-to-earnings ratio] above 38, the market has rarely been so expensive and history suggests that S&P 500 returns over the coming 10 years will be limited,” said Jackson.
“On top of which, the Fed appears more hawkish than for some time, which may bring short-term volatility.”
2. US 10-year treasury yield goes above 2.5%
With the 10-year yield currently at around 1.76%, Jackson said it was easy to see it reaching 2%, although 2.5% seemed more ambitious.
“It seems so unlikely that we think it worth considering, especially given the possible fallout,” he added, saying a combination of strong economic growth, persistent inflation, rate hikes and balance sheet shrinkage could produce this outcome.
3. Travel and leisure outperforms
Travel and leisure has been one of the sectors hardest hit by the pandemic, underperforming the Datastream World Index by 10.4 percentage points on an annualised basis over the past three years. Only energy has done worse, underperforming by 14 percentage points a year.
Yet Jackson said that if there were a silver lining to the Omicron variant, it was the weakening of the virus’s symptoms.
“This may have brought us closer to being able to live with the virus, thus enabling a return to ‘normality’,” he added. “We suspect travel & leisure would benefit enormously from that.”
4. The US Senate remains under Democrat control
Joe Biden is the least popular post-WWII president in the US at this stage of office, with the exception of Donald Trump. Meanwhile the Republican Party also has a slight lead in the polls. As a result, there is a growing likelihood the Republicans will control the US Congress after the mid-term elections on 8 November 2022.
However, Jackson pointed out the Senate elections were hard to predict, with only 34 of the 100 seats up for grabs – 20 of these are currently Republican and 14 Democrat, with five Republicans retiring compared with only one Democrat.
“The eight seats that are not considered relatively safe for the incumbent party are currently split equally between the two parties,” he said.
“With the Republicans only needing a single net gain to take control, the odds may be stacked in their favour. But a surprise is possible.”
5. Australia changes government and emissions policies
Prime minister Scott Morrison’s Conservative government has set a net-zero target for 2050, but Invesco analysis suggested this will not be achieved until 2080.
Australia has faced international criticism for its refusal to fully engage with the climate change issue and, as a large producer of coal, it has a vested interest in dragging its feet.
However, opinion polls suggested Labor will win the next election, to be held before 21 May.
“The Labor Party of Anthony Albanese has committed to a 43% cut in emissions by 2030 compared with 2005 levels, versus the 35% forecast (but not commitment) of the current government,” said Jackson.
“A change of approach and attitude could bring Australia back into the developed-world mainstream on this issue.”
6. Bitcoin falls below $30,000
Last year, Invesco claimed Bitcoin could fall below $10,000. Instead it reached a peak of around $68,000.
Despite this mistake, Jackson warned that the mass marketing of Bitcoin reminded him of how stockbrokers behaved in the run-up to the 1929 crash.
“We know how that ended, and Bitcoin has already fallen to around $42,000, closely following the downward path of our mania template,” he said.
“That template suggests a loss of 45% in the 12 months after the peak of a financial mania. If that pattern is followed, the price of Bitcoin would fall to between $34,000 and $37,000 by the end of October.”
7. Turkey government debt outperforms
Turkey appears to be caught in an inflation/currency depreciation spiral, with the lira falling by 44% against the dollar in 2021 and inflation reaching 36% in December.
Jackson said that while these figures make it appear “uninvestable”, there was a price for everything and sometimes “the best opportunities appear in the darkest of moments”. With this in mind, he said the 8% yield on 10-year dollar-denominated Turkish government bonds looked attractive.
“That is quite a cushion, unless of course Turkey defaults,” the head of multi-asset added. “Even better, the yield on local currency 10-year government debt is 23%, compared with 1.8% in the US, which gives a nice cushion versus future currency depreciation, especially since the currency has recently weakened so much.”
8. Brazilian stocks to outperform major indices
Jackson said the “Holy Grail” for his team was a dividend yield that exceeded the P/E ratio. While these are rare, they can currently be found in Kenya, Laos, Pakistan and Russia.
“Another example is Brazil, where after a 12% index decline in 2021, the current IBOVESPA price/earnings ratio is 6.6 and the dividend yield is 8.5%,” he said.
“Having been in the bottom three equity markets for each of the past two years, we suspect 2022 could be the year of rebound, despite the possible election of a left-wing president.”
9. EU carbon goes above €100 per tonne
At the start of 2020, Invesco predicted EU carbon would break above €30 a tonne, and in 2021 it predicted it would go above €50. Both forecasts proved correct, and the figure now stands at €85.
Jackson noted the Stern Review of 2006 calculated the social cost of carbon to be $85 (€96) per tonne, which was likely to have increased since then.
“With the world now focused on mitigating climate change, and the global economy perhaps accelerating later in the year if the great reopening occurs, there is a good chance that EU carbon may exceed €100/t at some stage during 2022,” he said.
10. Argentina win the World Cup
While bookmakers seem to favour five-times champions Brazil and reigning champions France for this year’s World Cup, Jackson pointed out the groups haven’t been decided yet, so it is impossible the chart the path to the final.
“Armed with an incomplete information set, we suspect that Argentina and England have as good a chance as any and we are going with the former, to avoid accusations of home bias,” he finished.
After a record year in 2021, Trustnet looks at the big private companies that could list over the next 12 months.
Technology software firm Discord and digital payment provider Stripe are two businesses that investors may be able to buy on the stock market this year, according to Freedom Finance Europe.
Last year was a record for UK initial public offerings (IPOs), with 120 businesses raising £16.8bn in new money from their launches.
Company listings were boosted by the relative lack of new offerings in 2020 as businesses held back from entering the public market until the pandemic uncertainty had abated somewhat.
Globally, IPOs were up 64% in 2021 although this tailed off somewhat in the fourth quarter as Omicron added fresh concerns.
Paul Go, EY Global’s IPO leader, said: “The winds shifted with the surfacing of the Omicron variant, continuing geopolitical tensions, slowing IPO activity and increased market volatility.”
He noted it was unclear whether or not IPO-bound companies would “press pause or forge ahead” in 2022, but said that those that do would need “resilient growth strategies and well-articulated environmental, social and governance (ESG) plans”.
Maxim Manturov, head of investment research at Freedom Finance Europe, was more optimistic, noting that the upcoming year looked “particularly bright” in 2022.
However, not all IPOs are a success. Of the 120 companies that listed in the UK last year, for example, share price returns ranged from a 300% to an 85% loss.
Manturov said: “Essentially, for those looking to capitalise on the ever-growing IPO craze, research into the fundamentals of a company is critical before choosing to invest.”
First up among the most-exciting potential launches of 2022 is Stripe, the digital payment platform for internet businesses that accepts credit cards, debit cards and mobile wallets around the world.
The company, which last month announced the launch of Stripe Treasury, a financial services arm that will move the firm into the banking as a service market, was last valued at $95bn (£69.5bn).
“Given its recent performance, it is likely to have hit $100bn by the end of 2021. For those looking to invest in some of this year’s most exciting IPOs, Stripe is most definitely one to watch as it continues to strengthen its position as a key player in the online payments space,” Manturov said.
Free text, audio, and video-chatting platform Discord is another one to watch. The app, which allows people to communicate with one another through voice calls, video calls, and text messaging, as well as sending media and files through private chats, has become popular among streamers who use it to record while playing games.
“As to be expected, the gamer-oriented app became extremely popular during the height of the pandemic, with thousands of users accessing the platform to communicate with friends and family whilst in lockdown,” he said.
“In 2021, Microsoft wanted to buy the company for $10bn, but Discord management rejected the deal. An official date for the Discord IPO is yet to be announced, but it is expected early this year.”
Perhaps unknown to the UK investor, Instacart is one of the most popular grocery delivery and pick-up services in the US and Canada and could make for an interesting listing this year.
The company has market-leading logistics, including agreements with more than 400 retailers covering more than 30,000 stores, making it available to 85% of households in the US and 80% in Canada.
“It is also important to note that customers can get fresh food delivered directly to their door in less than two hours,” said Manturov.
The firm was last valued at $39bn and at IPO could be valued at $50bn, he noted, with many expecting its flotation to take place in early 2022.
Last up is Databricks, an artificial intelligence start-up that has developed software to process big data. The company includes the likes of UK building society Nationwide and US telecoms giant Comcast among its 5,000 customers.
The start-up raised $1bn in its latest funding round in early February 2021 and is currently valued at $28bn, with investors including Fidelity Management and Research, Amazon, Salesforce Ventures and Microsoft, according to Manturov.
“The company could be valued between $35bn and $50bn as its IPO launches. Investors must therefore ensure to keep the AI-driven giant on their radars,” he said.
There will be outright goods deflation in the US, which will bring down inflation in the coming quarters, according to ClearBridge investment strategist Jeff Schulze.
Although US inflation is running at close to 7%, Clearbridge investment strategist Jeff Schulze is “very confident” that inflation will start to move down in a “meaningful fashion” in the second and third quarter of this year.
Central banks around the world have been grappling with rising prices over the past several months, but investors will be closely watching how the US Federal Reserve handles its stubbornly high inflation rates.
The US has experienced the highest levels of inflation for decades and its central bank is now under pressure to raise interest rates and withdraw quantitative easing (QE) – without derailing its economic recovery.
The Fed chairman Jerome Powell has long asserted that inflation would be a transitory phenomenon, only to dismiss the use of the word during a hearing before the US Senate Banking Committee at the end of last year.
But there are some reasons to believe inflation may indeed be on its way down, according to Schulze.
One reason is because he expects economies will start to experience goods deflation at the end of this year and going into 2023 and 2024.
He said: “The increase of inflation compared to pre-pandemic levels has been driven by two things: used cars and goods.
“So goods inflation has been the main driver behind the higher-than-trend level of inflation in the US and among G7 countries, 93% of the growth in goods consumption since the onset of the pandemic has come from the US.”
Source: ClearBridge Investments, BLS, Bloomberg
However, the strategist said that is going to change in 2022 as consumers spend more of their marginal income on services, rather than goods.
He pointed to the level of goods consumption relative to pre-pandemic trend levels, which has spiked but is starting to fade. Meanwhile, services spending continues to rise back to pre-pandemic trend levels.
Source: ClearBridge Investments, BEA, Bloomberg
“You started to see consumers purchase more services at the expense of goods at the beginning of the summer, but when delta flared up, consumers retrenched and went back to using their marginal dollars on goods purchases.
“Compared to trend levels, goods purchases are $460bn above trend, while services spending is about $300bn below trend.”
He argued that in an economy that is unaffected by new coronavirus variants and waves, spending will normalise to pre-pandemic levels and the gaps between goods and services will begin to narrow.
The strategist added that with a global economy less affected by variants and supply chain disruptions, there will likely be much more supply of goods “awash on US shores”.
“Less demand for goods, more supply of goods: that's a really strong combination for outright goods deflation,” he said.
“Our core view is that the end of 2022, and into 2023 and 2024, you're going to see goods deflation in the US which is going to help bring down overall inflation levels.”
However, with ongoing lockdowns taking place in particular regions in China and Omicron-driven supply chain disruption in Asia, Schulze said there is a risk that goods inflation might persist into the end of the second quarter.
Despite this, he said that the “path of least resistance” for inflation is down by the middle of 2022.
“I do think inflation is peaking at the moment,” he said. “It's going to be uncomfortable for the next couple of months but I do think it's going to start to move down in a more meaningful way as we move through this cycle.”
One of the biggest reasons why inflation is unlikely to be durable, according to the strategist, is because the bond market is simply not pricing it in.
He pointed to the US breakeven inflation rates over the next decade. Breakeven inflation rates are a market-based measure of expected inflation – calculated by taking the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.
US inflation breakeven rates
Source: ClearBridge Investments, Factset.
“Over the next five years inflation is expected to be 2.7%, but looking out over the following five years from 2027 to 2032, the markets are pricing in inflation to be right at that 2% target that the Fed has.
“This metric [US inflation breakeven rates] has been right in the middle of its trading range over the past decade – which means the market doesn't, and maybe more importantly, has never, expected a meaningful transition in inflation over the long term.
“If a global pandemic, unprecedented fiscal and monetary expansion, countless supply chain disruptions and inflation levels reaching 7% – if all that can't get the market to reprice inflation over the long term, it's really hard to see from my vantage point what could lead to a shift in expectations.”
As such, the strategist expects inflationary pressures will begin to moderate at the end of the first quarter of this year and move to the Feds 2% target by the end of 2023.
Trustnet asks the managers of 2021’s best performing UK funds and trusts what they think about the UK’s 2022 outlook.
Appealing valuations, UK technology stocks, inflation and US fiscal policy are all topics on the minds of 2021’s top performing UK managers.
In this series Trustnet asked fund managers that topped their sectors in 2021 what the future might hold for the coming year.
Compared with the start of last year, the UK is in a much better and stronger position, according to Jonathan Winton, manager of Fidelity UK Smaller Companies, 2021’s best IA UK Smaller Companies fund.
He said that the domestic market had shaken off a lot of the “baggage” that had been “dragging it down” for so many years: chiefly Brexit concerns and Covid-19.
When Brexit occurred in 2016 it caused an immediate, negative reaction from overseas investors, who chose to divest away from the UK rather than gamble on the unknown geopolitical outcome.
Then Covid came along, with new issues such as the continuous struggle to get a handle on cases, which forced the UK economy to a halt.
But with a successful vaccine rollout, the UK has entered the new year with a much rosier picture, he said.
Dan Whitestone, manager of the BlackRock Throgmorton trust, agreed, adding that the pandemic “has driven an acceleration of profound seismic market share shifts intra-industry, which we think of as ‘Corporate Darwinism’.”
He said that well-capitalised companies were reaping the benefits of changing consumer and corporate behaviour, while they also gained from “weakened peers exiting the market”.
He said it has been a story of little, unnoticed improvements going on since Brexit occurred, but when these were added up they “lead to significant growth”.
For many of the managers, UK valuations were one of the most positive characteristics overall. Kevin Murphy, manager of Schroder Income – the best IA UK Equity Income fund last year – said valuation was a “guiding light or a North Star”.
He added that, at the moment, the UK market is one of the cheapest global developed markets in the world, on a relative basis. A statement his peers agreed with.
Source: FE Analytics
FE fundinfo Alpha Manager Alex Wright, of the Fidelity Special Values trust, added that the UK market has actually been cheap over the past five years but the key difference now was that “fundamentals on the ground have been strong”.
He said the removal of the macroeconomic headwinds and successful vaccine rollout have contributed to the improved outlook and changed the game for the UK.
There is also a pretty rare event going on in UK value at the moment, which Winton said was significant for value investors globally.
In the past, Winton said those buying cheap companies in the hope they rebound have had to sacrifice on the quality of the businesses, but that this was not the case currently.
“There are businesses with 10 times earnings growth and good return prospects medium term all with low levels of debt. If you look back in history, it's quite rare to find attractive valuations for businesses that I would regard as sort of fairly high quality,” he said.
It is not just UK-only investors that should be taking note, however, as Murphy noted that his pan-European value funds and global value funds were also overweight the UK market.
Although the sun might be shining a little brighter for the UK it does not mean that the sky is totally blue, as all the managers noted several grey clouds they were keeping an eye on.
Valuations may be cheap overall, but there is still polarisation between the cheapest and most expensive stocks that investors need to keep an eye on, Murphy said.
For example, US technology stocks have been repeatedly criticised for being too pricey “and there's an element of truth to that, but UK technology shares are even more expensive, we just don’t have many of them,” he said.
He said: “Investors and companies alike are not used to dealing with inflation and interest rate rises are likely to be a headwind.”
The current UK rate of inflation is at 5.1%, well above the central bank’s 2% target. By now, companies that can should have already begun offsetting the cost to their customers, said Matthew Tonge, manager of the Liontrust UK Micro Cap fund.
“Those that haven't been able to had to issue profit warnings at the back end of last year and there will definitely be more this year for the same reason,” he said.
Another is what the US will do regarding its own fiscal policies. Horner, said that “whatever the US does impacts us”, due to the global reach of its market.
“We’re concerned about their massive fiscal expansion and the inflation that they are creating, which is huge. But there’s nothing we can do and frankly there is nothing that my companies can do about it. We need to just be aware that it is a problem.”
Overall the managers were positive heading into this year despite the challenges facing global markets and economies.
Murphy said: “Given the run of bad news the UK has had we should be able to do more than simply cross our fingers. The UK market deserves some time in the sun.”
|Fund/trust||Sector||Fund Size(m)||Fund Manager||Yield||OCF||IT Net Gearing|
|BlackRock Throgmorton Trust||IT UK Smaller Companies||1001.5||Dan Whitestone||1.12%||0.60%||0.00%|
|Chelverton UK Dividend Trust||IT UK Equity Income||67.7||David Horner, Oliver Knott||3.88%||2.33%||35.25%|
|Fidelity UK Smaller Companies||IA UK Smaller Companies||430||Jonathan Winton, Jac Jones||0.34%||0.91%|
|Fidelity Special Values||IT UK All Companies||982.4||Alex Wright||2.14%||0.72%||0.00%|
|Liontrust UK Micro Cap||IA UK Smaller Companies||212.5||Anthony Cross, Julian Fosh, Matthew Tonge, Victoria Stevens, Alex Wedge||0.00%||1.35%|
|Schroder Income||IA UK Equity Income||1864.6||Nick Kirrage, Kevin Murphy||2.71%||0.89%|
|Slater Artorius||IA UK All Companies||32.3||Mark Slater||0.00%||1.07%|
|Slater Growth||IA UK All Companies||1655.7||Mark Slater||0.00%||0.81%|
|Slater Recovery||IA UK All Companies||451.4||Mark Slater||0.00%||0.81%|