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Contrarian trusts for the year ahead

Most fund managers seem to be optimistic about equity markets for 2011 on the basis that economic growth is picking up and equities are not expensive. I am less convinced. Indeed, it seems to me that for 2011, caution is the watchword.

On the whole, investment companies are quite highly rated so there’s not much downside cushion in the discounts. This can be a good indicator that markets are about to make a decisive move upwards and this might happen. But a number of looming problems could curtail the rally.

If you think markets will be stronger for longer, opt for an investment in a Baillie Gifford fund. Mid Wynd is probably the raciest, but Scottish Mortgage is more liquid and trades on a wider discount. Global funds that are managed more defensively tend to be on absurd premia. British Empire has around 20% cash and trades on a 5% discount; it may not be a bad option. I also like Troy Income & Growth, though it needs to be a much bigger fund.

UK small caps had a great 2010, but economic austerity is likely to bite. I quite like Hansa Trust, although it is a big bet on one Brazilian play. Manchester & London is another favourite.

An investment in Europe calls for a good stockpicker. I’d go for Alex Darwall (Jupiter European Opportunities), Tim Stevenson (Henderson EuroTrust) or, for a small caps option, Charles Montanaro (Montanaro European Smaller Companies). The US is best played through an open-ended fund.

Japan’s equities are very cheap but the currency is too strong. If you can hedge the yen, I’d go for one of the Baillie Gifford funds. In Asia, caution dictates that you go for an Aberdeen fund – probably New Dawn. I’m not sure I would pile into India right now, but Fidelity would probably disagree with me. Of the generalist emerging market stocks, my money is in Genesis. The only other stock I have been buying recently is Worldwide Healthcare.

The funds of hedge funds proved beyond doubt last year they are a waste of space. Buying these funds to vote against continuation and make a profit out of the discount makes sense to me. One of the best performing of these (in net asset value terms) in 2010, Goldman Sachs Dynamic Opportunities, is the latest to announce that a continuation vote has been triggered.

Does it deserve to survive? No; most of the performance of the sterling shares came from sterling appreciation when it was unhedged. The current discount is 14%; though remember the continuation vote, and it may take some time to liquidate the portfolio.

The single manager hedge funds are more of a mixed bag. Third Point was the best performing last year, yet still sits on an 18% discount. It is very hard to extrapolate from this that 2011 will be just as good. About half the fund was net long, mainly US, equities at the end of 2010 with about one-third in credit and the rest in various other strategies. This fund may be more volatile than the average hedge fund, but ought to continue to perform if US markets carry on rising – and might deliver an acceptable result even if they don’t. 

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Related Fund Managers

Charles Montanaro
Charles Montanaro
53/68 in Equity - European Small & Medium Companies (Performance over 3 years) Average Total Return: 42.38%
Alexander Darwall
Alexander Darwall
13/87 in Equity - Europe Excluding UK (Performance over 3 years) Average Total Return: 45.28%
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