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Favourite funds: 15 wealth managers reveal their top picks
At the end of last year we asked a number of our readers to pick a fund for 2014. This is what they chose.
Denise Collins, investment manager at City Asset ManagementMuzinich Long Short Credit Yield
In an environment coloured with suggestions of tapering and the prospect of interest rates moving higher in the future, it may seem unusual to select a fixed income fund as a top pick but at City Asset management, we favour the Muzinich Long Short Credit Yield fund, managed by Jason Horowitz.
As high yield tends to be more closely correlated with equity than fixed income and has the ability to withstand multiple interest rate rises, we feel it remains an attractive asset class in the current environment.
The Muzinich fund is absolute return focused and primarily gains its added value through the US high yield market using both longs and shorts but also has limited exposure to emerging markets, European high yield and loans.
Horowitz looks to provide high single to low double digit returns with controlled volatility, an attractive proposition for our clients for whom we attempt to provide a real return over an investment cycle.Ignis European Smaller Companies
In recent months, we have been increasing our allocation to European equity and have selected the Ignis European Smaller Companies fund, managed by Ian Ormiston.
The fund was launched in November 2007, is currently £37 million in size and has produced absolute returns, year to date, in excess of 46%. Since launch it has outperformed the Euromoney Smaller European (ex UK) Companies benchmark, generating significant alpha in rising markets, whilst also limiting downside through prudent stock selection and a considered investment approach.
Ormiston focuses on genuine small caps with 50% of the fund’s investments in companies with a market cap of less than €1 billion (£835 million). Given our positive outlook for a recovery in Europe, beginning with Ireland emerging from its bailout programme (a market from which this fund has already enjoyed strong performance), we believe this is a strong contender to take advantage of the improving growth story.Polar Capital Japan Alpha
For those that have confidence in Shinzo Abe’s resuscitation of the Japanese economy, Polar Capital Japan Alpha is a relatively new fund worth considering.
The fund invests primarily in large and mid cap equity securities of issuers that exercise a significant part of their economic activities on Japan or are organised under the laws of Japan.
Managers Gerard Cawley and James Salter are currently positioned at “maximum bullishness” so this fund is not for the Japan perma-bears who do not believe that “this time it’s different”. The team retain a positive view on Japanese equity, centred on manufacturing exporters and financials as beneficiaries of reflation, while remaining underweight defensives.
Ben Gilmore, portfolio manager Kleinwort Benson
A fund that should continue to do well in 2014 is the Ardevora UK Equity fund, managed by Jeremy Lang (ex Liontrust). This stock-picking fund invests aiming to benefit from the biases of investors, analysts and company management, which can lead to valuation anomalies.
Jeremy can also go short which enables him to benefit from falls in stock prices, something which we feel is very useful after the positive market returns of recent years. An example is within the industrials sector, where they are 40% long and 19% short. Here they hold growth names Rotork and Spirax Sarco and unloved companies like Berendsen, but are short building contractors Balfour Beatty and Carillion.
Ben Gutteridge, head of funds research at Brewin DolphinSchroder Tokyo GBP Hedged
As Japan continues to make modest strides towards meeting its inflation target, we believe the authorities will continue, unrelenting, with their current course. This means further reform efforts from prime minister Shinzo Abe, but also more (offsetting) accommodation from the central bank.
This combination should prove supportive for Japanese risk assets, however, it is not likely to be a favourable one for the yen. As a result we would recommend Schroder Tokyo GBP Hedged.
‘Managed by the vastly experienced Andrew Rose, this fund is currency hedged and exhibits a marginal value bias, investing in the parts of the market most sensitive to broad economic recovery.Invesco Perpetual Global Financial Capital
We suspect next year will be a challenging one for generic bond funds as longer dated interest rates continue to creep upwards. As a result, our top pick within the bond fund universe is structurally positioned to cope in this environment. The Invesco Perpetual Global Financial Capital fund invests across the capital structure within the financial sector, including senior bonds, subordinated debt, and even equity.
There are a number of variables that should allow this fund to deliver next year. If, as we believe, longer-dated interest rates are rising due to better economic growth, the asset quality of financials’ balance sheets should also improve. Furthermore, the improved margin from making additional loans, while deposit rates remain firmly anchored, will be earnings enhancing.River & Mercantile UK Smaller Companies
This fund is managed by Daniel Hanbury, who uses the firm’s PVT (potential, valuation and timing) philosophy to manage assets. We are quite surprised that this fund, at around £50 million (at September 2013), has not attracted more assets.
This is all the more so as its impressive performance has been underpinned by strong stock selection and sector allocation, which stands testament to River & Mercantile’s robust investment process.
Ben Seager-Scott, senior research analyst at Bestinvest
For 2014, I would flag Barry Norris’s IM Argonaut European Absolute Return fund as one with a lot of potential. Whilst ‘absolute return’ as a sector hasn’t covered itself in glory over the last few years, Norris has a successful record in picking stocks for both the long and short books in this pan-European long/short equity fund, and correlation with broader equity markets has been low.
There are a number of concerns on the horizon for equity markets in 2014; this fund has the potential to limit losses in falling markets and give investors more complete exposure to Norris’s expert views on European stocks, though it is certainly not for the faint-hearted.
Gary Dell, head of research at IPS Capital
My top pick for 2014 is the Cazenove UK Dynamic Equity Long Short fund. This strategy has been run by Paul Marriage since 2009 in a Ucits fund, however its pedigree dates back to 2005. I believe this fund will continue to outperform on a risk adjusted basis in what could be a challenging yet rewarding year for equity markets.
The strategy looks to capture alpha whilst running a low beta. They have demonstrated the process adds alpha and is repeatable over a full cycle. The strategies maximum drawdown was -8% over an eight year period whilst the FTSE All-share was down -41%. The fund has returned 14% p.a with a volatility of 6.9%, generating a Sharpe ratio of 1.66 whilst the FTSE All-share has generated 4.1% with a volatility of 16.6%.
Inno van den Berg, chief investment officer at Victoria Private Investment
Having to pick a single fund for 2014 is difficult, especially after the Citywire 'Smart Beta' conference at the end of last year. There were a number of funds that offered very interesting investment opportunities.
The Source US Energy Infrastructure MLP fund offers a readily investible vehicle for non US investors into the shale gas and infrastructure theme in the USA , an investment theme we would expect to continue. Though not a straight forward structure it is certainly one too investigate.
Two other funds that are worth mentioning in dispatches from the conference are the new smart beta product being offered by Rothschilds and when investible the CROCI funds offered by Deutsche. Finally a new active manager in the emerging market universe Arbiter Global Emerging Market fund may well be worth further investigation.
James Keen, CEO at Mountstone Partners
GLG Japan Core Alpha (hedged). We finally started buying Stephen Harker’s fund in January 2013, having not invested into Japanese equities for over 10 years. Shinzo Abe’s aggressive monetary expansion programme has convinced the markets that the deflationary spiral in Japan has finally come to an end.
Japan came very late to the QE party and we believe that there is scope for further inflation of Japanese asset prices and a weaker yen, at a time when all the talk is of QE being reined in elsewhere in developed markets.
Lale Can, equity and fund researcher at Ashcourt Rowan
My top fund for 2014 is JO Hambro Japan: Although Japanese stocks have performed strongly since October 2012, further scope for monetary easing, yen weakness, strong company fundamentals and inexpensive valuations suggest that Japanese stocks can continue perform strongly in 2014. Furthermore, Abe’s third arrow (structural reforms) provides the potential to surprise on the upside.
To gain exposure to Japan, we are buyers of the JO Hambro Japan fund. Firstly, because of the proven track record of the fund managers, Scott McGlashan and Ruth Nash, and secondly because of the way the portfolio is structured. Over 80% of the fund is invested in small/mid cap stocks, which have lagged larger cap stocks and hence, we believe, offer great value.
Richard Bonnor – Moris, head of multi-asset solutions at Newscape Capital Group
The new Neuberger Berman Absolute Return Multi Strategy fund for 2014 because I believe it offers an attractive, lower risk alternative to equities, but also trumps bond funds due to the ability to profit from a rising interest rate environment.
It should be suited by a market characterised by equity dispersion and potentially higher bond volatility, but without relying on a continued upward trends in equities. The fund offers transparent access to a diversified pool of alternative strategies but without the fees or liquidity headaches of most other alternative products.
Weixu Yan, alternatives research manager at Close Brothers Asset ManagementDominion Global Trends – Consumer fund
I think developing markets are still main drivers of growth especially for companies that are expanding in that region and the fund invests in companies with globally recognised brands and in particular those that are directly or indirectly associated with the luxury goods and services sector.
As demand for luxury goods and services are mainly driven by emerging middle class in developing countries thus the fund is a great way of playing emerging markets through developed markets companies that can also attract higher margins. The only downside is that a fair amount of the companies are well priced.
Rob Morgan, investment analyst at Charles StanleyGLG Japan Core Alpha
Japan now has a prime minister who has the respect of both the Japanese people and his political colleagues. He has introduced much needed and radical change and the prospects look very promising for equity investors. ‘Japan was the best performing major market in 2013 but could be rerated if the new policies continue to achieve their objectives.
GLG Japan Core Alpha is my pick here as I believe Stephen Harker and his team should get the best out this sector over the long term with their value based strategy. I am tempted to use the currency hedged version, GLG Japan Core Alpha Equity, as the level of quantitative easing there is monumental and the currency could weaken further, but it will likely be a more volatile ride than the non-hedged version.Trojan
This fund had a tough time last year, largely due to exposure to gold and lack of exposure to economically sensitive areas such as financials. However, I believe it is due a return to form. Although economic growth seems to be picking up, wage growth is non-existent meaning little upward pressure on inflation and even the risk of deflation.
With its emphasis on capital preservation and mix of defensive, non-leveraged equities, fixed interest and gold I believe this is a fund to keep at the core of a portfolio for the long term.Aberdeen Global Chinese Equity
China didn’t experience a hard landing in 2013 as many predicted. With economic growth stabilising in the 7% region, Chinese demand is still having a highly beneficial effect on the global economy. So far this hasn’t done much for many local businesses as fierce competition and government interference has hampered many areas of the economy in terms of shareholder returns.
However, authorities look to be serious about reforming the economy. The plenum in November revealed that a more free-market driven economy is planned and this could be highly beneficial to businesses. With undemanding valuations, I think there is a good case to be made for Chinese equities right now, despite the many risks. Aberdeen is well known for its discerning approach to investing in good quality companies throughout Asia and emerging markets and I trust it to find the winners in this market.
Simon James, director at Gore Browne Investment ManagementHg Capital
Valuation uplifts across the private equity sector have lagged equity markets this year because the industry's accounting is driven more by earnings growth than multiple expansion. The MSCI World index has risen 24%, but most of this has been driven by P/Es rising from 15x to 18x, while earnings growth has been disappointing.
If private equity realisations increase in 2014, the valuation uplifts would reflect the multiple expansion of global equities in 2013.
Hg has an excellent history of such uplifts. Hg’s top 20 companies, 88% of the value, saw average sales growth of 8% in the year to 31 October, and earnings growth of 6%, which is accelerating. I believe momentum is returning to Hg's portfolio, and that the shares will once again outperform.
StJohn Gardner, head of investment management and Co-chief investment officer at Arbuthnot LathamOld Mutual GEAR
Following very strong returns in equities over 2013, and jittery fixed income markets ahead of Fed tapering in the next few months, we think the key to portfolio construction in 2014 will be finding complimentary low correlation strategies that have dependable returns agnostic of market conditions.
Old Mutual Global Equity Absolute Return has demonstrated this capability very well, providing low to negative rolling correlations to equity and fixed income markets, as well as other alpha strategies. The multi-factor quant methodology has delivered stable volatility, and has been a strong consistent performer in our portfolios over the last couple of years.
Thomas Becket, CIO at PsigmaLazard Strategic Japanese Equity
Japan has rightly been the leading light of last year’s drama, but our view remains that valuations there are reasonable, corporate profits’ growth is underestimated and we are finally starting to see tangible evidence of the army of naysayers buckling towards the region and investing. We are also comforted that there are still plenty of sceptics to change their minds.
You almost certainly won’t get the fireworks that we enjoyed this year, but there is absolutely no reason that markets can’t appreciate by a further 15%, matching the likely growth in companies’ earnings. We remain overweight Japanese equities across our investment strategies, with a favoured fund being the concentrated Lazard Strategic Japanese Equity fund.
This is overweight in our favoured theme of “Japanese reflation”, with allocations towards domestic consumption names and banks. The manager, Tim Griffen, invests with a high conviction approach and we believe this will lead to strong performance in the coming years.Allianz China
‘Cheap valuations, miserable sentiment, huge scepticism and underownership make Chinese equities a classic contrarian bet. When one combines these factors with the major recent policy announcements that could be transformational to the path and stability of the Chinese economy, it is fair to say that I’m bullish.
Risks exist and should not be ignored, but after two and half years of utterly abject performance, 2014 might be the year of the dragon’s equity market. In fact, our view is that it could be the year for Asian equities generally. This fund focuses on Greater China and currently favours the structural growth opportunity in consumer-facing and IT companies.
The fund is managed by an extremely impressive manager, backed by one of the most extensive analytical teams in the region, which is a vital factor in a still nascent financial market.Artemis Income
After the massive rerating of small and medium-sized companies in the UK market over the last few years, we are starting to look back to the undervalued and unexciting mega-caps for the best opportunities.
Held back by the recent strength of sterling and the relative lack of exposure to the “rampant” UK economy, mega-caps have continued to underperform. This has left many looking cheap, including excellent and understated long term growth opportunities in the pharmaceutical sector. ‘The new and undisputed “kings of income”, Adrians Frost and Gosden, agree with us. They also allow themselves the flexibility to invest in sectors such as banks, which other income managers lazily brand “uninvestable”, and mining, “not enough yield”. ‘While UK equities are a boring choice, anecdotal evidence suggests a return to favour from international investors, and income-stressed investors could drive a rerating of the big income plays.’
Steven McGregor, chartered wealth manager at Price Bailey Private ClientVanguard FTSE 100 Ucits ETF
A really cost effective and efficient way to obtain exposure to the largest companies in the UK. By getting UK equity exposure at a cost of just 10bps (0.1%) we find that we can add value to our clients by keeping costs down. The majority of active managers fail to beat their index while many still charge 10x that of an index tracking instrument. In 2014 this ETF will beat many active funds operating in the same space, for a fraction of the cost so has to be a top pick.