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What I'm backing for 2013: eight wealth heads reveal their picks

From underloved Europe funds to gold equities, we asked wealth managers to share the funds they are backing for the year ahead.

Edinburgh European Opportunities

European equities are at historically low valuations, and if there is one thing the market has already priced in, it’s more bad news, argues Justin Oliver, investment director at Collins Stewart Wealth Management.

He expects the region’s equity markets to outperform the US next year, and is backing the Edinburgh European Opportunities fund as a ‘particularly astute’ choice.

‘Surely this must be one of the most well flagged crises of all time and therefore how can the news be anything but priced into equity markets?’ he said.

‘Institutions remain underweight the region, which is positive from a contrary perspective, while profit growth is likely to accelerate, especially if the ECB suppresses borrowing costs.’

‘It is the starting valuation of any investment which is the most important determinant of future returns. With this in mind, on the presumption that the European sovereign debt crisis reaches a satisfactory conclusion, there is one area where valuations are particularly supportive - European equities,’ he said.

‘Despite their very recent outperformance, European equities continue to trade at multi-decade lows relative to the US equity market and it is entirely possible that, moving forward, we are about to witness a marked leadership change. European equities will outperform US equities in 2013. Euro tail risks have diminished and while investor sentiment toward the euro zone remains sceptical, who isn’t aware of the region’s travails?’

‘Meanwhile, eurozone authorities continue to de-emphasise fiscal austerity, which is an undoubted positive factor. A focus on a valuation strategy, in a region which is in itself supported by valuation, limits future downside.’

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Baillie Gifford Emerging Markets Leading Companies

The hunt for yield has sent equity income funds soaring over the last year, leaving more growth-focused funds behind.

But Giles Marriage, investment manager at Thesis Asset Management, says improving prospects in the emerging markets should mean good news for some funds with a growth slant. He expects the Baillie Gifford Emerging Markets Leading Companies could be one that makes the leap from bottom of the pack to good performer on the back of positive news.

‘It’s a fund that we have been buying for a year and a half but performance has not been great in 2012 because it’s mainly geared towards more growth investments – they have a strong preference for growth,’ he explained.

‘More income focused funds have performed better in the equity space but we think that trend will turn round in 2013. Certainly towards the second half of this year we will get improving GDP numbers and emerging markets that have been a little lacklustre will start to improve again. As a result those funds that are a bit more focused on growth mantles will perform a bit better.’

‘When you do analysis on funds you see that over a period a fund can be fourth quartile, and then when market conditions change they go back to being first quartile – and this is a fund is in that space.’

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Fleming Africa Fund

Many Africa funds have been up 15% through 2012, capitalising on an emerging middle class and mirroring Asia in the early 1990s, argues Chris Andrew, chief executive of Clarmond Advisors.

While he accepts it may be a volatile ride, he is backing the Fleming Africa fund for good returns in 2013 and likes that the manager is based in Botswana.

‘Africa has had a good 2012 with many funds up over 15% for the year. I chose the Fleming fund because it is run out of Botswana by a young local fund manager, although backed by the larger Fleming institution. It is vital to have the management on the ground in Africa, and, ideally not in South Africa,’ he said.

‘It is totally consumer focused. The story of Africa is the emerging middle class, urbanisation and the start of financial leverage, like Asia in the early 1990s.

‘Also, it avoids investing in commodities - so for me it is a 'pure play,’ he added.

‘Expect volatility, but, over the longer term it will be a massive capital growth booster for any portfolio.’

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SW Mitchell Capital’s European

This European fund has seen lacklustre performance since its launch in November 2011. But Hector Kilpatrick, chief investment officer of Cornelian Asset Management argues there is real scope for revaluation of European stocks and he believes this high conviction fund has a robust enough process to benefit.

‘This is a highly concentrated portfolio of roughly 30 European stocks. The fund manager is able to short stocks should he feel fit, but currently does not have any in place and is as bullish as we are about the prospects for the European market,’ Kilpatrick explained.

‘We believe there is scope for a material upwards revaluation of quality European global companies, which have suffered by association with the Eurozone and whilst fund performance has been lacklustre since launch in November 2011, the stock selection process is robust with a focus on undervalued quality and the long term track record of the fund manager is excellent.’

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Investec Global Gold

Against a backdrop of low interest rates and expanding balance sheets at central banks, Brown Shipley research analyst Alex Brandreth is expecting gold to do well through 2013.

He likes the Investec Global Gold fund, run by Citywire A-rated managers Daniel Sacks and Bradley George, pointing to the managers’ experience and investment process.

‘We think Investec Global Gold may do well in 2013. Low (or negative real) interest rates and Central Bank buying is usually a good environment for gold,’ he said.

‘Gold equities are at a substantial discount to the implied gold price and so represent an opportunity to participate in a gold bull run which usually ends with participation from the equity.’

‘While Central Banks continue to expand their balance sheets world production of gold may have passed its peak. The Investec team has a great depth of experience and a strong fundamental based equity analysis processes.’

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Hexam Emerging Markets

This Hexam Emerging Markets fund is ranked bottom quartile over the last three years but Brown Shipley’s senior fund manager Simon Nicholas expects better things from managers Bryan Collings and Grant Shotter next year.

‘This fund has continued to de-rate versus the market during 2012 leaving the fund on a PEG ratio of 0.5 on consensus numbers,’ he said.

‘The fund is concentrated with 35 holdings with a bias towards Brazil, China, and Russia where they believe valuations are cheap. The team remain committed to their GARP style and focused on company fundamentals.’

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GAM Star China

China’s eye watering volatility in recent times and lack of real growth has left the market trading at an attractively low entry point, says Whitechurch managing director Gavin Haynes.

While he concedes that managing an equity fund in such a market is ‘extremely tricky’, he likes Michael Lai’s GAM Star China fund for its high conviction, focused approached.

‘China remains one of the largest and fastest growing economies in the world. But having shown plenty of volatility and little return over the past three years its equity market currently trades at a historically low valuation of around nine times forward earnings. I believe that this represents an attractive entry point,’ he said.

‘China’s economy has experienced seven consecutive quarterly falls in its rate of economic growth. However, recent economic indicators show signs of an upturn in activity, whilst the lack of inflationary pressure in the economy provides hope that the authorities will implement stimulative growth measures in 2013. New leader Xi Jinping has already made noises that suggest positive economic reforms could be on the way.’

‘Managing equities in China is extremely tricky (just ask Anthony Bolton), but we have been impressed with Michael Lai at GAM. Lai has 23 years’ experience of managing Asian equities. He takes a high conviction, aggressive investment approach with no constraint, running a focused portfolio of around 40 stocks. His focus on quality, pricing power and making important top down thematic calls has seen the fund outperform in rising markets and hold its own in trickier times.’

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Neptune Japan Opportunities

While Japan has been a consistent disappointer for many fund managers, the outlook is starting to look interesting again, argues Psigma chief investment officer Tom Becket.

Such is his conviction, he believes Japan’s ‘moment’ is finally here and is hoping for ‘power-packed performance’ in the coming months.

‘Surely we’re not recommending Japan again? The outlook for Japan suddenly looks very interesting. There is a real chance of decisive political change, a long overdue shaking up of the sleepy fellows at the Bank of Japan and the yen looks to have finally started on a structural downtrend,’ he said.

Although he agrees investors have heard news of a turnaround that failed to materialise many times before, he says: ‘Our conviction that Japan’s “moment” is finally here has grown in recent weeks and the aforementioned changes when allied with cheap valuations could lead to a power-packed performance from Japanese equities in the coming months, prolonging the recent strong rally from the lows.’

‘Of course there are risks, don't forget that this is Japan, but if we are correct in our call for improved global economic momentum then Japan is well placed to benefit and could lead the performance tables next year. There is certainly not much chance that Japanese equities can become any more hated or under-owned. Certainly, given our negative view on the Japanese currency we would hedge out all yen risk, so the Neptune Japan Opportunities fund remains a key position in our strategies.’

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