With interest rate rises from the Federal Reserve and the Bank of England expected at some point, the Asia sell-off and last month’s ‘Black Monday’ still fresh in people’s minds, investors would be forgiven for being unsure where they should be putting their money at the moment.
Because of this, we have asked a panel of investment professionals to disclose which sectors they’re seeing the best opportunities in at the moment and which fund they believe could provide investors with a strong performance from here.
Baillie Gifford High Yield Bond
“My favourite IA sector at the moment is Sterling High Yield,” Informed Choice’s Martin Bamford (pictured) said. 
“With the prospect of rising interest rates signalling a strengthening global economy, high yield bonds have the prospect to perform well and continue to offer important diversification against volatile equity markets.”
The chartered financial planner and managing director’s favourite fund within the sector is Baillie Gifford High Yield Bond, which has four FE crowns and has been managed by Donald Phillips and Rob Baltzer for five years.
The duo mostly invest in sub-investment grade corporate bonds that they believe are trading below what they are really worth and, because of the fund’s concentrated portfolio of 50 to 70 stocks, any investment chosen must have an identifiable catalyst that will trigger a market revaluation.
Over Phillips and Baltzer’s tenure, the £739m fund has returned 41.51 per cent, outperforming its average peer by 10.69 percentage points and placing it in the top quartile of the sector.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
While the fund is in the top quartile for its Sharpe ratio over the same time frame, which indicates risk adjusted performance, it is in the bottom quartile for its annualised volatility and in the third quartile for its maximum drawdown, which measures the most an investor would have lost when buying and selling at the worst times.
Despite its higher level of risk, Bamford still believes the fund is a good investment so long as investors are prepared to ride out its volatility and invest for the long term.
“It offers a distribution yield of 4.7 per cent which is very attractive relative to cash. With ongoing charges of 0.38 per cent for the clean share class, this fund is very low cost and offers investors an efficient way to access the sector,” he said.
Meera Hearnden, senior investment manager at Parmenion, has long been an advocate of the IA UK Equity Income sector, which she believes has been the right place to invest in today’s low growth and low interest rate environment.
“Although we could be entering a period of rising interest rates, the asset class should continue to prosper on a long-term basis as well as provide rising income and capital growth,” she said.
“The UK economy is also showing an improvement in terms of lower unemployment, rising wages and stronger GDP growth which bodes well for the asset class.”
While she says it is difficult to pick one fund as she prefers to blend a number with different styles, Hearnden particularly likes Rathbone Income, which has been managed by Carl Stick for more than 15 years.
The five FE Crown-rated fund is in the top quartile for its performance over one, three and five years. Over the manager’s tenure, it has almost doubled the performance of its sector average and has outperformed its FTSE All Share benchmark more than three times over.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
Not only has it performed strongly, Stick’s aim is to achieve above average income without neglecting capital security and he does this through investing in shares that have an above average yield.
As such, the £1.1bn fund has achieved a top-decile alpha ratio, a top-decile Sharpe ratio and a top-quartile annualised volatility over the same time frame. It currently yields 3.42 per cent.
“Despite its bias in mid-caps it has a focus on downside risk, thereby delivering attractive risk adjusted returns,” Hearnden added.
Rathbone Income currently has a 50.53 per cent weighting in FTSE 100 stocks, a 26.35 per cent weighting in FTSE 250 stocks and 1.58 per cent in the FTSE Small Cap index.
It has a clean ongoing charges figure of 0.81 per cent.
Ryan Hughes, fund manager at Apollo Multi Asset Management, says that his favoured Investment Association sector at the moment is IA Japan.
“I think there’s a lot of potential in that market as companies look structurally undervalued – they’ve gone through a lot of restructuring themselves as businesses and have become far more shareholder-focused, and I don’t think that’s been fully reflected in the share prices of those companies,” he explained.
“In the short term the sector has been dragged down by its association with China and the fact that its currency is seen as a safe haven in Asia, and that’s holding back returns. But, as a market, I think there’s a lot of potential there.”
Hughes’ favourite fund in the sector is Legg Mason IF Japan Equity, which has been managed by Hideo Shiozumi for almost 20 years.
While the fund has delivered a top-decile performance over one, three and five years, it found itself in the bottom decile in 2006, 2007 and 2009 and this has led to the fund landing a place in the third quartile over 10 years. It tends to significantly outperform in rising markets but often fares worse than its peers in down markets.
“It’s a volatile fund and it’s not for the faint-hearted, but when the sector is in favour and when Japan is in favour, the manager has proven time and time again that he can deliver some spectacular returns,” Hughes said.
Over five years, the £318m fund has outperformed its sector average by more than five times to deliver a total return of 219.67 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
As Hughes mentioned though, the fund has been in the bottom decile for its annualised volatility over one, three, five and 10 years and this could partially be attributed to Shiozumi’s aggressive investment style, which focuses on companies with annual earnings growth in excess of 20 per cent.
“It’s also a domestically-focused fund that is down the cap spectrum and focuses on mid- and small-caps. Hideo Shizumi has got a wealth of experience in terms of investing in Japan,” Hughes added.
Legg Mason IF Japan Equity has a clean ongoing charges figure of 1.12 per cent.
