Financial advisers are considering adding global equity funds and multi-asset strategies to their clients’ portfolios in 2019, research by Schroders reveals, as Brexit and renewed market volatility weigh on their minds.
In the fourth quarter of each year, Schroders polls financial advisers to find out which Investment Association sectors they expect to be recommending to their clients over the course of the coming 12 months.
Last year’s survey found that IA Europe ex UK, IA Global and IA Mixed Investment 20-60% Shares were the three most popular peer groups.
Performance of sectors over 2018
Source: FE Analytics
As can be seen from the chart, all three sectors have posted a loss in 2018-to-date thanks in large part to the renewed volatility that has hit markets since the start of October.
The best performing member of the IA Global sector has been Fidelity Global Health Care with a 14.01 per cent total return, followed by Mirabaud Equities Global Focus (12.69 per cent), Schroder Global Healthcare (12.62 per cent) and Lindsell Train Global Equity (12.32 per cent).
Sarasin IE GlobalSar Strategic (USD) tops the IA Mixed Investment 20-60% Shares sector after making 1.61 per cent. The only other member to make more than 1 per cent was Schroder MM Diversity Income, which is up 1.23 per cent.
When it comes to IA Europe ex UK, Jupiter European leads with a 1.67 per cent total return while Comgest Growth Europe ex UK is up 1.63 per cent. Every other fund in the 120-strong peer group has made a loss over 2018-to-date.
But in the below article, we take a closer look at the three Investment Association sectors that advisers are tipping for client portfolios in 2019 and the funds within them that have been most heavily researched on FE Analytics over the past three months.
IA North America
We start with the fifth most popular sector – around 5.5 per cent of financial advisers said they are most likely to recommend IA North America funds to their clients over 2019. While the US is an area where active managers struggle to outperform, data from FE Analytics shows that advisers have been looking at some active funds here.
The most heavily researched member of the sector is Merian North American Equity, which is headed up by Ian Heslop, Amadeo Alentorn and Mike Servent. This team runs a number of successful long-only and market-neutral global equity funds at Merian (which recently rebranded from Old Mutual Global Investors).
Source: FE Analytics Market Intel Tool
Merian North American Equity, which uses a quantitative investment process that aims to exploit inefficiencies in global equity markets, is one of the best-performing members of the peer group over three, five and 10 years (making 443.11 per cent over the latter period and outperforming the S&P 500) although it has slipped into the bottom quartile on a one-year view.
While active funds such as Baillie Gifford American, JPM US Equity Income and Schroder US Mid Cap are also being researched, passive exposure is still a popular option for the US with HSBC American Index, Vanguard US Equity Index and L&G US Index Trust appearing in the top-10.
IA UK All Companies
The survey by Schroders also found that around 9 per cent of advisers say IA UK All Companies funds are the ones they are most likely to recommend to clients in 2019, despite the recent underperformance of the sector and the fact that Brexit is just around the corner.
The most popular fund on FE Analytics is Liontrust Special Situations, which is run by the FE Alpha Manager duo of Anthony Cross and Julian Fosh. The five FE Crown-rated fund has a strong track record and is currently in the top decile of the IA UK All Companies sector over one, three, five and 10 years on the back of the managers’ proprietary Economic Advantage process.
Source: FE Analytics Market Intel Tool
Analysts at Square Mile Investment Consulting & Research, which give the fund an ‘AA’ rating, said: “This is a very well-considered and defined investment process which steers the managers towards relatively steady businesses that are gradually growing and generating high levels of cash. Essentially, the team is looking for companies operating with a clear and unique competitive edge.”
Other longstanding favourites on the list include LF Woodford Equity Income, LF Lindsell Train UK Equity and Invesco High Income (UK) while rising stars that advisers have been keeping an eye on include CFP SDL UK Buffettology and TB Evenlode Income.
IA Mixed Investment 40-85% Shares
Some 14 per cent of advisers told Schroders that the sector they are most likely to tip for 2019 is IA Mixed Investment 40-85% Shares, which was formerly known as the ‘balanced’ multi-asset sector.
When it comes to individual funds, their eyes have firmly been on passive vehicles as the two most heavily researched members of the peer group over the past three months have been Vanguard LifeStrategy 60% Equity and Vanguard LifeStrategy 80% Equity.
Source: FE Analytics Market Intel Tool
All five Vanguard LifeStrategy funds, which are automatically rebalanced multi-asset funds of underlying Vanguard index trackers, are popular options with investors since their launch in 2011 and have become the mainstay of many advisers’ portfolios.
Active balanced multi-asset funds are also seeing some interest from advisers, however, with the likes of Baillie Gifford Managed, Premier Multi-Asset Growth & Income and Jupiter Merlin Balanced Portfolio being some of better-known funds that they have been researching.
IA Global
Schroders also found that 16 per cent of financial advisers highlighted IA Global as the sector they think they will be recommending next year. This is in keeping with a general move to diversify portfolios as the UK starts to break away from the EU.
It should come as little surprise that Fundsmith Equity, which is run by FE Alpha Manager Terry Smith, is the fund that advisers have spent the most time researching. It is very often the most popular fund on FE Analytics thanks to a very impressive track record (it’s made around 280 per cent since launch in 2010) and Smith’s long-term quality-growth approach to investing.
Source: FE Analytics Market Intel Tool
The FE Invest team, which has the £16.2bn fund on its Approved List, said: “The areas the fund is invested in have been in high demand since the financial crisis, which is why the fund has returned so much in absolute terms.
“If this changes and these areas underperform, the outlook for the fund will then depend on how much stockpicking can counteract this. In relative terms, the fund remains impressive, only being challenged by a few other funds with similar investment strategies.”
While Fundsmith Equity is the most popular IA Global fund by a significant margin, other strong performers being watched by advisers include Rathbone Global Opportunities, Lindsell Train Global Equity and Standard Life Investments Global Smaller Companies, while passive offering Vanguard LifeStrategy 100% Equity is also a common choice.
IA Mixed Investment 20-60% Shares
The sector that the 22.5 per cent of financial advisers said they are most likely to suggest to their clients for 2019 is IA Mixed Investment 20-60% Shares. This peer group used to be called the ‘cautious’ sector and is home to many income-focused multi-asset funds.
That said, a passive offering is topping the FE Analytics research tables here: Vanguard LifeStrategy 40% Equity, whose stablemates have been mentioned when we’ve been discussing other sectors above.
Source: FE Analytics Market Intel Tool
The £3bn fund has a strong track record, despite an index-tracking approach. It has made a top-quartile 33.42 per cent return over the past five years when its average peer made just 21.99 per cent and is first-quartile over one and three years as well; it holds five FE Crowns.
Income funds are also proving popular with the likes of Premier Multi-Asset Distribution, Invesco Distribution (UK) and Jupiter Merlin Income Portfolio being researched heavily, while the search for a defensive tilt is reflected in the appearance of LF Ruffer Total Return and Investec Cautious Managed on the list.