Japanese equities: Buy markets that are cheap
Analysis by Hargreaves Lansdown shows that Japanese shares remain cheap. In two years the yen has fallen 28.2 per cent against sterling, with further falls possible.
A weaker yen is good for Japanese exports and has already boosted Japanese company earnings.
The result is companies’ profits have grown more quickly than their share prices and in spite of the strong rally, Japanese shares still look attractive.
GLG Japan CoreAlpha
The fund is managed by Stephen Harker who has more than nine years of experience investing in Japanese equities, which we believe is important.
His approach is to buy unloved companies at low valuation levels and wait for them to return to more normal levels. This approach works particularly well in markets that are undervalued, such as Japan.
Healthcare: Consistent earnings growth
Concerns over future earnings, due to a lack of new blockbuster drugs in the pipeline and existing drugs coming off patent (the patent cliff), have weighed on the shares.
Pharmaceutical companies have improved their pipelines and managed to grow profits even when many of their blockbuster drugs came off patent.
The pharmaceuticals industry has an impressive record of consistent earnings growth going back at least 40 years (1973). The ability to generate consistent earnings growth, even in tough markets, has not been fully recognised by the stockmarket.
Rathbone Income
This fund, managed by Carl Stick, is a fund with exposure to this theme. It has 13.7 per cent in the pharmaceuticals and biotechnology sector.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has a number of attributes we like: there is a bias towards small- and medium-sized companies and Stick runs a concentrated portfolio of companies which have a high starting level of dividend as well as the ability to grow this over time.
The fund currently yields 3.7 per cent.
UK smaller companies: Exceptional active managers
The UK smaller companies sector has performed well over the last couple of years, returning 87.4 per cent, compared with 23.5 per cent for the FTSE 100. This makes it harder to find companies to invest in.
However the UK smaller companies sector has some exceptional fund managers with decades of experience.
They are among the best stockpickers and have a proven ability of finding companies whose full potential has not been recognised by the market.
Standard Life UK Smaller Companies
The fund has returned 360 per cent over 10 years compared with 107.8 per cent from the FTSE Small Cap ex IT index.
The fund outperforms in bear markets and the later stage of the recovery phase. Mid-2012 marked the beginning of a recovery and therefore the fund lagged.
Manager Harry Nimmo believes this signalled the start of another good time for the fund as the recovery settled.
Equity income: Don’t forget dividends
Equity income is one of the best long-term investments around. The philosophy is simple – get rich slowly.
Invest in companies that have strong cash-flows and that are able to grow their business, profits and dividends.
Reinvesting dividends has a huge long-term effect on total returns. A £100 lump sum invested in UK equities in 1899 would be worth £14,915 now, rising to £2.2m if the dividends had been reinvested.
Artemis Income
Through their stockpicking skills, Adrian Frost and Adrian Gosden have maintained an excellent track record.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
We like that they are avid investors into companies that have the cash-flow to sustain and grow their dividends.
Mining shares: a contrarian investment
Contrarians do something different from the crowd: they will invest in businesses that the market has shunned and whose potential is not being fully recognised.
Mining stocks fit this category; they have been a poor investment over the last two years with both their earnings and share prices tumbling.
Some contrarian managers have been buying certain mining companies; the skill is to pick those stocks that have the potential to recover while avoiding those that look cheap but have little or no room for recovery (value traps).
Old Mutual UK Alpha
Manager Richard Buxton was buying mining companies towards the end of 2013 because he believed the market was overly pessimistic.
He runs a concentrated portfolio of reasonably valued larger and mid-sized companies with good growth potential.
This fund could make an excellent choice for investors in search of capital growth.
Adrian Lowcock is a senior investment adviser at Hargreaves Lansdown. The views expressed here are his own.
