Man GLG UK Income, JOHCM Continental European and Fidelity Emerging Markets are some of the funds that analysts at Brewin Dolphin expect to perform well over the year ahead.
In his outlook for 2018, Brewin Dolphin head of fund research Ben Gutteridge highlighted six equity funds that he believes to be well positioned for returns next year.
Over this article, FE Trustnet takes a closer look at the six 2018 fund picks offered by Gutteridge.
UK - Man GLG UK Income
Gutteridge believes that GARP – or ‘growth at reasonable prices’ – strategies will perform well in 2018. In this space, he likes Man GLG UK Income, which is run by FE Alpha Manager Henry Dixon and resides in the IA UK Equity Income sector.
“When we look at the underlying characteristics of the fund we see both growth and value features and within those value characteristics a premium dividend yield to the market,” Gutteridge said. “The fund targets companies already uncovered by the team’s Undervalued Assets process in addition to a focus on companies with materially stronger balance sheets where the potential for dividend growth is high.”
Dixon’s investment approach has been developed over his 14 years in the industry; it essentially searches for companies with strong cash and balance sheets but where the share price suggests the market is undervaluing their assets or profit streams.
Performance of fund vs sector and index under Dixon
Source: FE Analytics
This process has clearly served the fund well. Since Dixon took over in November 2013, it is the best performer in the IA UK Equity Income sector with a 59.21 per cent total return and has outpaced the FTSE All Share by a wide margin. It must be noted that the four FE Crown-rated fund is one of more volatile members of the sector but it’s risk-adjusted returns have been among the best of its peers.
The portfolio is overweight financials, industrials, real estate and information technology, while underweight consumer staples, energy and healthcare. Top holdings include Royal Dutch Shell, Qinetiq and international Consolidated Airways.
Man GLG UK Income has an ongoing charges figure (OCF) of 0.90 per cent and is yielding 4.22 per cent.
North America - Legg Mason Royce US Small Cap Opportunity
Gutteridge’s team preferred method to play US small-caps is through Legg Mason Royce US Small Cap Opportunity, run by Bill Hench.
Gutteridge said: “The management have a clear value bias, allowing them to benefit from any upside surprises to US economy performance.”
The portfolio currently has 35.57 per cent in its ‘Undervalued Growth’ value theme, 30.31 per cent in ‘Turnarounds’, 18.16 per cent in ‘Interrupted Earnings’ and 15.95 per cent in ‘Unrecognised Asset Values’.
Performance of fund vs sector over 5yrs
Source: FE Analytics
However, Hench’s focus on micro-caps stocks undergoing difficulties makes Legg Mason Royce US Small Cap Opportunity the most volatile of its sector. FE Analytics shows its annualised volatility has been 22.89 per cent over the past 10 years, while its 44.23 per cent maximum drawdown is 10 percentage points higher than the Russell 2000 index’s.
The fund has returned 235.62 per cent over the last decade, compared with 224.46 per cent return from the average IA North American member and 227.42 from the benchmark. It is also outperforming both the sector and index over one, three and five years.
Legg Mason Royce US Small Cap Opportunity has an OCF of 1.23 per cent.
Europe – JOHCM Continental European
The four FE Crown-rated JOHCM Continental European fund, headed up by FE Alpha Manager Paul Wild, is the fund Gutteridge recommends from the IA Europe excluding UK sector.
“Wild uses a flexible, dynamic approach that incorporates top-down views with bottom-up stock-selection. He will be quite fast moving if the macro environment changes, as he was in the latter part of 2016 when he moved the fund to have a greater cyclical positioning to catch that rally.”
Managed with a business cycle approach, the portfolio is constructed so that the strategy delivers gentle outperformance of the benchmark and, as Gutteridge highlighted, “nasty surprises are a rarity with this fund.”
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Reflecting this, the fund has posted a lower maximum drawdown than its average peer and the MSCI Europe ex UK index over the past 10 years and is top quartile for risk-adjusted returns as indicated by the Sharpe, Sortino and Treynor rations.
The £1.9bn fund focuses on European large and mid-cap stocks and is overweight energy, financials and basic materials. Its top holdings are French oil and gas company Total, French mass media conglomerate Vivendi and German pharmaceutical and life sciences name Bayer.
JOHCM Continental European has an OCF of 0.82 per cent.
Japan – Baillie Gifford Japanese
Despite the recent retirement of Sarah Whitely as head of Baillie Gifford’s Japanese equity team, Gutteridge believes the Baillie Gifford Japanese fund looks well positioned to perform strongly in 2018.
“After 37 years in the industry, all of which spent at Baillie Gifford, Sarah has announced that she will retire in April next year. Over the years she has built up a relatively large team all well versed in the Baillie Gifford investment philosophy of long-term, patient, benchmark-agnostic investing in companies with above-average growth prospects.”
Gutteridge and his research team don’t expect much to change after Sarah’s retirement. They believe the portfolio will continue to be made up of companies with “attractive industry backgrounds, strong competitive positions, high quality earnings and management with favourable attitudes towards minority shareholders”.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The four FE Crown-rated fund has been consistently in the top quartile over one, three five and 10 years, returning 229.79 per cent over the last decade – almost double the TOPIX’s return 130.58 per cent gains.
Baillie Gifford Japanese has been more volatile than its average peer but was the sector’s best performer in 2016 and has made a top quartile return this year.
The portfolio has its largest sector allocations to machinery, services, electricals and financials. Top holdings include Softbank group, Sumitomo Mitsui Trust, Inpex and Yaskawa Electric Corp.
The fund has an OCF of 0.63 per cent and is yielding 0.71 per cent.
Asia ex Japan - Stewart Investors Asia Pacific Leaders
FE Alpha Manager David Gait runs Stewart Investors Asia Pacific Leaders, Gutteridge’s pick for Asia excluding Japan.
“This is a more defensive strategy which has lagged the equity market over the last few years. The manager, David Gait, looks to create a portfolio of very high-quality companies, in growing industries, which are run by exceptional management teams,” he said. “He has avoided some of the hotter areas of the market due to concerns over the VIE structure of Chinese internet companies, and more generally concerns over the quality of management teams and their treatment of minority shareholders.”
However, Gutteridge noted, with central banks removing global liquidity and China’s deleveraging gaining intensity, a pick-up in volatility is expected in the new year and “the defensive characteristics of this fund may once again come to the fore”.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
FE Invest’s analysts consider this fund as a strong candidate for investors to capture sustainable growth opportunities in Asia for the long term. However, it must be noted, the size of the fund is increasingly becoming a concern when it comes its liquidity.
Gait’s investment approach consists on carrying detailed research on companies and debating investment ideas within the team and long-term investment can give a significant advantage in the relatively unsophisticated Asia Pacific markets.
Its biggest sector exposure is to telecoms, consumer products and financials. Its main holdings are Tata Consultancy Services, CK Hutchison, Mahindra and Mahindra and Unicharm.
Stewart Investors Asia Pacific Leaders has an OCF of 0.89 per cent and is yielding 1.04 per cent.
Emerging markets – Fidelity Emerging Markets
Gutteridge’s team preferred emerging market investment vehicle is Fidelity Emerging Markets, run by Alpha Manager Nick Price since 2010.
“This strategy places greater emphasis on finding secular growth stories, far less vulnerable to the ebb and flow of Chinese or indeed global growth. This defensive orientation is also crucial for longer-term investors given the volatility of the asset class and the pain that can be exacted during more challenging markets,” Gutteridge said.
The fund is built on detailed analysis of individual companies by 50 analysts. Price invests in companies with superior business models demonstrating strong and sustainable profitability and consistent track records in good and bad environments. To avoid potential losses, special attention is paid to the companies’ debt amount and nature, selecting those with good corporate governance.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Over the past five years, the four FE Crown-rated fund has delivered a total return of 78.14 per cent compared with a 46.94 per cent gain for the MSCI Emerging Markets index and a 44.45 per cent return for the average IA Global Emerging Markets fund, as the above chart shows.
The portfolio is overweight consumer discretionary and underweight information technology. Top holdings include Naspers, Taiwan Semiconductor Manufacturing, AIA Group, HDFC Bank and SBERBANK of Russia.
Fidelity Emerging Markets has an OCF of 0.99 per cent.