The markets are gearing up for another bumper year. We see what stocks Killik & Co's Jonathan Jackson is going to watch in 2014 in: Nine stocks to watch in 2014.
Viewpoint: Six funds for 2014
By Thomas Becket | Fri, 3rd January 2014 - 16:37
Before we start "trifle season" in earnest, we thought it would be useful to share some of our key themes and favoured funds for the year ahead.
2013 has undoubtedly been the year to own Developed World equities and avoid everything in the Emerging World.
Next year we think it could be the year of the Asian equity; a continuation of Japan's stockmarket renaissance and a return to favour in "emerging" Asian equities.
Closer to home, UK mega-caps are cheap and should benefit from a decent year for the global economy; we are currently expecting above trend growth in global GDP next year.
In bond markets investors need to start being really "picky", but if you can turn over sufficient stones there are still richly rewarding opportunities available in hard to reach places.
In summary of our investment views for the year ahead, we expect a moderately positive year for equities, upward pressure on bond yields and a return to favour for currently contrarian investments.
It will also be a time when diversification is vital, as there will doubtless be periods when all of the current optimism coursing through the veins of investors seems wildly misplaced.
Here are our six favourite funds for 2014:
Allianz China - the patient investor
At a recent press event one of my co-round-tablers scoffed at my suggestion that China was a likely source of profits in the years ahead.
"You might as well go to Ladbrokes ()", was the retort. Well I'm off down the high street again then. Cheap valuations, miserable sentiment, huge scepticism and under-ownership make Chinese equities a classic contrarian bet.
When one combines these factors with the major recent policy announcements that could be transformational to the path and stability of the Chinese economy, it is fair to say that I'm bullish.
Risks exist and should not be ignored, but after two and half years of utterly abject performance, 2014 might be the year of the Dragon's equity market. In fact, our view is that it could be the year for Asian equities, generally.
Allianz China fund focuses on Greater China and currently favours the structural growth opportunity in consumer-facing and IT companies.
The fund is managed by an extremely impressive manager, backed by one of the most extensive analytical teams in the region, which is a vital factor in a still nascent financial market.
Lazard Japanese Strategic Equity - the momentum investor
Japan has rightly been the leading light of 2013's drama, but our view remains that valuations there are reasonable, corporate profits' growth is underestimated and we are finally starting to see tangible evidence of the army of naysayers buckling towards the region and investing. We also comforted that there are still plenty of sceptics to change their minds.
Japan's outperformance deserves to continue and we expect next year to be another solid one for Japanese equities. You almost certainly won't get the fireworks that we enjoyed this year, but there is absolutely no reason that markets can't appreciate by a further 15%, matching the likely growth in companies' earnings.
We remain overweight Japanese equities across our investment strategies, with a favoured fund being the concentrated Lazard Japanese Strategic Equity fund.
The fund is overweight in our favoured theme of "Japanese reflation", with allocations towards domestic consumption names and banks.
The manager, Tim Griffen, invests with a high-conviction approach and we believe that this will lead to strong performance in the coming years.
Airlie US Select High Yield - the adventurous investor
Asset allocating to fixed interest markets should only take place with a stiff drink in your hand. The threat of rising bond yields and the reduction of quantitative easing (QE) stalk today's bond investor.
We are increasingly being very selective when it comes to bond investing and almost exclusively focusing on specialist managers on specific opportunities.
Airlie manage one such fund, investing in US small-cap high-yield bonds; Airlie US Select High Yield. The managers only invest in bonds that have a small issue size, are trading below par and yield more than 8%.
Contrary to popular belief, such opportunities still exist despite the "great collapse in yields" enjoyed in the last five years.
Finding them means going against the pack, avoiding the big funds and being prepared to take some liquidity risk. However, such a pursuit should reduce elements of omnipresent duration risk and the fear of illiquidity in the behemoth funds. You also get paid a 9% coupon.
Is this compensation enough? Probably, although there will doubtless be some nervy moments when sentiment worsens. However, we expect this excellent team to deliver great returns to our clients in the next five years.
Artemis Income - the cautious investor
Surely points should get knocked off for such an obvious choice as Artemis Income?
Well, maybe, but please hear our explanation first. After the massive re-rating of small and medium-sized companies in the UK market over the last few years, we are starting to look back to the under-valued and unexciting mega caps for the best opportunities.
Held back by the recent strength of sterling and the relative lack of exposure to the "rampant" UK economy, mega caps have continued to underperform. This has left many looking cheap, including excellent and understated long-term growth opportunities in the pharmaceutical sector.
The new and undisputed "Kings of Income", Adrians Frost and Gosden, agree with us. They also allow themselves the flexibility to invest in sectors like banks, which other income managers lazily brand "uninvestable", and mining, "not enough yield".
While UK equities are a boring choice, anecdotal evidence suggests a return to favour from international investors, and income-stressed investors could drive a re-rating of the big income plays.
OK, I admit it, I am still boring, but this could be a fruitful strategy and relatively defensive if the legion of optimists are wrong in 2014.
Fidelity American Growth - the investor who came to the party late
We believe we are moving in to phase three of the equity bull market, so think about the Fidelity American Growth fund.
The first stage was a re-rating of the high quality "bond proxies" that investors rushed to buy to get equity exposure for the bull market that they didn't believe in.
The second phase was a recovery in the cyclical sectors that investors snapped up to try and make up for missing phase one, justifying their purchases on future economic optimism.
After the extremely strong catch-up performance from cyclical and recovery sectors over the last six months we think that phase is now running its course.
Phase three will see outperformance from those companies that can surprise on their earnings, regardless of sector or classification.
Fidelity new boy Peter Kaye's strategy typically does well in late-cycle equity market conditions due to his ability to screen for companies where analysts are underestimating the profit potential and where he has identified a catalyst.
Having been extremely underweight in US equities this year, we are marginally neutralising that bet (although we remain underweight) through this new addition.
Although US equities are generally expensive, there are doubtless certain opportunities and we expect Kaye to find them on our behalf. A bit of dollar strength would help too.
Aberdeen Short Duration Asian Bond - the contrarian investor
There have been two things to avoid in 2013; sovereign bonds and Emerging Market currencies.
The Aberdeen Short Duration Asian Bond invests in both and produced a mildly negative return this year. However, we believe that the future might be better and now could be the time to back emerging market currencies.
There is extreme negativity around the short-term outlook for Emerging Market FX, but with many of the Asian economies stabilising, we expect better performance in 2014.
Given the strength that the pound has enjoyed in recent months there are reasons to expect some of the shine to come off sterling next year, particularly if investors worry about the fact that consumption through debt creation is the primary driver for the UK economy.
Asian economies do not have that problem and will surely gain against the pound over the coming years.
Thomas Becket is chief investment officer at Psigma.