Interactive Investor

City experts favour defensive funds

17th December 2015 13:55

Rebecca Jones from interactive investor

This panel of leading collective investment specialists told us which funds and trusts they'd tap as the best and worst for investors. Rather than build their portfolios by investing in individual stocks or bonds, these managers invest largely or exclusively in investment funds and trusts, making them well placed to identify likely future winners.

This quarter we have a particularly mixed bag of fund picks, with few common themes and some big differences emerging. Japan remains a favourite, with two of our panellists highlighting funds from the region.

Capital preservation is also high on the list for some, as "expensive defensive" sectors including property and insurance make an appearance, while slow and steady multi-asset stalwart Ruffer Investment Company gets two mentions.

Opinion is most notably split on commodities, with one manager arguing that low valuations and high yields make natural resources highly attractive, while another is wholeheartedly avoiding the sector.

Fixed income and Asia also remain unpopular sectors as interest rates stay glued to the floor and fears over China continue, although India is an exception for one manager.

Max King

Multi-asset portfolio manager, Investec Asset Management

Veering away from his usual contrarian style, King is this quarter backing trusts that have enjoyed a sustained period of good fortune. "After the sharp summer setback, the instinct of many investors is to buy what has gone down, but the alternative strategy is equally logical - buy what has held up best as it is the most resilient to market turbulence," he says.

His first pick comes from the property sector, which the manager says has been "notably steady" this year. King highlights TR Property, one of our sister publication Money Observer's Rated Funds, which invests in property shares across the UK and Europe.

Trading on a 7.5% share price discount to its net asset value (NAV) and yielding 2.5% (as at 1 November), the trust has also returned a healthy 23% over one year.

Helped by 'understated asset values', private equity trusts have also proved a steady choice in 2015, so King's second pick is Electra Private Equity.

"Electra's shares have risen 25% this year, but still trade on a 5% discount to NAV owing to very strong progress in its underlying portfolio, some good disposals and promising acquisitions," King says.

His slightly edgier choice is Polar Capital Global Insurance, a fund that has benefited from an absence of claims this year, returning over 21% in the 12 months to 1 November.

King says that the trust has been resilient to equity bear markets and corrections over the past 10 years, but warns that returns could be easily derailed by an "expensive catastrophe".

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Ayesha Akbar

Portfolio manager, Fidelity Worldwide Investment

As we head into 2016, Ayesha Akbar concedes that the outlook for global growth is looking "more challenging". Despite this, she maintains her long-running bullish stance on equities, insisting that there "continue to be good opportunities for investors, particularly when focusing on specific regional equity markets".

As with last quarter, one such regional market is Japan. While economic growth has disappointed in recent months, Akbar says that Japanese equities benefit from strong domestic drivers including increased dividend payout ratios and a greater allocation to equities from government pension funds.

She has chosen the Pictet Japanese Equity Opportunities fund as, she says, the team look for companies that are exposed to the greatest growth opportunities.

Emerging markets remain an area of concern for Akbar, though she believes India may be an exception.

"Commodity importers such as India have benefited from falls in raw material prices. Franklin India could be a good choice for investors looking to play this theme. As well as having a strong stockpicking focus, the team also tries to incorporate broader economic considerations," she says.

Although Akbar is most positive on equities, she says that inflation-linked bonds can play an important protective role in portfolios as and when inflation resumes. She highlights the SLI Global Index Linked Bond fund which she says benefits from being run by Jonathan Gibbs, who leads the dedicated inflation team at Standard Life Investments.

Peter Hewitt

Director and investment manager, F&C Asset Management

Like King, Hewitt has chosen to focus on more defensive sectors and trusts this quarter, anticipating further tough times ahead. "My picks have similarities in that they seek to protect shareholders' investments and, if possible, grow the value in a modest and cautious manner," says Hewitt.

His first choice is Ruffer Investment Company, which invests in a mixture of index-linked bonds, gold, cash and around 40% in equities. Hewitt likes the trust as, he says, it has "steadily grown shareholder value over the long term", returning more than 100% in share price gains over 10 years to 1 November.

For those feeling a little more bullish, Hewitt highlights the UK smaller companies sector, which he says has "demonstrated good performance in volatile and uncertain markets" over the third quarter of the year.

Although it is not a dedicated smaller companies' trust, he has selected Henderson Opportunities, which has around one third of its portfolio invested in companies listed on the Alternative Investment Market and another third invested in small and medium-sized companies. Although it can be volatile, Hewitt says the trust has achieved "substantial long-term capital growth".

The manager continues to dislike Asia and emerging markets, stating that until China's prospects become clear, further volatility is to be expected. However, for those less sceptical he highlights Schroder Oriental Income. "It has an experienced manager, a clear focus on strong, well-financed companies and the attractions of a consistently growing dividend yield of 4.3%," he says.

David Coombs

Head of multi-asset investments, Rathbone Unit Trust Management

Replacing John Ventre on our panel following his departure from Old Mutual is Rathbones' head of multi-asset, David Coombs.

His first regional pick is Japan as, like Fidelity's Akbar, he believes the country will benefit from a number of unique market drivers including robotics and automation, as well as ageing demographics.

To capitalise on these he has chosen JPMorgan Japanese Investment Trust. "Managed by Tokyo-based Nicholas Weindling and Shoichi Mizusawa, it has a thematic style currently focused on the domestic economy. A weaker yen and relaxed visa authorisations have led to a tourism boom, which the Japanese are playing shrewdly," says Coombs.

Sticking with developed markets, Coombs's next pick is another single market fund, Baring German Growth. Launched in 1990, the fund is well-established and has returned an impressive 174% over 10 years and 50% over five years. Managed by the highly rated Robert Smith since 2008, the fund has its largest exposure to the telecommunications and industrial sectors.

"Interest rates have been set to aid struggling nations in southern Europe, and there is no ability to vary policy across the currency bloc. We see this as stimulative for Germany's stockmarket, particularly exporters," says Coombs.

Despite his bullishness on Germany, Coombs says he is less positive on Europe as a whole as, in his opinion, "analyst forecasts for company earnings growth are ripe for disappointment". However, for those so inclined, he says BlackRock European Dynamic fund is "a solid way to play the continent".

Ian Aylward

Head of multi-manager research at Aviva Investors

Never one to follow the crowd, Ian Aylward's first pick comes from the emerging market currency sector.

"We have just initiated a position in local currency emerging market debt for the first time in two years on the basis of attractive yields and our expectation that emerging market currencies are close to bottoming," says Aylward.

He also highlights their screening tool, the Global Weather Station, which he says provides in-depth analysis of the market drivers behind emerging market debt. 

Keeping it contrarian, Aylward's second pick is Marshall Wace TOPS Ucits, another off shore vehicle that specialises in European equities using hedge fund techniques, including "shorting", or betting that a company's share price will fall.

"This is a European equity market-neutral fund that harnesses the best long and short ideas from the broking community in a very sophisticated way. It has returned more than 13% over the past 12 months and we expect continuing positive returns," says Aylward.

Perhaps unsurprisingly, an area Aylward continues to avoid is commodities due to concerns over excess supply and slowing demand, particularly from China. However, he claims he has used the Threadneedle Enhanced Commodities fund in the past, describing it as a "rare, fundamentally orientated commodity fund with a very solid team".

Peter Walls

Fund manager, Unicorn Asset Management

In contrast to Aylward, Unicorn's Peter Walls is throwing his hat into the commodity ring, selecting BlackRock World Mining Trust as his first tip this quarter: "It's been a tough few years for commodities, and BlackRock World Mining in particular, with performance suffering from both the general malaise and the loss of £52 million on some ill-fated African mine royalties," says Walls.

Walls concedes that the "jury remains out" on Chinese growth, while the sustainability of dividends in the sector is also a concern. Nonetheless, with a share price to NAV discount of 10% and a 9% dividend yield, he says the trust may offer "an interesting contrarian opportunity".

Like F&C's Hewitt, Walls has also chosen Ruffer Investment Company, stating that markets could see more volatility in the months ahead: "Ruffer aims to achieve a positive net total return of at least twice the UK bank rate, and has outperformed the FTSE All-Share index since launch in 2004 with lower volatility," says Walls.

While the trust's share price is still likely to suffer in significant market corrections by virtue of it being a listed vehicle, Walls says it is "noteworthy" that Ruffer's NAV hasn't fallen in any full-calendar year since its inception.

Walls's one to avoid is Woodford Patient Capital. While he is sure it will prove to be "a successful long-term investment", at a 9% premium to NAV compared to an average discount for the peer group of 5.1%, he feels that there may be better opportunities to buy in the future.

David Hambidge

Head of multi-asset investment, Premier Asset Management

Premier's David Hambidge is focused on equity income this quarter. "With interest rates set to remain low for a long time and demand for income from retirees increasing, we believe that investor focus may well turn more to the delivery of income in the future," he says.

His first pick is another Money Observer Rated Fund, Rathbone Income. Manager Carl Stick has run the fund for over 15 years and invests in all areas of the UK stockmarket, with a modest overseas weighting. The fund has a yield of 3.7% and has delivered a top-quartile total return of 72% over five years.

Hambidge's second income choice, also a Money Observer Rated Fund, is BlackRock Continental European Income. "We believe that investors should look to have some exposure to European equities as part of a balanced portfolio, and we have been particularly impressed by this fund," says Hambidge.

He adds: "The portfolio is run by two experienced managers and performance has so far been excellent; not only has it consistently outperformed its benchmark and sector peers, but it has achieved this with lower volatility."

Hambidge is less keen on fixed income, and high-yield bonds are a particular concern due to their sensitivity to rising interest rates. However, he says that Hermes Multi-Strategy Credit has the flexibility to "navigate potentially choppy waters" and should provide a smoother total return than the high-yield bond sector.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.