Three Rated Funds to beat summer blues
14th April 2016 17:38
by Andrew Pitts from interactive investor
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Buyers are back. Well, back for a while. Stockmarkets have continued a steady climb from early February lows, as higher oil prices and improving economic indicators from China trump worries about rising inflation, an uncertain interest rate outlook and weak global economic demand.
On the face of it this market rebound is not surprising. Stephen Eckett, author of the UK Stockmarket Almanac and our sister magazine Money Observer's almanac column, points out that April is the second-strongest month for the year, after December.
As April marks the final leg of the six-month bullish cycle for markets each year, how far have we travelled? From 1 October to mid April, it's all been a bit underwhelming. The is up 4.8%, with the wider index gaining 4%.
The biggest 300 shares in continental Europe are down 1% and the Nikkei 225 in Japan has fallen 10%.
Overly optimistic growth forecasts
Emerging markets are staging a comeback - up 3.5% - but the brightest spot continues to be the US, with the S&P 500 index propping up the world with an 8% rise. Overall the FTSE World ex UK index is up 3.2%.
Oil's rapid ascent back above $40 a barrel has undoubtedly driven recent strength.
But concerns about China, beggar-thy-neighbour currency wars, the adoption of negative interest rates in major economies such as Japan and the eurozone, falling growth in corporate profitability and stuttering manufacturing output are issues that have not gone away.
That is reflected in the International Monetary Fund's (IMF's) Global Economic Outlook, published in early April. The IMF has pared back its forecasts for global economic growth in 2016 to 3.2% (from 3.4% in January) and to 3.5% in 2017 (from 3.6%).
But, as consultancy Capital Economics highlights, the IMF has consistently overestimated annual economic growth for the following year by an average 0.7% in each of its April publications since 2010.
Even after the downgrades, the consultancy believes the IMF is being overly optimistic, and doesn't expect global growth to top 3% this year.
As I write, however, the FTSE 100 index has powered to a 2016 high of 6350, and I am reminded of the fact that economists don't dictate the direction of markets - investors do.
But markets have a habit of overshooting on the downside as well as the upside, which is what I believe is happening now.
Evasive measures
In the US, from where other markets usually take their lead, the quarterly corporate earnings reporting season is underway. Analysts have reduced their expectations of growth in earnings per share since January, but even so, the current trailing price/earnings (PE) ratio is pretty rich at 22.8 times.
On economist Robert Shiller's cyclically adjusted PE over 10 years, the ratio is 26.19. The mean reading since 1880 has been 16.6, which suggests stocks are in overbought territory.
A more recent analysis from asset manager Oppenheimer shows that since January 2014, the US market has taken two significant tumbles when the trailing PE ratio hits 19 times, with buyers coming back when it falls to 16.5 times.
That seems as good a warning as any to take evasive measures. As we enter the traditionally weak summer period for equities, let's not forget to add into the mix political uncertainty, which markets detest.
First is the UK's EU referendum in June, likely followed by another summer of refugee and austerity-weary discontent in the eurozone's periphery (particularly Greece).
The bulls are squeezing the life out of the bears right now, but their strength is likely to sap as April turns to May.
Capital Gearing Investment Trust
Having adopted a discount control policy, the share price performance of the absolute return-oriented should now better reflect its underlying net asset value.
Its strong long-term record has been masked by mediocre medium-term performance, a reflection of the manager's commitment only to buy equities that look good value and its exposure to index-linked government bonds.
Its recent performance stacks up well: as inflation expectations creep upward, those index-linked bonds are finding favour with the wider investment community.
Fundsmith Equity
manager Terry Smith does not do market forecasts; he's only interested in buying big, proven businesses with durable franchises, strong free cash flows and return on capital employed.
Another pillar of the fund's strategy is to do as little as possible - its extremely low portfolio turnover rate and trading costs helped propel it to another stellar year.
It gained 15.8% in 2015 (global sector average 2.7%) and currently shows a 138% gain since launch in April 2011 (sector average 37%).
GAM Star Credit opportunities GBP
does something a little different: it buys the junior, subordinated debt issued by investment grade companies.
Manager Anthony Smouha explains that successful companies are highly unlikely to default on their debt commitments, wherever they rank in line for repayment, which enables the fund to enhance income payouts without moving into "'junk' territory".
It has a decent yield of around 4.5% and has outperformed the sterling strategic bond sector every year since launch in 2011.
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.