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10 October 2016

Year of the investment rotation?

As we move into autumn, Darius McDermott, managing director of FundCalibre, asks if we are about to see some changes in the investment landscape too.

Will 2016 be the year of the investment rotation?

Three possible investment rotations

1. Small to large cap

UK small and mid caps have significantly outperformed large caps over the past 10 years or more¹. It was thought that large caps would come into their own post-Brexit vote, and with sterling plummeting against the US dollar, they have certainly done well. The FTSE 100 recently surpassed the 7,000 mark. However, small and mid caps have surprised too, shrugging off concerns about the economy, as the FTSE 250 reached all-time highs in October.

The US election is an obvious worry for global markets, as is the Italian referendum, so any flight to perceived safety, and any further depreciation in the currency or economic prospects, could mean larger companies generally hold up better in the coming months.

Darius's fund picks: If you believe we are now in a period when larger companies will outperform, Elite Rated funds with a large cap-bias worth considering are Evenlode Income, Fidelity Enhanced Income and Jupiter UK Growth.

2. Developed to emerging markets

2016 has also seen a significant rebound in emerging markets. After a number of years of disappointing performance, an improving political landscape in a few key countries, as well as reduced budget deficits, have helped bring about what may be a bottoming-out of economies and markets. Even an increase in US interest rates is now seen as less of a worry as sentiment towards emerging market equities has become more positive.

Darius's fund picks: Elite Rated funds in this asset class include Charlemagne Magna Emerging Markets Dividend, Lazard Emerging Markets and M&G Global Emerging Markets.

3. Growth to Value

The one rotation we seem to have been waiting for signs of for some time, but which still remains elusive is the move from growth to value. While miners and oils have had a short rally, banks have lagged and growth stocks have continued to soar.

“A clear catalyst for this rotation to begin in earnest is yet to emerge, but if you think value is on the cusp of coming back into fashion, now may be a good time to invest in a company that's 'cheap', as long as you're prepared to be patient,” Darius says.

Darius's fund picks: Elite Rated value funds include Investec UK Special Situations, L&G UK Alpha and Man GLG Undervalued Assets.

¹FE Analytics, FTSE 100 v FTSE 250 v FTSE Small Cap (ex IT), 19/10/2001–19/10/2016

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