206. We’re now operating in a financial world we’ve not seen for decades
JOHCM Global Opportunities manager Ben Leyland explains why markets have been abnormal since the...
As stock and bond markets continue to struggle against a background of high inflation and rising interest rates, returns on investments so far this year have been thin on the ground.
Of the 58 different fund sectors, just seven are in positive territory over the first six months of 2022*.
These sectors are IA Commodity/Natural Resources (up 7.35%*); IA UK Direct Property (up 5.17%*); IA Latin America (up 4.72%*); IA Infrastructure (up 3.13%*); two ‘near-cash’ sectors (up 0.15%* and 0.14%*); and IA USD Government Bond (up 0.11%*).
Some individual funds have, however, fared better. What do they have in common? Either exposure to commodities, inflation-protection, or defensive characteristics.
Here, we look at the top ten performing Elite Rated funds and trusts over the past six months*.
The manager of this trust is never one to follow fashionable stocks or pay extravagant prices. Instead, he concentrates on more defensive, sustainable, long-term growth opportunities where valuations have yet to reflect widespread popular recognition.
The trust has had more exposure to Asia and emerging markets than some of its peers in recent times and is also able to invest a reasonable amount in bonds. This means it can lag during times of strongly rising equity markets. But over the past 6 -12 months, the positioning of the trust and the style of management have really come to the fore, and it has outperformed the market and peer group quite considerably. The companies held should be better able to weather market volatility and higher inflationary environments.
This trust is benefiting from the price rises in commodities and what the managers call the start of a “multi-decade period of strong demand” for the asset class. In this podcast. The managers explain the essential role commodities play in our lives now and how they will help us transition to a ‘net zero’ future. They also cover how the trust generates an income, the ESG matters they have to consider when investing in mining companies and reveal the role they think the trust can play in a wider portfolio.
Insurance isn’t the most exciting of subjects and it’s the one product we buy hoping to never have to use. But it does have a number of attractive qualities for investors, the main one being that non-life insurance is not a discretionary purchase – it is often required by law.
This means demand for insurance is less sensitive to macroeconomic conditions because it is required in good times and bad. And when the cost of living is increasing as it is today, and we are making cuts in our budgets, insurance will be one of the monthly outgoings we – and businesses – continue to pay.
There are few managers with a more intimate knowledge of their market than manager Nick Martin. His many years of experience working in the risk and casualty insurance markets are fundamental to the success of this fund, which provides access to this specialist and often undervalued sector.
This offering is a value-orientated, benchmark-agnostic and concentrated global equities fund that looks for companies that have an edge in their respective business sectors. It can invest in any business around the world, but because the managers are looking for industry leaders, there is a natural bias towards larger-sized companies. The fund is also differentiated by the managers’ systematic approach to portfolio construction, which means that behavioural biases should be removed.
A lot of the fund’s performance has historically come from the lack of downside capture – it tends to fall less than markets and peers. That has also been the case in the recent market sell-off, where the fund’s lack of mega-cap technology names have helped it return positive numbers instead of negative.
In this environment, an alternative to standard equity funds is real assets with inflation-linkage. For example, renewable energy, which has the double-whammy of RPI linked (which is higher than CPI) subsidy payments and higher power prices. There are many of these types of investment trusts available and, despite usually trading on high premiums, many of them are trading around NAV today. They also have high dividends.
VT Gravis Clean Energy Income is the perfect fund to play this with a diversified portfolio across the world but with about 50% in the UK. It can help income investors to protect themselves from inflation and has an attractive current yield of 3.5%.
With 54 years of consecutive dividend increases, this is one of the longest-running and most dependable equity income trusts in the UK. Manager Job Curtis has been at the helm for 30 years, helping to generate steady returns over a long period of time. It’s a cautious fund and has benefited recently from being well-positioned in parts of the market that can protect against inflation, and in companies whose business models provide the same qualities.
Job told us more in this podcast:
Another real asset that often has inflation-linkage and defensive qualities is infrastructure. First Sentier Investors has been a pioneer in this asset class and this fund aims to provide investors with a mix of strong capital growth and inflation-protected income.
The managers are conservative investors, recognising that capital preservation is critical to achieving long-term capital growth. They invest in real infrastructure assets with barriers to entry and pricing power. The investable universe of some 1,500 stocks includes highways and rail tracks, airport services, marine ports and services, railroads, utilities, oil and gas storage and transportation, and wireless communications.
Latin American equities have had a decent start to the year, which has seen Russia hit by economic sanctions from trading partners such as the European Union, UK, and US.
As we have seen, this has caused commodity prices to soar and Latin America – another source of commodities such as oil, gas, metals wheat and corn – has benefited.
This fund is managed by abrdn’s renowned emerging markets team, whose primary investment concern is whether companies demonstrate outstanding quality characteristics, such as strong management and balance sheets. This is followed by a value approach – targeting stocks which appear to trade for less than they should do.
This fund can invest in any company around the globe but has a strong bias towards larger and medium-sized multinational businesses. It is highly active and unconstrained, and its manager always has an eye on capital preservation. As a result, he is very willing to hold high levels of cash if valuations are unattractive.
In a recent update he said: “How do you invest in a world where geopolitics is fragmenting into a multipolar landscape, where capital controls are being reimposed, where inflation is structurally rising, where the Fed Put no longer exists and cross-asset correlations are changing? The problem in transition phases is that recent experience is not much use in navigating new challenges, and benchmarks and most peoples’ portfolios are all facing the wrong way. We don’t have all the answers ourselves, but we do have a strong set of core principles which underpin a proven investment process which has been battle tested in periods of much higher volatility than we have seen in recent years.”
Managed with a distinct contrarian and value-based approach, this fund offers investors access to a reasonably diversified portfolio of large- and mid-cap UK stocks. The manager, Ben Whitmore, is hugely experienced and has had considerable success in running this type of mandate.
The companies he invests in will typically have prominent franchises and sound balance sheets but will tend to be out-of-favour because they are unfashionable, have suffered a fall in profitability or are involved in industries where there are concerns on future prospects.
*Source: FE fundinfo, total returns in sterling, 1 January to 28 June 2022