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As you know, here at FundCalibre we rate all different types of funds. Many are solid, steady investments that could form the core of a portfolio and aim for consistent growth with volatility that is perhaps lower than, or equal to, the market.
Some funds we rate, though, aim for more aggressive, higher growth and take more risk to get there. These funds might be used as satellite investments in a diversified portfolio, where you may want one or two holdings that ‘shoot for the stars’, as well as your core funds.
The key thing to remember with these types of funds is that they should be viewed as long-term investments. You must be able to wait out shorter term fluctuations in the value of your money, which could go down in value as well as up. If this causes you to lose sleep then these may not be right for you. What’s more, the quality of the fund and the manager make a huge difference in these types of investments, so research is crucial before you choose.
For our more adventurous investors, however, who are happy to tolerate a bit of market movement in pursuit of long-term gains, here are five Elite Funds that have performed quite spectacular flip-flops in recent years – in honour of National Flip Flop Day (and yes, we do mean the footwear!).
With the exception of last year, emerging markets have been out of favour for some time and Latin American economies in particular have been beset with political scandals, corruption, devaluing currencies, inflation and bad debt. Many investors predicted even more dire outcomes for these markets in 2016 as Trump was elected and the US dollar rose (making bonds issued in US dollars even harder to repay). Yet, other factors including a new president in Brazil (himself now under fire, unfortunately) and doubt as to Trump’s ability to tear up trade agreements saw Latin American equities do better than they had in a few years. This fund has continued to do well so far in 2017, returning 10% to date, and researches laboriously each of the companies in which it invests to help alleviate other risks.
Japan is perhaps the ultimate market of flip-flops! People commonly refer to the ‘lost decade’ of Japan from the early 90s to the early 2000s, after its asset price bubble burst and the economy sunk into recession and deflation. The country is still struggling to generate inflation even 25-plus years later. Yet, its stock market will have years of incredible returns, preceded by double-digit negatives and then followed up by returns of less than a percent. The fluctuation of the yen currency has also strongly impacted performance. Hope was rejuvenated when prime minister Shinzo Abe was elected with a strong reform plan in 2012, but waivered again as progress lagged. In 2017, investors are positive once more on Japan and this exceptional fund was the best in its sector in 2016 and has returned 150% over the past five years^, despite any macro hiccups.
Although gold is considered a ‘safe haven’ asset because investors tend to flock to it in times of unease and it can be used as a hedge against inflation, it can also be an incredibly volatile investment. The commodity price fell dramatically after reaching a high above US$1,800 an ounce back in 2012 and it has yet to recover these levels. That said, political uncertainty, combined with concern around central banks’ quantitative easing, made the precious metal popular once more in 2016. This fund gets its exposure through shares in gold miners, instead of buying the gold itself, which is one of the reasons it did so well in 2016, when these companies rebounded significantly. The fund has been around since 1988 and has been a ‘go-to’ gold name for nearly 30 years.
This fund’s geographic reach is much wider than the Latin American Equity fund we looked at above, although its manager, too, likes Brazil. Other regional exposures include South Korea, China and Hong Kong, Taiwan and South Africa. Active management in these markets is a must to find good companies that treat shareholders well and can hopefully deliver sustainable growth regardless of political or economic ups and downs. The fund stands out because it invests in companies of all sizes, including nearly 30% of the fund in small caps (around twice the benchmark weighting), where the manager seeks to find opportunities that others have missed.
Flip-flopping is not just for emerging markets and commodities, different investing styles in more familiar markets can offer increased return potential alongside increased volatility too. This fund invests in out-of-favour UK companies and has returned 140% over the past five years^^. This approach is known as ‘value investing’ and the style has historically delivered superior returns over the long term. But investors must be patient and wait for poorly-performing companies to turn around, as well as accepting that some of these firms may just never pay off. Again, an experienced manager who knows what to look for when buying ‘cheap’ shares is a must. This fund underperformed the UK stock market in both 2014 and 2015 with returns of -7% and -2%, before coming almost top of its sector at 27% in 2016! A holding for patient investors, but so far, a profitable one.
*All returns data for calendar years, FE Analytics
^FE Analytics, Baillie Gifford Japanese vs TSE Topix, TR in GBP, 15/06/2012–15/06/2017
^^FE Analytics, R&M UK Equity Long Term Recovery vs FTSE All Share, TR in GBP, 15/06/2012–15/06/2017