Inflation or deflation? Six investors give their views
Expectations of an explosive reopening of world economies in the coming months is causing inflation...
In a world of constant change, stability can be comforting thing – especially when it comes to our life savings.
At FundCalibre, we like consistency and managers with long-term track records. Why? Because it means they have experience of investing throughout the different stages of a market cycle and we know what to expect from them in the future.
With that in mind, we take a closer look at some Elite Rated funds celebrating big milestones in 2021: their managers look back over the years sharing memories and words of investment wisdom.
While the City of London Investment Trust celebrates its 130th anniversary this year, manager Job Curtis is also celebrating milestone of his own: 30 years in charge.
“When I started as City of London’s fund manager in 1991, the UK was in the ERM with a fixed exchange rate for sterling at too high a level against Germany’s Deutschmark. This caused a severe recession which only ended when the UK crashed out of the ERM in September 1992. At this point, there was a dramatic shift in the market away from defensive to more cyclical stocks in anticipation of improving growth.
“There is some parallel in 2020 when defensive stocks outperformed for the first part of the year given the effect on the economy of the lockdown. Since the news in November of the efficacy of vaccines from Pfizer, Moderna and AstraZeneca, there has been much greater confidence in the markets about the time scale of the return to more normal economic activity. In contrast to the earlier part of the year, defensives have given back ground to more cyclical stocks.
“As a fund manager, it is very difficult to predict such turning points in the market. My focus over the years has been on dividend paying stocks that are investing enough for growth. I also believe it is worth having some diversification in the portfolio, including some stocks adversely affected by short-term issues but with medium-term recovery potential.”
Austin Forey has managed the JPM Emerging Market Trust for 27 of its 30 years.
“One of the consequences of such a long time in any role is that there is nowhere to hide. I cannot plead inexperience, I cannot blame other people, I cannot claim that failures are down to bad luck. Many others have helped me, bringing me good ideas over the years; while they must take credit for the successes we have had as investors, the failures and mistakes are mine alone.
“The thoughts that go through an investor’s mind are not always neatly ordered or linear, but if I were to draw out those that seem to have an enduring relevance for me, I would choose the following things that I keep coming back to when I think about businesses and investing:
The Liontrust Sustainable Investment team were among the pioneers of sustainable investing when they launched their Sustainable Future fund range in 2001.
“We were founding members of the Principles for Responsible Investment and have engaged on issues that are now central to mainstream investing. These include raising concerns about the risks posed by oil sand investment and arctic drilling, poor health and safety in clothing supply chains, palm oil driven deforestation and the mis-selling of financial products.
“We seek to identify key structural growth trends that will shape the global economy of the future and then invest in well-run companies whose products and operations benefit from these transformative changes and contribute towards a cleaner, healthier and safer world.
“Our latest initiative is the One and a Half Degree Transition Challenge that was launched in early 2020. This is calling for all companies held within the funds to explain how they plan to decarbonise their businesses to limit global warming to 1.5 degrees.”
Chris Garsten and Charles Glasse have co-managed Waverton European Capital Growth since launch 20 years ago.
“This century there have been enormous economic and social changes. New entrants have disrupted (or even destroyed) many a previously successful business. For example, John Lewis and M&S have found that their core middle-ground franchise has gone, wreaking havoc for them. By contrast, anyone interested in a bespoke Ferrari now has to wait about five years for it to arrive.
“However, the one thing that hasn’t changed is that share prices are still primarily driven by earnings per share growth. This means that our investment process has only changed at the margin, as we are still looking for the same things; a capital cycle that allows the companies we invest in to keep (and use) their pricing power. Valuations have certainly risen for some successful companies, although strangely, this doesn’t overly concern us as there have always been new candidates where pricing power is improving.
“In the last 20 years, we have seen many a cycle come and go. We still think that if it feels expensive, it probably is and we’ve learned to avoid such situations, to reduce risk and to maximise our performance.”
Richard Woolnough has run M&G’s flagship Optimal Income fund since launch in 2006.
“An important characteristic of the fund is the unconstrained approach that allows me to invest across the whole of the bond universe, and this has been fully tested since the fund was launched. Let’s take 2008-09 and the global financial crisis. As risk sold off and bank bonds capitulated, we avoided the sharp losses experienced by others by underweighting credit risk and banks. We were also long interest rate risk as rates fell in the latter stages of 2008 and short rates risk in 2009. So being able to take against-consensus investment calls enabled the fund to perform in a mixture of market conditions.
“A decade on and the impact of the coronavirus pandemic on economic activity has been severe. We argue this recession is unique, and very strange, because it has been self-inflicted, with lockdowns necessary to stem the rise of virus cases. But what has happened to financial markets in the meantime and how has the fund reacted? We added to high yield as prices here were the first to slump and increased overall credit risk, again on attractive valuations. Since March, central bank support (and investor sentiment) in these assets has risen, so we have either trimmed or held our positions. Similarly, being able to have modest exposure to inflation markets and bonds on the cusp of investment grade – but not quite (fallen angels) – has been beneficial during a volatile 2020.”
Andreas Zoellinger set up the BlackRock Continental European Income fund up 10 years ago as an alternative to fixed income products when we were in a low rates, low growth and low inflation environment.
“A decade later this has not changed. With interest rates likely to be held at depressed levels for many years to come, equity yield as an alternative to bond yield remains highly relevant for investors.
“One interesting change over the last few years has been our move from the energy sector to utilities. Oil companies historically represented a significant dividend pool. However, we believe these companies have a multi-year journey ahead of them fraught with execution risk and potential for mis-allocation of capital as they attempt to evolve their business models to cater for a greener future. We prefer to play the theme via our investments in utilities. Europe is home to some of the largest and leading renewable companies in the world, and they will play a major role in Europe’s green transition.
“Right now is actually a very exciting time for income investing: 2020 was a tumultuous year with many companies cancelling or suspending their dividends, either for corporate governance or regulatory reasons. With earnings expected to recover strongly in 2021, we expect dividends to get back to more ‘normal’ levels this year. However, investors will need to remain selective to avoid value traps.”
Chris St John has managed AXA Framlington UK Mid Cap since its launch a decade ago.
“We have seen significant changes in the composition of the FTSE 250 index over the past decade. Oil & gas and basic materials companies have declined in importance, as these businesses have struggled to grow and seen their economic output shrink.
“The technology sector’s weighting has also fallen, partly because UK-listed tech businesses tend to get acquired by their international peers and not enough new businesses list in the UK to replace them. However, a lot of the UK’s tech businesses are also ‘hidden’ in other sectors.
“Looking across the fund’s holdings, Rightmove is one of several names we have held throughout the past decade. While this group features a diverse set of businesses, they have all managed to position themselves on the right side of change, whether that’s investing in service (Ashtead), an efficient online retail operation (Dunelm) or the growth of the cybersecurity industry (Beazley, providing cybersecurity insurance).
“All of this underlines the importance of investing in quality growth businesses which can grow their economic output over time. By focusing on these businesses, investors can achieve returns over and above those of the FTSE 250’s already attractive market return.”