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“They always say time changes things, but you actually have to change them yourself.”
The words of Andy Warhol have a strong resonance in today’s investment world, as structural changes begin to make a significant impact on the way we invest.
For example, this year we expect Asia’s GDP (growth) to overtake the rest of the world combined. It’s a trend which is only going to grow, with the region expected to contribute roughly 60% of global growth by 2030*.
It’s not the only significant trend which will have a material impact on our society: awareness of both ethical and environment standards is increasing and becoming mainstream. Around four million people took part in the climate change strikes in September 2019, with teenage environment activist Greta Thunberg spearheading the charge. There’s also plastic free July – a movement which has inspired over 250 million participants in 177 countries**.
As we head towards the business end of the 2020 ISA season, the question is: are you taking advantage of these – and other – trends in your portfolios?
We take a closer look at the opportunities.
The International Monetary Fund estimates emerging and developed Asia will grow by 5.8%*** in 2020, well ahead of both global (3.3%***) and advanced/developed economies (1.6%***). Over the course of the next decade, it is also forecast that Asia-Pacific will be responsible for the overwhelming majority (90%) of the 2.4 billion new members of the middle class entering the global economy*. It’s an evolving story – with many changes occurring across the region, each opening the doors to new investment opportunities.
One way to tap into this is through the Guinness Asian Equity Income fund, which has an attractive yield of 4%****. The fund invests in 36 equally weighted stocks and its largest exposures currently are to China (27.8%) and Taiwan (18.6%)****. Another fund worth considering, with a slightly wider remit, is the Hermes Global Emerging Markets SMID Equity fund, which currently has almost two-thirds (61.8%)***** of its exposure to Asia Pacific Emerging Equities.
It does not take a rocket scientist to recognise the growing trend towards Environmental, Social and Governance (ESG) issues within the global fund management industry. However, if you were to split the acronym up, it’s fair to say Governance has led the way until recently, given its importance from a commercial sense, with companies looking to improve the way they treat both employees and shareholders. Environmental and Social issues have come under the spotlight more recently, due to greater public awareness.
A good starting point for investors new to ESG is the Rathbone Global Sustainability fund. The 39-stock portfolio will not only actively avoid businesses involved in unethical or unsustainable practices (such as animal testing, armaments or extraction of fossil fuels), but each stock must also demonstrate at least one positive environmental, social or governance attribute. Those focused more on the environmental side may like the Pictet Global Environmental Opportunities fund. The managers have identified nine environmental challenges including but not limited to; climate change, ocean acidification, biodiversity and freshwater use. All companies within the portfolio must operate ‘within a safe operating space’ for each of these nine areas and actively contribute to solving environmental challenges.
This is a trend which investors have been aware for some time, but the truth is, the search for income has become even more challenging in the past 12-18 months. Take the UK – a traditional hotbed for income – as an example: the majority of dividends from the top 100 companies comes from a handful of players, meaning that should one of them fail to deliver on their annual dividends, investors could face a big fall in their income payments. The majority of stock markets also look expensive on a global scale, meaning investors are having to pay more to access these dividend paying companies.
Infrastructure has been one of the success stories in the past decade, and the asset class has become a strong alternative income stream. The VT Gravis UK Infrastructure Income fund invests mainly in investment trusts exposed to different types of UK infrastructure. It has an income target of 5% which is distributed quarterly. It has a minimum of 22 holdings but will have exposure to around 1,000 separate underlying projects.
Alongside Japan, Europe and the UK have been the two most maligned markets in the past few years, particularly as Brexit has hung over both economies. 12 months ago Europe was flirting with recession, as disappointingly weak economic indicators kept rolling in. A year later and, despite returning almost 20% in the past 12 months^, sentiment remains unchanged with the region seeing outflows of £3.8bn in 2019^^. Could the tide be starting to turn? Options to consider include the RWC Continental European Equity fund, run by Graham Clapp, or the Legg Mason IF Martin Currie European Unconstrained fund, managed by Zehrid Osmani.
The UK also offers opportunities after a General Election which finally gave us a stable government and a potential way forward on Brexit. The whole country has been at a standstill, with little or no investment by businesses, individuals and foreign investors since 2016. Investors could look to recovery funds or smaller companies vehicles in this scenario. Options worth considering include the LF Tellworth UK Smaller Companies fund, managed by the experienced duo of Paul Marriage and John Warren, or the TM Crux UK Special Situations fund, run by Richard Penny.
The final area is technology, which continues to go from strength to strength as a sector. The Investment Association Technology sector has returned almost 140%^^^ to investors in the past five years, almost 40% ahead of any other sector. It’s growth is also reflected globally by the fact that it is now the largest sector in the MSCI World Index (18%)^^^^.
The obvious option for investors is the AXA Framlington Global Technology fund, which invests in companies with progressive-thinking management, dominant positions, above-market growth and sustainable or improving profitability. Another option is the Smith & Williamson Artificial Intelligence fund. Its unconstrained focus means that it can invest in businesses of almost any size and it uses an artificial intelligence system itself to help find companies in any sector, whose business models are aligned to benefit from this growing theme.
*Source: World Economic Forum Annual Meeting, 20 December 2019
***IMF World Economic Outlook, January 2020
****Source: fund factsheet, 31 December 2019
*****Source: FE Analytics, 31 December 2019
^Source: FE Analytics, total returns in sterling, MSCI AC Europe index, 1 January to 31 December 2019
^^Source: Investment Association, calendar year 2019
^^^Source: FE Analytics, 10 February 2020
^^^^Source: MSCI, MSCI World Index (USD) constituents, 31 January 2020