Which global fund will you choose this ISA season?

Sam Slator 02/03/2023 in Multi-Asset

2023 has, so far, started more positively than 2022, especially when it comes to stock and bond markets. The FTSE 100 has even achieved a new all-time-high. But can the good times continue? And where should investors be looking to allocate money this ISA season?

Earlier this week, we co-hosted one of our popular ‘speed-dating events’ where we invited six financial journalists to meet six global fund managers. While the journalists concentrated on getting their investment scoops, we took the opportunity to ask some questions of our own.

Each manager that attended the event invests in companies from all over the world, but each has a very different focus. We asked them what the biggest threat and opportunity is to their asset class this year, and why investors should consider their fund this ISA season.

The managers were:

Chris Ford, Sanlam Global Artificial Intelligence

Graeme Baker, Ninety One Global Environment

Jeremy Gleeson, AXA Framlington Global Technology

Peter Ewins, The Global Smaller Companies Investment Trust Plc

Mick Dillon, Brown Advisory Global Leaders

Sam Witherow, JPM Global Equity Income

Here’s what they had to say.

What’s the biggest threat to your asset class this year?

Chris: The fallout from ChatGPT! It made for eye-catching headlines but it’s not yet in a true workable format in my view – there are still biases and it needs to be used with care  – it needs to evolve before it is commercially viable. At the moment, most of the publicity has been around people trying to do bad things with it. The more mundane areas of AI are far more exciting, if you think about the long term potential. In 2025 for example – just two years from now – we will create more data in a single year than we will have done in the entire history of humanity up to the point we launched the fund in 2017.

Graeme: Last year, the war and issues over security of energy supplies meant there was the potential for short-term acceleration of climate change – priorities were simply elsewhere. But when you look closely, renewable energy has not seen the same level of price rises as hydrocarbon, so that’s a positive. This year, the increased cost of capital is a threat – and how it impacts utilities – as well as inflationary pressures and the availability of some components. We think we are through the worst of it though.

Jeremy: If the economy continues to struggle, it’ll be hard because large parts of the technology sector are still classified as discretionary spending. Corporate spending might not get cancelled completely but it could be deferred because IT budgets tend to get kicked down the road when times are tough. It’s the same for consumers – you might put off buying a new computer until your finances are more sound.

Mick: That interest rates keep rising – but that’s a threat for every asset class. The only way to offset this really, is with high gross margins. Say gross margins are 80% and costs increase 10%, the price only has to rise 2% to keep pace. If it’s the other way around, they have to rise 8% to past though costs. It doesn’t matter how good pricing power is if margins are squeezed.

Peter: Inflation and interest rates. We’ve been pleasantly surprised by how well the UK and European economies have been getting through. But we need interest rates to peak. Markets thought that had happened in January, but the last few weeks have seen data hot up again.

Sam: Dividend cuts. We’re starting this year on a pretty good footing. Dividend payouts are at 25 year lows. Usually companies pay out between 35%-50% of earnings, but it’s around 36% today following the Covid cuts, so we go into a potentially recessionary period with a buffer. Profits can fall a lot more before dividends get cut. Earnings have expanded since Covid, but dividends not so much.

What’s the biggest opportunity for your asset class this year?

Chris: All the mundane things! For example, think about the people who currently work on spreadsheets – they open them, update them, copy and paste information, save it and close it. This happens millions of times every day. This could be automated with AI and the changes have hardly even begun. And jobs won’t be lost to robots – they will just change, like they do anyway. When I was growing up in the ’70s and ’80s, mining was still an occupation in the UK, for example. It’s a myth that  humans won’t be able to find jobs in the future – AI does a lot of things well, but it can’t empathise or be critical.

Graeme: Structural growth opportunities for decarbonisation. The growth outlook for solar power, electric vehicles (EVs), all sorts of areas, is a structural trend. EV sales in China are particularly strong – they were 30% of car sales last year and I think we’ve reached a tipping point for acceleration. In India, 50% of first time car buyers are buying electric. The Inflation Reduction Act in the US will also help, and I think Europe is likely to respond too.

Jeremy: If the central banks engineer a decrease in inflation and manage to allow a soft landing, it’ll be good for the sector. If we take a step back, the challenges we’ve seen in technology in 2022 and 2023 have been more to do with the economic cycle and the long tail effect of Covid making it difficult for year-on-year growth comparisons – fundamentals have not unravelled. If we get more confidence in the outlook, inflation under control, and see interest rate hikes have done their job, tech could be a good place to be.

Mick: The opportunities presented by market wobbles. Usually our fund has very low turnover because we take such a long-term view with our holdings, but when markets experience moments of panic, more opportunities present themselves and in March 2020, for example, we invested in three new companies in two weeks. Last year we added five new companies – two in one day. That’s never happened before.

Peter: If we can take advantage of sold-off stocks. A number of companies look undervalued now. We took advantage of some of these opportunities last year in the energy space, for example (small cap producers and services) and we’d look to do the same again. We’ve been looking at the defence and infrastructure areas where structural tailwinds would be positive in the next few years.

Sam: Relative to broader equities, a prolonged period of higher inflation and central bank responses is positive for equity income. The popularity of growth companies was a headwind for some years, but this period has shaken the tree and we are seeing relatively low valuations and high yielding equities converging a bit.

What is your biggest conviction holding and why?

Chris: Invidia. Everything that happens in the AI world happens with their chips. You don’t have to worry about whose AI will work best, as every company will use Invidia. The share price is up, so now may not be the best time to invest, but it is interesting.

Graeme: We only have 25 stocks in the portfolio, so they are all high conviction! But one I’d highlight, is Wuxi Lead Intelligent Equipment, a battery equipment manufacturer in China. It underperformed last year over concerns about EV demand and the reduction of a grant (subsidies were reduced to zero). So the stock price fell but the fundamentals are strong. We’ve topped up on it at better valuations.

Jeremy: Palo Alto Networks. It’s a cyber security firm and one of the largest. Security could be one of the biggest areas of spend in 2023 – and one of the few projects that wouldn’t get cut if the economy worsens. The bad guys don’t stop trying to steal your data in a recession! This firm has gone successfully from on-premises firewalls to being cloud-based, and its customers are some of the largest enterprises in the world.

Mick: Unilever is one of our biggest active positions. It’s got a new business structure with five divisions and has had some internal capital redeployment. There’s now the potential for each division to unlock better margins and with more of a focus, they can grow.

Sam: We don’t have any big sector bets but below the surface we like resilient pricing power – not consumer staples but idiosyncratic opportunities, like stock and futures exchanges which are unique businesses with natural monopolies. We also like some industrial technology businesses in areas like energy transition, and global super brands.

Why should an investor consider your fund this ISA season?

Jeremy: I’ve always said this is a fund for long-term investors. The tech sector has been beaten up in recent months and valuations are now back to levels not seen since pre-Covid. The sector is full of companies with stronger balance sheets, proven business models and if you’ve got that long-term time horizon, now might be the time to invest.

Mick: There are strong correlations between sport and investing. You have a game play you follow, you need to be resilient through tough patches, you have different phases of play, and you need a coach. We work with a coach – someone who can help us continually become better investors. We got the idea from the Sky Sports cycling team and have used a coach for a number of years now.

Peter: We give investors exposure to smaller companies in a lower-risk way. They get global coverage with a low fee structure and a long-term track record to look back on. We have a small but growing dividend that has been increased every year for the past 53 years and ultimately, I think the Trust has a part to play in a wider portfolio.

Sam: I think we’ve proved that we can deliver performance in a wide range of environments. What’s more, we’ve tended to be able to give 100% of market upside and just 80% of market downside, so investors aren’t ever missing out. We’re not growth or value orientated either, so it makes a good core fund.

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