28th September 2015
Tom Stevenson, investment director, at Fidelity Worldwide Investment examines the present market backdrop and highlights five funds investors might want to add to their portfolio…
Janet Yellen’s caution about pulling the interest rate trigger is the latest sign that the world is stuck in a low-growth rut. It’s what former US Treasury Secretary Larry Summers has dubbed “secular stagnation”. We think dealing with this environment will dominate investment thinking for the foreseeable future.
Economists explain this stagnant world as a surplus of savings over investment. In layman’s terms it means there is too much money chasing too few opportunities.
Not all the reasons for this mismatch are bad – more middle-aged people are saving for their retirements, for example, and new technology making companies more productive and needing less capital investment.
But good or bad, the main implication of secular stagnation is that interest rates will stay lower for longer. And that means that savers and investors face an uphill battle to find investment opportunities that can provide them with income, growth or preferably both.
In this environment, we believe that high-quality companies that can offer robust, predictable and sustainable earnings will trade at a premium.
The few shares that can demonstrate these kinds of quality characteristics will be chased down by income- and growth-seeking investors. In similar periods in the past, these kinds of company have risen to extreme valuations.
This means that active investment strategies that can sort the wheat from the chaff are likely to be more successful than passive index-trackers that simply buy all the companies in a market, good and bad.
So where can investors find these kinds of quality companies? Five managers on Fidelity’s Select List who focus on investing in the best include the following:
1. Lindsell Train UK Equity: Nick Train, manager of the Lindsell Train UK Equity Fund, describes himself as a “one trick pony”. He looks for undervalued, cash-generative UK companies which are leading franchises – and, like his investment hero Warren Buffett, he then holds them for the long term. It’s a concentrated fund and it doesn’t change much – to make the cut, a company has to offer something “truly unique”, says Train.
2. Threadneedle European Select: Over in Europe, David Dudding, who runs Threadneedle’s European Select Fund, invests in large global companies characterised by strong growth and above-average returns on capital employed. Like Nick Train’s fund, this is a fairly concentrated fund with about half of the assets invested in the top ten stocks. Dudding’s justification for his approach is simple: “it means we know the companies we hold much better.”
3. Old Mutual North American Equity: We believe that developed markets, and particularly the US, will be the best hunting-ground for quality companies, especially for those that can demonstrate a high degree of innovation. Ian Heslop, manager of Old Mutual’s North American Equity Fund, takes a more quantitative approach than the other managers here but the proof of the pudding is in the tasting – he’s generated a strong five year track record.
4. Fidelity Emerging Markets: Emerging markets is the ultimate stock-picker’s investment class, especially when there are plenty of headwinds in the developing world. Nick Price, who runs the Fidelity Emerging Markets Fund, has a focused quality approach: “we invest in well-managed companies with under-leveraged balance sheets and structural competitive advantages that enable them to generate superior and sustainable returns on assets.”
5. Rathbone Global Opportunities: Finally, in a world of scarcity – of both income and growth – there seems little point in limiting your investment universe. One of the best global funds on the Select List is James Thomson’s Rathbone Global Opportunities. He is a dedicated stock-picker, with a strong growth bias and he invests in companies with earnings expected to grow faster than the market average. Inevitably there is sometimes a price to pay for this: “unblemished businesses never come cheap”, Thomson says.