From equity income to property to commodities: Our round up of this year’s ISA ideas from investment advisers and fund selectors

25th March 2014

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Investment journalist Cherry Reynard has been writing about the various mutual fund sectors, summarising what they do, how they have performed and asking investment advisers, fund selectors and multi-managers for their recommendations. We bring you a summary of those recommendations and their comments below.

Government bonds

Gavin Haynes, investment director, Whitechurch Securities

“Funds in the UK Gilt sector can provide access to a well diversified portfolio of gilts with differing maturities that can be managed according to which are more desirable in the prevailing climate. Management fees need to be looked at closely in a gilt fund because of the relatively low risk profile, return expectations are going to be low so high charges can have a marked effect upon the net returns.

“In the low interest rate environment gilts have rallied strongly over the past five years. Interest rates are the key determinant upon the attractiveness of gilts. Increasing interest rates will have a negative effect in making their coupons less attractive relative to cash based investments. For our fixed interest exposure, we continue to focus on corporate debt as we see more value in credit spreads over government bond yields. However, at some stage I have no doubt that we will include gilts in our portfolios once again.”

Suggested funds

M&G Gilt and Fixed Interest fund

 

Gary Potter, joint head of multi-manager at F&C Investments

“We don’t currently have any developed market government bond exposure. I don’t think that the bond market is going to collapse – there are still concerns about the world and interest rates rises are still some way off – but I think the risk/reward for mainstream government bonds is still poor.”

Suggested funds                  

F&C Global Macro

High yield bonds

Gary Potter, joint head of multi-manager at F&C investments

“While this should be a good environment for high yield, it is largely in the price and investors are not getting much additional compensation for the risks they are taking. In high yield, investors need to ensure they are getting access to a team with good credit analysis skills. In this way it is difficult to ignore the strength of teams such as those at Kames, Neuberger Berman and Legg Mason.”

Suggested funds

Kames High Yield Bond fund

Neuberger Berman High Yield Bond fund

Legg Mason Western Asset Global High Yield

 

Gavin Haynes, investment director, Whitechurch Securities

“As the economic climate has improved investors have been more willing to invest in the riskier end of the bond market and get the higher yields that high yield corporate bond funds offer. Over five years the total return from the IMA Sterling High yield bond sector has been 110%. However, past performance is no guide to future returns and investors cannot expect to see the returns from high yield bond funds that they have enjoyed over the past five years.

“However, I still see pockets of value in high yield bond funds. Although this area of the bond market does carry greater credit risk, it has traditionally been less sensitive to rising interest rates compared to other areas of bond markets. Providing the global economic backdrop remains benign I expect defaults to be low and investors to be rewarded for taking on the extra credit risk.”

Suggested funds

Kames High Yield bond fund

Commodity funds

David Coombs, head of multi-asset, Rathbone Unit trust managers

“We like the mining sector. There is a strong self-help story there. It is a different story to the commodities one, where prices could go on falling.”

Suggested funds

BlackRock World Mining Trust

 

Marcus Brookes, head of multi-manager at Cazenove Capital

The mining sector has de-rated significantly over the past two years and is now very cheap. Management have changed and instead of excessive capital spending, have started to pay more cash to shareholders. We have around 1% of our Diversity fund in natural resources funds

Suggested funds

JPM Natural Resources

BlackRock Gold & General

European funds

James Calder, head of research, City Asset Management

“It could be argued that Europe is still a basket case, but we increased our weighting in the third quarter of last year. Things certainly aren’t getting any worse and some companies have emerged in better shape.”

Suggested funds

JPM Europe ex UK Dynamic

Ignis European Smaller Companies

 

Darius McDermott, managing director, Chelsea Financial Services

“There is low to negative GDP growth in the area as a whole. It is still a cheap developed equity market, but not as cheap as it was. Nevertheless, there are some world class companies in Europe, which produce products and services for parts of the world with stronger economic growth.”

Suggested funds

Jupiter European

Blackrock Continental Europe

Emerging markets

Rob Burdett, joint head of multi-manager at F&C Investments

“It looks very cheap now, in terms of P/E ratio, relative to developed markets, and relative to the history of emerging markets. Investors just have to lock it away and not look at it.”

Suggested funds

Hermes Global Emerging Markets

JPM Emerging Markets

 

Gavin Haynes, investment director, Whitechurch Securities

“Emerging markets covers such a wide spectrum of different countries at different stages of development and investors should not tar them all with the same brush. We have already seen emerging markets underperform and currency weakness, so some bad news is priced into markets.”

Suggested funds

JPM Emerging Market Income

Threadneedle Global Emerging Markets

 

Sterling corporate bond funds

Jason Hollands, Managing Director – Business Development & Communications, Bestinvest

“Bond markets face further volatility as interest rate expectations change and the prop of central bank asset purchases is slowly withdrawn. We are therefore cautious on fixed income and prefer strategic bond funds that are running with short-duration.

Our preference would strongly be to hold strategic bond funds rather than investment grade funds. Our top picks include L&G Dynamic Bond and TwentyFour Dynamic Bond.

“But if investors really do want to box themselves in to an investment grade fund, our choice is Invesco Perpetual Corporate Bond managed by Paul Causer and Paul Read. The fund invests primarily in sterling denominated, investment grade, corporate bonds and may also include some exposure to high yield bonds and non-sterling issues to increase diversification and improve overall returns. Historically where their convictions are high, the managers have been prepared to aggressively manage the interest rate sensitivity and the credit exposure of the fund.”

Suggested fund (with reservations about the sector)

Invesco Perpetual Corporate Bond fund

 

Patrick Connolly, financial planner, Chase de Vere

“We hold investment grade corporate bonds in client portfolios as they can provide steady income and some protection in an investment portfolio from stock market falls. However, we are concerned that many bonds look expensive and so prefer to get exposure through strategic bond funds where the manager has the flexibility to hopefully avoid the worst of any fallout across the fixed interest spectrum. The investment grade bond funds we recommend are the Fidelity Moneybuilder Income, Rathbone Ethical Bond, but we prefer strategic bond funds such as Henderson Strategic Bond or Jupiter Strategic B

Suggested funds (with reservations about the sector)

Fidelity Moneybuilder Income,

Rathbone Ethical Bond

 

Commercial property

Jason Hollands, Managing Director – Business Development & Communications, Bestinvest

“Property is back on the radar of investors again, as capital values have recovered in line with economy since last summer. UK commercial property returns are expected to be in the 10-12% range this year but lower as we move into 2015 when rate rises are anticipated, impacting re-financings.  That makes us overall neutral on the asset class.

“While normally we prefer closed end structures for illiquid assets like physical property, the leading trusts are trading at hefty premium to NAV, reflecting strong demand for income generating investments. For example: F&C Commercial Property Trust is trading at +15% premium, Schroder Real Estate Investment Trust a +15% premium and the less London/SE orientated UK Commercial Property Trust a 10% premium.

“Our favoured open ended fund is Henderson UK Property, yielding 3.9%. The portfolio consists of 59 quality properties, negligible voids and long leases. Around three-quarters of the portfolio is invested in the South East. It also has an above average allocation to higher quality tenants. It has around 20% in cash which gives it flexibility to invest quickly and to meet redemption requests, but could also be a drag on performance and dividends.”

Suggested fund

Henderson UK property

 

Patrick Connolly, financial planner, Chase de Vere

“Commercial property can provide consistent long-term returns and can act as a good diversifier in a portfolio, providing some protection from stock market falls. This means that most investors should look at holding property in their portfolios.

“It is important to understand where a property fund invests. Some invest mainly in the shares of property related companies and don’t buy any actual buildings where as others will invest predominantly in real ‘bricks and mortar’ properties. We only recommend commercial property funds which invest in ‘bricks and mortar’ property, as these have far less correlation to the stock market and are less volatile than investing in property shares.

Suggested funds:

Ignis UK Property,

L&G UK Property Trust

 

Absolute targeted return funds

Gavin Haynes, investment director, Whitechurch Securities

“There are now 70 funds in the Targeted Absolute Return sector, but the disparity of funds within this sector makes it very hard to compare performance. There are significant differences in risk/reward profile of absolute return funds. When looking at this sector it is important to analyse at each fund on its own merits and have a good understanding where the funds will invest and what strategies will be employed.

“Stand out funds in the sector include the Standard Life GARS fund which follows a multi-asset approach and has been exceptionally successful in grinding out returns across market cycles. Such has been the popularity of this fund, it is now £20 billion in size. Blackrock European Absolute Alpha is another fund that has produced solid, steady returns. This is a European equity focused strategy that has a relatively low risk profile, taking a market neutral approach.”

Suggested fund

BlackRock European Absolute Alpha

 

David Coombs, head of multi-asset investments at Rathbone Unit Trust Management

“This is very good environment for long/short equity funds and we have been adding money to this type of strategy recently. At the moment we hold the Henderson UK Absolute Return fund, managed by Ben Wallace, but we are working on finding more funds in this area”.

Suggested fund

Henderson UK Absolute Return fund

 

Global funds

Damien Fahy, head of research, FundExpert.co.uk

“This is always an interesting sector offering a mix of different investment themes. Although sector returns have been strong over the last 6 months, their US bias in particular has served them well; given the US stock market’s strong returns in 2013 (the average Global fund has around a 40% exposure to US stocks).

“We like Standard Life Global Smaller Companies fund. The fund was launched in January 2012 and uses same tight quant-based investment process successfully employed by the manager in its successful stablemate, the UK Smaller Companies fund. While we ordinarily wouldn’t recommend a relatively new fund, the fund’s performance in 2013 (up 37.67%) indicates that the transition to a global mandate is going well.”

Suggested fund

Standard Life Global Smaller Companies fund

 

Patrick Connolly, financial planner, Chase de Vere

“The Global sector includes a wide range of funds that can have different strategies and objectives. The sector includes funds which will take big asset allocation bets and others that don’t, those that have some exposure in the UK and those that don’t and a splattering of specialist and ethical funds. This can cause confusion and makes it really important to fully understand how individual funds work and not to necessarily compare funds with others in the sector or with the sector as a whole. The major benefit of this sector is that investors can achieve a good level of diversification in global stock markets with a relatively small investment.”

Suggested funds

Aberdeen World Equity,

Threadneedle Global Select

US Funds

James Calder, head of research, City Asset Management

“We believe the US markets may have a little further to go. The main things will be earnings, but if they don’t come through in the US, they won’t come through anywhere else. We continue to be pleasantly surprised by the strength of GDP growth figures.”

Suggested funds

CF Miton US Opportunities

Aviva US Equity Income

 

Darius McDermott, managing director, Chelsea Financial Services

“The US has good growth but current stock market valuations require companies to sustain strong earnings growth. Nevertheless, we think the market will stay strong this year.

Suggested funds

Framlington American Growth

Miton US Opportunities

 

Japan

Rob Burdett, joint head of multi-manager at F&C Investments

“We are overweight in Japan and have been for some time. It was been one of the best markets in 2013, particularly if you hedged the currency. Also, unlike a lot of other markets, share price growth in 2013 was driven by an improvement in company earnings, rather than an expansion in valuations.”

Suggested funds

Coupland Cardiff Japan Alpha fund

 

Gavin Haynes, investment director, Whitechurch Securities

“Japan has had a difficult start to 2014 after an exceptional year last year. Markets have rallied strongly on the prospect of reform, but now investors want proof of strong and improving profits from Japanese companies.”

Suggested funds

Jupiter Japan Income

Neptune Japan Opportunitie

 

Equity Income

Tim Cockerill, head of research at Rowan Dartington

“Equity Income suits income seekers, but dividends also give an underlying support to share prices. Another key benefit is that the rate of growth in income often exceeds inflation, so it is a good source of growing income.”

Suggested funds

Invesco Perpetual UK Strategic Income

Threadneedle UK Equity Alpha

JO Hambro UK Equity Income

Artemis Income

 

Patrick Connolly, financial planner, Chase de Vere

“The UK economy seems to be on the road to recovery and this is positive for the stock market, although it is important to recognise that overseas sales make up about 70% of the revenue of FTSE-100 companies, so what is happening elsewhere in the world is also hugely important.”

Suggested funds

Threadneedle UK Equity Income

Rathbone Income

Artemis Income

 

UK Growth

Chris Sexton, investment director, Saunderson House

“We are leaning towards growth funds this year, believing that equities are neither cheap nor expensive, but fairly valued. That said, smaller capitalisation companies did well last year and may not perform as well this year.”

Suggested funds

Schroder Recovery

Fidelity Special Values

GVA UK Focus

BlackRock UK Special Situations

 

Patrick Connolly, financial planner, Chase de Vere

While we are positive about the outlook for UK equities, it should be remembered that the market has made strong gains over the past 18 months with relatively modest earnings growth. We need to see improved earnings in 2014 if stock markets are going to rise further in the short term.

Suggested funds

BlackRock UK Special Situations

Investec UK Special Situations

M&G Recovery

 

 

 

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