The Bank of England has continued to hold interest rates, and while the UK economy has grown by 0.3% in November last year, according to the Office for National Statistics (ONS), the risk of a potential recession remains.
The FTSE 100 continues to be volatile, reacting to a recent uptick in inflation. Meanwhile, the S&P 500 has surged to a new high. As always, our professional fund pickers find ways to positions themselves in an ever-changing economic environment.
Every quarter, the fund managers on our multi-manager panel reveal their current bull and bear points. They discuss the new funds and investment trusts they have purchased, those they have increased their holdings in and the ones they have trimmed or sold.
Peter Hewitt, fund manager of CT Global Managed Portfolio Trust
Reason to be bullish: during Q4 2023 a turning point was reached on both inflation and interest rates. With the former trending lower, it is possible that interest rate cuts in developed economies could happen sooner than anticipated. This is a positive development for equity markets in 2024.
Reason to be bearish: there is still a risk that developed economies in the US, Europe and the UK could fall into recession. If this happens, then corporate earnings estimates are too high and would have to be cut which is bearish for financial markets.
Hewitt has bought the Mercantile (LSE:MRC), which is managed by Guy Anderson of JPMorgan, with a market value of over £1.6 billion. It focuses on the FTSE 250 index, specialising in UK medium-sized companies. While the past two years have been a painful period for investors fishing in this area, due to high levels of inflation and rising interest rates, Hewitt notes: “Over the long-term, this segment of the UK equity market has significantly outperformed.”
Performance is potentially on the turn with the mid-cap index experiencing a notable bounce over the last two months. The outlook for 2024 with the prospect of lower interest rates is more positive. Despite a recent recovery in the share price, the trust remains on a historically wide discount of 12% with a 3.5% dividend yield.
He increased his position in private equity investment trust Pantheon International (LSE:PIN), which he first purchased in Q4 2023. “The change in capital allocation towards further share buybacks remains in place after the successful tender offer and is a significant support to the share price,” says Hewitt, adding that there is every prospect the underlying net asset value (NAV) could have a decent year in 2024. The shares are on a historically attractive discount of 36%.
He disposed of BB Biotech AG Ord (SIX:BION), a Swiss investment company with a market capitalisation of more than £2 billion. The biotechnology sector has underperformed over recent years, with the Nasdaq Biotechnology Index being flat over the last one and three years, while the S&P Composite has risen 19% and 42% over the same time period.
“While the sector looks attractive, with many exciting new drug discoveries and trials, there are other investment companies within the sector better placed than BB Biotech to participate in a recovery,” says Hewitt.
He points out that in a sector among the riskiest in equity markets, BB Biotech has an unusually concentrated portfolio. The top five holdings account for nearly 60% of assets with the largest holding over 15%. “A better-balanced portfolio with more and smaller holdings would be preferred,” says Hewitt. The shares are the most expensive in the sector on a 1% premium.
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David Hambidge, co-head of multi-manager team at Premier Miton Investors
Reason to be bullish: although the market may have got ahead of itself in terms of the timing and magnitude of interest rate cuts this year, it seems likely that the Federal Reserve, European Central Bank and Bank of England will loosen monetary policy in 2024.
Reason to be bearish: geopolitics is never far from investors’ minds and the current situation in the Middle East needs careful monitoring, as does the ongoing war in Ukraine. The last thing the global economy needs right now is further supply chain disruption which may put upward pressure on inflation.
Hambidge has purchased the Invesco US Treasury Bond ETF GBP H Dis (LSE:TRGB) in early October. “We took advantage of further weakness in the US bond market to add a new position in US Treasuries,” he says.
The Invesco US Treasuries ETF tracks the Bloomberg US Treasuries total return index, an index of the US government bond market.
He has increased his position in the Fidelity Asian Dividend fund. Asian equities lagged other markets last year, mainly due to weakness in China and Hong Kong. However, Hambidge believes that the long-term outlook remains positive for Asian equities.
“We like the disciplined way the Fidelity fund is managed, and we benefit from an attractive dividend while waiting for a recovery in share prices,” he says.
Meanwhile, he decided to trim his position in the Montanaro UK Income fund. “It was a great end of the year for the UK and many other stock markets and in particular UK mid- and small-cap equities,” he says.
The performance of the Montanaro fund benefited from this and performance in Q4 2023 was particularly strong. “We have therefore taken some profits,” says Hambidge.
Vincent Ropers, co-manager of TB Wise Multi-Asset Growth and TB Wise Multi-Asset Income
Reason to be bullish: global economies continue to perform better than expected, showing great resilience while inflation is trending lower. Against all odds, a soft landing might prove to be a possibility and, with central banks close to pausing their interest rate hikes and having a sufficient buffer to start cuts if necessary, risk assets should be supported.
Reason to be bearish: a key lesson of the past few years is that we live in an environment prone to shocks and those are likely to remain a key feature in 2024. Inflation could start picking up again, geopolitical tensions abound (Ukraine, Middle East), China remains a wild card, and, with more than half of the world population heading to the polls this year, politics will have scope to disrupt economic trends.
“We did not add any new position to our funds in the last quarter of the year,” says Ropers. He explains that being already well diversified across sectors and regions, he resisted the temptation to add new positions. “With the macro-economic backdrop still uncertain and investors’ sentiment easily swayed by central bankers’ narrative from one month to the next, we believe that our best protection is to concentrate on positions we know well and have full confidence in,” he says.
Average discounts for investment trusts reached their highest level since the financial crisis of 2008 in October, as a sign of excess pessimism. Ropers continues: “Rather than adding new positions, we used this extreme negative sentiment early in the quarter to tilt our funds towards existing holdings presenting the most upside potential, be they in infrastructure, UK smaller companies, private equity or healthcare.”
Ropers has continued to increase his positions in healthcare via International Biotechnology Ord (LSE:IBT) and Worldwide Healthcare Ord (LSE:WWH). The sector continued to suffer from investors’ lack of interest until the broad equity markets rebound in November and December.
He argues that with supportive demographics trends, such as an ageing population in increasing need of care, innovation in drugs development accelerating quickly and increasing M&A activity (allowing large incumbents to replenish their drugs pipeline), healthcare has been an interesting area for a while.
“After months of derating, valuations are now offering yet another tailwind,” he says. Those two trusts, managed by teams of scientific experts and offering access to exciting biotechnology and pharmaceutical companies continue to trade at abnormally wide discounts and he therefore believes they present an appealing investment opportunity.
He trimmed his position in the AVI Global Trust Ord (LSE:AGT), which is his largest position, on the back of strong performance (+19% peak-to-trough during the quarter). The trust focuses on global opportunities where the team’s fundamental research can unearth mispricing. To do so, they narrow their investment universe down to holding companies, investment trusts and special situations (areas where market prices can be compared to tangible assets) and, once identified, will often take an activist approach to close the valuation gap.
Ropers notes that the trust benefited from positive idiosyncratic developments in their concentrated portfolio, as well as from the general recovery in investment trust discounts from record lows during Q4 (reducing the discount on both the AVI Global Trust itself and some of its underlying holdings). “This remains the largest position in our TB Wise Multi-Asset Growth fund, but our valuation discipline led us to book some of our profits after a strong quarter and year,” he says.
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Tihana Ibrahimpasic, portfolio manager, multi-asset team at Janus Henderson Investors
Reason to be bullish: a lot of the enthusiasm appears to be based on the increasingly dovish outlook for interest rates, with the Federal Reserve and the European Central Bank expected to start cutting rates in the second quarter. Inflation is expected to drop below 3% by then, further reducing the pressure on central banks to keep policy as restrictive as it is now.
Reason to be bearish: however, growth is expected to slow in 2024 with the US economy expected to expand by less than 1% and the eurozone by less than 0.5%. While the eurozone continues to show worrying signs, the US economy has remained relatively durable in the face of significant and rapid increases in interest rates. With markets already expecting a very dovish outcome, it is increasingly difficult to see where positive catalysts are likely to come from in the near term.
Ibrahimpasic has bought the iShares MSCI USA Minimum Volatility ESG ETF, as she looked to reduce the risk of her US exposure and take profits on growth stocks which have done particularly well throughout the year.
“The addition of the ETF gained positions in relatively cheap businesses operating in the multi-utilities, food products, and industrial distributers industries, among others,” she notes.
She has added to her holdings in Regnan Sustainable Water and Waste on the margin, a thematic diversifier in the portfolio with substantial exposure in industrials and utilities, and strong sustainability credentials.
While the long-term success of the strategy is underpinned by its thematic mandate, the strategy exposure to capital intensive businesses – such as water utilities and industrial machinery – makes it very sensitive to interest rate moves. “We topped up the position into weakness as interest rates peaked during the year,” says Ibrahimpasic.
She sold her remaining stake in the Bluefield Solar Income Fund (LSE:BSIF), as part of the decision to consolidate her position in the renewable energy space and fund the position in Renewables Infrastructure Grp (LSE:TRIG), an investment trust.
“The move allowed us to shift to an attractive position in the alternative space at a relatively lower valuation, as Renewables Infrastructure Group trust trades at a lower NAV discount than Bluefield Solar Income trust,” she says.
The four multi-manager panellists
David Hambidge is head of multi-asset investment at Premier Miton Investors. He helped set up the fund-of-funds operation in 1995 and is regarded as one of the UK’s most experienced multi-managers.
Tihana Ibrahimpasic is a portfolio manager on the multi-asset team at Janus Henderson Investors. Prior to taking on this role in 2021 she was a research analyst in the team from 2018.
Vincent Ropers is a portfolio manager at Wise Funds, responsible for multi-asset strategies, using value and fundamental investment styles. He is co-manager of TB Wise Multi-Asset Growth and TB Wise Multi-Asset Income.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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