Marina Gerner details the funds and trusts four fund buyers have been buying and selling.
Russia’s invasion of Ukraine continues to drive uncertainty across global stock markets. However, the stock market continues to present pockets of opportunity, with the FTSE 100 up 1.6% since the start of the year.
Every quarter, our multi-manager panel participants 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.
This quarter, the four fund managers have been diversifying their portfolios through investments in sectors including UK equity, gold and healthcare. A new manager has joined the panel: Dean Cheeseman, who is a fund manager in the multi-asset team at Janus Henderson. He has replaced Liontrust’s John Husselbee.
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Peter Hewitt, fund manager of BMO Managed Portfolio Trust
Reason to be bullish: despite everything that has taken place certain economies, especially the US and UK are still recovering strongly from the pandemic. Although growth is slowing, it is from higher levels and for this year will still be positive after taking account of inflation.
Reason to be bearish: inflation has rapidly risen to levels not seen for decades and will remain at high levels for some time. Central banks notably in the US and UK have begun to raise interest rates, which may need to go much higher than markets are anticipating, to combat inflation. The risk of overshoot and of recession in 2023-24 has risen materially.
Bought: Hewitt recently bought Temple Bar (LSE:TMPL). This long-established trust has been under new management since late 2020. “RWC Partners employ a large-cap value investment style, which is very relevant for current market conditions,” says Hewitt. This investment approach guides the managers towards large cyclical companies in out-of-favour sectors. The portfolio is heavily oriented towards FTSE 100 constituents. Major holdings are BP (LSE:BP.), Shell (LSE:SHEL), Marks & Spencer (LSE:MKS), Anglo American (LSE:AAL) and NatWest (LSE:NWG) He notes that the historic p/e of the portfolio is 10x with the forward p/e falling to just 8x. Temple Bar’s dividend was cut in 2020, but is now on a rising trend with the recent interim dividend increased by 5%. The trust’s yield is 3.5%
Increased: Hewitt has increased his position in Law Debenture (LSE:LWDB). “This trust has been a long-term holding and continues to deliver strong capital and income returns,” he says, adding that it has a highly differentiated and unique business model with a significant portion of the trust’s income coming from its Independent Professional Services business. “This allows the equity portfolio greater flexibility in stock selection and underpins the dividend of the trust,” says Hewitt.
The managers – James Henderson and Laura Foll – employ a value style with a significant weighting in industrials, financials and oils. They have a decent exposure to smaller and medium-sized companies, and around 18% overseas. The trust has a very strong long-term performance record and increased the dividend 5% in 2021. It current yield is 3.6%.
Reduced: “Early in the new year the decision was taken to top-slice certain investment companies with substantial exposure to the technology/high-growth sector,” says Hewitt. With inflation at its highest in decades in both the US and the UK, it didn’t come as a surprise that the Federal Reserve and the Bank of England raised interest rates. Both have made clear in forward guidance that more increases should be anticipated.
“This creates a headwind for highly valued companies as it has the effect of compressing their valuations,” says Hewitt. “It is likely this trend will run for a while yet. Longer-term attractions of investment companies such as Scottish Mortgage (LSE:SMT), Polar Capital Technology (LSE:PCT) or Edinburgh Worldwide (LSE:EWI) remain, however locking in some profits and retaining a smaller holding seems a sensible move.”
David Hambidge, investment director of multi-asset at Premier Miton Investors
Reason to be bullish: investor sentiment has declined since the start of the year, which is often a sign that stock markets are likely to rise rather than fall.
Reason to be bearish: global economic growth will not be as strong as previously thought as a result of the war in Ukraine, significant Covid restrictions in China and high inflation in many parts of the world.
Bought: “We recently purchased Fidelity Asian Dividend for our income portfolios,” says Hambidge. This fund seeks a good level of income together with the potential for capital growth given the wealth of opportunities in the region. “The dividend history of the fund is very solid, with the expectation that this will grow over time, given the positive dividend backdrop in Asia.” Hambidge argues that the experience of the manager, Jochen Breuer, along with the wider global equity income team at Fidelity and the significant research analyst resources available to them provide additional comfort. The manager has a focus on companies with a resilient dividend stream, which are supported by strong balance sheets and predictable cash flow.
Increased: having previously reduced their position, Hambidge and his team recently added to their holding in MI TwentyFour AM Dynamic Bond following one of the worst periods for bonds in decades. “We have been long-term holders of this fund and see the recent weakness as a good opportunity to pick up additional yield from a broad range of bonds and fixed-income assets without taking on too much interest rate risk,” he says.
Reduced: he recently reduced his holding in Atrato Onsite Energy (LSE:ROOF). “Having only purchased this London-listed holding late last year, it may seem a surprise that we are now selling,” he notes. “However, to be clear, we intend to remain long-term holders although have topped-sliced our position with the share price having had a very strong run since launch.”
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Vincent Ropers, co-manager of TB Wise Multi-Asset Growth and TB Wise Multi-Asset Income
Reason to be bullish: although uncertainty is undeniably heightened, fundamentals remain strong and global economies should be able to withstand a certain amount of damage without falling into a sustained recession.
Reason to be bearish: the macroeconomic picture has been further blurred by the invasion of Ukraine, raising the probability of stagflation. Central banks were already facing a difficult balancing act of keeping inflation under control without putting a brake on the recovery, but the conflict makes it even harder with inflation reaching multi-decade highs and growth in jeopardy.
Bought: Ropers initiated a position in the Worldwide Healthcare (LSE:WWH), which increases his allocation to the healthcare and biotechnology sectors. “Those appear to have been unjustifiably punished post the Covid rebound and look particularly attractive to us at present, both from an absolute and relative valuation standpoint,” he says. The structural growth drivers – an ageing population, new technologies, increasing number of new drug approvals – show no signs of abating either. The trust trades at a wide discount close to 10%, which Ropers views as a bargain price.
Increased: at the start of the year, he increased his position in the BlackRock World Mining Trust (LSE:BRWM) when it was trading around 7% discount. “Global supply chains' tightness and an increasing move towards renewables were already themes before the Russia/Ukraine war but they have gained further momentum since then,” he says. “The mining sector will undeniably be a part of the green transition and, in the short term, allows to hedge inflation in our portfolio.”
But he adds that it isn’t a pure hedge. Instead, Ropers points out that it works only under the right set of circumstances. “Mining companies offer strong balance sheets and high cash flows, increasingly distributed to shareholders: this, on its own, represents an attractive characteristic,” he says.
Reduced: Ropers took some profits by trimming his position in Oakley Capital Investments (LSE:OCI), a direct private equity investment trust, during the quarter. The managers delivered strong results in 2021, with net asset value growth of 35%. “Most pleasingly, the vast majority of this return came from underlying growth and not from improvement in valuations, which supports our conviction in the team’s ability to source, manage and exit deals successfully. It remains our largest private equity trust holding.” he says.
Dean Cheeseman, portfolio manager on the multi-asset team at Janus Henderson
Reason to be bullish: with all the negativity in markets for a multitude of reasons, it’s easy to be bearish! However, recent market weakness has resulted in equity valuations looking less stretched and credit spreads less tight than at the start of the year. Europe, largely due to proximity, has been the most adversely hit by the war in Ukraine and should be the primary beneficiary when a positive resolution is announced.
Reasons to be bearish: mass complacency to central bank-hawkishness to tackle inflation, which has now been proven to be non-transitory (interest rates are now rising in the UK and US, and forecast to be at such an accelerated level that it will negatively impact future growth); the conflict in Ukraine (negative impact to global growth rates measured by GDP and complications to supply chains that were already stressed); and various concerns about China (regulatory intervention, contagion from Evergrande causing a wider property slump, and risk of sanctions for failing to denounce Russia in the Ukraine conflict).
Bought: Cheeseman recently purchased iShares Physical Gold ETC (LSE:IGLN) to bring greater diversification and ‘ballast’ into the lower-risk portfolios. Gold is regarded as a store of value at times of market stress and the combination of the Ukrainian conflict and spiralling inflation has caused elevated volatility across both equities and bonds. “With real yields on sovereign debt negative (calculated as nominal yields minus the inflation rate), gold acts as an inflation hedge,” he says. While central banks remain ‘behind the curve’, or slow to respond to rising inflation, and general market uncertainty caused by the war in the Ukraine and recessionary fears, Cheeseman argues that gold will remain attractive.
Increased: the position in First Sentier Japan Equity was recently increased on weakness after tech and industrials (the fund’s two largest sector exposures) sold off. “The broader market weakness has enabled the management team to rotate the portfolio into a number of stocks on their watchlist at attractive valuations,” he says. The fund’s longer-term track record remains very compelling, and the historic outperformance has been primarily driven by the success of the stock selection, which Cheeseman expects to be the primary return driver going forward.
Sold: AXA US Short Duration High Yield was sold in the first quarter of 2022 having performed strongly on a relative basis as broader markets sold-off. “The short duration nature of the strategy gives a lower-risk exposure to an asset class that can otherwise be very economically sensitive,” he says.
Cheeseman remains supportive of the high yield team at AXA, but felt that there were opportunities elsewhere to allocate that capital.
The four multi-manager panellists
Peter Hewitt is a director and investment manager with the BMO global equities team, and fund manager of the BMO Managed Portfolio Trust, where he specialises in investment trusts.
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.
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
Dean Cheeseman is a portfolio manager on the multi-asset team at Janus Henderson Investors. Prior to joining the firm in 2017, he was a portfolio manager and member of the asset allocation committee from 2011 at Mercer. Before that, he was with F&C Asset Management from 2007 to 2010, finishing his tenure as head of fund of funds.
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