Four fund buyers share their most recent buys and sells, and offer their outlook for the months ahead.
Inflation, rising interest rates, and the collapse of Silicon Valley Bank and Credit Suisse (SIX:CSGN), continue to weigh on global economies. And yet, there are reasons to look ahead. As always, professional fund pickers find new ways to positions themselves in a challenging economic environment.
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.
David Hambidge, investment director of multi-asset at Premier Miton Investors
Reason to be bullish: with inflation starting to fall in many parts of the world – and yes, the UK will join in soon as well – it is likely that the current round of interest rate hikes is coming to an end.
Reason to be bearish: while interest rates are probably nearing their peak in the current cycle, March’s banking crisis will result in tighter lending standards and a higher cost of capital for both consumers and companies.
Bought: Hambidge has added MI TwentyFour AM Monument Bond fund to his multi-manager income portfolios in early February, attracted by the increasing level of income that the fund is producing as well as the quality of the underlying assets.
“The objective of the fund is to produce an attractive level of income compared with bank deposits while maintaining a strong focus on capital presentation and this has certainly been achieved over the last 10-plus years,” says Hambidge.
To achieve its objective, the managers invest in a diversified portfolio of high-quality European and Australian asset-backed securities with the highest geographical weighting in the UK at just under half of the fund.
Increased: he increased the position in Primary Health Properties (LSE:PHP). “It has been a tough nine months for the UK commercial property market with valuations falling as interest rates have increased,” he says. That’s why he has been increasing his exposure to areas where he feels the underlying assets are high-quality and continue to offer an attractive level of income. Primary Health Properties fits the bill, with an eye-catching yield of 6.2%.
Reduced: Hambidge has decided to trim the TwentyFour Income (LSE:TFIF) holding. “While the dividend outlook for this closed-ended bond fund looks promising, we have decided to take some profits,” he says. However, he adds that the share price has held up exceptionally well in a period that has been tricky for credit markets.
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Tihana Ibrahimpasic, portfolio manager, multi-asset team at Janus Henderson Investors
Reason to be bullish: evidence of stress in the financial sector is a game-changer for monetary policy and a clear sign that this frantic US rate-hiking cycle is more or less over. This is the stage of the economic cycle when interest rate hikes begin to gain traction, slowing growth and inevitably causing financial accidents. This is rarely the best time in the economic cycle for risk-taking.
Reason to be bearish: although there are reasons to prioritise defensiveness, it’s good to be wary of getting too gloomy. Across the multi-asset space, asset valuations are now at levels from which investors have normally enjoyed respectable medium-term investment returns. Market volatility is likely to remain a source of frequent discomfort for investors in the months ahead, but it can also be a source of great opportunity.
Bought: in the first quarter, Ibrahimpasic deployed capital in the newly launched Janus Henderson Emerging Markets Debt Hard Currency. “This is a team who recently joined the firm from Danske Invest, bringing a wealth of experience in managing client money,” she says. She has been impressed with the depth of their quantitative framework.
Increased: recently added to her position in the AXA Global Strategic Bond. It is a fund that uses a flexible approach to navigate between key assets such as government debt, investment grade and high-yield credit, as well as emerging market debt. “We recently increased our exposure, rotating from some higher risk fixed income assets,” she says.
Sold: Ibrahimpasic exited a long-standing position in Principal Finisterre Unconstrained Emerging Markets Fixed Income. She said: “Its flexible, absolute return approach in selecting emerging debt paid off particularly well during the 2022 sell-off, protecting client capital in a market downturn and outperforming many of the peer strategies.” However, the fund has been sold to take advantage of the aforementioned Janus Henderson Emerging Markets Debt Hard Currency fund becoming available.
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Peter Hewitt, fund manager of CT Global Managed Portfolio Trust
Reason to be bullish: inflation in the US looks to have peaked with Europe not far behind, even the UK will have declining inflation in the second quarter. Interest rates, which looked like they may be “higher for longer” also appear to have either peaked or are one raise from being there. Although a move into recession is likely, markets look 12 months ahead and lower inflation and interest rates creates a better backdrop for investors.
Reason to be bearish: the recent failure of certain banks in the US and Europe will not lead to problems similar to those of 2008-09. Although it may result in much tighter lending criteria being applied by banks and fewer loans being made. This could result in a deeper recession than most consensus estimates.
Bought: UK smaller companies have been out of favour since the Brexit referendum of 2016, which makes them inexpensive. Hewitt has bought the Aberforth Smaller Companies (LSE:ASL), which has a market value of £1 billion and a well-defined and disciplined “value” investment approach.
“Higher inflation and interest rates and the prospect of a more cyclical economy over the next few years bodes well for this type of investment strategy,” he says. The current price earnings ratio for the portfolio is only 8x and 40% of its 79 holdings have net cash on the balance sheet. “So, in the event of a recession they should survive harder times.” The trust, which is on a 13% discount, could generate strong returns when smaller companies recover.
Increased: Hewitt increased his holding in Lowland (LSE:LWI). “It has a strong long-term record and after a period in the doldrums is beginning to experience better performance,” he says. The trust employs a “value” style of investment and is starting to trim its near 50% exposure to larger companies in the FTSE 100 redeploying the proceeds into medium and smaller sized companies.
Hewitt says Lowland’s fund managers – James Henderson and Laura Foll - are finding a series of undervalued opportunities with good prospects for growth. The portfolio is valued on a price earnings ratio of only 9x. With a dividend yield of 5% and trading on a 7% discount, Lowland is attractively valued at current levels, says Hewitt.
Sold: he disposed of Supermarket Income REIT (LSE:SUPR). Against a background of rising interest rates and higher bond yields, the valuations of its underlying investments have declined. The trust, as the name implies, invests in supermarket property – focusing on those that offer both online capabilities (home delivery and click and collect), as well as in-store shopping.
Hewitt is cautious on its prospects in the current macro environment. He says: “With little progress likely in the net asset value over the next couple of years, the shares could languish at a significant discount for some time.”
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Vincent Ropers, co-manager of TB Wise Multi-Asset Growth and TB Wise Multi-Asset Income
Reason to be bearish: as the first quarter progressed, inflation proved stickier than previously anticipated, forcing central banks to stay on the path of monetary tightening. Higher interest rates made their first mainstream victims in March in the banking sector. This has raised fears of future credit tightening, and recession.
Reason to be bullish: it is worth noting though that the fallen banks in question had idiosyncratic problems and the banking system is in much stronger state than in 2007-09 thanks to strong capitalisation. Consumers and corporates, despite repetitive negative headlines, also remain relatively healthy, which should help dampen any upcoming recession.
Bought: Ropers added a position in HICL Infrastructure (LSE:HICL) towards the end of the quarter. This is a large, liquid diversified fund with access to high-quality cash flows from critical companies with dominant market positions – across water, electricity, communication, transport, accommodation and hospitals. “Trading at a historically wide discount to NAV and an attractive yield, this looks like a good time to add the position in our portfolio given an outlook of defensive earnings and an element of inflation protection,” he says. Its discount is 5.5%, and dividend yield is 5.3%.
Increased: “As active managers, cash plays an integral part in our asset allocation arsenal,” says Ropers. In uncertain times, it is a means to protect capital and ensure his team can quickly take advantage of opportunities when they arise. Having started 2023 with around 2% in cash, he increased his cash level in February (after the strong start of the year) and then again in March (after the turmoil in the banking sector) to around 5.5%.
“Markets still need to come to grips with stickier inflation and increased recession risks, which will continue to create volatility,” he says.
While he still finds many opportunities across assets, the current circumstances require caution and he is comfortable with elevated levels of cash while the price discovery process plays out.
Trimmed: Ropers used the strong rebound in risk assets since October to take some profits, by trimming positions across the board in equities in February. An example was Fidelity China Special Situations (LSE:FCSS), which rallied close to 70% in three months. Later in the quarter, Ropers also trimmed his position in the Vontobel TwentyFour Strategic Income fund. “We have no concerns about the fundamentals in the portfolio and think it will be well placed for the months ahead,” he says.
But he adds that sentiment around bank debt might remain negative for the foreseeable future following the write down of Credit Suisse’s Additional Tier 1 debt to zero while shareholders received some compensation, as he says, “thus throwing away the long-established rulebook of hierarchy in corporate capital structure”.
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.
Peter Hewitt is fund manager of the CT Global Managed Portfolio Trust, where he specialises in investment trusts.
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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