Our panel of experts have been adding spice and diversification to their portfolios in sectors including music, healthcare and biotech.
While the UK economy has picked up, inflation is rising too, and the fuel crisis continues to unfold, leaving question marks about economic recovery as we approach the end of the year. Every quarter, our multi-manager panel participants reveal their current bull and bear points.
The panel 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.
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Peter Hewitt, fund manager of BMO Managed Portfolio Trust
Reason to be bullish: the strength of the recovery in corporate profits and earnings, significantly ahead of expectations, should continue into next year. It would be unusual to have a bear market in these circumstances with growth so strong.
Reason to be bearish: concerns over inflation have once again moved to the forefront of investors’ minds and they have begun to doubt the view of central banks that it will be transitory. Although rises in interest rates to combat inflation are still some way off, a tapering down of monetary stimulus is imminent and could cause volatility in equity markets.
Bought: Hewitt recently purchased Supermarket Income REIT (LSE:SUPR), which owns a portfolio of highly sought after omnichannel supermarkets that offer physical sales, online deliveries and click-and-collect services. Hewitt notes that “the last two methods are experiencing rapid growth”. The portfolio is diversified throughout the UK with Tesco (LSE:TSCO) (47%), Sainsbury's (LSE:SBRY) (27%), Morrisons (LSE:MRW)’s (10%) and Waitrose (8%) accounting for most of the portfolio.
“The vast majority of rents are index-linked so higher inflation is not a negative. There is prospect of capital growth also as yields in the sector are compressing causing values to rise. With a dividend yield of over 5% growing in line with inflation the shares are attractively valued,” he says.
Increased: he has increased his position in Fidelity Special Values (LSE:FSV). Hewitt says that the fund manager Alex Wright “has built a long-term record of strong outperformance through a contrarian style of stock picking”.
The fund has a bias towards smaller and medium-sized companies, which are benefiting from the re-opening of the economy. “The overall portfolio is valued less expensively than the market as a whole with superior growth characteristics,” he adds.
Sold: Hewitt sold Templeton Emerging Markets (LSE:TEM). He says that the performance from the largest trust within the emerging markets sector has turned down sharply over this year due to large holdings in certain Chinese internet companies, which have been negatively impacted by regulatory interventions from the Chinese government.
However, the long-term fundamentals for these companies appear good and it is difficult to predict the actions of the Chinese government. “For a large fund, the portfolio is unusually concentrated with the top four holdings accounting for over 40% of assets. This adds a level of volatility in already volatile markets,” he says. “Against this background [a decision was taken] to sell.”
David Hambidge, head of multi-asset investment at Premier Miton Investors
Reason to be bullish: it has been a buoyant year so far for mergers and acquisitions in the UK and we believe this will continue into 2022. This should help support UK equities and in particular smaller companies.
Reason to be bearish: supply chain issues are likely to have a negative impact on global growth at the same time as ultra-loose monetary conditions appear to be coming to an end.
Bought: Hambidge recently invested in Round Hill Music Royalty (LSE:RHM). This is a London-listed investment trust that has built a portfolio of music copyrights with a focus on classic, older copyrights with enduring appeal and proven steady earnings protected by copyright law. It targets a 4.5% dividend yield, as well as capital growth over the long term.
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He says: “The equity-like returns and lack of correlation to traditional financial markets makes this a useful diversifier and we believe the fund should be a beneficiary of the strong growth in music streaming.”
Increased: he increased his position in the care home provider Target Healthcare REIT (LSE:THRL), which invests in a diversified portfolio of quality care homes providing first-class care for its residents.
“With an ageing UK population and lack of quality care homes, this is another structural growth story that has provided investors with an attractive income and which we hope will increase over time,” says Hambidge.
Reduced: Hambidge recently sold Seraphim Space Investment Trust (LSE:SSIT) after having backed this listed fund at launch in July. It’s the world’s first listed space tech fund. With a main market London listing, this closed-end vehicle targets early stage growth companies operating in the field of space technology.
“While we intended to invest in this fund for the long term, the share price has surged on strong demand from index funds, so we have decided to bank our profits,” he says.
Vincent Ropers, co-manager of TB Wise Multi-Asset Growth and TB Wise Multi-Asset Income
Reason to be bullish: we remain happy that there are many areas of attractive value within global markets for active asset allocators. Investors need to be willing to look beyond broad indices though, but we think that volatility will present interesting opportunities to be taken advantage of.
Reason to be bearish: once again, sharp moves in bond yields are creating increased volatility across markets. The inflation risk is building up, from increased energy prices to tight supply chains, and central banks are hinting at liquidity withdrawals in the near term. One should expect continued nervousness among investors, at least until immediate inflation pressures abate.
Bought: Ropers created a new position with the CC Japan Income & Growth Trust (LSE:CCJI). “Japanese equities have lagged the recovery in other markets, mainly driven, in our mind, by investors’ apathy towards the country, despite strong fundamentals,” he says.
In September, Japan caught up with the US in terms of its vaccination programme, helping to reduce the Covid risk. He notes that even though he did not anticipate it, the departure of prime minister Yoshihide Suga seems to have acted as a strong catalyst for investors to consider the Japanese market again, in the hope that his replacement will be more popular and able to press on with market-friendly measures.
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Increased: Ropers added to some of his defensive growth names over the quarter, taking advantage of attractive discounts and weak performance “to give us some downside protection, while increasing our exposure to structural growth themes”, he says.
International Biotechnology Trust (LSE:IBT) was one such example of a trust exposed to the biotechnology sector directly exposed to ageing demographics trends. Another example is the Ecofin Global Utilities & Infrastructure (LSE:EGL) trust, which is well exposed to the decarbonisation theme by investing in global utilities companies, “but without paying the hefty premiums on display in the pure renewables sector”.
Trimmed: “With the easy gains for markets likely behind us, we were diligent in booking some profit in the summer, ahead of an expected rise in volatility,” he says. One area trimmed was UK Value equity names, such as JOHCM UK Equity Income fund and Aberforth Smaller Companies Trust (LSE:ASL), which have performed strongly over the past year.
“Value equities, particularly in the UK, remain our largest exposure and we still see upside in the sector, but this is an environment where one needs to be particularly disciplined in rotating one’s portfolio,” he says.
John Husselbee, head of multi-asset at Liontrust
Reason to be bullish: no repeat of the taper tantrum so far, despite central bankers starting to talk about ending asset purchases, with interest rates still some way in the future.
Reason to be bearish: persistence of the Delta variant, elevated inflation, supply chain blockages and spiralling raw material prices merging to form an increasingly dark stain on market optimism.
Bought: Husselbee added Polar Capital Global Convertibleto his strategic asset allocation as a differentiated source of risk/return as well as equity/bond characteristics.
“We favour the hybrid nature as well as the asymmetric benefits of convertibles and see them as a structural addition rather than a tactical play,” he says.
The fund has an attractive target yield of around 4%, one of the highest in a universe that is generally low yielding in comparison to higher-octane areas of fixed income.
Trimmed: “Overall, we remain confident in the ongoing recovery of risk assets although acknowledge momentum is slowing and supply constraints are hindering progress,” says Husselbee. During the quarter, he felt it prudent to cut back slightly on risk given rich valuations in many areas.
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“We chose to reflect this stance in high yield where spreads are tight already and further recovery looks relatively limited after a strong run buoyed by solid earnings as well as plummeting default rates.”
As a result, he trimmed Baring Global High Yield, his most risk-on sub-investment grade holding, which has, correspondingly, rallied the most year-to-date.
Man GLG Japan CoreAlpha has also been trimmed. After a number of years in the doldrums, the fund has been one of Husselbee’s strongest performers year-to-date owing to its deep value bias.
“However, as the value rally started to fade, we felt it prudent to start taking profits, mirroring how the fund managers have trimmed their banks' positions, for example,” he says.
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.
John Husselbee is head of multi-asset at Liontrust. He manages a range of multi-asset funds, including growth and income portfolios.
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.
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.
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