The Bank of England has held interest rates, and the UK economy has shown signs of recovery from Covid, as gross domestic product (GDP) was estimated to be 1.8% above pre-pandemic levels in the second quarter of this year.
Meanwhile, inflation continues to be very high. Markets are likely to continue being fragile, but as always, there are opportunities to be found. Our professional fund pickers find new ways to positions themselves in a challenging economic environment.
Every quarter, the participants in 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.
David Hambidge, investment director of multi-asset at Premier Miton Investors
Reason to be bullish: interest rates appear to be at or very close to their peak in the current cycle and investors are now able to lock in very attractive yields in quality assets including (but not exclusively) investment grade corporate bonds.
Reason to be bearish: interest rates may be at or close to their peak, but central banks are determined to defeat inflation, so monetary policy is likely to remain tight well into 2024.
Hambidge has purchased the M&G Short Dated Corporate Bond fund, which aims to provide a very low-risk approach to obtaining exposure to short-dated high quality corporate bonds, with an average credit rating of A, which is higher than most of the peers.
He notes that this fund “can be seen as a cash alternative, with the preservation of capital being paramount, while also seeking protection from rising interest rates”.
Hambidge adds: “The fund typically allocates a reasonable amount to high-quality short dated asset-backed securities, which in our view offer attractive value and this differentiates the fund from some others.”
He has owned the MI TwentyFour AM Dynamic Bond fund for several years and while he thinks that this fund is higher risk than the aforementioned M&G offering, he believes the potential reward is also higher.
“With bond yields having ticked up again of late, we have taken the opportunity to add to our position,” says Hambidge.
He decided to trim the MI TwentyFour AM Monument Bond fund. The fund invests in good-quality mortgage backed securities and unlike so many bond funds, has benefited from higher interest rates due to the floating rate nature of the underlying assets.
Hambidge says: “Performance has been excellent this year and while we are not selling out completely, we have taken some profits recently.”
Tihana Ibrahimpasic, portfolio manager, multi-asset team at Janus Henderson Investors
Reason to be bullish: this is not a 1970s-style wage price spiral as the job market continues to remain resilient and real incomes are recovering. Further, consumer balance sheets are in good health in aggregate and companies suggest more confidence through their actions than many surveys suggest. Overall, these factors indicate that we may already be passed the worst of the monetary tightening.
Reason to be bearish: on the less optimistic side, we can already see some signs of investor complacency, while further monetary tightening remains a possibility if inflation persists or if the labour market continues to be resilient. Prior stimulus effects are ending and so the consumer is likely to become more vulnerable as savings get depleted, while the debt backdrop for companies may be deteriorating as they approach refinancing periods.
Ibrahimpasic has bought the Amundi Prime Japan ETF to tap into the value and dividend potential on offer in Japan. In her opinion, this ETF is a very cost-effective way of getting exposure to Japan, and the performance of the index it tracks, corresponds closely to that of the TOPIX.
She has added to her holdings in select alternative assets – Greencoat Renewables (LSE:GRP), Greencoat UK Wind (LSE:UKW), HICL Infrastructure (LSE:HICL) and International Public Partnerships (LSE:INPP).
Alternative investments have been out of favour in the rising interest rate environment. Ibrahimpasic notes that “rate sensitivity”, as well as “negative sentiment towards UK-listed assets”, is proving short-term pain. But in increasing exposure, she is taking advantage of lower valuations.
iShares Euro Dividend ETF EUR Dist GBP (LSE:IDVY) has been sold. Ibrahimpasic says this is to “reduce risk and take profits after the market rally earlier in the year”.
The ETF has a concentrated exposure to insurance and bank sectors, and she prefers more diversified exposure.
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Peter Hewitt, fund manager of CT Global Managed Portfolio Trust
Reason to be bullish: both the Federal Reserve in the US and the Bank of England in the UK have paused interest rate rises. In the case of the UK, there was a much better than expected inflation print in September. More is needed – however, it was a step in the right direction, which is supportive of equity markets.
Reason to be bearish: although the peak of interest rates in developed economies maybe in sight, markets are moving to price in a “higher for longer” scenario. This has seen elevated bond yields, especially in the US and means, if sustained, the chances of recession have increased, which will concern financial markets.
Hewitt has bought Pantheon International (LSE:PIN), a large established investment trust with a solid long-term performance record. However, the shares stand at a 35% discount to its net asset value (NAV).
“The trigger for the purchase was a major change in capital allocation policy,” he says. Driven by a new chair, the trust has committed to spend up to £200 million to buy back 15% of the equity in the current financial year to 31 May 2024, which is possible due to having one of the strongest balance sheets in the sector.
If all £200 million was spent on buybacks at the current discount, it would add nearly 7% to NAV. “This is very positive for the share price,” says Hewitt.
To Hewitt, the incredible upsurge in interest in artificial intelligence (AI) since the advent of ChatGPT has highlighted the attractions of Allianz Technology Trust (LSE:ATT). The trust has large holdings in key semiconductor stock NVIDIA Corp (NASDAQ:NVDA), which is the leader for supplying chips for AI applications.
Also, certain tech giants will be the initial beneficiaries of AI, such as Microsoft Corp (NASDAQ:MSFT) and Meta Platforms Inc Class A (NASDAQ:META), and are major positions in the trust. “Allianz Technology, which currently trades on a 13% discount, is an excellent way of gaining exposure to these secular growth trends,” he says.
He decided to dispose of Mid Wynd International Inv Trust (LSE:MWY). “This sale was driven by a change of investment manager,” he says.
The previous manager, Simon Edelsten, developed a thematic-based investment style and achieved a strong long-term performance record. When he intimated that he wished to retire, the board was not satisfied with the replacement put up by Artemis, the management company. The board, after a selection process, appointed Lazard to the role. Lazard employs a quality-growth investment style, which is similar to a number of others in the global sector.
“Lazard’s is an institutional manager with no presence in the investment trust sector, so ongoing marketing will be a challenge,” says Hewitt.
Vincent Ropers, co-manager of TB Wise Multi-Asset Growth and TB Wise Multi-Asset Income
Reason to be bullish: global economies continue to prove more resilient than feared a few months ago, particularly thanks to tight labour markets. This has allowed central banks to tackle inflation while seemingly achieving an economic soft landing.
Reason to be bearish: although peak interest rates might be nearing (if not there already), inflation remains stubborn. Moreover, the full effects of this almost two-year-old hiking cycle on growth are yet to be felt. As such, we remain in a transition phase likely to be volatile for the foreseeable future.
Ropers recently added a new position in ICG Enterprise Trust (LSE:ICGT) and built it up over the quarter. This is a listed private equity trust focusing on companies with defensive growth characteristics, which typically translates into profitable companies with dominant market positions, strong margins and predictable cashflows.
As with other alternative investments private equity is out of favour. One of the main reasons is down to scepticism over whether the valuations of unlisted companies, which are set behind closed doors, have re-priced sufficiently to account for the higher interest rate backdrop.
Ropers, however, views the low sentiment attached to the sector as an opportunity.
He points out: “The end result is a relatively economic insensitive portfolio of medium-sized companies with already attractive growth characteristics that the ICG management works closely with to grow even further.
“This appealing portfolio profile is missed by many investors who doubt valuations in private markets despite the manager consistently realising value in the portfolio by exiting positions above their carrying value.”
Ropers also increased his allocation to infrastructure during the quarter, mainly via the Ecofin Global Utilities & Infrastructure (LSE:EGL) Trust and International Public Partnerships (LSE:INPP).
He says the sector has suffered from the relentless rise in interest rates, reducing the appeal of the cash flows offered by their underlying holdings. This is despite most of those offering attractive inflation-linked revenues.
The investment trusts in the sector saw a sharp widening of their discounts in the past couple of years as investors increasingly switched to cash as an income alternative. Ropers adds: “The yields on display in the infrastructure names are now attractive enough to warrant considering the sector again, particularly given its defensive and inflation-linkage characteristics.”
Ropers exited his position in Henderson EuroTrust (LSE:HNE) at the end of the quarter. “This is a position we had held for years and performed well for us thanks to its quality-growth bias and the manager’s adaptability in difficult markets,” he says. Its performance over recent months has been strong, allowing him to take profits and recycle those into more undervalued opportunities.
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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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