My investment trust tip for 2024
First, I’ve got to address the elephant in the room. For the last two years I’ve picked Fidelity China Special Situations (LSE:FCSS), so I’ve now got egg on my face. I still like the trust and, while there are of course no guarantees, I think over the long term the rewards should outweigh the risks, provided you’re investing for at least five years, or ideally 10 years.
I am not going to double down again like I did last year. Instead, the area of the stock market I think is really interesting in terms of its valuations having been out of form for two years, is UK mid-cap and UK small-cap. Interest rate rises, which started at the end of 2021, caused many investors to dial down on risk as returns rose on safer assets such as cash and government bonds. In such an environment, smaller company shares naturally suffer.
In addition, smaller company shares tend to be more economically sensitive, which has proved to be a headwind, given that economic growth has been sluggish, and consumers have been tightening their belts in response to the cost-of-living crisis.
While headwinds remain – not least the prospect of a recession occurring in 2024 – I think now is the time to consider bagging a bargain among a UK smaller company specialist investment trust. At some point the market will turn for smaller companies, and it will turn fast, so I would sooner get in early rather than wait for the market to show signs of a recovery and miss out on some of that recovery.
- The funds pros have personally invested in for Junior ISAs
- How I plan to invest my ISA allowance in 2024
There are lots of options for investors to consider, but one that I like is Henderson Smaller Companies (LSE:HSL). The trust is managed by Neil Hermon, who has been at its helm since 2002. The investment approach is focused on identifying quality growth companies and holding them over the long term.
At the time of this recording in early December it is on a discount of over 10%, which offers investors the chance to buy a diversified portfolio of cheap UK smaller companies at an even cheaper price.
The fund I’m tracking in 2024
For 2024, investors should consider the Invesco S&P 500 Equal Weight ETF Acc (LSE:SPEQ).
This exchange-traded fund provides equally weighted exposure to US blue-chip stocks that make up the S&P 500 index.
Every stock in the index has the same weight at just 0.2%, regardless of how large or small the company is. Therefore, even Apple Inc (NASDAQ:AAPL) will have the same weight as the smallest company that is a constituent in the S&P 500.
The fund is designed to reflect the US large-cap equity market while taking a size-neutral approach and covers approximately 80% of the available market. It is listed on the London Stock Exchange and is competitively priced, with an ongoing charge of only 0.20%.
The fund’s equal weight approach offers greater exposure to smaller stocks and stocks with lower valuations, providing a better diversified approach to investing in US stocks which could lead to potentially higher returns.
- Why you should think twice about making a big move to cash
- How fund manager predictions fared in 2023 – and forecasts for next year
But bear in mind that the fund may go through periods of relative underperformance in momentum-driven markets, when large-caps outperform small- and mid-caps, and growth outperforms value.
Currently, the S&P 500 is dominated by the so-called Magnificent Seven largest technology companies that make up almost 30% of the index. In 2023, they contributed to over 80% of the performance. If you're invested in funds that track the S&P 500, your portfolio may be too concentrated and greatly impacted by fluctuations in tech stocks.
By enhancing diversification and reducing concentration at the stock and sector level, the Invesco S&P 500® Equal Weight ETF offers unique core exposure to US blue-chip stocks in the S&P 500 and could be a good alternative to high-fee active funds that usually struggling to outperform.
My bond market tips for 2024
There are three reasons I think that bonds will make a great investment in 2024.
First, inflation is falling, which will allow the Bank of England to cut interest rates. Lower rates are good news for bond prices, as the value of existing higher-yielding debt increases when interest rates fall, and new bonds offer lower yields. The Bank of England expects inflation to keep dropping throughout 2024 and hit its 2% target by the end of 2025.
Second, bonds now offer an attractive income. With yield to maturities on gilts at around 4%, and corporate bonds yields at about 6%, you are finally getting paid well to hold bonds. Given that UK equities have returned about 6% a year for 100 years, earning that as income from bonds is impressive.
- Bonds expected to be the best-performing investment in 2024
- The highest-yielding money market funds to park your cash in
Finally, bonds should bolster the resilience of a portfolio. Now that inflation is falling, central banks have more scope to cut interest rates if the economy is in trouble. So during a period when stocks might be struggling, bonds could rally, giving a portfolio more balance.
In terms of what bond funds to buy, I’d highlight Vanguard UK Government Bond Index for broad exposure to gilts, and Rathbone Ethical Bond for a diversified, actively managed portfolio of sterling corporate bonds.
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