Top fund picks for 2010

taitran:

Top fund picks for 2010

Created:

4 January 2010

Updated:

7 January 2010

Written by:

Faith Glasgow

Darius McDermott, Chelsea Financial Services

Defensive: Jupiter Absolute Return

Mr McDermott picks out both strategic corporate bond funds such as M&G’s Optimal Income and defensively positioned equity income funds such as Artemis Income as possibilities for investors worried by the potential for a market reversal. But for his own money, he says, the newly launched absolute return fund from Jupiter, run by Philip Gibbs, is the only place to be.

“Absolute return funds use hedge fund strategies to attempt to beat cash in all conditions, and they also tend to have a relatively low correlation with equities, so it’s certainly the case that if the UK economy starts to move up and underpins the market rally then they will lose out. But if there’s a good chance of the market falling, as there still is, then I’d like my money to be with Gibbs – he’s a brilliant fund manager,” he says.

Mr Gibbs undoubtedly has an impressive track record: He has managed a hedge fund since March 2000, during which time it has gained 380 per cent, while his Financial Opportunities fund is sixth out of the 817-strong UK fund universe over 10 years to 8 December, up 355 per cent. “The new fund, because it can use investment tools such as cash and derivatives as well as other assets, will give him much more flexibility to express his macro-economic views,” comments Mr McDermott.

The downside of absolute return funds is that they tend to be pricey: a typical arrangement is an annual management fee of 1.5-1.75 per cent plus performance fees of 10-20 per cent of any return over London Interbank Offered Rate (Libor). The Jupiter fund costs 1.5 per cent plus 15 per cent over Libor. However, Mr McDermott is quite happy to pay the premium if Mr Gibbs consistently beats the target return of 8-10 per cent after fees.

Aggressive: Allianz BRIC Stars (THXRBA)*

“It’s much more straightforward to choose an adventurous fund than a defensive one at the moment: there’s not much growth in the west, but there is long-term growth in the emerging markets, so that’s my choice,” says Mr McDermott. As a relatively safe bet he suggests First State Asia Pacific Leaders, with a broader mix of holdings in both emerging and well-established Asian states as well as developed nations such as Australia.

But for anyone prepared to focus their interests purely on the four main emerging markets: Brazil, Russia, India and China, he backs the Allianz BRIC Stars fund, which is run from Frankfurt by Michael Konstantinov and a ‘well resourced’ team. It provides varying exposure to all four markets and therefore does away with the need to worry about asset allocation between them.

“Each has its own strengths - China is hugely dominant in terms of its size and domestic market, but Brazil has the best corporate governance in place and is looking increasingly like an established market, and India, although it’s been through a shaky patch, also has huge potential,” he says.

But Mr McDermott stresses that this fund is not an option for the weak-stomached. “It involves a lot of risks - currency risks, geopolitical risks, oil market risks which can impact in a big way on Russia,” he observes, “but it could be a nice one for drip-feeding funds in on a regular basis.”

* Full fund data and factsheet here!

Ben Yearsley, Hargreaves Lansdown

Defensive: Invesco Perpetual High Income (PPHI)*

As Ben Yearsley acknowledges, Neil Woodford’s acclaimed fund is not a particularly imaginative choice; but it is in an interesting position. Mr Woodford has made a name for himself as a manager who adopts positions of strong conviction that may go against the run of the market for a while, leaving his funds trailing in the wake of their more market-responsive peers until a market correction gives him the upper hand once more.

“Over the past year he has held a defensive position, focusing on sectors such as utilities, pharmaceuticals and tobacco, and he has been left behind because he has not been in the cyclical stocks that have really moved,” says Mr Yearsley. The High Income fund has gained just 14 per cent in the 12 months to mid December, compared with the FTSE All-Share, which rose 32 per cent and the IMA Equity Income & Growth sector, up 24 per cent.

“Woodford is sticking with his defensive stance on the UK economy,” Mr Yearsley continues. “However, the stocks he holds are paying decent dividends, and they’re now looking attractively valued, having been left behind in recent months. The fund is now in a situation where, if the rally turns into a broader, longer-term recovery, these more defensive stocks should be pulled up on the back of wider improvements - and if the market does go down, they should not be so hard hit because they’re not so exposed to the economic cycle.”

* Full fund data and factsheet here!

Aggressive: GLG Technology

For Mr Yearsley, the technology and telecoms sector is now an attractive proposition: “It has no real pension problems, it has cash on the balance sheets, it has pricing power,” he comments. “Those companies that survived the tech crash of 2000 have prospered - think of Google and Amazon, for example.”

Mr Yearsley stresses that any technology investment needs to be on a five to 10-year view, because although firms may not have the spare cash to invest in 2010, over the longer term, “new technology is one way for them to cut costs and become more efficient.”

GLG Technology, the former SocGen Technology fund which was taken over by US-listed hedge fund manager GLG Partners earlier in 2009, is a broad-based global fund holding a mix of technology firms such as Dell and Intel which they believe could benefit from improving demand created by the launch of Windows 7, plus media companies such as WPP and ITV.

It has done well in both absolute and relative terms, having gained 50 per cent during 2009 against the IMA Technology sector average of 42 per cent. Mr Yearsley points out that because there has been a change of managers, the performance record is not particularly useful, but that the new managers - Anthony Burton and Philip Pearson - have been running institutional technology funds for many years.

Mike Horseman, Cockburn Lucas

Defensive: Ruffer Total Return (CGRIA)*

“One big problem for 2010 could be a gilt funding crisis if the market stops believing that the UK government is good for its money. That would push gilt yields up and prices down, knock the UK economy’s triple-A credit rating and damage confidence in sterling. We currently believe that there’s more risk in holding UK sovereign debt than in holding emerging market debt,” says Mike Horseman.

In the light of this nervousness, he favours Ruffer’s multi-asset based total return fund, run by David Ballance and Steve Russell. He regards this as a core multi-asset holding, strongly driven by the managers’ convictions and demonstrably able to provide steady returns in all markets.

“It’s a very defensive choice and they don’t use derivatives or hedge funds, but it has returned 20 per cent over the past year,” he adds. Over both three and five years it is top of the IMA cautious managed sector; it has made money and outperformed the sector average over each of the past three years.

Mr Horseman comments that the managers believe the equity rally of the past months is coming to an end, and have therefore oriented themselves towards larger cap equity holdings. They are also focusing on protection against inflation, with almost 40 per cent of the portfolio in UK and overseas index-linked gilts and a further 8 per cent in gold. “Another concern is that sterling may weaken, and they therefore have the fund about 50 per cent hedged against sterling movements,” he adds.

* Full fund data and factsheet here!

Aggressive: Sarasin AgriSar (XVSSAA)*

As a long-term thematic play, this is an interesting fund for the future: it invests in a very broad spectrum of companies involved with all aspects of food production, processing, transport, sales and consumption, from fertiliser producers to coffee shops.

The fund has, in Mr Horseman’s words, “done quite nicely out of the rally”, up 36 per cent over the year to the end of November 2009. Moreover, manager Henry Boucher observes that in a particularly uncertain global climate, food and agriculture is being widely picked out as a “relatively robust potential investment area” for 2010. However, Mr Horseman views it as a fund to buy and hold for the long term.

“I expect other funds will do better over the coming year, but this is about positioning for the future,” he says. “Over the next decade, trends such as population growth, water shortages and changing patterns of consumption in emerging markets will be powerful influences on this sector. If you buy into the idea that resources are going to come under pressure as the global population rises, this is a good responsible choice, run by an extremely knowledgeable manager.”

* Full fund data and factsheet here!

Steve Laird, Carrington Wealth Management

Defensive: Cazenove Diversity

Steve Laird fears there may be more tough times ahead in 2010, which leaves him with a limited choice of defensive investment. He explains: “Many cautious funds have high exposure to fixed interest, but I think 2010 may see some governments renege on some of their debt. I also believe that there will be a double-dip recession, if the UK ever gets out of the first dip - which would not be good for fixed interest either, as the government might have to pay higher returns to be able to raise the money it needs.”

His choice is Cazenove Multi-manager Diversity, a multi-asset fund run by Marcus Brookes and Robin McDonald, which aims to produce an above-average return for below-average risk. It’s up 18 per cent over the year to mid December, and up 11 per cent over three years, ranking top of the IMA Cautious Managed sector for that period.

“It’s a cautious fund, yet it only has around 20 per cent in fixed interest,” he points out. “For an actively-managed fund, the annual management charge is also reasonable, at 1 per cent (TER 1.69 per cent). I have it in my own pension fund.”

Aggressive: CF Miton Strategic Portfolio

In general terms, Mr Laird favours good quality funds of funds, because many of them have great flexibility in terms of asset allocation and he is reluctant to put clients into any single-asset investment at present. “Given the gloomy outlook for 2010, the best returns will be gained from talented active managers who get their asset allocation right and who aren’t afraid to stay heavy in cash when necessary,” he adds.

Against this downbeat backdrop, he settles for Miton Strategic Portfolio. “I don’t really have a racy choice because I don’t think 2010 will be a year to be racy in,” he comments. “Miton is regarded as a relatively racy investment house by some people, but they consider the Strategic Portfolio fund as a cautious choice.” It’s housed in the IMA Balanced Managed sector, where it ranks fifth over three years.

The Miton fund has been awarded a five-star rating by Morningstar, and fund manager Martin Gray has an excellent 15-year track record at Miton. It invests mainly into other funds, although the manager has a lot of flexibility and is able to invest directly into any asset class, anywhere in the world, if appropriate. Currently, says Mr Laird, it’s holding around a third in cash.

“The managers have a good track record in producing Alpha - outperformance - with below-average volatility, which is the only reason one would look at a fund with a total expense ratio of 2.32 per cent, as this has,” Mr Laird adds. However, although Miton Strategic Portfolio has done well over three years, it has had a bad 12 months, returning just 6 per cent against the balanced managed sector average of 22 per cent.

http://www.investorschronicle.co.uk/InvestmentGuides/Funds/article/20100104/c1527ad0-ebe8-11de-bb4f-00144f2af8e8/Top-fund-picks-for-2010.jsp

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