Five funds tipped for resurgence

When we asked financial advisers to suggest sectors, and/or funds within those sectors, that are currently out of vogue but could be worth a punt as sentiment recovers, the responses we received spanned a broad range of ideas and interpretations.

Given that the Investment Management Association (IMA) property sector has tumbled by around 37% over three years to the end of December, several see potential in buying into these funds at a low point in the cycle.

But, as Jennifer Storrow at Gee & Co points out, don't expect much in the way of significant returns over the short to medium term.

Technology is another area some commentators feel is worth tapping into at this stage, although top performers in the IMA technology and telecoms sector have already seen impressive returns over the past year and the sector is up 45% on average.

Other experts focus indirectly on individual stocks due for a turnaround in fortune via the recovery funds.

It's interesting to note that last year's unloved list contained a couple of this year's most popular and best-performing holdings: JPM Natural Resources and Jupiter Financial Opportunities, alongside the top-performing Japan fund: Neptune Japan Opportunities.

You'd be up 32% if you had taken a punt on the latter. 

However, there are no guarantees of a turnaround in performance or popularity - another choice AXA Framlington Health, languishes in the bottom quartile of the specialist sector, up just 17% over the year.

Aberdeen Property Share

"From its peak, the commercial market plummeted 45%, but it is now attracting the attention of investors again," says Peter McGahan of Worldwide Financial Planning.

He and Raj Shah at Blue Wealth particularly like the Aberdeen Property Share fund as a route back into the asset, as the Aberdeen fund invests into property securities such as real estate investment trusts (Reits), rather than directly into bricks and mortar - an approach that McGahan believes makes sense in the current market.

He explains: "The rising property market will narrow the discounts on the fund's key holdings such as Reits, which have been trading at a large discount relative to their underlying net asset value.

"This, coupled with Reits' potential to increase their exposure to property holdings by gearing, makes individual property shares more attractive than investing in bricks and mortar itself."

Turnover in the fund is low and recent performance has been relatively strong as property shares have rallied in value more swiftly than underlying property values.

The fund is up more than 24% over the year to 1 December against a rise of just 7% for the sector as a whole.

GLG Technology

Darius McDermott puts the 2009 technology story neatly into perspective: "This sector is now the second-cheapest in the US, and companies like Apple and Microsoft are the most innovative in the world."

Ben Yearsley too sees a promising future for tech funds. He adds: "The tech sector has no debt problems and no real pension issues. There's plenty of cash on the balance sheet and as economic recovery goes forward, other companies will use technology to help reduce costs and drive efficiencies."
Yearsley's choice of tech fund is the small but successful GLG Technology, which gained 56% over the year to 1 December.

Managers Anthony Burton and Philip Pearson have been increasing exposure to medium-sized tech firms, and also the likes of Dell and Intel, which they believe could benefit from the launch of Microsoft's Windows 7 operating system.

Martin Currie North American

At Informed Choice, Martin Bamford makes an interesting selection for his unloved fund: he is unusual in homing in on a fund that has lost its way somewhat, albeit temporarily, within a sector that has recently seen a pickup in performance.

"Martin Currie North American used to put in first-quartile returns, but more recently (and particularly over the past year) it has been languishing near the bottom of the performance tables," says Bamford.
Over the year to 1 December, the fund is up 14%, compared with the North America sector average of 20%.

Mark Dampier at Hargreaves Lansdown adds that the fund's low exposure to financials has not helped matters in this respect, although a bias towards technology, with holdings such as Google and Apple, has served it well. 

However, Bamford continues: "Assuming the US economy posts a strong economic recovery, this fund stands a good chance of being a strong performer over the next five years, as a result of the high-conviction approach taken by the managers, led by Tom Walker."

A further attraction is the low total expense ratio of just 0.9%.
Invesco Perpetual Global Smaller Companies

Jennifer Storrow selects a global smaller companies fund on the grounds that smaller companies have been particularly hard-hit by the downturn.

Like many other formerly out-of-favour areas, smaller companies have already enjoyed considerable uplift on the back of the rally during 2009, with the IMA global growth sector showing a rise of 27% over the past year.

But looking forward, they should benefit from further improvement in the wider economic situation.

"The Invesco Perpetual fund is a good example of such a fund, with a global mandate to search out the best opportunities available," comments Storrow.

Manager Bob Yerbury, who is also chief investment officer of Invesco Perpetual, clearly has a nose for such opportunities, as he has delivered consistently strong performance over short and longer time frames.

Recently, he has done particularly well by tapping into emerging markets and the US as it emerges from recession, and he is also upbeat about improvements in economic sentiment in Europe.

The fund has risen by more than 50% over the past 12 months, far outstripping the sector average, but Yerbury sees more opportunities ahead.

Schroder Recovery

Recovery funds are anything but unloved at present: the gigantic £4.3 billion M&G Recovery is the best-selling fund in the IMA all companies sector this year, having risen 45% over the 12 months to the end of November.

Unsurprisingly, it also crops up as a recommendation among our core growth funds. The attraction of these funds lies not in any current ack of allure for investors, but the capacity of their fund managers to sniff out the UK's most unloved individual companies.
Christine Morris of Informed Choice passes the M&G leviathan by in favour of the smaller, nimbler £260 million Schroder Recovery fund, which also has "a long, rich heritage and has delivered first-quartile returns over all time frames", gaining a massive 56% over the past year alone.
"We have started to move monies back into the UK and I like Schroder Recovery," she says. "The fund is looking for fallen angels - companies that have suffered a severe setback in share price.

Research is based on valuations, as many businesses have had poor short-term numbers, which have given the fund superb opportunities to buy, and it has certainly taken advantage of this."

The portfolio contains many FTSE 100 giants, including Barclays and Lloyds, GlaxoSmithKline, AstraZeneca and Legal & General. Despite being housed in the UK all companies sector, which is growth-oriented, the fund is yielding 2.3%.

This article was originally published in Money Observer - Moneywise's sister publication - in February 2010

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