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.
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.
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.
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
The managers of these funds look for shares in companies that have fallen in price and popularity for reasons such as operational difficulties, management changes or financial over-extension, are unloved by the market but have the potential to recover over the long term. Managers of recovery funds focus on buying these undervalued companies where they see significant potential that should lead to a turnaround in their fortunes, a renewed appreciation by the market and that recovery will be reflected in the share price.
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.