Our experts' fund picks for 2011
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall.
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.
Bank stress tests, fresh rounds of quantitative easing, fears of a double dip and problems across the eurozone have ensured a bumpy ride for stockmarket investors in 2010. The FTSE 100 started the year around 5500 and finished the year only a smidgeon up from that.
At the start of July 2010, we saw banks take a nosedive, as fear grew of a dreaded double-dip recession, and the FTSE 100 touched 4812.
Fast forward just four months and investors had perked up considerably at the news of a $600 billion (£380 billion) splurge of printed money in the US. On 4 November, the FTSE 100 soared to 5862, its highest since 2008.
Continued low interest rates and some better-than-expected company profits also helped keep the stockmarket fairly buoyant in 2010. But fund managers and stockbrokers believe volatility will continue in 2011 and that government spending cuts and tax rises will be painful.
Despite the uncertainty, our experts have picked their funds to watch out for in 2011.
SCHRODER INCOME - price 4,538p, yield 3.2%
Brian Dennehy, managing director of Dennehy Weller & Co, points out that this fund reduced its dividend payout in 2010.
That decision was made, he says, "not because it had to, as with many of its peers, but because managers Kevin Murphy and Nick Kirrage could see opportunities emerging for superior growth in capital and income".
Dennehy adds: "These opportunities are uncovered by a disciplined process that has a successful track record. With any UK fund in 2011, you are at the mercy of the markets, but I would happily hold this fund through the turbulence, taking a longer view."
AXA FRAMLINGTON UK SELECT OPPORTUNITIES - price 1,128p, yield 0.9%
Mick Gilligan, head of research at Killik & Co, makes this fund his star tip.
Among the themes he believes will be relevant in 2011 are the impact of the government's austerity measures, though he does not believe these will be enough to derail growth, and the cash on companies' balance sheets that they will start to deploy.
"The reason I like this fund is that it is invested in sectors that are likely to benefit from these trends, such as industrials, technology and support services," he explains.
"The manager, Nigel Thomas, is very experienced. He has been through a number of market cycles and is always keen to find growth. The markets we are experiencing at the moment play to his strengths."
John Husselbee, chief executive of North Investment Partners, also tips the fund. He says Nigel Thomas is one of the most experienced in the UK equity sector. "He has a well-established investment style and approach, and a proven long-term track record against the market and his peer group," says Husselbee.
"He invests in companies of all sizes with no particular bias to any market cap. Thomas is a stockpicker, and since the financial crisis, the importance of stock selection has grown, as it is necessary to be increasingly selective to distinguish between the future winners and losers."
STANDARD LIFE UK EQUITY UNCONSTRAINED - price 109p, yield 0.2%
Andrew Merricks, head of investments at Skerritt Consultants, says it appears inevitable that stock market volatility will continue.
"We will lurch between threat and opportunity for some time to come," he says. "This is the type of fund I think can deal with that scenario most efficiently. If defensive large cap shares are the order of the day, manager Ed Legget can overweight them.
"However, if talk of double dips recedes next year and interest rates remain low, he can focus more at the smaller company end of the market and gain from the inevitable rise in mergers and acquisitions activity that will surely occur as large companies look to spend their cash."
INVESCO PERPETUAL HIGH INCOME - price 301p, yield 3.7%
Manager Neil Woodford is being cautious and refusing to be drawn into what he sees as risky cyclical shares, according to Jennifer Storrow, managing director of Gee & Company.
"Woodford's fund remains defensively positioned, resulting in some short-term underperformance, but he makes no apology for this and takes a long-term view," she says.
"I am confident this strategy will bear fruit in the long term, and believe now is a good time to buy into it relatively cheaply. It offers a good dividend yield."
CIS SUSTAINABLE LEADERS - price 279.8p, yield 1.6%
Julian Parrott, partner at Ethical Futures, describes his choice as a pragmatic fund operating on moderate ethical screens. He says: "It has a well-diversified portfolio, investing in companies of all sizes, with an emphasis on positive stock selection, based on the contributions companies make to broad sustainability.
"Companies seeking to minimise the environmental damage caused by their activities are among those favoured. The fund has outperformed its peer group more often than not."
This article was originally published in Money Observer - Moneywise's sister publication - in January 2011.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
A type of derivative often lumped together with options, but slightly different. The original derivative was a future used by farmers to set the price of their produce in advance before they sowed the seeds so that after the harvest, crops would be sold at the pre-agreed price no matter what the movements of the market. So a future is a contract to buy or sell a fixed quantity of a particular commodity, currency or security (share, bond) for delivery at a fixed date in the future for a fixed price. At the end of a futures contract, the holder is obliged to pay or receive the difference between the price set in the contract and the market price on the expiry date, which can generate massive profits or vast losses.
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.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.