Top investment funds for 2010

There is concern that as good a year as 2009 was, stockmarkets may see the wind taken out of their sails when the stimulus programmes initiated by governments to ward off recession start to come to an end this year. But few investors want to have too much money sitting in a cash savings account when interest rates are so low.

So what are independent financial advisers recommending? We asked our panel which growth and income funds they thought might produce the best returns in 2010.
One area which gets the thumbs up is the Asia Pacific region, with all five advisers recommending at least one fund with exposure to those markets. Corporate bond funds also remain in favour as an income selection for three out of our five professionals.

Mick Gilligan is managing director of Killik & Co

Growth - First State Asia Pacific Leaders

Gilligan believes the Asia Pacific region offers good growth prospects for 2010, but is concerned about potential volatility. He has therefore chosen a fund run by experienced manager Angus Tulloch, who has a strong track record in capital preservation.

"It has a bias towards larger companies and aims to hold quality businesses with strong fundamentals that can deliver sustainable long-term earnings growth. Tulloch currently remains cautious on the outlook for the global economy, believing that when government stimulus measures end recession may return."

Gilligan believes this fund will be well positioned if equity markets go into reverse.

Income - Invesco Perpetual Income

For a consecutive year, Gilligan nominates Neil Woodford's fund as his income choice. The fund slightly underperformed during 2009 due to its defensive positioning, but Gilligan is undeterred, pointing to Woodford's past record of success.

"He is still cautious on the outlook for the UK economy. Woodford suspects the recovery will be anaemic, as he believes consumption and public spending will languish. Against this relatively morose background, he is therefore continuing to position his portfolio in more defensive companies that have demonstrated consistent growth and low-earnings volatility."

Brian Dennehy is managing director of Dennehy Weller & Co

Growth - Jupiter India Fund

Dennehy is sticking with this fund, which was also his growth choice last year. "India's growth prospects continue to be outstanding. Economic growth for 2010 is projected at 7.5%. India has achieved growth in 2009 with credit falling, whereas China has achieved similar growth with credit exploding - making India's growth appear somewhat more sustainable."

The fund manager, Avinash Vazirani, has been investing in India's equity market for more than 15 years. He points out that with over 7,000 companies there are many opportunities for patient investors to buy high-growth businesses at attractive prices.

He has positioned the fund to benefit from further consumer growth in India as the country industrialises, with exposure to financials, industrials, consumer sectors and healthcare.

Income - Henderson New Star High Yield Bond

Interest rates are expected to stay low for some time, which Dennehy believes should underpin a continuing recovery in corporate bonds. But he argues that investors will need to move beyond pure investment-grade bonds to take full advantage of the potential.

"The long-standing manager of this fund, James Gledhill, believes that because high yield has been out of favour for years some managers will overlook the potential in front of them because of lack of familiarity.

In contrast, he has monitored much the same universe for years and believes there is now a high-quality group of surviving companies in the high-yield universe with ongoing potential."

Phil Eaton is from Roger Harris & Co

Growth - CF Octopus Absolute Return

As the bulls rejoice that the worst is behind us, Eaton takes the contrary view that 2010 is going to be a difficult year. "Rising unemployment, consumer retrenchment and the switching off of quantitative easing may cause markets to possibly test the lows of March 2009."

David Crawford has been managing this fund since launch in March 2008 and the objective is to invest in UK equities on a long/short basis. With net performance of 85% growth since launch, Eaton believes the manager can continue to exploit market opportunities whatever the climate.

Income - Newton Asian Income

Asian economies should benefit from China's powerful growth, while Western economies face the possibility of a double-dip recession, says Eaton. There is very little choice for income investors who want exposure to Asia, but one fund Eaton favours is Jason Pidcock's Newton Asian Income fund.

The historic yield is around 5%. "Performance has been excellent, with four years of rising dividends - over the past year dividend growth was 7.2% - in a sector dominated by pure-growth managers. The fund is currently 28% invested in Australia, 22% in Hong Kong, 16% in Singapore and 10% in Taiwan."

Jennifer Storrow is managing director of Gee & Co

Growth - First State Global Resources

Storrow believes that if markets continue to progress then commodities are likely to be among the areas showing the most growth potential. First State Global Resources, managed by Joanne Warner, invests in energy as well as natural resources.

Currently, its top positions are in large diversified mining companies, followed by energy, and gold and precious metal shares.

The fund is 24% invested in the UK, where many mining companies are quoted, but it has larger holdings in the Asia Pacific and North American regions. "Despite having rebounded dramatically over the past few months, if the markets continue to rise then this fund should provide good returns," Storrow predicts. 

Income - Henderson New Star Strategic Bond

Corporate bonds have provided unprecedented returns over the past few months. While Storrow does not envisage this re-rating will continue over the next year, she sees some room for growth, given that bonds are still pricing in high default rates.

She considered a specialist high-yield bond fund, but decided on a more flexible approach so the manager can move into high yield to a greater or lesser extent. The fund has a historic distribution yield of 6.74% and Storrow is confident the level of income will stay competitive in 2010.

Julian Parrott is a partner at Ethical Futures

Growth - First State Asia Pacific Sustainability

China and the Far East are difficult territories for the ethical investor, but are increasingly important in the global economy and for investment returns.

Parrott points out that First State is a specialist in the region and has an experienced team, led by David Gait and Angus Tulloch, who make pragmatic choices about investment selections, based on a sustainability theme.

"The team also undertakes active engagement in investments, so have adopted the right approach to this market and although it is a volatile fund it has delivered some good results."

Income - Standard Life Ethical Corporate Bond Fund

For many ethical investors, the traditional equity income field is a compromise too far, says Parrott. "Even well-screened funds still find space for questionable banks, miners and oil companies."

When selecting corporate bond funds for income seekers, investors need to be reasonably confident that capital will be protected as well as generate a decent yield.

Parrott says: "The Standard Life Ethical Corporate Bond fund has walked that tightrope well over the past 18 months and Alasdair MacLean, the fund manager, has a good track record for stockpicking to achieve outperformance over the long term."

This article was originally published in Money Observer - Moneywise's sister publication - in January 2010. Investors should only act on these suggestions if they are certain they match their own risk profiles.