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.
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.
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.
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%.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
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.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.