Top investment tips for 2013

Published by Andrew Pitts on 08 January 2013.
Last updated on 08 January 2013

At the start of 2013, investors face the same issues as in the previous two years. Interest rates remain ridiculously low, forcing income-seekers into more risky asset classes to obtain a decent yield, while growth-focused investors need to keep an eye on the politicians - in the US over its budget impasse and in the eurozone with sovereign debt and banking issues yet to be resolved.

Investors still face a 'wall of worry' but, as in previous years, there are decent gains to be had for those with the courage to scale it.

I've got four tips of my own for the year ahead. I'm wary of valuations across the fixed-interest spectrum, which have driven yields on most bonds to multi-decade lows, so these selections are all equity-focused.

The first two are primarily for income-seekers, but both would fit into a balanced portfolio. For growth-seekers, I've picked an unconstrained, steady-as-she-goes fund delivering decent returns, and a speculative specialist trust.

Fidelity Enhanced Income

The first fund I'd look at is Fidelity Enhanced Income. It uses options strategies to enhance its yield and currently distributes a net annual equivalent yield of 7.4%.

It is co-managed by Michael Clark, and David Jehan runs the options strategy, which involves selling covered call options on the underlying holdings to boost income. With UK equities yielding around 3.5%, this strategy is certainly delivering income enhancement.

The top 10 shares make up nearly half the fund's value and read like a 'who's who' of income shares in the FTSE 100, which should help reduce volatility in capital values.

Diverse Income Trust

As we went to press, the Diverse Income Trust was due to announce the success of its efforts to raise in excess of £20 million in new capital to invest. The trust is run by respected fund manager Gervais Williams, managing director of MAM Funds.

The trust had a rocky start. From launch in May 2011 it fell 12% by the year end, but has since seen a 35% return over the year to 3 December - double the return of the UK Growth & Income sector. The trust yields 5.5% and is currently trading on a small premium, but that should narrow when the new shares start trading.

Fundsmith Equity

Fundsmith Equity's manager Terry Smith adopts an investment style that is as uncompromising and far-reaching as his views on everything from the madness of Ed Balls to the causes of climate change. You may take issue with his views but there's no arguing with the outstanding performance of his fund.

From a standing start in November 2010 it has grown to £800 million, and early callers have been rewarded with returns of 30%, or six times the Global sector average of 5% to 3 December 2012.

Smith describes his style as lazy. Once he buys a share for the fund, he holds it long term.

Baker Steel Resources

My second growth choice is a little off-piste but this is often where big potential gains can be found, in under-researched and unloved sectors of the market.

Baker Steel Resources (BSR) is a speculative choice. Its portfolio is comprised mainly of unquoted mining and commodities companies, and the share price has been on a rollercoaster ride over 12 months, from a high of 125p to 75p, a whisker below where it is now.

Many analysts believe the recent flotation of miner Ivanplats, which represented 30% of BSR's portfolio, has not been recognised in the trust's share price, which is at a 26% discount to net asset value.

With the trust's unquoted assets stated at book cost rather than estimated value, there could be substantial gains from further successful realisations.

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