Market valuations remain a little elevated. The big risks are a worsening of Covid, current inflation becoming embedded in the system and policy errors by central banks in managing the rocky road out of the pandemic.
While the current news about the Omicron variant of the virus is cause for concern, it seems likely the world economy will muddle through, with continuing local and regional headwinds to growth from measures to counter the pandemic and with some general move towards a tighter monetary policy to combat inflationary pressures. The US will be looking to raise interest rates a modest amount once it has ended quantitative easing.
This poses a rather more difficult environment than we have generally seen over the past decade. Rising inflation and interest rates have, for many years, been the dog that didn’t bark, but there are now signs of pressures building, most notably in wages which tend to represent the stickiest form of inflation. Supply bottlenecks, energy price spikes and shortages and a lack of workers in key areas may ameliorate but there are some factors that prove longer lasting. The reshoring of industrial production could be more structural, not to mention the added costs involved of decarbonising global industry which requires huge capital investment.
A little more inflation and a little lower growth may not be a disaster for investment portfolios, but it could be tougher than what investors have generally got used to over the past decade. Those taking on too many risks in the same direction could face a tough time, and it may be necessary to think harder about how to construct an investment portfolio. Balance will be the key and at times bonds may not provide the same shelter they used to from falling equity markets when the biggest worry is the withdrawal of stimulus and higher interest rates.
With this backdrop in mind here is a selection of funds our Collectives Research Team believe could do relatively well in their respective areas over 2022 and beyond – they should all be considered long term investments meaning five years plus. They are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus to ensure they meet with your objectives and risk appetite. The very broad risk category is indicated.
Ruffer Investment Trust (medium low risk)
Ruffer Investment Company is designed to be an ‘all-weather’ vehicle for managers, Hamish Baillie and Duncan MacInnes to dynamically express their views through a wide range of tools. They combine conventional asset classes – global equities, bonds, currencies and gold – with the use of derivatives strategies that serve as protection to market downturns.
The overall aim is to protect as well as grow, so the balance of different assets is designed to pay off in a variety of economic scenarios – and the managers have a strong record of making shrewd macro-economic judgements. The trust is positioned for a period of stubborn inflation, so it could be an important diversification tool for many investors’ growth-biased equity allocations or, more generally, make a more stable ‘core’ holding in a portfolio.
The managers believe that we are witnessing the beginning of a new market dynamic where the key question has shifted from whether inflation is transitory to whether central banks have the “willingness and the ability to bring this lingering, sticky inflation back down.” Mounting pressure on authorities to dial back stimulus makes equity and credit markets vulnerable, they suggest, and they have increased allocation to protection strategies and reduced the equity component of the portfolio to just under 40%. They have also upped their weighting to the longest-dated inflation linked gilt issues.
Schroder Asian Total Return Trust (higher risk)
Asian equities faced a number of headwinds in 2021. On top of the pandemic, the Chinese government became more interventionalist towards listed companies, looking closely at issues such as competition, data protection, consumer rights, employee’s rights, and wellbeing. There were also troubles in the highly indebted property sector with Evergrande the first, but quite likely not the last, to default.
Although prospects have been damaged by the more authoritarian and state led approach to the next phase of Chinese development, there’s some great longer term prospects too with room for many companies to grow strongly across the region. Asia already accounts for half of the world’s economic activity, a proportion that looks likely to grow further over the next few years, aided by a pronounced demographic advantage, rising wealth and hard-working populations. With recent relative weakness versus other global markets, notably the US, it could be a good time for long term investors to consider upping exposure.
One option is Schroder Asian Total Return investment trust, which aims to achieve market-beating performance while offering a degree of capital preservation through tactical use of derivatives. This approach offers the managers the opportunity to go some way to protect capital in weak markets while still harnessing long term returns from the region. Having greater exposure when markets are cheap and gradually reducing and focussing on relative performance as markets get expensive makes sense – although the timing can be difficult to achieve.
Managers Robin Parbrook and King Fuei Lee currently have a modest allocation to China directly and higher weightings in Taiwan and Hong Kong. They are on the lookout for ‘oversold’ stocks in areas less exposed to regulatory risk, warning that Chinese internet stocks may become more like quasi-state owned enterprises (SOEs) similar to how certain banks and telecom stocks operate. The Trust has significant exposure to technology – with a strong bias to semiconductor companies – and consumer spending, an area of the market that capture the economic growth from the expanding Asian middle class.
FTF ClearBridge Global Infrastructure Income Fund (medium high risk)
Infrastructure assets should be resilient in a variety of scenarios. They provide steady income and often have a certain amount of contractual inflation protection built in. They can potentially provide investors with an attractive, income-orientated return and welcome diversification. The area is also expanding with the transition to net zero carbon calling for huge investment in new, more efficient electricity generation, storage and transmission, not to mention the huge roll out of charging points that the widescale shift to electric vehicles will bring. Meanwhile, heavy investment in high speed broadband is still necessary, notably in large swathes of the US.
There are a number of options for investing in this specialist area, which looks relatively well placed to generate consistent returns. The managers of this fund are experienced infrastructure specialists based in Australia and have built an impressive record whilst consistently delivering a decent yield. The fund invests in companies around the world operating in infrastructure related sub-sectors. The fund is exposed to both regulated assets (gas, electricity and water utilities) and to ‘user pay’ assets (toll-roads, airports, rail and communication towers). Around 90% of underlying revenues in the portfolio are inflation linked, so the portfolio should be resilient in a scenario of higher inflation. However, it may be more challenged if economic activity drops off, particularly in respect of companies with ‘demand-based’ revenues, such as toll road operators and airports. The historic yield is 4.6%, which is variable and not guaranteed.
Premier Miton US Opportunities (higher risk)
We think a genuinely active approach in the US can still add value above low-cost trackers given the premium valuation placed on the market. An attraction of the Premier Miton US Opportunities Fund is its ability to search for opportunities from the small to the very large in terms of company size and the flexibility with which the portfolio is managed.
The managers’ approach centres on identifying good-quality companies and paying appropriate valuations, described as ‘cash machines surrounded by barbed wire’. The managers are not wedded to ‘growth’ or ‘value’ stocks, preferring to take a more nimble and pragmatic approach, although the type of businesses they favour will tend to trade at a slight valuation premium to the market at times. We believe the fund has the ability to outperform its peers and the index in a variety of market conditions.
Performance since the 2013 launch has been good, achieved through a broad cross section of the portfolio, and beating most peers – though past performance is not a guide to the future. Expensive large cap technology names getting even more expensive has been a strong headwind, but good stock selection further down the market cap spectrum has compensated for this. The strategy can be expected to underperform if the ‘mega caps’, notably the technology cohort, lead smaller and medium-sized companies, though the managers’ sector positioning will be flexed over time depending on the opportunities they can uncover.
Schroder Global Energy Transition (higher risk)
As recent events at the COP26 climate conference have illustrated, investment in climate solutions has rapidly moved from the periphery into mainstream. To achieve climate goals, how we produce, distribute and consume energy will have to change significantly and will require monumental investment – as much as $120 trillion of over the next 30 years in order to get to net zero in 2050.
It is hoped the policies that emanate from the landmark Glasgow conference will lead to a more transparent and coherent framework for industry to accelerate investment the power the energy transition to meet net zero goals. By investing in industry-leading sustainable companies in areas such as batteries, electric vehicles and wind power, investors are helping bring about that transition. It’s clear that companies have a key role to play in the battle against climate change and the evolution of a more sustainable energy system, and the huge investment required will likely create significant opportunities. Businesses delivering products or services that are part of the solution should be well placed to deliver growth to shareholders.
Energy transition is a multi-decade theme where capital will be reallocated on an unprecedented scale, creating investment opportunities across a multitude of sectors and industries. However, there has been a surge in interest in renewable energy stocks recently and consequently valuations have become more expensive.
We believe a selective, disciplined and active approach such as the one adopted by this fund is a sensible means to access the space. The combination of a well-resourced team and competitive charges for a fund of its type add to the attraction. However, even among the more established businesses in the energy supply chain there will likely be significant losers as well as winners. The combination of the strong recent track record of the area and the positive environmental outcomes should not distract from the high risk involved. For patient, longer term investors it could be worth considering as a more adventurous holding in a broad portfolio.
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