The US, short duration, Europe, India and income are Brewin Dolphin fund research head Ben Gutteridge’s picks for 2015.
Gutteridge says there is “plenty” to look forward to next year, despite the worries of greater volatility and an uncertain and divergent monetary policy environment.
“Including a UK market with compelling dividend yields, and a positive outlook for Japan,” he says.
“Our picks represent a diversified portfolio – but everyone’s needs are different.”
Majedie UK Income
Brewin is bullish on the UK market given its “compelling” dividends and global revenues at attractive valuations, although the recent oil price falls has led the firm to trim energy exposure.
Gutteridge says the dollar-denominated dividends especially are a helpful boost to investors.
The Majedie UK Income fund shares the same views, selling most of its oil and gas holdings in the early summer and giving it a relative performance boost in the second half of the year.
“Elsewhere the bulk of the funds aggregate revenue is focused in the UK, where falling energy prices should serve to further dampen inflationary headwinds, boosting consumer performance,” Gutteridge says.
The fund differs from other UK equity income funds because of its multi-cap process, limited capacity and 20 per cent overseas exposure.
Dodge & Cox US Stock
A long-standing overweight to the US has been one of the most rewarding asset allocations for Brewin, Gutteridge says.
Next year the firm does not plan to reverse or even take the foot off the gas, he adds.
“Talk of valuation excess is overdone; US equities are fairly priced, and the attractions relative to other asset classes remain highly compelling,” he argues.
“Of course the US economic story is now well understood, but in the face of an increasingly benign inflationary outlook, we expect the Federal Reserve to remain highly accommodative. Such a stance could well drive US equities into a sustained period of over-valuation.”
The Dodge & Cox Stock fund has a disciplined value strategy that picks up long-term bargains enduring short-term turmoil, he says.
“This process should help the fund capture those stocks most sensitive to economic recovery – something Brewin Dolphin is increasingly sure of.
”The Dodge & Cox name might be relatively new to UK investors but they are a formidable brand in the US. Of considerable interest too was the extremely low level of staff turnover. This is clear evidence of the collective support for how the strategy is managed, and the firm’s ability to retain talent.”
Schroder Tokyo (Sterling Hedged)
Japan is another market Brewin is positive about.
The Schroder Tokyo fund is managed by 34-year Japan veteran Andrew Rose who has posted consistent returns throughout his career in the Far East, Gutteridge says.
“Our central thesis is that the unparalleled cohesion demonstrated between prime minister Shinzo Abe and the Bank of Japan, to help stimulate and reflate the Japanese economy, will continue to weaken the yen and lift equity markets.”
For that reason the hedged share class is the recommended option.
“[Rose] currently shares our positive outlook and has therefore positioned the fund with a moderately pro-cyclical bias through overweight positions in the industrial and auto sectors,” Gutteridge adds.
Edinburgh Partners European Opportunities
As this year dawned Europe was pulling out of its recession and a “consensus overweight”, however it is now firmly unloved once more, Gutteridge says.
Investors took flight on poor and worsening economic and political news pushing values lower, however it is the impending rejuvenation of the continent’s banks that compelled Brewin to up its exposure, he explains.
“In part this is due to more attractive valuations, but the more pivotal factor has been the progress the ECB has made at healing the banking system,” he says.
“Via the host of extraordinary policy endeavours, peripheral European bank lending rates are converging on the core, and is exactly the stimulus the more troubled areas require.
“Any decision to begin outright sovereign bond purchases is not something we see as particularly helpful, given how low bond yields already are, however it would be sure to give markets a boost. Europe remains a long-term multi-year recovery story.”
Since the global financial crisis wary investors have paid a premium for companies making high and increasing earnings growth, making value stocks underperform – something that is likely to reverse – he says.
“The fund stands out compared to other value managers offering a more balanced sector exposure while avoiding the imminent political risks of Greece and Spain. While the fund is exposed to economic recovery, it is a consistent performer and has historically offered decent protection in falling markets.”
Axa Short Duration US High Yield
A defensive bond strategy within the traditionally “riskier” part of fixed income is Brewin’s bet with uncertainty hovering over monetary policy next year.
The fund will have much lower volatility than a typical high yield fund because of the lower maturity and subsequent protection from interest rate movements.
“In that regard the mandate is less likely to suffer capital losses as a result of any rise in interest rates,” Gutteridge explains.
“There is still a reasonable degree of corporate and liquidity risk within this strategy but again, due to the short duration, – and also the ‘higher quality’ investment approach – at least part of this has been mitigated.”
Investors should be incremental in adding positions because of the more volatile markets, he adds.
“With the yield on US junk bonds widening to 6 per cent versus roughly 4 per cent in Europe, this looks like a reasonably attractive entry point.
“A word of caution, however, volatility is likely to persist so investors may want to wait or incrementally build positions. The primary concern centres on the tumbling oil price; the underweight Axa has assumed to the energy sector is, therefore, reassuring.”
Ocean Dial Gateway to India
While more cautious on emerging markets as a whole, Brewin is becoming “increasingly positive” on India.
The landslide victory of prime minister Narendra Modi has given the government a mandate to pursue an ambitious program of much needed reforms, Gutteridge says.
“India is one of the few emerging markets, therefore, where the potential growth rate is moving higher. Indeed in 2016 we could even see India growing faster than China,” he explains.
The Ocean Dial Gateway to India fund is Brewin’s preferred pick for the subcontinent.
Ocean Dial is still a relatively unknown fund house, formed by a management buyout of the Indian investment team from Caledonia Investments.
Its India fund is managed by Sanjoy Bhattacharyya who has an exceptional long term track record running Indian equity portfolios, Gutteridge says.
“His style is best described as growth at a reasonable price; he looks for high quality companies with attractive through cycle earnings that are available on reasonable valuations. We identified this opportunity at an early stage in the fund’s life cycle, and as such it is still quite small in size.”