The year end is a natural time for people to review their investment portfolios and ensure it is well positioned for the year ahead. Alena Kosava, head of investment research at AJ Bell, looks at eight funds and investment trusts with different risk levels covering bonds, global equities, infrastructure, healthcare and dividends.
Personal Assets IT
Personal Assets is a solid choice for investors looking to protect and increase (in that order) the value of their investment over the long term. The trust has generated steady returns over previous years and tends to do particularly well amid challenging market conditions and souring economic narrative – conditions we’ve been experiencing throughout 2022 – which the trust’s experienced manager Sebastian Lyon had been concerned about for a long time. With a heavy sell-off across equity markets and material repricing across the bond universe, underpinned by fears over the potential for persistently high inflation for a considerable period going forward, the defensive positioning of this trust, and in particular its exposure to inflation protecting assets such as gold and inflation-linked bonds, means it has notable appeal. The portfolio is relatively unchanged from a year ago with around 9% in gold bullion and 37% in US TIPS (US index linked bonds) supporting the core exposure to high quality equities such as Unilever, Visa and Nestlé. As a result, the trust is effective at providing investors with a multi-asset diversified portfolio and, given the emphasis on capital protection, should sit well with more cautious investors. Amid bear market falls in both equities and bonds throughout 2022, the trust is down around 2.4% YTD at the time of writing (1 December 2022), thus offering protection to client capital.
Royal London Investment Grade Short Dated Credit
With high inflation and interest rates expected to increase, albeit likely at a slower pace, it could be a challenging year for fixed interest. Nonetheless, many investors should consider exposure to bonds as part of a diversified portfolio. Keeping duration short can dampen volatility in times of market dislocations amid rising bond yields as well as offer capital protection. The fund’s investment objective is to achieve a total return over the medium term (3–5 years) by investing at least 80% in investment-grade bonds. Of these, at least 70% will be short-dated (bonds that will reach maturity within five years).
Prior to investment, the fund’s holdings are subject to predefined ethical criteria. Manager Paola Binns aims to outperform, after the deduction of charges, the ICE Bank of America 1-5 Year Sterling Non-Gilt Index by 0.25% over rolling 3-year periods. The index focuses on shorter dated maturities relative to the broader market and is regarded as a good measure of the performance of short-dated sterling-denominated bonds, not including those issued by the UK government (gilts). As base rates rose and pushed bond yields higher, the performance of long duration assets faced challenges throughout 2022. The fund’s shorter duration stance held it in good stead, with the strategy delivering a negative -7.3% return relative to -14.6% performance of the broader IA £ Corporate Bond sector year to date. The fund is well-ahead of the IA sector over the medium and longer term, as well as outperforming the shorter-dated ICE benchmark. The outperformance over time has been achieved with broadly half of the volatility of the IA sector peers. As yields have risen, the fund is now yielding c.3.2% and has a duration of c.2.9 years, slightly above its index benchmark, which stands at 2.9 years. The portfolio is well diversified holding some 280 positions.
Fidelity European Trust
The trust aims to achieve long-term growth in both capital and income by predominantly investing in equities of continental European companies. The strategy is focused on identifying long-term growth opportunities in companies with strong fundamentals as well as long-term structural growth prospects. Manager Sam Morse has three decades of experience having worked at Fidelity for 18 years and looks for businesses exhibiting an ability to grow dividend sustainably over a 3-5 year period. He co-manages the strategy with Marcel Stötzel, who was appointed in September 2020.
The portfolio is comprised of quality companies trading at reasonable valuations, best thought of as a GARP investment style. The manager also runs an open-ended strategy – Fidelity European Fund – implementing the same philosophy and approach to selecting European stocks. The process steers clear of trying to time markets and typically avoids more cyclical stocks and smaller companies in order to manage downside risk. The managers are supported by a breadth of resources at Fidelity, with a group of dedicated European analysts as well as a well-established team of ESG research specialists. With the manager being well-resourced and seasoned cautious investors focusing on ensuring capital loss mitigation on the downside, clients are set to benefit from this approach amid continued market turbulence. Trading on a -4.9% discount (as at 1 December 2022), the trust has offered protection in falling markets YTD, while also outperforming both the broader European equity market and sector. Returns are also ahead over the longer term, with broadly similar levels of volatility. The trust carries an overweight to financials, technology and consumer discretionary names, featuring some of the household names at the top of its portfolio, including Nestlé, Roche and ASML.
First Sentier Global Listed Infrastructure fund
As the prospect of recession is staring investors in the face, the importance of portfolio diversifiers in the form of real assets such as high-quality infrastructure has been clearly illustrated. Whether it is through energy needs, distribution networks or communication services, infrastructure is a key part of a fully functioning economy. Due to the ongoing war in Ukraine, the importance of energy security and independent infrastructure assets also came to the fore. The First Sentier Global Listed Infrastructure fund looks to provide exposure to all of these areas and more in a global portfolio of infrastructure companies. With over 40% invested in energy related companies, it provides exposure to many who are leading on energy transformation while also giving exposure to critical distribution infrastructure such as railroads and toll roads. The portfolio is biased towards the US sector (c.58% of assets) and has material exposure to electric utilities (30%), highways and rail tracks (15%), and multi-utilities (14%). It is currently yielding 2.6%. The fund benefits from the experienced team at First Sentier based in Australia, who have been at the forefront of infrastructure investing for many years. The fund is ahead of the index YTD, having kept up with the market rally from the lows in March, delivering a gain of +8.8%, relative to the index gain of +7.3%. Longer term performance is also ahead of the broader market.
Worldwide Healthcare Trust
Having emerged from the Covid-19 pandemic and now facing a prospect of a global recession, a healthcare selection might seem like an obvious choice, but Worldwide Healthcare Trust had a tough 2020 and has languished so far in 2022 for a number of reasons. With an underweight to the big Covid pharma stocks and an overweight to life sciences, biotech and China, this trust has faced some strong headwinds and underperformed its benchmark by 20%. Challenges around Chinese exposure persisted in last couple of years.
However, the bigger picture away from the immediate Covid winners’ story is how the rapid drug development of the last 18 months translates into revolutionary new treatments looking forwards. In a recent update, managers talked about biotech being in a ‘sweet spot’ and the place to be in a recession. Despite a widening discount (-5.9% at the time of writing), the managers are bullish about the healthcare sector given its track record of delivering revenue growth and share price outperformance during recessionary periods. The trust’s managers, healthcare specialists OrbiMed, continue to find very attractive opportunities and the issues in China have created further buying opportunities. In addition, the trust has access to private markets and has been looking to invest in the unlisted space with c.7% of the trust now here. With the long-term drivers behind healthcare well established and further investment set to continue making for an exciting future ahead for drug development, this broad, diversified play on healthcare looks attractive after a period of significant underperformance. Lastly, the high levels of mergers and acquisitions over the prior quarter are a key signal that the sector is reviving after a difficult start to the year, offering an opportunity to profit from companies being acquired (typically at significant premiums).
JPM Emerging Markets Income
While emerging market equities have suffered material underperformance over the last few years, this has largely been driven by steep losses in China. Amid numerous challenges, including property sector rebalancing, common prosperity narrative, geopolitical risks around Taiwan and zero-Covid lockdowns to name but a few, investors may (understandably) feel nervous. Having said that, China is likely to start emerging from its zero-Covid policy in due course, and while western central banks are fighting inflation in full force, emerging economies were swift to react and raised rates earlier, with many regions now in a position to start easing policy. As inflation starts to come down from its peak in the US, this might also signal a change in the stance for the Fed as it continues its tightening policy, though likely at a slower pace. This, in turn, could mean a pullback in US dollar, which should also be supportive for emerging markets.
An equity income approach at the current juncture appears attractive, offering some cushioning in the form of regular dividends. JPM Emerging Markets Income fund is currently on our Favourite Funds list. Yielding c.4.2%, the fund aims to provide a portfolio designed to achieve income while participating in capital growth over the long-term (5-10 years). This is a credible EM income strategy with a breadth of analytical support combined with a dedicated portfolio management team focusing on the income consideration. Diversified across c.90 names, the fund offers sufficient compositional breadth, while ensuring diversity of drivers underpinning its dividend. The fund is closely aligned with the closed-ended JPMorgan Global Emerging Markets Income Investment Trust listed on the LSE, with the strategy launched one year before this fund in July 2010. The trust is yielding c.4.8% and can carry up to 20% gearing, although it currently has little based on the latest available figures and has a higher exposure to China (c.30%) compared to the open-ended vehicle (c.27%) and the broader index benchmark (c.26%).
City of London IT
For many investors who want income the UK is the obvious place given its traditionally higher yield, and City of London Trust is, perhaps unsurprisingly, one of the highest yielding trusts on our Trust Select List. Yielding c.4.9%, the trust aims to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange. It has the longest track record of dividend increases of any investment trust for annual increases in dividends, since 1966. It has achieved this mainly by focusing on quality companies able to grow dividends over time. The board fully recognises the importance of dividend income to shareholders, with a relentless focus on consistency over time – the trust is able to hold back up to 15% of its income, beefing up revenue reserves for use in challenging times when company dividend income may be cut. The trust invests mainly in UK equities with a bias towards large, multinational businesses able to grow their profits consistently over the long run.
Manager Job Curtis has been running the trust since 1991 and has a valuation-driven conservative investment approach focusing on sustainable income and long-term capital growth. While invested mainly in UK stocks, the companies underpinning the portfolio enjoy overseas revenue streams making for a diverse global exposure. Overseas names include the likes of TotalEnergies, Nestlé and Novartis. Diversified across some 80 holdings, the manager focuses on delivering a level of capital protection in falling markets, as well as being able to capture benefits on the upside. One of the largest and most liquid trusts within the UK Income category, it is currently trading on a premium of c.2.1% and has performed well over time. Some of the largest holdings are British American Tobacco, Shell and Diageo.
Jupiter Asian Income fund
Away from the UK, there are other regions with strong dividend cultures. In Asia, dividends have long played a key role in shareholder returns and the Jupiter Asian Income fund looks to capitalise on this. Asian companies continue to be relatively well managed with low debts, helping to support the dividend which currently sits at c.4.7% from a concentrated portfolio of 28 names. Manager Jason Pidcock is a cautious investor, seeking out high quality companies that have strong management and governance, as well as a clear focus on the shareholder to ensure dividends are a key part of the company strategy.
The fund has historically been significantly underweight with regards to China, fully exiting its position earlier in the year. Political risk has been a significant concern for many investors since the Chinese government began implementing its common prosperity policies, while heightened tensions with Taiwan proved to be the final straw for the manager in this case. At a country level, the fund carries a material overweight towards Australia (c.35% exposure) relative to the broader index (c.18%). At a sector level, the fund is overweight towards energy, industrials and technology. Materially ahead of the index and the IA sector in 2022, the fund delivered a +7.5% gain amid falling markets (index down -10.1% and the sector fell -6.7%). Top holdings – including Woodside Energy Group and BHP within energy and materials sectors, together with technology and consumer staples Hon Hai Precision Industry and ITC – have delivered strong absolute returns for the strategy over the period. Intended for use by journalists only, not to be relied on by consumers.