Uncertainty continued to cloud markets throughout 2023. Geopolitical risk has only increased over the course of last year and while inflation has begun to fall away, interest rates in Western markets remain high after one of the most rapid tightening cycles in recent memory and fears over recession remain an ever-present concern.
Nonetheless, there is every reason to be cautiously optimistic as we enter 2024, and regardless of the wider backdrop, there is always a good cohort of fund managers across asset classes with the ability to navigate challenging market conditions and identify opportunities to deliver compelling returns to investors. Square Mile’s team of fund analysts are committed to identifying such talented fund managers to help investors make better informed decisions over their fund selection.
While it is important to maintain a long-term investment horizon when considering investment options, Square MileInvestment and Consulting’s research team highlight below the funds in which they have a good level of conviction in their potential to deliver on their stated investment objectives.
David Holder, Senior Investment Research Analyst:
Polar Capital Global Insurance fund
For investors seeking capital growth, we like the AA-rated Polar Global Insurance fund for several reasons, not least due to the proven investment approach of its lead manager, Nick Martin. It invests in a sleepy sub sector of markets that is not widely covered, perceived as complex and which includes many firms of variable quality. Mr Martin has built a deep pool of company knowledge and is well informed in the intricacies of investing in this sector.
The fund typically comprises a concentrated portfolio of 30 to 35 holdings from across the market capitalisation spectrum although it is biased towards medium sized insurers, preferably in the US, Bermuda and the UK with non-life insurers accounting for c.90% of the portfolio. Mr Martin, and co-manager Dominic Evans, are long-term investors who look for insurance businesses globally that have high returns on equity and profitable underwriting records. They will tend to avoid firms with long-term liability claims, which can be complex to value. We like the clear performance objective of seeking to deliver an annualised 10% total return per annum over the long term and pleasingly the fund’s management team has succeeded in providing returns in line with this.
Amaya Assam, Head of Fund Origination:
Redwheel Global Emerging Markets
This fund’s manager aims to deliver long-term capital growth by investing in emerging and frontier markets. This A rated fund’s objective of outperforming the MSCI Emerging Markets index by at least 3% per annum over rolling five-year periods is challenging, but we believe manager John Molloy is able to achieve this given the breadth of his investment universe. He has an impressive long-term track record and is supported by a diverse and experienced team of dedicated analysts. Mr Molloy applies a well-constructed process which includes markets that are often overlooked by other investors, and he seeks to take advantage of these where they present attractive growth opportunities. In addition, the combination of macroeconomic considerations and themes with rigorous fundamental stock research is an attractive feature of this strategy, and the resulting portfolio can look very different from the index and many peers.
Comgest Growth Europe Smaller Companies fund
The A-rated Comgest Growth Europe Smaller Companies fund has a number of attractive features and should appeal to investors seeking to grow their capital over the long-term. It follows the group’s well established house philosophy which its managers apply to identify high quality and growing companies. These businesses are typically at the earlier stages of their growth and with a market capitalisation of €1-€10bn within a portfolio of 25 to 30 holdings. The team’s edge is its company analysis and an absolute return mindset with the strategy’s success measured by investee companies’ longer-term earnings capability. The portfolio can have some sizeable positions at the stock, sector and country level which can be a double-edged sword at times, as the portfolio concentration can be beneficial when stock selection is working. However, it can also add to the fund’s volatility, which is already an inherent feature when investing in smaller companies.
Mark Hinton, Equity Fund Research Manager:
Liontrust Special Situations fund
The AA-rated Liontrust Special Situations fund, led by Anthony Cross and Julian Fosh with further support provided by Liontrust’s Economic Advantage team, is another capital growth-oriented strategy with several compelling attributes. The team works in a highly collegiate manner and has complementary skill sets, and together its members apply a very well-considered and defined investment process. This steers them towards relatively steady businesses that are gradually growing, generating high levels of cash and have a clear competitive edge. A firm must also be able to demonstrate that it can capitalise on this advantage to produce consistently attractive returns, importantly at levels that are greater than the cost of servicing its invested capital. The managers believe that companies which have this durable competitive edge will generate above average returns over the long run. The team operates with a disciplined adherence to its investment process and is fully prepared to exit those companies that lose their idiosyncratic advantage or fail to translate it into superior returns. Nevertheless, the thoroughness of the approach and experience of the team, mean that stock turnover in any given year tends to be low.
Eduardo Sánchez, Associate Research Director – Fixed Income, Alternatives & Multi-Asset:
Man GLG Sterling Corporate Bond positive prospect
The Man GLG Sterling Corporate Bond fund, which sits in the Academy of Funds with a Positive Prospect rating, is suitable for investors looking for a combination of growth and income from the sterling corporate bond market, but are perhaps more willing to endure short term periods of elevated volatility. Lead manager Jonathan Golan is a talented fixed income manager and is passionate about credit selection. He has delivered a very strong track record since he began managing sterling corporate bond strategies. Unlike many of its peer group, this fund’s edge lies in its bottom-up focus on smaller issuers and Mr Golan’s supporting team’s ability to extract excess returns from undervalued credits; many of which are overlooked by larger scale investors. While smaller issuers provide greater opportunity to be well-rewarded, they are also more volatile which can lead to larger drawdowns. Over the longer term, however, we would expect this fund to generate strong returns from the investment grade credit market.
The process begins with a top-down framework to identify a range of investment themes which then inform the bottom-up security selection. Within this, the team looks at company fundamentals, valuations, technical factors as well as the different risks involved. The team set out to extract 100% of the fund’s performance aspirations through credit selection. Hence, duration management is typically a secondary driver of returns, and is not determined by macroeconomic factors, but rather finding the best valuation along the credit curve.
Wellington Global Impact Bond fund
The Responsible AA-rated Wellington Global Impact Bond fund adopts the philosophy and process developed by Wellington to provide a clear positive social and/or environmental impact, and is suitable for income-seeking investors. The team holds the fundamental belief that the biggest environmental and social problems facing the world present some of the greatest investment opportunities. Their impact investment process is well thought through, considering issuers against the materiality, the additionality and the measurability of their impact investment case. We believe that these considerations have created a very solid base on which the team has built a credible impact strategy whilst also aiming to provide above market financial returns. Since launch in 2018, the impact bond team has delivered a strong track record of returns ahead of the mainstream global fixed income index, as well as achieving significant positive social and environmental impact through the issuers held in the portfolio.
Ajay Vaid, Investment Research Analyst:
Artemis US Smaller Companies fund
Cormac Weldon, the lead manager of the capital growth oriented, AA-rated Artemis US Smaller Companies fund, has an extensive track record in running US equity mandates. He and his team believe that investors can be slow to price in the implications of change that can enable style-agnostic investors to outperform the market, regardless of market conditions. The team conducts considerable macroeconomic analysis in order to understand cyclical and secular trends, as well as the broader outlook for the US economy. This attempts to identify emerging themes for areas of the market that are set to benefit from economic developments as well as those that might experience difficulty. The scope of this research is broad, but on its own does not determine which stocks to invest in. Meeting companies is an important source of new ideas but the team also source stock ideas through a variety of sources including broker research. Once a promising idea has been identified, the team carries out in-depth analysis to develop an investment thesis. The final portfolio provides a good level of diversification distilled through a fairly concentrated group of 50 to 70 holdings with market capitalisations of between $1bn and $10bn.
Charlie McCann, Investment Research Analyst:
WHEB Sustainability fund
WHEB Asset Management is a pioneer in responsible investing and the Responsible AA-rated WHEB Sustainability fund is a compelling option for those seeking capital accumulation from their investments, whilst making a difference to society and/or the environment. Co-managers, Ted Franks, Victoria MacLean, Ty Lee, and Claire Jervis are ultimately responsible for portfolio decisions, but given the nature of the firm, the managers operate in a highly collegiate manner with the broader investment team. Collectively, they apply an investment process which sets a high hurdle for inclusion in the portfolio to keep the overall impact high. As a result of this process, and where the team tends to find suitable stock ideas, the fund is likely to have significant biases to areas of the market such as the healthcare and industrials sectors, and towards mid-capitalisation companies. Conversely, it is unlikely to have any meaningful exposure to the energy and financials sectors and has a notable underweight to the largest companies within its MSCI World benchmark. Given its biases and the stock-picking nature of the portfolio of between 40 and 60 high quality and growing responsible companies that trade on reasonable valuations, the fund is likely to have a differing return profile against its reference index, particularly over shorter periods.
All investments are framed within nine themes – Cleaner Energy, Sustainable Transport, Resource Efficiency, Environmental Services, Water Management, Well-being, Health, Safety and Education. To keep the responsible hurdle high, a stock can only meet the theme criteria if at least 50% of its revenue or profits are attributable to that theme. The team also excludes unprofitable stocks, those below $2 billion cap and those not listed on main primary markets.
Alex Farlow, Associate Director, Multi-Asset Research:
Ruffer Diversified Return fund
The A-rated Ruffer Diversified Return fund is a multi-asset strategy with an exceptional long term track record of strong returns and relatively low-levels of volatility. It has achieved this through a dynamically managed mix of growth and defensive investments. The former mainly comprises of global equities and the latter cash, conventional bonds, index-linked bonds, gold, options and other derivatives. The exposure to options and other derivatives is primarily used to reduce directional equity market or interest rate risk when deemed appropriate. This sets this fund apart and has been particularly and consistently successful in protecting investors’ capital when it matters most. We note that performance has been disappointing in 2023, but we expect it to bounce back in 2024.
The fund’s named managers are Duncan MacInnes and Ian Rees, however, the strategy’s asset allocation and its main investment themes are set by the firm’s asset allocation committee which meets formally once a week and on an ad hoc basis when required.
