Introduction by Thomas Becket, Chief Investment Officer

As always at this time of the year, the Psigma Investment Team like to dust off the crystal ball and outline their key fund picks ahead of a New Year. It might well sound cowardly, but our key view is that the outlook for the year ahead is as “confusing” as it has been for some years and we expect the immediate future to be highly unpredictable as the confluence of a slowing economy, unsettled politics and increasingly attractive valuations throw up a range of different possibilities for the coming year. That being said, the good news is that the recent pullback in markets and the reset of asset valuations has thrown up some of the best opportunities that we have seen since the end of 2015 and this is reflected in our fund picks below.

Our key advice for what appears a tricky year ahead is to ignore the noise, focus on valuations and continue to take a contrarian approach. It would be naïve of me to say that risks do not exist, but likewise it would be wrong for me not to recognise that the reset we have seen in certain investments’ valuations offer great long-term return potential for investors. It is also worth noting that after a lengthy period after the initial recovery from the financial crisis a decade ago during which investors could simply own any index or asset and make a positive return, 2018 looks to have been an inflection point where active management and investment selection once again took on greater importance. We believe this shifting dynamic will afford us greater opportunity in the coming years, particularly with the investment opportunities selected here today.

Investment Theme: Fixed Interest – The Attractive Risk/ Reward Investor
Fund Choices: TwentyFour Focus Bond / TwentyFour Dynamic Bond Fund
Selected By: Thomas Becket, Chief Investment Officer

As we wrote in our Psigma Outlook for 2019, we see the situation around our chaotic political scene as an opportunity as well as a risk. With UK assets now distrusted and shunned by most global investors and approaching historically cheap absolute and relative valuations, investors should not throw the towel in on their UK investments. Whilst the obvious play is the UK equity market and we see a probable opportunity next year to move overweight UK equities, investors could find better risk/reward opportunities in UK credit markets. Indeed there currently exists a “Brexit” premium that investors can take advantage of in high quality fixed interest investments, where UK companies are being charged around 1% higher to issue debt than their global peers, as markets worry over the threats posed by our departure from the European Union and the spectre of Prime Minister Corbyn. Whilst we think the political factors are a potential threat to profitability, we don’t see them as structural solvency risks, and this allows us to reap the rewards caused by other investors’ nerves. Indeed, some of the pricing of bonds in the recent turbulence around a global economic slowdown and our domestic political mayhem has become nonsensical and allows nimble investors outsized rewards, which we have aimed to take advantage of in our specialist fixed interest mandate the TwentyFour Focus Bond fund (they can also be found in the TwentyFour Dynamic Bond fund). These opportunities can currently be found in the financial sector, in particular. The important messages for investors in fixed interest markets now are to be short in terms of duration, be in funds that will not come into challenges over liquidity and are very selective in the bonds they buy. I cannot personally understand why investors are still happy to keep outsized positions in very large bond funds, which is something we shall continue to avoid doing.

Investment Theme: Asian Equities – The Contrarian Investor
Fund Choice: BlackRock Asian Growth Leaders
Selected By: Daniel Adams – Senior Investment Analyst

One of the best long-term opportunities we can find in markets today is in Asian equities. The ongoing “trade war” between China and the US has led to a significant de-rating of Asian Equities over the past 12 months. Although there remain obvious risks around trade, we believe that anyone who can “look through the noise” will be handsomely rewarded over the long term. For a contrarian investor, Asian equities trade on compelling valuations, on a price-to-earnings of just over 11x, a dividend yield over 3% and a price-to-book of 1.3x. Historically, the latter has been a particularly good indicator of a buying opportunity in the region, although historical observances imply that Asian equities can become cheaper still. The BlackRock Asian Growth Leaders fund is run by the impressive Andrew Swan and his team, who have extensive experience investing in the region. We believe the manager’s flexible style and strategy (opportunistic with a macro overlay) is particularly well placed to take advantage of the ever-changing market environment and the accompanying bouts of volatility. While the fund is not wedded to a particular style, the fund currently has a value and cyclical tilt to the portfolio, which is unsurprising given the huge performance differential between growth and value over the past decade. While slowing economic growth globally and the negative trade backdrop act as near term headwinds, investors should recognise that the world’s most potent economic engines remain in the East and the fund is extremely well positioned to benefit from this over the long term. In addition, we would be unsurprised were a fiscal stimulus to emerge from China early next year, driving an improvement in risk appetite towards the increasingly unloved region.

Investment Theme: Long Term Recovery – The Activist Investor
Fund Choice: RWC Nissay Japan
Selected By: Daniel Adams – Senior Investment Analyst

The Japanese equity market has suffered extreme swings of investor sentiment during the last decade, principally driven by investors’ misplaced obsession over the direction of the yen and the successes and failures of Abenomics. What we consider to be a far more important positive long-term factor for investors to consider is the slow but steady change in corporate culture occurring within Japan and, in particular, the improved focus on shareholder returns, much of which we believe has gone under the radar of global investors who appear to hate Japanese equities. This is currently reflected in Japanese equities’ valuations; indeed we consider Japanese equities to offer compelling absolute and relative value, with the Topix Index trading on a forward price-to-earnings of just 12x and a dividend yield of 2.5%. Collectively companies also have very strong balance sheets, which provide a huge amount of flexibility with regards to dividends, buybacks and ongoing CAPEX requirements. We are beginning to see the fruits of these changes in some companies’ share prices, but feel there is plenty of value on offer for the contrarian investor, supporting our long-term commitment to the region which began in 2011. Despite the strong performance of the Japanese market from the 2013 lows, the market has actually de-rated over this period, with earnings growing faster than the market’s rise. The RWC Nissay Japan fund directly exploits the corporate governance theme, working with a concentrated number of companies that trade at attractive valuations, but also offer scope to increase returns by engaging with management to help improve the companies’ operations and drive better shareholder returns.

Investment Theme: Long-Term Equity – The Patient and Considered Investor
Fund Choice: Loomis Sayles Global Growth
Selected By: Martin Ward – Senior Investment Analyst

Information overload is rife in today’s investment environment, with it seemingly becoming harder to “look through the noise” and take a long-term view. This strategy does exactly that, with Aziz Hamzaogullari and his team being genuine long-term investors, aiming to find quality growth companies that are trading at significant discounts to the teams’ view of intrinsic value. Quality is defined as difficult to replicate business models with protective “moats”, while the company must be able to demonstrate sustainable and profitable potential for growth, with a particular focus on long-term secular drivers. The team are pure “bottom up” stock pickers, taking a private equity approach to investing, with the output being a high conviction portfolio of 38 names. Long-term annualised turnover is always expected to be at sub 25%. We have been hugely impressed by the team’s thorough and detailed approach to research, with each stock owned known “inside and out”. This is a strategy where you trust the process employed by the team, take a long-term view and let the manager deliver genuine alpha over the medium to long term. Performance since inception for the strategy has been strong and given the rigorous and repeatable investment process, we would expect this outperformance to persist. We are long-term holders, aiming to “look through the noise”.

Investment Theme: Defence – The Panicking Investor
Fund Choice: BlackRock Gold and General
Selected By: Rory Mcpherson, Head of Investment Strategy

My fund pick for next year is the BlackRock Gold and General fund, which forms part of our “alternatives” allocation to defensive strategies. Gold mining stocks have been pretty insipid since their big bounce in 2016, but we are of the belief that the tide has turned and that 2019 could well be their time to shine (please excuse the bad pun!). Gold was swimming against the tide for much of this year; suffering from consistent outflows from US investors who saw no need for safety, as they were enjoying a strong economy and a surging stock market. That dynamic has clearly changed and with it the outlook for the fund and asset class. Increased caution begets increased requirement for safety and could well set the scene for good times ahead. We believe that the BlackRock Gold and General fund (run by portfolio managers Evy Hambro and Tom Holl) is one of the best ways to exploit what we see as outstanding long-term opportunities within this asset class.

 

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