21st March 2013
When it comes to the stock market, a rising tide does not necessarily float all boats. Certainly, many fund managers have done well out of the hike in equity markets since June of last year, but a number of managers have been left behind; not necessarily because they have become bad managers, but because the environment has not suited their style. So, as investors fret that they have missed the rally, the alternative to chasing those who have done well, could well be finding out if there are any gems among those who have done badly. Investment journalist Cherry Reynard considers the options.
Perhaps the most fruitful ground initially is anyone with natural resources exposure. Mining and commodities shares have been widely unloved as investors have been troubled about the potential for a ‘hard landing’ in China. Mark Dampier, head of research at Hargreaves Landsdown says: “If the rally continues, eventually investors are going to ask what has been left behind. Natural resources have been absolutely clobbered.”
Investors could pick up one of the commodities focused funds that have been hit hardest. Dampier suggests a proven, quality manager such as Neil Gregson on the JP Morgan Natural Resources fund. The fund is down 22.5 per cent over one year, placing it near the bottom of the specialist sector. Other funds could include the BlackRock Gold & General fund or the Junior Oils Trust. All these funds have shown themselves to be top performers in more buoyant commodities markets.
Another option may be to pick a more generalist fund that has been hurt by its commodities exposure. Dampier suggests the M&G Global Basics fund. Manager Graham French recently admitted that 2012 was the worst year of his career – reported here on Citywire – and apologised to his investors. The fund suffered from a heavy allocation to resources stocks and also from a few poor stock choices, notably G4S, but French has a strong long-term track record.
As the spectre of a Chinese hard landing recedes, many of the issues that have dogged resources companies may fade and some big institutional investors are changing their views.
As Ft.com reported recently Calpers, the largest US public pension fund, has endorsed commodities as a safeguard against inflation despite recent moves to pull money from the asset class.
The $255bn fund chopped commodities investments by more than half late last year, prompting reports it was retreating from the market…Andrew Karsh, portfolio manager for fixed income and commodities at Calpers, said the fund’s shift from commodities to inflation-linked bonds may be “short-lived and did not reflect a change of strategy.”
Another area that has suffered has been recovery funds. Although some with a strong value tilt, such as the Schroder Income and Schroder Recovery funds, have done well out of the recovery in financials, a number have suffered from the lack of merger and acquisition activity in the market. Notably, Tom Dobell, veteran manager of the M&G Recovery fund, has lagged the rising market. His fund is still in positive territory over one, three and five years, but substantially behind the wider UK All Companies sector.
Psigma believes that merger and acquisition activity may come back strongly this year as companies come under increasing pressure to deploy the cash that has built up on their balance sheets. Tim Gregory, head of global equities at the group says: “This area has been very quiet for a long time and we expect it to pick up. Shareholders are making quite a lot of noise and we believe the Heinz deal was a game-changer.” They are investing in the Rothschild Europe Synergy fund, but funds like Dobell’s should also do well.
The other option is to look at ‘quality’ focused managers. There are plenty of managers who will have studiously avoided financials on the basis that the business models remained opaque, who have suffered for their prudence this year. Ben Yearsley, head of investment research at Charles Stanley Direct, says: “There are a number of quality managers that have been left behind by the rally. Here I would highlight managers such as Anthony Cross at Liontrust.” He believes some of these strong managers should rebound.
Other managers that have been hurt include Mark Slater of the MFM Slater Growth fund, whose high technology position has acted as a drag on performance. John Wood, manager of the JOHCM UK Opportunities fund, has also been hurt by a ‘quality’ focus. In Europe, managers such as Barry Norris, manager of the Argonaut European Alpha fund, have seen shorter-term performance hit by being out of voguish areas such as financials.
Although emerging markets as a whole have been extremely popular, taking the lion’s share of equity inflows since the start of the year, certain parts of emerging markets remain widely unloved, notably in the BRICs. Russian has been the worst performer: Baring Russia is down 9.6 per cent over one year, Neptune Russia & Greater Russia is down 6.4 per cent and the Pictet Russian Equities fund is down 5 per cent. Latin America, in particular Brazil, has also been weak. China’s problems have been well documented, but some of the managers who have struggled most over the past three years in China – Anthony Bolton at Fidelity or Philip Ehrmann at Jupiter – are now starting to see performance turn. Michael Konstantinov has strong historic performance on the Allianz BRIC stars fund, but has suffered from the weakness of the largest emerging economies.
Many asset allocators may now be starting to question the sustainability of the equity market rally, but there are areas and fund managers that have not participated in the rising markets that may still provide opportunities for investors.