Mar­kets where fund man­agers are putting their money

Laura Suter dis­cov­ers where fund man­agers have de­cided to put their money next year in search of the high­est re­turns

The Sunday Telegraph - Money & Business - - Front page -

Stock mar­kets in Europe and the emerg­ing economies will pro­duce the best re­turns next year, pro­fes­sional in­vestors say. Al­most a third of fund man­agers ex­pect Europe to pro­duce the high­est re­turns next year, while al­most a quar­ter picked emerg­ing mar­kets as the most promis­ing area, ac­cord­ing to a sur­vey by the As­so­ci­a­tion of In­vest­ment Com­pa­nies (AIC), a trade body.

Re­search from Bank of Amer­ica Mer­rill Lynch told a sim­i­lar tale, with 45pc of global fund man­agers say­ing they had a greater per­cent­age of their money in Europe than would be suggested by the re­gion’s share of global mar­kets.

After a strong rally this year, the US stock mar­ket has lost some of its ap­peal for fund man­agers: it was seen as the most at­trac­tive re­gion go­ing into 2017 but has slipped to third place for the com­ing year.

Fund man­agers said their con­fi­dence in Europe was based on steady eco­nomic growth, high con­sumer and busi­ness con­fi­dence and de­cent earn­ings growth, after a bet­ter-than-ex­pected 2017. Lucy Mac­don­ald, man­ager of the Brun­ner in­vest­ment trust, a global port­fo­lio, said: “Europe has de­liv­ered a num­ber of pos­i­tive sur­prises in 2017 and early in­di­ca­tions point to­wards an­other good year ahead. It of­fers in­vestors rel­a­tive sta­bil­ity and a strong pos­i­tive vi­sion for growth.”

How­ever, some in­vestors are still ner­vous about Europe and in par­tic­u­lar about the ef­fect that in­ter­est rate rises could have on stock mar­kets.

Ryan Hughes, head of fund se­lec­tion at AJ Bell, the in­vest­ment shop, rec­om­mended the Crux Euro­pean Spe­cial Sit­u­a­tions fund, run by Richard Pease, for in­vestors who want to bet on Euro­pean growth. He said the fund “typ­i­cally finds more op­por­tu­ni­ties in medium-sized and smaller com­pa­nies and, while it can be more volatile than its com­peti­tors, it is proof that tal­ented stock pick­ers can add sig­nif­i­cant value”.

Emerg­ing mar­kets de­liv­ered some of the high­est re­turns in 2017, re­turn­ing in­vestors more than 21pc for the year. But de­spite this, fund man­agers are still con­fi­dent, with the Bank of Amer­ica Mer­rill Lynch sur­vey show­ing that 35pc have more in emerg­ing mar­kets than their share of global stock mar­kets would sug­gest.

Nick Price, man­ager of the Fidelity Emerg­ing Mar­kets fund, said: “De­spite a pe­riod of su­pe­rior per­for­mance, it is crit­i­cal to high­light that emerg­ing mar­kets are ris­ing from a very low base. With a heavy dis­count to share prices in de­vel­oped mar­kets, these as­sets re­main at­trac­tive.”

What are fund man­agers avoid­ing?

Fund man­agers’ big­gest fear go­ing into 2018 is much the same as last year: Brexit ne­go­ti­a­tions weigh­ing on UK stock mar­kets. The AIC’S re­search found that 23pc of fund man­agers ex­pected dis­ap­point­ing Brexit ne­go­ti­a­tions to be the big­gest threat to stock mar­kets in the com­ing year.

This is al­ready re­flected in fund man­agers’ al­lo­ca­tions, with 34pc hav­ing less ex­po­sure to Bri­tain than the size of its mar­ket would im­ply, ac­cord­ing to Bank of Amer­ica Mer­rill Lynch.

Thomas Moore, man­ager of the Stan­dard Life Eq­uity In­come Trust, said: “The UK po­lit­i­cal en­vi­ron­ment re­mains highly un­cer­tain, which has re­sulted in a di­ver­gence in val­u­a­tion be­tween stocks and sec­tors as in­vestors have tended to spurn small and medium-sized stocks in favour of de­fen­sive larger stocks.”

How­ever, he said that any po­lit­i­cal un­cer­tainty could pro­vide a buy­ing op­por­tu­nity, as some stocks had be­come un­fairly un­der­val­ued.

A num­ber of man­agers said they ex­pected the lack of volatil­ity seen in mar­kets in 2017 to come to an end next year. Stephen Jones, chief in­vest­ment of­fi­cer at the as­set man­ager Kames Cap­i­tal, said: “It is prob­a­bly naive to an­tic­i­pate that mar­kets will go up in a sim­i­lar ‘straight line’ as they have this year.”

Cau­tious in­vestors should con­sider the Troy Tro­jan fund, said Mr Hughes. The fund “has a very clear eye on pro­tect­ing cap­i­tal”, he said.

“The port­fo­lio has ex­po­sure to shares, bonds, cash and gold, mak­ing it well di­ver­si­fied and giv­ing in­vestors an in­stant port­fo­lio. Should volatil­ity in­crease next year, this fund is well placed to pro­tect in­vestors,” he added.

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