A diversified ISA portfolio will have a mix of income and growth funds – the weighting dependent on timing: as a broad rule of thumb, growth for long-term and income closer to when income is needed.
Jason Hollands, managing director of Bestinvest has made a selection of seven funds to achieve growth. We then get some fund manager views on the performance of their respective funds and their views on the market outlook for 2021.
The Growth Funds Jason has selected are:
4 Morgan Stanley US Advantage
1 Fidelity Special Situations
Fidelity Special Situations, managed by Alex Wright, targets companies across the UK market cap spectrum environment, but has a bias to small and mid-cap stocks. Wright follows a contrarian approach, backing out of favour companies with turnaround potential, such as undergoing a restructuring, change of management or where he sees hidden growth not yet recognised by the market. This management style has been out of favour itself in recent years while investors have been busy jumping on the tech stock bandwagon, but more recently the fund has returned to winning form as markets have started to eye a recovery and investors rotated into shares with bounce-back potential.
2 Liontrust UK Growth
This is a smaller sister fund to Anthony Cross and Julian Fosh’s hugely successful but now quite large Liontrust Special Situations fund. It invests across the UK market-cap spectrum but typically holds around 90% of its capital in FTSE 100 and FTSE 250 stocks. Cross and Fosh look for quality companies with an ‘economic advantage’, such as intellectual property, which enables them to produce sustained profit, high recurring income streams or hard to replicate disruption channels. This leads them to business with strong pricing power, able to sustain resilient earnings across the economic cycle and away from highly cyclical areas such as banking and mining.
3 Aubrey Emerging Markets Opportunities
The fund is co-managed by Andrew Dalyrmple, a veteran investor in Asian and emerging markets. It follows a “wealth cycle” approach that seeks to identify each stage of development a country is going through and the sectors that will benefit accordingly. The four stages are rising prosperity (when countries are focused on developing their infrastructure), a behavioural change phase (when the middle class grows and new consumption habits develop); an innovation stage when there is more demand for technology and, finally, a maturity stage which drives interest in areas like financial services and healthcare. The fund invests globally but is currently 54% invested in China. In particular, the fund has strong focus on the growth of the emerging market consumer with 39% invested in consumer discretionary stocks and 29% in consumer staples.
4 Morgan Stanley US Advantage
Managed from New York by Dennis Lynch of Counterpoint Capital, an autonmous boutique within Morgan Stanley, this fund focuses on typically larger US companies with sustainable competitive advantages. The team describes their approach as investing in companies rather than shares, which means a focus on fundamental business strengths rather than trading shares. The fund takes high conviction positions and does not seek to ape a benchmark. Major holdings include payment technology firm Square Income, music streaming service Spotify and Intuitive Surgical which manufactures robotic products for use in surgery.
5 GuardCap Global Equity
The fund targets longterm growth by investing in a concentrated portfolio of global equities. The managers, Michael Boyd and Giles Warren, have worked together since 1997. While the philosophy, which emphasises quality, growth and value, has remained constant, the investment process has been intentionally honed over many years. Typically the fund will invest in high quality companies that are resilient to economic environment but grow quicker than the market. Ideas are sourced through quantitative screening and DORA days (days out researching anything) where the team research longerterm structural trends.
6 Baillie Gifford Japanese
The fund aims to achieve sustainable capital growth through investment in large and midcap Japanese equities in any economic sector. The fund has a team based approach led by Matthew Brett. Their process is driven from the bottomup, investing in companies which have strong financials, a positive industry background, a competitive advantage in that industry and favourable attitudes towards shareholders. The team, as well as the investment house, invest with a growth orientated style and typically hold companies for the long term.
7 Schroders ISF Asian Total Return
This fund targets capital growth and income through investment in equities in the AsiaPacific region excluding Japan. Managers Robin Parbrook and Lee King Fuei are based in London and Singapore respectively, and work closely with Schroders’ locally based research team. They focus on quality companies and invest with a total return mindset, aiming to maximise investor return, rather than simply beating an index. To achieve this, they use derivatives to mitigate downside risk where feasible, though their use is dependent on prevailing market conditions.
Parbrook and King-Fuei believe 2021 is likely to prove challenging for investors. They say high valuations, frothy expectations, clear bubbles in an increasingly large part of the market and rising retail participation leave them cautious on the outlook for equity returns in Asia.
The pair hope the fund can make positive returns this year but say they are now looking to position the fund more cautiously, taking profits on internet and technology stocks and if pricing is attractive adding to capital protection strategies via the purchase of puts.
“The key risks we see over the coming twelve months are firstly rising inflationary pressures or “taper tantrums” and secondly escalating trade tensions between China and the US/West. Whether inflationary pressures are short lived or structural depend very much on central bank policies. A move to MMT (or the fusion of monetary and fiscal policy) would suggest we need to review our long-held view that the world economy is deflation prone due to the 4Ds (Debt, Demographics, Disruption, Disparity in income).”
Consumer stocks add growth
Consumer stocks in the UK will also present challenges for investors. Alex Wright, portfolio manager, Fidelity Special Situations says the pandemic has had a profound impact on the UK economy, which has experienced the sharpest contraction among developed economies.
“One of the reasons for this was the way in which the lockdowns were imposed,” he says. “But a bigger reason is the make-up of the UK economy with many sectors requiring face-to-face interaction heavily impacted by Covid-19 restrictions. Some 30% of the consumption basket comes from these areas and that has had a very big effect on GDP.
“While our portfolio was defensively positioned going into the pandemic, our holdings were not immune and a few, like aerospace equipment supplier Meggitt and alcoholic drink manufacturer and distributor C&C Group, two normally-resilient businesses, have been severely impacted by the disruptions.”
However, the impact of lockdown, while curbing spending in some areas has been of benefit to other sectors of the economy.
“Unusually, consumers have not been able to spend as much as they would normally due to lockdowns and other containment measures still in place,” says Wright. “So, they are spending considerably less on transport and travel, leisure activities and eating out – normally a substantial share of their spending – leaving them with more disposable income to spend on housing, DIY, electronics and sports equipment and clothing.”
This trend, Wright says, has benefited holdings in specialist retailers such as Halfords, Dixons Carphone, Studio Retail Group and Frasers Group, which have been reporting stronger-than-anticipated trading.
Julian Fosh, co-manager of the Liontrust UK Growth fund is pleased with the way the majority of companies in the Liontrust UK Growth Fund have performed recently, given the challenges presented by the pandemic.
“During the sell-off at the start of 2020, the fund accrued good relative performance against the index partly due to its insulation from some of the areas worst affected by the pandemic. It lost some of this ground as investor sentiment and the market recovered very sharply on vaccine progress at the end of the year yet finished 2020 ahead of the FTSE All-Share Index,” he says.
Consumer goods players again saved the day with the biggest contributions to Fosh’s returns including Reckitt Benckiser and Unilever and some cyclical industrials that beat market expectations, the latter including Renishaw, the high-precision metrology and healthcare technology group, Spirax-Sarco Engineering, a designer of products regulating steam and electrical thermal energy, and Synthomer, a supplier of aqueous polymers for use in products such as textiles, paper and synthetic latex gloves.
“The pandemic over the past year, as with other crises, has shown the importance to focus on a company’s ability to trade through a downturn and its potential to emerge on the other side in a healthy position to take advantage of any subsequent upturn,” says Fosh. “The companies held by the UK Growth fund all have strong barriers to competition, attractive market positions and a history of high returns, which should stand them in good stead. Once we get past the Covid-19 crisis, these companies could be able to take share from weaker competitors who have suffered more or ceased trading altogether.”
And consumer stocks were again behind growth for the Aubrey Global Emerging Markets fund which had a really strong year in 2020 and is seeing this continue into 2021.
Rob Brewis co-fund manager said: “Longer term, the fund has significantly outperformed, which is down to the focus on the consumer and their aspirations, and in particular those areas of consumption demonstrating particularly rapid growth,” says Brewis. “Each country we invest in is at a different stage of income and so we often need to focus on different areas, those at the sweet spot of growth, and then find the best businesses to invest in.”
Brewis says 2020 was particularly helped by having over half of his portfolio in China which managed its way through Covid-19 with more success than most.
“To us, China remains the best consumer investment opportunity in the world. The rationale is based on the generational change happening, where the current crop of younger people are much more able and willing to consume, unlike their parents and grandparents who have spent the past 40 years saving.
“It is also, along with the US, the key driver of innovation in the world today. Much of this is done by China’s manufacturers as they move up in scale and technology, but much is also done in the service and consumer sectors such as e-commerce, social media and other online services. This latter area forms the core of our China portfolio.”
Brewis says India is the fund’s second largest exposure and had a torrid time early on in 2020 as the country was locked down in March, but he adds that the recovery has been stronger than almost anywhere as the virus was controlled relatively quickly.
“India is also the most exciting up-and-coming consumer market, a long way behind China, but finally starting to move and with several decades of growth ahead of it. We used the weakness in 2020 to build up our India portfolio and this is now coming through strongly for the portfolio,” he says.
Elsewhere Aubrey Global Emerging Markets’ managers are finding exciting opportunities in some of the same sectors (e-commerce, online services) in South East Asia and Brazil. Growth in these areas is just at that sweet spot right now, Brewis says.
“So overall we are optimistic for 2021,” he adds. “Global conditions are supportive: early stage recovery, low but rising interest rates and inflation. While the rally in Emerging Markets may broaden to include more traditional sectors in 2021, we do not expect a change of leadership, and that the emerging consumer remains the key place to focus your attention.”
Think long term
As ever, thinking long-term and careful analysis is key to investing – whether for income or growth. Parbrook and King-Fuei say: “What doesn’t change in our post Covid-19 world is the need for good long-term analysis. With the value of companies increasingly held in intangible assets this poses new challenges and requires a different approach. We need great analysts with the ability to think long-term and who do not get caught up in near term noise and momentum. On the other hand, we also need analysts who are not so zealous on the use of traditional valuation metrics and modelling so as to think there is a magic “number” or fair value for a business. Long-term thinking (“what/if” and scenario analysis), deep industry knowledge, out of the box thinking and extrapolation have become more important than ever as industry disruption accelerates. This is the key challenge for your fund managers, but also the most exciting one.”