Each week, a professional investor tells us where he’d put his money. This week: John Goodall of WH Ireland Wealth Management.
Global equity valuations remain full on the whole, yet economic growth is slow and the outlook is highly uncertain. With the impetus from low oil prices fading, the inflation rate looks to be at, or close to, the peak. Total US loan growth has dropped to a three-year low – a growth rate of 4% is approximately half of what it was this time last year. Growth in UK consumer spending – the most important component of economic output – has been propped up by a record low in the savings ratio and by rising unsecured debt. This does not look sustainable in the long term.
Against this backdrop, where does today’s investor look for capital preservation, growth and income? The following three funds look attractive.
The Newton Real Return Fund is a classic defensive, alternative fund. One of its benefits is that it has a simple strategy that is easy to interpret. It invests in traditional risk assets such as equities, corporate debt and infrastructure, offset by stabilising assets such as cash, government bonds and gold. This is overlaid with hedging strategies in currencies, bonds and equities. The result is a lower-volatility fund that offers low correlation to equity markets and a strong record of capital preservation. While the fund is almost certain to underperform equities in a rising market, the reverse will be true in a bear market. At this point, the fund will be well placed to take advantage of opportunities to raise the weighting in risk assets, leading to outperformance as markets rebound.
In UK equities, we favour the Investec UK Special Situations Fund, managed by Alastair Mundy since 2002. While the fund has underperformed recently, this has been due to its focus on value stocks, an area of the market that has lagged behind high-quality and growth companies. The UK market is characterised by sector rotation, so we do not believe that this underperformance will persist. We believe that the fund will be well positioned to benefit from overweight positions in banks, retailers (both general and food) and builders’ merchants. There are clear underweight positions in the overvalued consumer-goods sector, and in mining stocks due to uncertainties in China. While not immune from the risk of recession, much of the bad news is priced in to the fund’s investments, and we remain confident in the manager’s long-term record.
The iShares MSCI Target UK Real Estate ETF is a relatively recent addition to WH Ireland’s recommended buy list. The fund reflects the new composition of the real-estate asset class in the WMA Private Investor Indices following the switch from FTSE to MSCI earlier this year. The fund aims to provide targeted exposure to liquid real estate, as opposed to traditional “bricks-and-mortar” investments. Around 30% is currently invested in short-dated index-linked gilts, with the balance in UK-listed real-estate investment trusts (Reits). We believe this is where the value is in listed property: operators such as British Land and Land Securities trade at large discounts to net asset value, while listed property trusts currently trade at large premiums. Although the fund is only small, at around £10m in assets, we expect it to grow quickly as investors look for a cost effective way to buy into the sector.