Fund tips for 2015

Europe

The outlook in Europe may not look good, with a snap election coming up in Greece and fears over default. But a number of advisers and investors are betting on Europe. These include Tilney Bestinvest, which believes that European equities are likely to benefit from a European Central Bank asset purchase programme this year.

"There are challenges to the economy in this region and political risk, but there have been for the past five years," admits Ben Seager-Scott, director, investment strategy at Tilney Bestinvest. "But European equities are cheaper than 12 months ago and while markets may have gone sideways, earnings have gone up. Elements of the current risk are also priced into valuations, which makes them more attractive than developed markets such as the US which is expensive."

Asset manager Martin Currie expects European equities to bounce back in 2015, with the impact of quantitative easing on the region's potential underestimated.

"The disadvantages, pain and political impact of Europe's struggle to reform its economies and cost structure are well known," it says. "What's less appreciated - and likely not yet reflected in share prices - is the potential advantages that may accrue to companies doing business in that same environment. The combination of rampant unemployment and the mobility of labour within the EU have had the effect of driving labour costs down in parts of peripheral Europe, to the dismay of many, but to the advantage of employers trying to compete in a difficult global economy. If you then include the potential benefit of a more open-handed European Central Bank, as well as the heavily promoted €300bn ($374bn) infrastructure fund and the declining euro, it could add up to a solid year for select European companies."

Mick Gilligan, head of research at broker Killik & Co, points out that, despite the still fragile state of the economy, the European equity market is home to a range of global leading companies. Equities in the region trade on a discount to US peers (based on forward price-earnings), while on an aggregate basis earnings across European companies have significantly lagged behind those of their US peers post financial crisis. "Considering these two metrics, a sustained period of recovery could lead to attractive equity market returns over the coming years," he says.

However, Dr Seager-Scott also points out that quantitative easing can have a downward effect on currency so suggests getting exposure to Europe via a fund with a hedged share class.

There are not many that offer this, but options include JPMorgan Europe Dynamic (ex-UK) Fund GBP Hedged (GB00BCV7MM92), which offers a sterling hedged C share class.

The fund is unconstrained by benchmark, country, size or sector, with absolute rather than relative risk controls. An active approach to stockpicking, rigorous fundamental analysis and a desire to exploit inefficiencies in the European stock markets combine to focus on contrarian value and under-recognised growth opportunities.

The C share class of the fund is available on platforms including Bestinvest and Fidelity Personal Investing, or via intermediaries.

Source: JPMorgan as at 30 November 2014

Japan

Japanese equities did not have the best 2014, with the Topix index of Japanese domestic companies returning just 2.68 per cent. However, advisers and analysts are more optimistic for the year ahead.

"While scepticism about the efficacy of the country's aggressive stimulus programme is well deserved, we believe it ignores real change in company governance toward creating shareholder value," comments asset manager ClearBridge Investments. "This fundamental improvement has yet to be discounted in share prices, with valuations remaining among the lowest in the world. We believe low expectations for improvements in profitability and growth set the scene for continued upside surprises."

"Corporate earnings in Japan are likely to continue to improve," adds Simon Somerville, manager of the Jupiter Japan Income Fund (GB00B0HZR397). "Interim results were much better than was generally forecasted and with the weak yen we expect to see companies continue to grow in the first half of 2015. In addition, Japanese companies continue to improve shareholder returns. Interim dividends were at record levels and, by the end of November 2014, the number of companies buying back their own shares had already exceeded the total level for the whole of the previous fiscal year (to March).

"With the Government Pension Investment Fund (GPIF) and the Bank of Japan buying domestic equities on a large scale and also companies buying back approximately ¥3 trillion of their own shares annually, the dynamics for the Japanese equity market look attractive for 2015."

The Bank of Japan, meanwhile, stepped up its monetary stimulus at the end of October and Prime Minister Abe postponed the scheduled consumption tax rise from 8 per cent to 10 per cent until April 2017.

Oil price falls and wage rises could also help boost the Japanese economy, according to Chris Taylor, head of research at asset manager Neptune.

At the same time, Prime Minister Abe called a snap election, held on 14 December, which the ruling Liberal Democratic Party and its coalition party safely won with a two-thirds majority of the Lower House, which should put him in a robust position to push through significant and possibly controversial reform early in the new year.

Read more on the prospects for Japan

However, a major dent in UK investors' returns has been the strength of yen against sterling, and the impact of more quantitative easing could result in more. In our fund tips for 2014 we included two hedged funds and these did much better than unhedged Japan indices, while wealth managers such as Tilney Bestinvest are advising that investors in Japan funds stick to currency-hedged share classes of Japan funds.

Good options again include iShares MSCI Japan GBP Hedged ETF (IJPH), which outperformed the unhedged MSCI Japan NR GBP Index by a tremendous amount over the 12 months to 11 December, when we reviewed our tips.

Read more on this

The fund has a reasonable ongoing charge of 0.64 per cent and uses physical replication, ie buys the shares it invests in.

Source: Morningstar as at 2 January 2015

Asia ex Japan

A key event in 2014 was the collapse in the oil price from more than $100 a barrel in the summer to less than $50 a barrel. While this has been highly detrimental to emerging markets economies such as Russia, a number of countries that import a lot of their oil are set to benefit - and a number of these are in Asia.

The most notable example is India, but a number of other countries in the region could benefit, particularly those that subsidise energy. "These subsidies were a drag on government budgets, and lower market prices make removing such subsidies less painful for consumers residing in those countries," says Mark Mobius, manager of IC Top 100 Fund Templeton Emerging Markets Investment Trust (TEM). "Indonesia has removed some subsidies, and we see signs that India and China are moving in that direction as well. An environment of lower energy prices has helped some emerging countries embark on much-needed reforms with less painful effects."

The way to play falling oil prices is to overweight Asian economies that are energy intensive, according to analysis by fund research site FundExpert.co.uk.

"This includes India, China, Japan, Thailand and the Philippines among others," it says. "For example, 37 per cent of India's total imports are made up of oil or refined products. So a sharply lower oil price substantially improves their trade position and reduces inflation. This in turn could spur a fall in long term interest rates."

So a good option could be IC Top 100 Fund Pacific Assets Trust (PAC) which offers substantial exposure to India - 30 per cent of its assets - as well as significant exposure to the Philippines (8 per cent of assets). It is also invested in China (6.4 per cent), Thailand (5.4 per cent) and Indonesia (2.4 per cent).

The fund is one of the best performers in the Association of Investment Companies (AIC) Asia ex Japan sector and at the moment can be picked up on a discount to NAV of around 5 per cent, slightly wider than its 12-month average of 4.5 per cent.

Source: Morningstar as at 2 January 2015

Wealth preservation

While some investment areas look promising, 2015 is unlikely to be a year for the faint-hearted, according to Guy Stephens, director at wealth manager Rowan Dartington, although good returns should still be available if you can cope with the rocky ride.

If you can't deal with this volatility or want to mitigate downside for part of your portfolio, then a fund with a wealth preservation focus and a multi-asset portfolio may be a good option.

You could consider IC Top 100 Fund RIT Capital Partners (RCP), an investment trust that invests globally across a wide range of assets to prioritise preserving investors' capital over profit maximisations. It aims to achieve long-term capital growth through international quoted securities and unquoted holdings, including via other funds.

The fund has delivered positive returns in most years, and recently increased its allocation to absolute-return and credit from 7 per cent to 15 per cent. Active currency management is integral to the construction of the portfolio and has been a source of outperformance over the longer term.

The trust trades on a discount to NAV of around 4 per cent, slightly tighter than its 12-month average of 4.42 per cent.

"RIT Capital Partners provides access to a number of highly regarded external managers," say analysts at Winterflood. "The approach has delivered strong returns over the longer term, while providing an element of capital protection in down markets. Although the fund re-rated last year with a significant tightening of the discount, it has traded on a premium for extended periods in the past. With significant uncertainty returning to markets it is possible that the fund could once again trade on a premium."

It has an ongoing charge of 1.26 per cent, which is more reasonable than a number of other multi-asset funds of which the investments include other funds.

Source: Morningstar as at 2 January 2015