Funds and trusts four professionals are buying and selling: Q4 2022

Our four fund buyers name their most recent buys and sells, and share their outlook for the months ahead. 

The bear market does not show significant signs of abating. The S&P is down by 18% over the past six months and the FTSE 100 down by 8.5% over that timeframe. And yet, the pros have a range of views on how to positions themselves in this economic environment.

Every quarter, our multi-manager panel participants reveal their current bull and bear points. They discuss the new funds and investment trusts they have purchased, those they have increased their holdings in and the ones they have trimmed or sold.

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Peter Hewitt, fund manager of CT Global Managed Portfolio Trust

Reason to be bullish: Sterling has fallen notably year-to-date relative to the US dollar. With over 75% of revenues for companies in the FTSE All Share index generated overseas this currency decline against the dollar is very beneficial for UK companies with large exposure to the US and other dollar related countries.

Reason to be bearish: Rising inflation and rising interest rates create an adverse environment for equity markets. They also increase the likelihood of recession which is also a headwind for equity markets. Until investors believe they can see the peak for both it will continue to be a challenging environment for equity markets.

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Bought: Hewitt recently bought Merchants Trust, managed by an experienced team led by Simon Gergel. The trust’s focus is on large companies within the FTSE 100 index. There is a “value” bias to the portfolio and a great deal of due diligence undertaken with much emphasis on prospects for cash flows from the underlying holdings.

The top 10 positions include GSK , BAT, BAE Systems, Shell and BP, which are all major beneficiaries of a weak sterling relative to the dollar. “Merchants has achieved 40 years of consecutive dividend growth and is well placed to continue this,” says Hewitt. The trust has a dividend yield of 5.5%.

Increased:Worldwide Healthcare. “As the prospect of recession increases the underlying companies in this portfolio are likely to be more resilient than most in terms of profits and earnings,” says Hewitt. Some 34% of the portfolio is in pharmaceuticals with a further 19% in managed care, which are sectors viewed as being resilient in a downturn. “A further 25% is exposed to biotech companies. which after substantial underperformance in 2021 and the first half of 2022 are very undervalued,” points out Hewitt.

Reduced:Chrysalis Investments. The trust buys fledgling companies that might make it big, such as buy now, pay later firm Klarna and digital bank Starling.

Its shares rose from around £1.20 at the start of 2020 to a peak of £2.70 (3 September 2021) as investors rushed to own a slice of the future. However, with interest rates rising rapidly, its share price has plummeted to 55p today.

Hewitt notes that much depends on biggest holding Starling Bank (22% of assets), which is planning an IPO. 

“Although there are some potentially interesting holdings things may well deteriorate either in terms of fundamentals or valuations before any recovery takes place,” adds Hewitt.

David Hambidge, investment director of multi-asset at Premier Miton Investors

Reason to be bullish: Bonds, equities and a number of other asset classes have priced in a lot of bad news this year and as a result valuations are now starting to look more attractive.

Reason to be bearish: Money will continue to get more expensive over the coming months while in the UK, interest rates may rise more than previously anticipated following the recent ‘mini’ budget which is targeting higher economic growth at a time when inflation remains close to 10%.

Bought: “Following a dreadful period for both government and corporate bonds we have added the Royal London Sterling Credit to our income portfolios,” says Hambidge.

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The fund is predominantly investment grade bonds, with the majority invested in UK fixed interest securities. “The yield on bonds is now starting to look for attractive and following the recent decline in bond prices, the distribution yield has risen to well over 4%, with the yield to redemption much higher than this,” he says. “This of course assumes no defaults, but this is a quality fund with a very experienced team behind it.”

Increased: Hambidge recently added to his position in Primary Health Properties, a London-listed fund which invests in a diversified portfolio of quality healthcare facilities. He says: “Prices of listed UK property funds fell sharply in September following the steep rise in bond yields and as a result new investors are being compensated with a mid single digit yield and the prospect of decent dividend growth.”

Reduced: Pictet Strategic Credit.This fund has held up well over the last few months, but given the rise in bond yields Hambidge has reduced exposure in favour of higher yielding opportunities elsewhere.

Vincent Ropers, co-manager of TB Wise Multi-Asset Growth and TB Wise Multi-Asset Income

Reason to be bearish: Inflation pressures continue to strengthen central banks resolve in tightening financial conditions, despite the pain this will undoubtedly cause to economies. As such, recessions are looming, and the times ahead will remain volatile.

Reason to be bullish: While never pleasant, those recessions still have the scope to be shallow with economies helped by a strong employment market and relatively strong household and corporate balance sheets. It is a time to be nimble and diversified but not one to run for the hills, as opportunities do exist.  

Bought: A new position added in VPC Specialty Lending Investments, which lends capital predominantly to non-bank lenders.

Ropers explains: “The loans are structured in such a way that VPC are in the driving seat, dictating terms and lending money in stages, only when objectives are delivered, limiting the risk and the duration of the debt.

“We were impressed by the level of due diligence and ongoing monitoring performed on the collaterals used against the loans.”

Each loan has a floating rate (as opposed to a fixed rate that does not move higher when central banks hike rates). This, he says, is “offering a particular appeal in an inflationary environment”.

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The trust trades on a wide 29% discount, and offers a yield that’s close to 11%. “While not without risk, we think the upside more than outweighs the downside risk,” says Ropers.

Increased: He added to his exposure to fixed income markets via the TwentyFour Strategic Income Fund, first purchased in the second quarter. The fund gives provides broad exposure to the global government and corporate bond markets, “managed by a team we rate highly and offering us a yield close to 9%,” says Ropers.

He adds: “With fixed income markets suffering one of their worst years on record with both base rates and spreads widening, very attractive yields can currently be locked in without having to extend duration (sensitivity to interest rate rises) or go down the quality too much.”

Sold: Times have not been the easiest for investors in UK value equities with a mid-cap bias, which includes Polar UK Value Opportunities.   

“That said, this is an area of the market that we continue to like medium term but the increase in risk aversion this year has led to arbitrage opportunities opening up in the investment trust universe thanks to discounts widening,” says Ropers.

As such, he sold his exposure in the Polar fund to switch into the Fidelity Special Values, “which gives us similar exposure but at close to 10% discount, a level not seen for the past couple of years”.

Dean Cheeseman, Portfolio Manager, Multi-Asset Team, Janus Henderson

Reasons to be bullish: Markets, both equity and fixed interest, have already corrected a long way year-to-date and a lot of bad news – such as prolonged war in Ukraine, inflation shocks, slowing economic growth, elevated policy error risks - is already known and largely priced into current valuations.

Reasons to be bearish: There are many risks, both economic and political, which are already known and have had their potential impact repriced by the market. We should however err on the side of caution as the impact of these risks could still escalate given the current apparent vacuum of global political leadership raising the possibility of policy errors and rash decisions. Recession seems inevitable but the magnitude will determine the impact on asset prices; a shallow recession would be positive news while a deep recession would likely see further weakness.

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Bought: “Within a diversified portfolio it is important to maintain a balance of lower and higher risk assets which hopefully work in tandem with one another over a market cycle,” says Cheeseman.

During early September he repositioned his sovereign debt exposure by buying US Treasuries and sourcing this from UK gilts. “We felt that the US economy was more likely to experience only a shallow recession; inflationary pressures in the US were near peaking, and that the move to quantitative tightening should offer additional support,” he says.

His timing was fortunate with what subsequently unfolded post the UK mini-budget when gilts sold-off sharply. 

Increased: “With the correlations between equities and bonds remaining positive in the recent past, the role for alternative assets to provide diversification has increased in importance,” he says. During the third quarter he added to Montlake Dunn, a managed futures hedge fund that specifically targets uncorrelated returns. The fund is itself highly diversified and has exposures to commodities, currencies as well more traditional assets like equities and fixed interest.

Reduced: During the third quarter Cheeseman reduced his equity exposure across all regions and specifically in value-orientated strategies. “We were becoming increasingly concerned about valuations, revised corporate earnings, and recession risk,” says Cheeseman.

He adds: “Value stocks tend to outperform in recovery and expansionary phases of a market cycle, whereas we are currently in the slowdown phase heading to recession where a bias to higher quality stocks ordinarily prevails.”

He reduced his exposures to: Jupiter UK Special Situations, Dodge & Cox US Stock, and Federated Hermes Asia ex Japan.

The four multi-manager panellists

Peter Hewitt is fund manager of the CT Global Managed Portfolio Trust, where he specialises in investment trusts.

David Hambidge is head of multi-asset investment at Premier Miton Investors. He helped set up the fund-of-funds operation in 1995 and is regarded as one of the UK’s most experienced multi-managers.

Vincent Ropers is a portfolio manager at Wise Funds, responsible for multi-asset strategies, using value and fundamental investment styles. He is co-manager of TB Wise Multi-Asset Growth and TB Wise Multi-Asset Income.

Dean Cheeseman is a portfolio manager on the multi-asset team at Janus Henderson Investors. Prior to joining the firm in 2017, he was a portfolio manager and member of the asset allocation committee from 2011 at Mercer. Before that, he was with F&C Asset Management from 2007 to 2010, finishing his tenure as head of fund of funds.