From Nick Train to property, the out-of-form funds pros are buying

Interactive investor asks expert fund buyers where they are seeing value in markets today.

Professional fund buyers are paid a fee – on top of underlying fund fees – to chop and change portfolios at the optimum time, as well as stay diversified and avoid fund clangers.

That’s why it’s always interesting to watch what they are buying and selling, particularly the out-of-favour funds they are backing for a rebound.

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Speaking to “fund of fund” managers produced some interesting findings, with a wide range of open-ended and closed-end fund ideas revealed. Here are the out-of-favour funds the pros are currently buying.

UK shares

John Husselbee, who heads up Liontrust’s multi-asset fund range, says that undervalued fund sectors at the moment include “quality” UK shares and small UK companies.

Looking out on a 12-month to 18-month view, Husselbee says investing in Lindsell Train UK Equity could prove a good move. The fund is held in a number of his multi-asset funds.

“We like to look at poorly performing funds to find out-of-favour ideas. Quality stocks have been left behind. Lindsell Trian UK Equity struggled last year but performance picked up this year. Nick Train owns the quality companies that were sold off indiscriminately last year, but are now good value.”

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Train’s fund has large stakes in Diageo, Unilever and publisher RELX, all firms he regards as owning unique assets that can grow profits steadily over time.

Over the past three years, Lindsell Train UK Equity, which is a member of interactive investor’s Super 60 investment ideas list, has returned 15% compared with nearly 30% for the FTSE All-Share index. Since launch in 2006, it is up 420% compared with a 154% gain for the index, however.

Likewise, smaller UK firms have also been punished recently by investors but now look good value, Husselbee argues. His pick in the space is Janus Henderson UK Smaller Companies. The fund has returned just 7% over the past three years, below the 25% from the Numis Smaller Companies Excluding Investment Companies index.

The fund’s biggest bets include Oxford Instruments, a firm manufacturing high-tech scientific instruments, and Impax Asset Management, a sustainable investing firm.

Husselbee warns investors against chasing fads or hot trends. He says don’t get involved in noise and trying to time the market.

“Not many succeed or survive. The strategy is to have a broad blend of funds that fit lots of investment themes and styles. We rebalance our portfolios every three months, which means we don’t become too concentrated in any area.”

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Paul Green, investment manager in the multi-manager team at Columbia Threadneedle, also likes cheap UK firms as a rebound play, highlighting Premier Miton UK Values Opportunities as an exciting fund this year.

“The fund manager uses his value-oriented process to identify mis-priced equities across the whole market cap spectrum. This adds to the out-of-favour element of the opportunity, as the fund has a mid-small cap bias, an area of the market which has been sold off most aggressively compared to large-cap defensive names. We like his benchmark-agnostic approach and focus on absolute value when assessing the fundamentals of a business.”

The fund has fallen 18.5% over the past 12 months, but its long-term track record is strong. Since it launched in 2013, it is up 131% versus a 78% return for the FTSE All-Share index. Top stocks include Shell and BP, as well Glencore and Howden Joinery Group.

Property

David Lewis, co-head of strategy for the Jupiter fund of fund “Merlin” range, says that commercial property is an out-of-favour sector they like at the moment.

Lewis continues to have confidence in the Mayfair Capital Commercial Property Trust, in which the Jupiter Merlin Income and Balanced portfolios are invested.

He said: “Managed by Swiss Life Asset Managers UK, the trust has a bias towards warehouse assets, which we believe will continue to be in high demand due to the growth in online commerce.

“The fund yields over 5% with a degree of inflation linkage and we see it as an attractive diversifying asset against the predominantly equity and fixed income exposures within portfolios."

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While it is unavailable to retail investors, investment trusts that own commercial property, which trade on large discounts to net asset value (NAV), include: abrdn Property Income Trus, Balanced Commercial Property Trust and Schroder Real Estate Investment Trust.

Green also backs the sector for a rebound. His pick in the space is LXI REIT, which has been added to some portfolios. Shares have dropped 12% this year and they trade at a 30% discount to NAV.

The trust is heavily invested in food stores, at 25% of the portfolio, followed by industrial property at 18%, and hotels at 13%.

Green said: “The REIT contains diversified assets which are let on long-term, inflation-linked leases. We highly rate the management team of Simon Lee, John White and CFO Freddie Brooks, who have delivered a double-digit average annual return since IPO in 2017. The team have demonstrated ability at rotating assets within the REIT and visibility has been improved with the re-financing of debt earlier this year.”

Japan

Japanese shares are another out-of-favour sector that Green likes. He says that Japanese equities are cheap. The MSCI Japan index has a price-to-earnings (p/e) ratio of 14.5, which is cheaper than global equity index. His fund pick in the space is LF Zennor Japan Equity Income, a fund only launched last month.

Warren Buffett has also been seeing value in Japanese shares, and has bought stakes in its large banks: Mitsui, Mitsubishi, Sumitomo, Marubeni and Itochu.

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Japanese shares have had a strong start to 2023, rising 8.5%, taking the Nikkei 225 finally above its 1990 bubble high.

Super 60 funds investing in Japan include the HSBC Japan Index, Lindsell Train Japanese Equity, and Baillie Gifford Shin Nippon, a Japanese smaller companies investment trust.