Sat. Oct 23rd, 2021

It has been an “extraordinary” and “unpredictable” year. COVID-19 forced us to completely revaluate the economic reality that we had expected at the start of 2020, whilst the unprecedented actions of governments and central banks to stem the financial losses afforded us an opportunity to buy some very cheap assets and to experience the resurgence we have seen in asset prices since the March lows. As well as the obvious wishes for health and the economy, let’s all hope that 2021 proves to be a calmer period for investors too!

For the whole of this year we have battled to keep one step ahead of the market rollercoaster and have been very active in our investment strategies, trying to make money in spite of the situation that we had admittedly not expected as we started this year. This approach continues today, as we try to use our mantra that “volatility is our friend, not our enemy” to our advantage, and we recalibrate our clients’ investment strategies to reflect the ever-changing investment reality in front of us.

The overarching view that we have for the year ahead is that the economic outcome in 2021 will be better than that of 2020 (it wouldn’t be hard, in all honesty) but that we should not immediately assume that the expected economic improvement will neatly translate in to an “easy” backdrop for financial markets.

We believe that the best way for investors to protect themselves against the uncertainty of the future is to find attractive investments and back them with conviction. We can’t pretend to be able to predict the future with any certainty, but we feel strongly that we can find several dependable and, in some cases, tantalising investment opportunities to help us achieve our aims and those of our clients. Here, as we do every year, we have outlined five of our most compelling investment opportunities for the year ahead.

Matthews Asia-ex Japan Dividend

Theme: Emerging Market Growth


The Matthews Asia-ex Japan Dividend fund was a timely new addition to our portfolios in 2020. Matthews’ investment philosophy and strategy are very much in-line with our long-term optimism for economic growth and development in the Asia Pacific countries. One of the long-term themes we have been attempting to gain exposure to across our investment strategies is the growth of Asian domestic consumption, and this strategy enables us to efficiently access this theme. Asia is also home to diversified sources of income, with no single sector dominating the region in terms of dividends paid. A diverse group of sectors such as information technology, healthcare and consumer discretionary have accounted for the fastest dividend growth over the past decade. We would consider the investment focus of this strategy to be on “high-quality” companies; the managers aim to blend both higher yielding shares and dividend growth stocks in order to generate an attractive total return, combining both income and capital appreciation. The current yield is close to 2%, with the fund currently tilted towards dividend growth stocks, which the team at Matthews view as a specific opportunity for the months ahead. The key thesis of the team is that dividends can be an important signal of successful capital allocation, business quality and corporate governance. Since inception, the fund has had an attractive return profile, with an upside capture of 91.81%, downside capture of 67.98% and beta to the wider market of 0.84, which perfectly suits the approach that we have in managing our clients’ portfolios.

TwentyFour Core Corporate Bond

Theme: Defence


The TwentyFour Core Corporate bond fund is one of the “solid defenders” in our portfolios and was specifically created for our clients in 2016; it is a tailored version of the manager’s (Chris Bowie) main fund at TwentyFour. This segregated fund approach gives us additional comfort around liquidity, as we are in total control of flows in and out of the strategy, ensuring that the fund is not forced to sell bonds in times of market stress, as could have been the case in March 2020. The smaller size of the fund also allows it to remain nimble, and affords us an advantage to take opportunity of specific situations in credit markets that some of the bigger funds in the asset class simply would not be able to. We think it is key that the fund does not have to own any bonds it does not want to (as opposed to increasingly popular passive funds), and the team can be very selective in constructing a high-conviction portfolio of around 100 bonds. The fund can be selective and still offer a higher yield than the market, while taking lower interest rate risk, which could be vital to protect the fund, in our opinion, in the uncertain environment ahead. The yield on offer is 2.2%, a premium of 0.5% to the benchmark, while the fund also has a lower duration than the benchmark of 6.7yrs vs 8.7yrs. The yield premium does not sound like much, but in a low-rate world, we feel this is attractive without taking on any unwanted risks for our clients. The bonds within the portfolio also still look attractive, with a credit spread on offer against government bonds of 180bps vs 133bps for the benchmark. To end of November, the fund has performed exceptionally well on a risk-adjusted basis in 2020 against its peers, something we feel confident that the manager will be able to repeat in the coming years.

NinetyOne Global Environment Fund

Theme: Long-Term Equity


Climate change is a global threat and every industry must evolve to confront this challenge. The ethos at NinetyOne Asset Management is ‘investing for a world of change’ and the Global Environment Fund is at the forefront of this shifting landscape. The fund, which we invested in at an early stage, invests in companies that are enabling the transition to a low-carbon world and seeks to capture the structural growth opportunity that is driven by decarbonisation. The fund focuses on three key areas of decarbonisation: renewable energy, resource efficiency and electrification. As well as offering an excellent investment proposition, the fund aims to have a measurable positive impact through investing in the companies that are solving the world’s environmental challenges. The fund has returned 48% since we added it to our portfolios in May 2020, making it our top-performing investment over that period. However, more importantly, we believe that such sectors can continue to outperform in the future. In response to the economic havoc wrought by COVID-19, governments around the globe have directed their fiscal stimulus towards a green recovery, one that “builds back better”, and this has led to a boost for sustainable businesses. We have had a strong track record of identifying long-term themes to exploit within our strategies, and, in our view, the transition to a sustainable economy is an investment theme which is necessary to limit global warming but also one which we believe can generate significant investment returns for our clients.

UBS Asia Full Cycle Bond Fund

Theme: Hunt for Yield


It says a lot about the investment landscape today that we’re excited about a fund yielding just shy of 4%! However, with around $17 trillion of debt globally offering a negative yield to income-strapped investors, combined with record-low yields in UK investment grade and global high yield bonds, we, like all investors, are being forced to cast our “investment nets” much wider, and 4% for investment grade credit risk is extremely compelling. We do not believe that the significant yield premium will last forever, as other investors follow our lead into such investments. With that in mind, we’re delighted to have made a recent investment into the UBS Full Cycle Asian bond fund, which is run by Hayden Briscoe and his wider team, who we think are the best in the business. In addition to yielding roughly double what a similarly rated western developed credit fund might, it also comes complete with a commensurately shorter duration than its western investment grade brethren (of roughly 5 years). This gives us higher levels of predictability about the future returns. Our current proprietary forecasts suggest that returns in the order of 4% are achievable from this fund as we look towards 2021. In addition to the yield pick-up, there’s also the lower debt burden of the sovereign issuers within Asian economies that makes their debt dynamics attractive and sustainable. Furthermore, the gradual introduction of China’s $15 trillion dollar bond market into global and emerging market benchmarks provides an extra kicker for these markets, if the yields alone aren’t enough to lure other investors in. We take great comfort in these catalysts as we look towards 2021 and are extremely pleased to have introduced a differentiated source of yield and return into our clients’ portfolios in the last few months.

Polar Capital Healthcare Blue Chip Opportunities

Theme: Long-Term Equity


Healthcare remains a structural long-term investment opportunity for us to exploit on behalf of our clients. This strategy invests in high-quality developed world healthcare companies, specifically targeting the growth opportunities created by an ageing population, technological advances and increasingly personalised medicine. It has proven to be an excellent sector for us to be overweight at the start of 2020: investors became more bullish on the sector as it was offering defensive earnings potential in a world where earnings expectations were being slashed. It was understandably perceived to be a major beneficiary of the pandemic. We have actively managed our position in this fund through this year. We took profits in May, after a great start to the year, before increasing our position once again recently, following a period of relative weakness for the sector. We believe that recent developments have been positive, with healthcare less likely to be a target for regulation under a Biden administration. Moreover, the current undervaluation adds to the sector’s attractions and it continues to be a sector of steady, resilient growth driven by the underlying fundamentals. This could be vital in the “low-growth environment” we expect ahead. Overall, the fundamentals and macro environment look very attractive for healthcare, whatever 2021 throws at us!

Thomas Becket, Chief Investment Officer

By Editor