US Equity

Just browsed the top 10 North American funds in FE Trustnet (by 1y, link) and they all jittery in the last 1y and have high volatility (risk between 110 and 140). True that they give good return (38%-42%), but their Sharpe is about 2-3. GAM NA Growth (FE, Morningstar) which I just sold is smoother than then top 10. Its risk is 93, 1y 29%.

Unicorn UK Smaller Co (link) is a better investment, with Sharpe of 5.9, risk of 71, 1y of 58.8%. It’s very smooth. Here’s a few other good ones from UK: Unicorn Free Spirit, Cazenove UK Smaller Co, IP UK Aggressive, Unicorn UK Income, ConBrio Sanford Deland UK Buffettology, CF Miton UK Multicap. Their return is about 40%, risk 50-110.

So I think I will be out of US market for the time being. US is still good in the long run, but it’s not as good as UK. Even Europe is generally better than US (in the sense that it gives better return for the same risk). US is good in the long run means that if we invest now, in 3 years time it will produce a good return. But it will be bumpy along the way. I will wait until it becomes smoother, probably March next year.

20th Nov 2013, note on US equity: Legg Mason Capital Management Opportunity had a stellar performance of 80% (71% in HL for A Acc). But the nasty 30% fall in July 2011 worries me. This indicates that when something goes wrong in the market, it would have a big fall. And the rebound was not quick. It got to Jan 2011 level in Jan 2013 (2 years period), whereas S&P fell 20% in July 2011 and got back to that level in Jan 2012 9only 6 months). There might have a change of policy or management in Nov 2012, because since then the performance was excellent: 70% in 1y versus S&P of 30%. The market fall in June 2013 and mid Sep was handled very well by this Legg Mason fund. Overall it is a good fund and worth considering. Whitechurch uses it.

The fund may invests in equity, bonds, derivatives, and not limited by industry, size or asset class. It’s in USD.

US Equity

Focus on UK

UK equity is the best investment in the next 1 year, and for 2 year horizon it’s US and Europe. Japan is oscillating converging so I am avoiding it at the moment. Bond has been poor since May so we should avoid it, including bond in mixed investment and IL gilts. Strategic bond is better, but I would avoid as there are better places (for now). China had a sharp drop in June, but has been better ever since. Still, I would avoid China because there are better places. It is possible that strategic bond and china are investable in 2014, but at the moment they are not. EM is also not investable in 2013. Absolute Return looks like bond: less risky. Avoid gold and commodity, they are not investable (loss making and risky).

I prefer a portfolio of something like: 40% UK Equity, 10% US Equity, 10% Europe Equity, 10% Absolute Return, 10% Healthcare, 20% Asia Property. Or make UK Equity 50%, reducing both Absolute Return and Healthcare to 5%. For UK, US and Europe equities, I prefer small cap. But I’m open to equity income and absolute return if they are brilliant, for example IM Argonaut European Absolute Return (33%, 10), Cazenove European Income (34%, 16) and Cazenove UK Opportunities* (39%, 10). Numbers in brackets are 1y return and vol. Star indicates that I have it in my portfolio.

Best small cap for UK are Cazenove* (45%, 7) and Fidelity* (52%, 8), who have been in the top spot for a long time. For Europe, best small cap are Ignis* (50%, 14) and Schroder (45%, 13). For US, Threadneedle (32%, 16) and GAM* (27%). For Absolute Return the best one is Cazenove Absolute UK Dynamic* (19%, 9). For Healthcare my preference is Schroder* (32%). One factor that limit me from getting the best fund in FE is if the fund is not available in my brokers (HL & TD), or if there is a big spread. For example, in Absolute Return CF Odey is legendary, but it it’s not available.

If those good funds are currently down, it is important that we wait until it has bottomed and goes back up. We should never catch a falling knife. But leave it drops to the floor and pick it up on the way up. Classic I know, but very important. With funds, which lag 1-2 days to equity, it becomes more important that we wait until it has bottomed. The other thing I keep reminding myself is that if the price has rocketed to the sky, such as Argonaut European Absolute Return, the risk of it dropping is big. Especially if it is long only. With Absolute Return it is possible to sustain the phenomenal growth because it is long short hedged.

One word about Asia property. Hong Kong, Dubai, India and Indonesia (Jakarta, Bali) have been enjoying good growth for years. In Jakarta & Bali, return of 25% is a normal case, 40% happens quite often. Dubai is behind, about 15-20%. One drawback we have to be careful is FX. Since August, India and Indonesia had FX issues. We are talking about 20% down here. Rupiah which has been 15k for years is now 18k. Which means that a return which should be 10k became only 8k. Shanghai and HK are question mark, so is Manila (we are talking 10% there). Nairobi and Thailand’s time has passed. India has just burst. My preference is Jakarta.

The focus of investment today should be UK. 40-50% allocation. In the next 6 months small cap will still give better return than large cap, and equity income. March 2014, we need to look at large cap. We should not balance it, but should tip heavily towards the high growth area. And for the next 3-6 months that area is UK.

Focus on UK

Equity Income and Absolute Return Funds

With the bond funds now seem having low returns in the next 2 years, Equity Income Funds and Absolute Return Funds are better choices.

In the last 1 year, GBP Corporate Bond Funds returned 3.6% (top 10 4.2%) whereas UK Equity Income 24.9% (sources are in the links, from Trustnet), and the average of top 10 is 35.0%. Absolute Return Funds returned 5.6%, but the average of the top 10 is 18.2%.

After up 6% from Feb to May, GBP Corporate Bond sector was down 6% in May. In July it was up 2% then down 2% again in August. From Sep it is up 3%. Hence 3.6% in the last 1 year. I can’t invest in a yoyo sector like this. And the prospect is not looking good either, because of interest rate raise. I pulled out from Corporate Bond in Feb, and switched to equity. In the last 6 months, every fund in the top 10 return negative.

UK equity income looks good so far, and the future looks bright too. From October 2012 to May it was up 20%, down 10% in June, up 10% in July, flat in Aug & Sep, then up 5% in Oct. Hence 24.9% return in the last 1 year. My choice in this sector in Unicorn UK Income, which returned 41.1% in 1 year with volatility of 8.1%. That is better than Invesco Perpetual High Income, which returned 21.9% with 9.2% volatility.

The Absolute Return sector looks good too. It was up 5% since October 2012 until May, then down 2% in May-June, up 2% in July, flat in Aug-Sep and 1% in October. My choice is Cazenove UK Absolute Dynamic, which returned 16.3% in the last 1 year, with 4.5% volatility! This fund is consistently upwards since Oct 2012.

Date written 25/10/2013

Equity Income and Absolute Return Funds