Patrick Thomas, investment manager, Canaccord Genuity, London
Fund pick: Impax Environmental Markets
Impax Environmental Markets has been a strong performer for much of the past five years, but, like most thematic global funds, it found 2018 challenging.
The portfolio targets smaller companies that underperformed, is overweight in environmentally efficient industrials and is underweight the US dollar, which was unhelpful in a year when sterling was so weak.
The portfolio, by design, has no exposure to healthcare or large cap technology, which, again, did not help. For us, this creates an interesting opportunity to own a genuinely differentiated global trust that is targeting structurally significant long-term themes.
The team has a genuinely impressive track record in being able to find hidden gems that become market monopolists in growing sectors. Think about their brave foray into the world of reverse vending machines in 2006 and subsequent EU legislation relating to recycling targets.
Kasim Zafar, portfolio manager, EQ Investors, London
Fund pick: Liontrust Special Situations
The dire state of the political landscape means UK assets are nearly universally unloved. How much of this is due to uncertainty with the currency versus uncertainty with the outlook for UK companies is hard to tell.
What we can tell is that from a valuation perspective, UK equities look attractive, both versus their own history and versus other regions. The economic and political benefit of eventually reaching a Brexit agreement far outweigh the alternative on both sides of the channel.
We favour the Liontrust Special Situations fund in the UK. This fund focuses heavily on high quality growth companies with strong balance sheets and intangible strengths that provide barriers to the respective market.
We like that the fund offers a unique and well-defined investment process and philosophy that has consistently delivered in the past. The managers are very experienced and have developed their philosophy over time.
Alex Neilson, investment manager, Investec Click & Invest, London
Fund pick: Hermes Global Emerging Markets fund
After years of strong growth, trade wars and other geopolitical factors caused the MSCI Emerging Markets (EM) index to drop 20% in 2018.
However, there are tentative signs of an EM recovery in 2019, as many of the external factors which led to falls last year begin to stabilise. Coupled with the fact that EMs now appear to be historically cheap on a price-to-earnings basis, we are reassured that, should a recession rear its head in 2019 or 2020, EM assets should be somewhat defensive.
We significantly increased our EM exposure toward the end of 2018. A particular favourite is the Hermes Global Emerging Markets fund, which invests in companies located in or generating revenue from EMs.
Its 'growth at a reasonable price' ethos means that we shouldn’t get caught out by unjustifiably expensive stocks in periods of EM strength. The fund’s high conviction approach also means that we aren’t just tracking the index, with a historically 90% active share.
Nick Wood, head of fund research, Quilter Cheviot, London
Fund pick: Vulcan Value Equity
Of the US-based funds on our buy list, Vulcan Value Equity stands out as one that, from a relative standpoint, we think is likely to perform well. The Alabama-based manager seeks a combination of attractive valuation, as well as inherent underlying company growth.
While Vulcan is perhaps a less well-known manager, it is well established, having been set up in 2007 by CT Fitzpatrick. He has a large team of highly experienced analysts working with him, investing in US value companies. Today, the fund is primarily biased toward financial and technology stocks.
The fund has historically done well in falling markets, and, while we are not predicting a major correction in the US, the combination of protecting assets in a falling market and being willing to take advantage of share price declines should make this a good environment for the fund.
James Burns, co-manager, S&W Managed Portfolio Service, London
Fund pick: M&G Emerging Markets Bond
In the most recent review of the holdings in our managed portfolio service, we introduced the M&G Emerging Markets Bond fund across our range.
We have followed this fund for a number of years and like the approach taken by manager Claudia Calich, who has run it since 2013. The portfolio is constructed using a mixture of top-down and bottom-up views and seeks opportunities in both local and hard (US dollar) currency issues, as well as any mix of corporate and sovereign bonds that she deems appropriate.
We felt that with some of the high profile issues that have arisen within emerging markets in the past year or so, there will be a number of opportunities for managers with such flexible approaches to take advantage of. In addition, some of the yields currently available appear highly attractive.
Michael Paul, analyst, Brewin Dolphin, London
Fund pick: Morgan Stanley INVF Asia Opportunity
Recent equity market stress makes it tempting to suggest a risk off trade for 2019. However, our investment outlook is more optimistic.
We believe the softer inflation picture has further elongated the current cycle and, given the still-robust growth outlook, we prefer risk assets for 2019. Our choice within equity markets is driven primarily by our view that the dollar will weaken.
While cognisant short-term risks are skewed to the upside, once growth outside the US stabilises, we expect investors to lose faith in the greenback after dollar-based securities funding Trump’s stimulative policies are issued. We expect developing markets to outperform developed, although this may need time to bear fruit.
Given this outlook, my fund pick is the Morgan Stanley INVF Asia Opportunity fund. The strategy underperformed last year, but we retain very high conviction in it and expect 2019 to provide a more supportive backdrop.
Jonathan Webster-Smith, head of multi-asset team, Brooks Macdonald, London
Fund pick: JPM Emerging Markets investment trust
So, why are we tipping emerging market equities? Some of the issues that caused markets to decline in 2018 are reversing and this should support positive momentum in the region in 2019. The US-China trade war appears to be settling down, the oil price has weakened and certain benchmark bond yields have fallen back to near where they started in 2018.
Meanwhile, the dollar has begun to trade sideways, after its appreciation in recent years put pressure on emerging market holders of dollar-denominated debt. China has also begun to implement economic stimulus and investors now expect the Chinese government to do what it takes to stabilise the country’s economic growth rate.
The JPM Emerging Markets investment trust has a strong long-term track record, and recent market volatility has allowed the manger opportunities to invest in stocks at attractive P/E multiples. It is currently trading at a discount to its net asset value of just below 10%, which provides for a good entry point.
Iain Barnes, Head of portfolio management, Netwealth, London
Fund pick: iShares Edge MSCI World Value Ucits ETF
At Netwealth, the fund we’ll be watching in 2019 is the iShares Edge MSCI World Value Ucits ETF. This ETF tracks the MSCI World Enhanced Value index, which is designed to give increased exposure to value stocks.
Over the past decade, value stocks have consistently and meaningfully underperformed in comparison with their growth peers. A major reason for this has been the strong performance of growth stocks in sectors such as US consumer technology, which have delivered sustained profits growth in an environment where other sectors, such as banks, traditional retailers and resources, have struggled.
However, at some point, markets will start to doubt the ability of this current group of high growth stocks to sustain this differential, and global value stocks will benefit as a result. We think this fund is well placed to capture this upside potential.
In addition, through the market turbulence of the past few months, value stocks have held up well. While stocks with attractive valuations were supported, those impacted by a perceived weakening macro environment were punished. We expect this trend to continue.
Ryan Paterson, research analyst, Thesis Asset Management, Chichester
Fund pick: Montanaro UK Income
We think you get the best of both worlds with the Montanaro UK Income fund, which focuses exclusively on small and mid caps. Investors receive higher capital growth from the small cap effect and an attractive yield with higher dividend growth from the mid caps.
UK small caps look better value by historic standards, trading at 11.5x P/E, below the median valuation of 13.5x and significantly below that of their international peers. We believe the small cap market is inefficient, largely because it is so labour-intensive.
The specialist investment team at Montanaro identify new ideas and complete their own due diligence work without the help of brokers. They are firm believers in visiting companies in person.
In addition to quality in-house research, we also like other characteristics of the fund, such as size. At just over £300 million, it still offers plenty of capacity, with the added benefit of less liquidity risk, as the portfolio excludes AIM stocks, which differentiates the fund from its small cap peers.
Ben Stoves, investment analyst, Rowan Dartington
Baillie Gifford Japanese Smaller Companies
This fund is a long-term buy and hold approach with low turnover, typically less than 20%. Baillie Gifford have an experienced and established presence in Japan. Their stylistic bias suffered during the second half of 2018 as growth stocks fell out-of-favour but it’s not a rotation that looks fully entrenched and of course this presents opportunities.
Long-term valuations have returned to far more appealing levels. Who knows what 2019 may bring and whilst it may be difficult to escape the geopolitical reach of Brexit and Trump, focussing on Japanese small-cap may offer some respite and an opportunity to concentrate on fundamentals.
Escalating trade wars remain a threat but the economy is less export-dominated than it used to be. A heavy weighting to technology should be expected. Clearly, the fund requires a high risk appetite given its overseas small-cap orientation, it’s not for the feint-hearted, but the long-term growth potential is significant.
Peter McLean, director of investment strategy and research, Stonehage Fleming, London
The valuation discount of emerging markets to developed markets, at around 30%, is comparable to the financial crisis, and presents opportunities for skilful managers to benefit from a brighter outlook for 2019. Investors have reacted to a slowing Chinese economy in 2018.
However, looking forward we see reasons to be optimistic. Domestically, Chinese authorities are tilting towards pro-growth policies, with tax cuts and monetary easing expected to boost consumption in 2019. While protectionist policy is likely to remain, a thaw in relations would boost severely depressed sentiment towards the region.
The US economy should remain strong, supported by a fully employed consumer, however growth will moderate as the impetus of recent fiscal stimulus fades. With profit margins at all-time record highs US stocks could face further headwinds, as earnings growth expectations are revised down. On a relative basis, emerging markets offer an attractive long term opportunity at current valuations.