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Investment outlook brief


Every so often we go slightly off-piste and come across other unloved candidates, writes Alastair Mundy, manager of the Investec UK Special Situations fund in Investment Week (27th Nov). For example, we often explore companies that have been spun off from much larger parents. Unsurprisingly, as the world’s largest market – and one not short of activist investors – the majority of spin-offs are found in the US. However, a healthy number pop up in other ma

rkets. Just looking at the FTSE 350 index one can find, among others, Howdens Joinery (born out of MFI), Aggreko (from Christian Salvesen), AstraZeneca (from ICI), Britvic (from multiple ownership), Direct Line (which was an IPO but came out of RBS), Indivior (from Reckitt Benckiser) and Mitchells & Butlers (from Six Continents). Investing in spin-offs has proved highly profitable. Why? An investor typically receives a reasonably small holding following a spin-off. Interestingly, these actions seem to be discounted in the first day’s price as there is no evidence that waiting for any stock overhang to be sold aids investment performance. Of much greater long-term relevance than this technical issue is the opportunity for spin-offs to perform better as independent units. Obviously, not all spin-offs work well for investors. They can start life with too much debt, poorly incentivised management, or too high a valuation. But, in general, they have performed better than the market and continue to throw up some interesting opportunities.


FT Adviser website (2nd Nov) headline of bond investors have reacted to today’s (2 November) rise in UK interest rates by saying the focus now will be on bonds with a short duration to maturity. Fund managers such as David Coombs at Rathbones take the view that a UK interest rate rise could lead to an economic contraction in the UK. Short-dated bonds may offer some protection against economic contraction, because they return the capital quickly, so an investor can use the capital to invest in overseas assets if the economic outlook darkens. Richard Woolnough, who runs the £20bn M&G Optimal Income fund doesn’t believe recession is on the cards in the UK, and said an interest rate rise makes it more likely he will buy UK government bonds, and sell European bonds. He is investing in short dated bonds as he feels the economy is performing well enough that the bonds of companies that are economically sensitive could start to perform better as the market stops fearing recession.


In Investment Week (20th Nov), Xavier Hovasse, head of emerging market equities at Carmignac, said emerging market fundamentals have been steadily improving and this is bound to continue. There are multiple, firmly-rooted drivers behind these improvements: a sustained rise in manufacturing indicators, solid export growth and momentum in consumer spending. Removal of developed-country monetary support, which has often had a harmful or even detrimental impact on emerging markets, as in 2014, is unlikely to be the same sort of game-changer today. With real interest rates averaging 1.3% - notably higher than in the industrialised world, emerging markets have built up a substantial safety cushion. That cushion is getting even thicker as disinflation continues in those economies, thus boosting local household disposable income and giving some emerging market central banks the leeway they need to ease monetary policy. Against this backdrop, we perceive great opportunities in Chinese and Argentine equities.


Multi-asset managers believe having exposure to a diversified spread of market capitalisations can help deliver outperformance. Thomas Wells, multi-asset fund manager at Aviva Investors, insists building robust, diversified portfolios is the most sensible way to run money. ‘It ensures our portfolios can withstand unexpected market events and minimises potential capital losses,’ he said on New Model Adviser website (3rd Nov). Wells applies this approach to a variety of risk factors, including equity market capitalisations, to help safeguard investors’ cash. ‘By blending different market caps and equity styles, it is possible to construct a multi-asset fund that can benefit from exposures without them dominating the return profile,’ he added. Wells believes a benefit is being able to invest in small-cap names without the associated concerns of being dependent on this area of the market performing well. For example, in emerging market equities he has exposure to large caps via emerging market equity futures, and to small caps through an internal active fund. ‘This means our portfolios capture the rewards of the emerging market structural growth story in a controlled, yet diversified way,’ he said.He also believes the difficulties of tracking small-cap indices means an active approach is the most sensible way to gain exposure to this part of the market. ‘It also ensures we invest in good quality stocks, which have a higher return on equity, and consistently deliver growth over the long term,’ Wells added.

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