THREE FUNDS FOR 2020
Three funds for 2020
Last year we picked Vulcan Value, Veritas Asia and Baillie Gifford Japan Income Growth as our top three picks for 2019. At the end of November, all three are ahead of their respective markets, though I would emphasise that a fund is something for the long term, rather than just a calendar year.
This year, our three are Matthews Asia ex Japan Dividend Fund, Montanaro UK Income Fund and Schroder European Alpha Income Fund. All three funds have an income bias, and could be seen as going against the grain a little, given investor nervousness around China and Hong Kong, the UK and political risk, and Europe.
The Matthews Asia ex Japan Dividend fund invests in companies that pay a growing dividend and which have a strong balance sheet to continue paying said dividend. The philosophy is based on the premise that dividends can be an important signal about the business quality and management’s ability to allocate capital well. Many companies they own still have significant family or management ownership, with family ownership a proven factor in producing long-term out performance.
Firstly, we like the fund’s bias towards the growth in the Asian consumer, which we believe is a positive long-term driver. Additionally, the fund tends to have exposure to smaller companies as well as more ‘frontier’ markets such as Vietnam, a growing market which has also benefitted somewhat from the US/China trade war.
Finally, the portfolio’s composition of balancing more volatile areas of the market (small/mid cap and frontier Asia) with companies in developed Asia with strong balance sheets and good management helps capital preservation in more volatile periods. The fund is growing but has assets of less than £100m today, which means it can be fairly nimble and gives it more opportunities than much larger funds.
My second fund is Montanaro UK Income. Brexit discussions have taken a heavy toll on the popularity of UK equities and, with the home market fairly unloved, I wanted to highlight a potential winner. The Montanaro UK Income Fund combines a number of characteristics that we think might work next year. Run by Charles Montanaro, the fund is focused on small and mid-sized higher quality businesses. It invests in companies that have a reasonable dividend yield of at least 1.5%, but that also have potential for growth.
So why this fund in particular? It is clear that smaller companies remain relatively unloved in the UK, despite doing well operationally this year. It has also tended to hold up better than other smaller company funds in falling markets, however. With 29% of the fund’s investments having a net cash position that should continue to be the case. The fund has done well this year, but we think a more positive view on the UK could see another good year. It is also somewhat more liquid than other smaller company funds, something we are very conscious of post Woodford. Charles Montanaro has been running money this way since 1991, and the team of ten analysts is the largest in Europe within the small and mid-cap space, so the experience and resource are clearly in evidence.
My final fund pick is Schroder European Alpha Income, a more contrarian choice. Portfolio Manager James Sym has managed the fund for seven years, outperforming every calendar year from 2013-2016. 2018 and 2019 have been tougher, however, with Sym, lagging the market significantly.
We rate Sym highly and the combination of manager skill and a portfolio of undervalued stocks is attractive. Sym makes a persuasive case for Europe, arguing that the consumer is looking strong, that governments are likely to start spending more, and that capital expenditure is likely coming back. The fund’s current pro-cyclical value style would strongly benefit from a reflationary environment, and while Sym is probably not in the majority, his fund offers investors an interesting opportunity to diversify their more growth-focused holdings.