Disappointing equity markets push some towards corporate bonds while others tip sector themes such as healthcare
Investor moves and a lack of direction in markets mean that for the first time in many years the unit trust industry lacks an obvious sales message.
Disappointing equity markets are leading some to believe that income funds will continue to rise and corporate bonds will play a part of the next trend, while others are expecting the resurgence of a sectoral theme, such as healthcare.
Over the past decades, clear investment trends have emerged, which have determined the funds that are pushed forward by fund management houses. Kristine Bryan, manager of the Schroder Medical Discovery fund, said: 'The theme for the 1970s was oil, while the 1980s saw investment into consumer staples and the 1990s was the decade for technology.'
It is still unclear whether there will even be an investment theme in the first decade of the new millennium.
Michael Owen, director at Plan Invest, said: 'The question that needs to be addressed before a theme can be identified is whether there is going to be an upturn in markets or not. Investors will probably remain nervous even if there is a pick up as recent times have brought home the importance of taking a balanced view.'
Peter Pearson Lund, managing director at Rathbones, agreed that there is a severe lack of direction in the market, but he hopes for some improvement around the autumn.
Tim Rees, director of UK equities at Clerical Medical, said he believed that outside of technology the nature of the current downturn is shallow and the potential recovery will be more muted than in previous cycles.
Robin Stoakley, executive director sales and client services at Schroders, said: 'The funds that were going off the boil last Isa season are still doing badly so the general feeling is to go back to fundamentals. As such, there will probably be a surge towards equity income funds. The likes of Bill Mott, Anthony Bolton, Ian McVeigh and Humphrey Van Der Klugt will be the names floating around.'
Owen also noted that the majority of investors want to get back to basics but added that they are now avoiding specialised funds, such as technology or healthcare. He said: 'There is value in the markets and although there are some individuals willing to take risk, most will not be greedy.'
Consequently, Owen also believes that UK equity income funds are back on the agenda again. He said: 'Rightly or wrongly, it will be a good year for value and the big fund names will be Invesco Perpetual Income, Credit Suisse Income and Newton Income.'
Pearson Lund added that with the downturn there has been a flight to value as people want companies with developed earnings records, good household names and a recognisable portfolio. He said: 'Income funds are historically reliable, which is an additional pointer to where the trend might lie.
'There is also the sense that people want very secure low risk products, such as bonds. Now is exactly the wrong time to get involved in bonds, but people have had a bashing and do not want to get hurt again.'
Owen concurred that if markets do not pick up then investors are likely to buy more zero dividend preference share based portfolios and bond funds. He said: 'It is not a bad time for bonds if investors keep their eyes open and have a lot of diversity in their portfolio. Many investors believe that all bonds are safe and see 8% yields advertised but they could be investing in something that is pretty risky. For the next 12 months, high yield and corporate bonds are where a lot of money will be going.'
Robert Matthews, managing director, institutional and retail funds, at RSA Investments, agreed: 'We are seeing a rush of investments into corporate bonds on both the retail and the institutional side. As equities disappoint, the significant yields available from corporate bonds are attracting investors.'
Still despite the uncertainty, some groups are trying to anticipate what the market will want and over the next two quarters will look to push areas of their range which they believe will have appeal.
Schroders will be pushing its Medical Discovery and Mid 250 funds.
According to Stoakley, it will also be advantageous that there are few healthcare and mid cap funds in the industry. He added: 'Healthcare is considered to be a good bet in times of low growth. We do not mean biotechnology as that is technology-linked but healthcare stocks such as pharmaceuticals. Given that nobody knows when there will be a recovery, my guess is that healthcare funds will perform well. There is also a long-term sustainable increase in the demand for healthcare. It is a strong thematic sell but one can also point to a visible growth and earnings. In a recovery it will start to do less well because it is cyclical in nature.
'As the FTSE continues to disappoint, the Mid 250 is outperforming. We are not the only one that thinks this as New Star is also coming out with a mid and small cap fund.'
Still, Owen is not convinced by the more specialised themes and believes that UK equity and North American portfolios may be the trend for the second half of the year. He said there is a feeling that there is some good value in the market at the moment. He added: 'For those who want the more aggressive portfolios it will be ABN Amro UK Growth that sells. Fidelity Special Situations will also be a big seller that people will buy on the back of its past performance. The lower risk candidates will go for trackers.'
Owen thinks that intermediaries will be advising clients to consider North American funds rather than the UK as a lot has already been invested in the domestic equity market. He said: 'The idea will be that we have missed the US for years so now that it has had a weak period it is time to get back in. Some braver investors will go into technology, while most will want to be in funds such as the Credit Suisse Transatlantic and other larger cap portfolios.'
He noted that Schroders and SG Asset Management have recently launched American funds, so must believe there is going to be a theme there.
Pearson Lund said he believes special situations funds will be the upcoming trends. He said: 'Now is the time for investors to build a special situations fund into their portfolio. The one thing that the stock market has taught people in the last few months is to lessen risk by diversifying your investments. So good idea to build into portfolio of investments but not just put all your money into one.'
Patrick Evershed manages the Rathbones Special Situations fund, which Pearson Lund said has been selling well so far.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till