The managers of five of the largest global generalist trusts in the retail sector ' top performing funds from Alliance, Witan, Scottish, F&C and Scottish Mortgage ' share their forecasts and views for 2002
With the Isa season drawing to an end, Investment Week's sister publication Investor's Week conducted a survey of the positioning of five of the larger global generalist investment trusts available to retail investors.
Together, the £1.651bn Alliance, the £1.636m Witan, the £1.153bn Scottish, £1.441bn Scottish Mortgage and giant £2.549bn Foreign & Colonial investment trusts dominate their global growth sector as the only five £1bn-plus companies.
Their combined £8.43bn represents nearly two-thirds of the £13.126bn of assets held in trusts in the sector as at 13 March, with the average size of the remaining trusts being just £204m. Common themes running through all the investment trusts are the belief that the US is overvalued, that Pacific excluding Japan offers good opportunities, while the UK is at best a neutral holding.
Jeremy Tigue, manager of F&C trust, believes that global economic recovery will become firmly entrenched during 2002, but that the extent to which it will affect the world's stock markets is less certain.
Tigue said that positive factors supporting the market include strong consumer confidence, which should continue as the impact of aggressive interest rate cuts throughout 2001 start to pick up pace in coming months.
He said: 'I don't expect interest rates in all the key economies to increase within the next few months, although there could be some rises toward the end of the year, depending on the strength of the recovery.
'On the downside, low inflation means that price growth will not drive margins up and large increases in sales volumes look unlikely.' There are other threats to markets, according to Tigue. He said: 'One risk to stock markets is whether there are more Enron-type shocks about manipulated accountancy standards to be released to the market. I expect the Enron scandal is a one-off event but if we find that other companies have been indulging in false accounting, then that would have a significant negative impact on global markets.'
Style also poses an important question to managers. Tigue said: 'The big question this year is whether there will be a swing back toward growth, or whether value stocks will be the best performers for the third year running. I expect there will be a balance, leaning slightly in favour of value. While the past two years have been overwhelmingly dominated by value stocks, this year the balance is likely to be 55% value and 45% growth, so successful stock picking will become even more important.'
On asset allocation, Tigue said: 'I am not sure which markets will perform best in the coming year, but Foreign & Colonial Investment Trust is marginally overweight in Europe and emerging markets.'
Emerging markets will benefit sharply from recovery in the US, he noted, adding a US recovery will lead to increased exports from developing countries, particularly electronics in Asia. Meanwhile, as Western businesses recover, they will once again turn to the Far East for outsourcing, which will benefit the local economies.
'Latin America also relies heavily on exporting. For example, Mexico is integrated through the North American Free Trade Agreement (Nafta) so increased demand for products will boost company profits in these markets,' he said.
The trust's portfolio has held an overweight exposure to Europe for several years, which in 2001 proved to be a mistake, as Europe lagged many of the other key global markets.
Tigue said: 'The overweight position in Europe was initially taken because we expected the market would benefit from the structural changes on the continent and the move toward a more Anglo-Saxon equity culture.
'However, the take off of this has been slower than expected and the introduction of the euro has also led to more price transparency, which has been negative for corporate profits. Now, however, we are expecting an improvement in Europe later in the year as a beneficiary of recovery in the US.'
The trust is underweight US, where Tigue believes valuations remain overstretched. Despite that, he says, there are some opportunities starting to arise, however, he is considering increasing exposure to this market to ride on the coat-tails of a recovery.
The trust also holds a slightly underweight position in the UK. 'The only reason not to be more positive on the UK is simply that it has performed well and there are now better opportunities elsewhere.' In addition, he said: 'I see little light at the end of the tunnel for Japan, so remain underweight. The hopes of the new president implementing reforms are now all but gone. Unless some way to stop deflation in Japan is found, there can be little hope that this market will turn the corner.'
Sector bets in the trust are limited because Tigue sees little direction in terms of sectors over the coming year. He remains cautious about the technology, media and telecoms sectors. The pharmaceutical sector is also a concern, due to high valuations.
A similar vein of careful optimism can be felt from James Robinson, manager of Witan Investment Trust, sharing Tigue's UK underweighting.
'In determining the current asset allocation for the Witan portfolio, it would be fair to say that we are holding a cautiously optimistic view on world markets,' he said.
'The trust's benchmark is 60% UK, a defensive market, but at this time, 56.5% of Witan's assets are invested in the home market.
'We are in recovery mode and, in this environment, we believe prospects for the UK look steady.'
The trust's strongest regional bet is on Asia, currently representing 4.9% of the trust or a 3.4% overweighting.
Robinson said: 'We have taken this positive view on investing in Asian countries since last summer for two reasons. First, Asian markets will benefit from US economic recovery. Second, share prices in these markets are starting to increase, and companies are becoming far more profitable. Companies in these markets are beginning to address some of their fairly deep-seated problems, and we have been waiting to see this recovery since the Asian crisis back in 1997-98.'
Initially, he said, it appeared that companies would not recover, but it now seems as though the depressed conditions in the US over the past year have helped the situation.
'Once the economic growth returns in this area, Asia will offer more interesting opportunities,' he said.
Robinson agrees with Tigue's reservations regarding Japan, a theme all the large trust managers share, as well as his underweighting in the US, a reflection of high valuations. 'The underweight exposure in the US market is the main risk we are taking in the portfolio. We are compensating for that by placing a strong emphasis on the Pacific, which will benefit from the US recovery,' he said.
'Our overall view for 2002 is that, as confidence returns and economic growth picks up, growth will fare better than value, although not by a significant amount.
'In the past two years, value has outperformed growth. In 1999, when technology stocks were performing well, growth stocks were the strongest performers.
'However, in 2000 and 2001, value companies regained all their lost ground. Witan should be well placed to benefit, as the trust has a small growth bias.'
Ian McLeish, who manages the Scottish Investment Trust prefers the Pacific excluding Japan region because equity valuations across the area are low by historic standards and liquidity is high, so providing investment opportunities.
Strong performance in the region is, however, dependent on stability in the developed markets and on economic recovery in the US from the summer of 2002, said McLeish, a recovery he expects to materialise.
'While the strength of performance in the Pacific excluding Japan region will depend on stability in the developed markets, it looks more likely this reasonably valued area can outperform other global markets as Western economies recover,' he said. 'Pacific markets did not reach the same heights as Western markets in early 2000, so have less froth to work off.'
The US market has continued with the rally that began in September 2001. Despite some positive factors, its economy will likely make only a mild recovery due to weak export markets and high corporate and personal debt, noted McLeish.
There is a strong disincentive to invest in the US market, however, reflected in an underweight position in the trust. 'The US stock market has priced in a stronger recovery than will probably materialise so equities remain fully valued.
'We take a neutral stance to the UK. For some months our opinion has been that share prices would struggle while earnings downgrades continue. We now expect cuts in interest rates over the past year should stimulate economic activity.'
The key influences this year focus more on individual companies than on geography, said Alan Young, manager of the Alliance Trust.
'Although we can see a further market rally at some point this year, markets will probably trade for some time between a floor of support, provided by the central banks and governments, and an upper range restrained by a variety of factors such as heavy issues of equity for the purpose of balance sheet repair,' he said.
This has led the trust, despite stretched US large-cap valuations, to target less bid up stocks with lower market caps.
'The individual companies which have become stretched will take some time to work through their various layers of gearing and act as a drag. Nevertheless, there are many good quality US companies and, although some of the largest have become expensive, we still see opportunities to switch into some smaller stocks which are better valued,' he said.
Similarly, in Europe and the UK, it is at the company and not stock level that opportunities exist. Young sees value in some Asian markets and 'converging' emerging markets, those adjacent to the large North American and EU trading blocks, such as Central Europe and Mexico, as providing interesting opportunities.
He said: 'Japan could yet be the wild card this year, although the odds are lengthening against it, with economic restructuring delayed by politics. Until there are clear positive signs, our focus remains only on its good global companies, run on the basis of realistic returns on capital. Their competitiveness has increased and they will benefit from a general global upturn.'
Young, who runs a significant portion of the trust on global sector lines, said: 'Over the past year our stance has been cautious, with net cash and no borrowing. Our performance has benefited from the selection of defensive stocks, especially in the US and the UK and, in sectoral terms, for example, from our relatively high level of exposure to healthcare.
'We are not currently looking to gear up the trust, as the outlook is not yet sufficiently strong. Although we remain relatively cautious about the short-term outlook for profits, we have already increased our exposure to some of the more cyclical stocks, especially in the Far East ex Japan, gradually taking advantage of volatility, but we are still proceeding with care, searching for sustainable sources of return.'
scottish mortgage trust
Baillie Gifford's James Anderson, manager of Scottish Mortgage, invests in blue chip equities worldwide and usually has about 50% of assets in the UK.
Anderson said: 'Around the world we have seen good recent evidence of economic revival. However, the strength of recovery is still being gauged but it appears to be stronger than we had feared it might be.'
He expects US corporate earnings to recover over the course of the year, but the trust's position in Japan has been cut back to 5% of NAV.
Anderson said: 'In the US, economic data has been encouraging. Retail sales have been better than expected as consumer confidence continues to hold up well. However, there is still some concern that the recovery will be lacklustre.'
Overall, he believes that the US will perform roughly in line with other markets. 'In the US, we still favour financial stocks with low credit risk exposure such as Golden West Financial and Freddie Mac, both residential mortgage lenders. We also have a sizeable holding in Wellpoint Health Networks, a healthcare company. At the moment, the North American holdings represent 24% of total assets.'
He is cautiously optimistic about the UK, expecting that consumer demand will be sufficiently buoyant to push interest rates towards 5% by the end of the year. He said he saw little reason to be underweight in the UK at this time.
In Continental Europe, where Scottish Mortgage's weighting is 13% of its total assets, economic data has been unremarkable. In general, there is evidence that the market is bottoming.
He said: 'Over the past six months, as well as increasing our exposure to the US and the UK, we have bought holdings in the Asia-Pacific region, which we believe will be an early beneficiary of the recovery. Overall in sector terms the trust remains slightly overweight in consumer goods and financials and underweight in telecoms and IT.'
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