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The professional investor: 7 magnificent funds for tough 2017

Experienced investor columnist David Kempton has his annual brainstorm with the Hawksmoor investment team and returns with some fund tips.

Sweet fund picks

I am a director of Hawksmoor Investment Management and every March, I meet the managers of their Vanbrugh and Distribution funds and challenge them to tip a fund for the year ahead.

The winner will be awarded a small bar of Toblerone and the loser a Brussels sprout. 

I emulate Eddie Jones here, England’s rugby coach, who also manages a very successful team, and wards a chocolate bar to a player who has performed something outstanding in the game. I like this contrast to Premier League footballers who for similar feats are awarded thousand of pounds.

The rules of the game dictate that every fund choice must be a holding in either of the Vanbrugh or Distribution funds, both of which, as cautiously managed funds, have had outstanding years with exceptionally low volatility.

All the funds chosen in 2016 continue to offer value with good diversification benefits and remain holdings within the Hawksmoor funds, with the exception of Prusik Asia.


How last year's picks fared

Last year's selections show very strong growth over the year:

The choices for 2017 are of a similar vein targeting specific growth stories such as biotechnology, Indian equities and care homes, which should thrive regardless of US president Donald Trump’s policies or the triggering of Article 50.

Fund investment is quite different from direct equity. You start with a view on the potential for the sector then locate the best manager to run with. Find the team, which after due diligence appears likely to perform best in the current world economic circumstances.

Here I confess to seeking help from the Hawksmoor team who will have met and know the managers well. In my case, I pick my sector and they guide me to the ‘best’ fund.

Click through the slides to see their picks for this year.


India Capital Growth (IGC)

Picked by Daniel Lockyer

This investment trust makes the most of the closed-end structure by having a high conviction portfolio in relatively illiquid mid-cap companies.

The mid-cap focus of the fund gives greater exposure to the domestic economy which is a powerful structural growth story for years to come based on demographics, a reformist prime minister, strong government finances and a proactive central bank. 

The recent demonetisation episode provides an opportunity to invest while the trust trades on a 22% discount.


Impact Healthcare REIT (IHR)

Picked by Richard Scott

This £160 million REIT came to market on just last week. The proceeds from the initial public offering were used to purchase an existing portfolio of 55 residential care homes, enabling Impact to deliver a 6% yield over its first year, with growth thereafter, including a high degree of inflation linkage.

Although operating care homes is not without risks, it is a sector with burgeoning demand, enabling Impact’s managers to provide attractive total returns at a time when it is hard to find cheap investments and attractive levels of growing income in mainstream financial markets.   


Old Mutual Gold & Silver

Picked by Ben Conway

For the fourth year in a row, Ben picks a gold equities fund. The Vanbrugh fund still has a core holding in Ruffer Gold (last year’s pick), but has recently introduced a holding in the one-year-old Old Mutual Gold & Silver fund, where the smaller size should prove an advantage.

The fund invests in silver as well as gold, which gives the manager more levers to pull in search of outperformance, owning both metals in physical form (via appropriate structures) when equities seem less attractive. The fund is currently heavily-weighted towards equities, illustrating a high degree of conviction in the fund’s prospects.


Polar Capital UK Value Opportunities

Picked by Hannah Isaac

Last year's Toblerone winner Hannah picks a fund run by a team who, until last year, ran the top performing Miton UK Value Opportunities fund.

Launched in January and now at £150 million, the fund has a rigorous investment process, creating financial models for all existing and potential investments. With no size bias, the fund invests in any UK listed company where there is sufficient liquidity.

This is a classic case of following the manager and his team, which often produces superior performance.


Hermes Asia ex-Japan Equity

Picked by James Clark

Fresh from eating the Brussels sprout, James picks another Asian equity fund this year but switches to Hermes where the manager buys companies attractively valued relative to their quality with a relatively concentrated portfolio.

With very strong performance since launch in November 2012, this is a useful core holding for Asian equity exposure.


Schroder European Alpha Income

Picked by Daniel Cartridge

Hawksmoor's new recruit picks the currency hedged version of a fund which has outperformed its benchmark by over 40% since launch in November 2012, with a high conviction approach and typically fewer than 50 holdings in large or medium-sized European companies and a useful yield of around 3%.

The case for Europe over the next year and beyond is based around investors’ hatred of uncertainty. We saw it last year with Brexit, then again with Trump, but in the past year it hasn’t seemed to matter what the outcome is, as long as there is one that can then be priced into markets.

The European elections provide more uncertainty, but based on current market form (in February companies in the eurozone enjoyed their best growth for six years), once they are behind us we can get back to fundamental analysis again. The fund holds around half its assets in France and Germany, which should provide a ‘certainty’ boost.


Polar Capital Biotechnology

Picked by David Kempton

Specialist expertise is essential in this sector with its high risk/reward dynamics where fortunes or failures are dependent on the success of just one drug.

I picked the sector (but Hawksmoor chose the fund for me) in the belief that we are in the midst of a strong secular growth story driven by advances in technology and large pharmaceutical companies’ desire to partner with innovative companies, whilst their own growth appears more lacklustre.  

A further powerful attraction of the fund is its comparatively small size, enabling the manager to take advantage of attractive opportunities among small and medium-sized biotech companies’ shares, whereas many peer funds have to focus mainly on the large biotech companies for reasons of liquidity.

Investing in biotech is akin to investing in small exploration oil companies. You need to hold at least 10 to assume three will fail, four will lose money and be sold through boredom, whilst three will shoot the lights out. Biotechs are similar; hence, unless it’s your specialist subject, buy them in a collective run by an expert team. Note the fund has a high weighting to US dollars.



Tough road ahead in 2017

Last year was certainly a tumultuous one, but surprisingly good for many investors, including those who backed last year's Hawksmoor fund choices.

With concerns about various events in 2017, not least Brexit, the prospect of rising US interest rates, and important elections in Europe, this year could turn out to be a tougher one for investors than 2016.

However, I feel the latest round of fund choices shows there are still plenty of interesting opportunities for investors to consider.

David Kempton is non-executive chairman of Hawksmoor Investment Management. He is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.

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