Navigating the year ahead - fund experts to give their top picks

It is perhaps an understatement to say that there have been better times to be a saver. Cash rates may be rising but they go nowhere near compensating for the rising cost of living. To achieve real growth, investors must take their chances with the stock market. At the moment, that appears to be a snake pit of volatility and uncertainty.

Pockets of opportunity

However, a key selling point for stock markets is their diversity. There is always something that does well even in the toughest of conditions. Since the start of the year, it’s been energy companies, which have benefited from soaring commodities prices. There are also plenty of companies that are largely agnostic about the wider economy – healthcare stocks, for example.

With that in mind, we asked a range of fund experts to give their picks for the year ahead. These funds are designed to help investors navigate the tough climate ahead. We’ve asked them for a pick for capital growth, for those with eye to the future, and a pick for income, for those that like a little jam today.

Capital growth - we asked the experts for their views

Poppy Fox, investment manager at Quilter Cheviot, says in this environment it is necessary to take some stock market risk, given cash and fixed interest are likely to be difficult areas over the next two years. She believes investors should gravitate to sector specific funds investing in technology, healthcare and environmental themes.

She adds: “A good pick to gain access to healthcare includes the Polar Capital Global Healthcare, a global healthcare-oriented UK investment trust, which has delivered solid returns over the past few years in difficult markets. Meanwhile the Quilter Cheviot Climate Assets Fund, which invests in businesses working on environmental technologies, could help your portfolio beat inflation".

“It’s also worth considering US equity exposure to outpace inflation in the medium term. US markets have performed poorly this year with the S&P down over 18% and the Nasdaq down over 25%. The Blackrock IShares North American Index fund would offer good value exposure. US equities provide a good opportunity to buy the dip and hold for the medium term.”

Dzmitry Lipski, head of funds research at interactive investor, also believes there are some bargains amid the current rout. He picks the abrdn Private Equity Opportunities Trust (formerly Standard Life Private Equity Trust), which is currently trading at more than 40% discount and paying a 3.5% yield.

He says: “The trust aims to achieve long-term total returns through a diversified portfolio of private equity funds, and co-investments, the majority of which will have a European focus. Since its launch in 2001, the trust has been managed by highly experienced team led by Alan Gauld at SL Capital Partners, abrdn dedicated private equity arm. ESG is fundamental to the trust investment philosophy and process with the manager selecting PE funds committed to ESG".

“The portfolio is highly concentrated with the top 10 holdings accounted for over 40% of portfolio NAV and invest with 17 core managers. The aim is to maintain a broadly diversified portfolio with 450+ underlying companies. Healthcare, technology and consumer staples account for almost half of the portfolio, underpinned by the trusts long-term investment strategy, focused on high-growth, non-cyclical sectors. Geographically, the largest allocations to UK and Nordic countries.”

He also likes the WisdomTree Enhanced Commodity ETF, which provides broad commodity exposure, covering major commodity sectors such as industrial metals, precious metals, energy and agriculture. It combines passive and active investing. It aims to track the performance of the so-called rule-based index, the Optimised Roll Commodity, while looking to outperform the widely followed passive Bloomberg Commodity Index over the long term.

“Historically, investors turned to commodities as a source for portfolio diversification and hedge against rising levels of inflation. The fund is well positioned to benefit from the current market climate and potentially deliver higher real returns. Its effective cost management and lower risk profile gives the strategy a competitive advantage against other funds in the sector.”

Emma Wall, head of investment analysis and research at Hargreaves Lansdown admits the short term economic outlook is far from rosy: “The Bank of England, Goldman Sachs, CitiGroup, EY all predict double digit inflation for at least another year, and interest rates are likely to continue to rise, making consumer and corporate indebtedness harder to manage. New Prime Minister Liz Truss has announced some respite this week in the form of an energy bill freeze for households and businesses, but we’re all paying out significantly more for our utilities than a year ago".

She adds: “If your financial goals are longer term, you’re likely to pick up a few bargains through the volatility, particularly if you drip feed the market regularly, without attempting to time the cycle.” She says funds focused on capital preservation such as Troy Trojan can add ballast to a portfolio, but adds: “Don’t be afraid to hold tight to your more risky allocations alongside these core holdings if you’re saving for retirement – as over the long-term these market moves will just be blips.”

Darius McDermott, managing director at Chelsea Financial Services is nervous about the market and keen to find a fund that balances growth and value characteristics. His choice is the Capital Group New Perspective fund. He says: “The group has a unique way of running money. They don’t hand it to one manager – they give it to several managers who each run a sleeve. That means value can sit alongside small cap. You get a collection of different stocks and investment styles within one portfolio. This makes for a good core offering.”

Ben Yearsley, director at Shore Financial Planning, picks infrastructure funds for both income and growth, pointing out that they are a beneficiary of inflation with good cash flows. He says: “Of course, these companies still have some cost pressures and it can’t fully escape a tough environment for equities, but they offer some protection. For capital growth, I’d suggest the First Sentier Responsible infrastructure fund. It also pays a dividend of 2.5% to 2.7%.”

Income - using diversification to protect from inflation

At a time of inflation, income has some real appeal. Investors get back 4-5% of their initial investment each year, which can help them deal with volatility. A lot of fund experts suggest looking outside mainstream stock markets for higher yields.

Fox at Quilter says: “To add diversification to a portfolio, investors could consider looking at alternative investments. Income-yielders, such as property and infrastructure funds can provide a semi-hedge against inflation. These funds buy infrastructure assets, such as hospitals and schools, and benefit from predictable and inflation-proofed rental income. Infrastructure investment trusts have been a particularly bright spot this year. One caveat, however, is that inflation is rising rapidly and therefore these funds are unlikely to be able to fully protect against its impact.”

Within this universe Yearsley suggests looking at the renewable infrastructure trusts, such as Foresight Solar, some of which pay an income of 5% or more. He says: “The income comes from a blend of inflation-linked government payouts, long-term power price contracts and short-term power contracts linked to the current power price. If investors don’t want to buy investment trusts, they could try Time UK Infrastructure, which is an open-ended fund that invests in a portfolio of trusts.”

Lipski at interactive investor also targets infrastructure, picking the Legg Mason IF ClearBridge Global Infrastructure Income Fund. He says the fund has two main objectives: “Reliable income generated from dividends of underlying holdings and capital growth above the level of inflation over five years. The managers seek to outperform the OECD G7 Inflation index by 5.5% over an investment timeframe of five years".

“The fund invests in a diverse basket of global listed infrastructure assets in various sub-sectors such as water utilities, gas, electricity etc. The portfolio is also spread across different geographical areas, with the US, Australia and Canada the top three country weightings. The fund is run by the highly regarded and well-resourced infrastructure team at ClearBridge Investments.” The current yield is over 4%.

Fixed income has been fallow ground for income seekers over the past few years, with interest rates at record lows. However, yields are improving and it continues to have a diversifying role in portfolio. In the current environment it may also add much-needed stability to a portfolio. Wall suggests Jupiter Strategic Bond, which gives flexible exposure to fixed income and a relative high yield (currently over 4%).

McDermott picks a more traditional UK equity income fund. He says: “We quite like the UK for income. There are certain sectors, such as oil, or mining, that are well-represented in the UK market and fit well in today’s inflationary environment. We like Adrian Gosden, who runs the GAM UK Equity Income fund. He is a manager with a careful valuation discipline, focusing on large and mid cap companies. When his style comes into favour, he does really well.”

There will be no easy wins in this environment, but there are places to invest that should help grow your capital and deliver an income over time. Even in the most horrible of market conditions, there will be areas of strength.