Navigating the CoronaMarkets: Some Investment Ideas for the Small Investor (Part II)
As global markets adapt to the progression of the coronavirus pandemic, investment management specialist MATTHEW FEARGRIEVE suggests some investment fund products for a small personal portfolio. In this instalment he looks at European (ex-UK) Equities and Corporate Bonds.
In the first part of this blog, we looked at some reasonably-priced investment funds (mutual funds) that have had good historic returns and which would be compatible with the retail investor's aim of investing in an index-beating or index-tracking return at a reasonable cost, with a focus on UK, US and Global large-cap equities.
We will look now at some of the candidates for your investment monies in the sectors of European (ex-UK) equities and corporate bonds. As in the first part of this blog, our objective here is to identify fund managers who have delivered returns that have beaten or at least tracked the markets over the previous five year, with investment products that have an OCF (the "ongoing charges figure", broadly speaking the annual fee you pay the manager) of less than 1.00% per year (why? because we consider any annual manager fee greater than 1.00% to be too much of a drag on likely future performance). We divide them into two groups: actively managed investments and passive investments (index trackers), and we suggest an active fund for you and couple it with a passive one, so you have both sides of the coin (active and passive) covered.
Where the click-links in this blog take you to a factsheet that has not been produced by the manager, it's because we couldn't find a paywall- or cookie- free link to the manager's own website. That shouldn't stop you from visiting their website yourself, though, when checking out these products.
Note: the OCFs mentioned below, whilst taken from the funds' latest (June 2020) available factsheets, do not include transactional charges. You should look at the factsheets to ascertain the total cost of investment.
European (ex-UK) Equities
European stock markets are seeing inflows as the coronavirus tightens its grip on the US and the country's economic woes continue to mount. Whilst May and June saw the S&P 500 recover most of the losses of the crash in March, with the Federal Reserve providing emergency economic stimulus, the attention of markets is now focusing on the possibility that the virus remains uncontrolled in the US for some time to come. The Presidential election in November adds political uncertainty to the mix.
Across the Atlantic, the European Central Bank provided welcome support for the Eurozone economy, together with a recovery fund to channel resources to the hardest-hit parts of the European economy, mainly in the south. In contrast to the picture in the US, the spread of COVID19 and the infection rate appears (at the moment) to be largely under control across the EU.
In addition, European stock markets, unlike those in the US, do not suffer from a glut of large- and mid- cap technology companies that look somewhat overvalued and combine to maintain the index at what many on Wall Street consider to be a precariously and unsustainably high level.
So it is that the European stock markets recently have diverged somewhat from those in the US, with the S&P 500's bear rally momentum of June starting to stall. Since the bottom of mid-March to end-May, the S&P 500 index rose by 38.6%. The gain during the entire month of June was just 1.8%. In contrast, the corresponding gains in Europe were 28.5% and 2.8%, respectively, with momentum seemingly unflagging. Outflows from the S&P 500 and flowing into European indices tell the same encouraging story. The Stoxx Europe 600 index (comprising 600 European companies of all sizes) is currently 17% below its previous high of February, and if the index follows the same post-March trajectory of the S&P 500, there is still a decently-sized chunk of value up for grabs.
So, whilst we would refrain right now from going overboard (or overweight) on European shares, now would seem as propitious time as any, at least since March, to buy European companies on the strength of a rising European market that still has some distance to go, coupled with a disconnect between US and European economies that looks set to get worse. Before we dive in, we should say that we are not considering UK stocks; we discussed those in the first part of this blog that you can read here.
We start off with an actively managed fund. We like the Baillie Gifford European Fund. The Fund aims to outperform the MSCI Europe ex UK Index by at least 1.5% per annum over rolling five-year periods.The Fund invests at least 90% of its assets in listed and unlisted shares of European companies of any market capitalization, located in any European country (and in Turkey, but excluding the UK) and in any sector. It currently has its biggest allocations to industrials, consumer cyclicals and technology.
Launched in 2000, the fund has consistently beaten the index since 2015. Which isn't bad, particularly when you consider that these returns cost investors over this period an OCF of 0.58%. In short, the fund is another attractive and affordable offering from Baillie Gifford. It has a five star rating from Morningstar.
What about a passively managed stablemate for this fund? Have a look at the Index Europe ex UK Fund managed by Fidelity. We are not, on the whole, a fan of Fidelity's actively managed funds, and the same goes for some of their passively managed funds and ETFs, for the simple reason that their OCFs tend to be somewhat high in light of lacklustre returns. But their Index Europe ex UK Fund has faithfully tracked the MSCI Europe ex UK Index for the last 5 years and has delivered a reasonable 0.65% annualized return over that period. Which, for an annual fee of 0.13%, makes it a safe, index tracking bet worthy of consideration for inclusion in your portfolio.
The pandemic has dealt a major blow to yields on government bonds and gilts, with yields so low as to be negligible in many cases, not least in the case of UK sovereign debt. It is a different story for corporate bonds, however, with the spread (ie., the difference between corporate bond yields and those of government bonds) falling back to pre- COVID levels. Many investors and fund managers are increasingly of the view that credit is the place to be, with attractive coupons (ie., the interest rate paid on the bond's face value by its issuer) being offered by companies desperate to shore up their balance sheets as lockdown restrictions continue to bite.
Bonds issued by companies with healthy balance sheets and cash reserves (pandemic "war chests") are arguably a safe haven investment if there is a second wave of the virus; and if this does not come to pass, the issuing companies will likely buy back some of the bonds. Corporate bonds are particularly attractive in low- interest rate environments, in which the incidence of issuer default is typically low.
This is the thinking underpinning the recent major sell-off of government bonds and reallocation to corporate bonds by a prominent actively managed bond fund, the Janus Henderson Strategic Bond Fund which, although not discussed here (because it falls foul of our self-imposed "OCF less than 1.00%" rule) is in the "top ten" buy list of many bond fund investors in the UK.
So what actively-managed corporate bond funds would we suggest for your consideration? We like Baillie Gifford's debt funds, notably their Investment Grade Bond Fund (a fund of corporate bond issuers with higher credit ratings) and their High Yield Bond Fund (a fund of sub-investment grade, or "junk", bond issuers with lower credit ratings). Both funds have outperformed their respective indices over the last five years and each comes with an attractive OCF (a hallmark of most of Baillie Gifford's actively managed funds) of 0.27% and 0.37% respectively.
We like an offering from iShares as a passively managed counterpart to the Baillie Gifford funds, namely the iShares Overseas Corporate Bond Index Fund. The fund tracks the Barclays Global Aggregate Corporate ex GBP Index, by investing in fixed income securities (corporate bonds, but not exclusively) that comprise the index. Currently the small majority of the fund is allocated to US corporate bonds.
The fund was launched in 2012, and has delivered a healthy 8.37% five-year annualized return over the index. More than acceptable for an OCF of just 0.18%.
We have reviewed, as candidates for inclusion in your savings or pension (including ISA and SIPP) portfolio, some low-cost active and passive investment funds with reasonable historic returns in the sectors (or "asset classes") of European (ex-UK) Equities and Bonds. In the next part of this article we will suggest some investments in other sectors, including Japan, Asia-Pacific ex-Japan, Emerging Markets and Commodities. Check back here for this, or message us to subscribe to this blog.
Important information: the views expressed in this article are opinion only, and are not intended to be relied upon as financial advice or treated as a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.