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Choose income funds and commercial property in 2010, says Pemberton


Rob Pemberton, investment director of HFM Columbus, is predicting a stampede for income in 2010 as investors seek higher yields in the face of continuing low rates from ordinary savings accounts.

“We have witnessed a truly astonishing year for investors with returns in 2009 way above expectations across a number of asset classes,” says Pemberton. “But global equity market P/E valuations are now back at long term averages and no longer cheap.

“With the FTSE 100 level currently hovering around the 5,350 mark, there is plenty of hope built into prices, but the market needs concrete evidence of a revival in final demand in the economy if it is to make further substantial gains.”

According to Pemberton, high yielding, defensive large cap companies traditionally held by UK equity income funds are well placed. He expects Invesco Perpetual Income’s Neil Woodford to be laughing longest in 2010.

Given that Sterling is likely to come under pressure next year, diversification into overseas equity income funds, like Newton Global Higher Income Fund and Ignis Argonaut European Income Fund, is a sensible option, says Pemberton.

HFM Columbus would switch some exposure from corporate bond funds into the daily dealt bricks and mortar property funds such as SWIP Property Trust and M&G Property Portfolio. Corporate bonds have produced returns well in excess of expectations this year but they are no longer the “slam dunk” they were a year ago, says Pemberton.

Spreads over government bonds have narrowed considerably and they have duration risk (i.e. they will fall in value if interest rates rise). Government bonds look a real concern, with little upside potential and plenty of downside risk.

Pemberton believes the best play in the fixed interest world are the strategic bond funds with flexible mandates and the ability to use derivatives to shorten the duration of the fund to protect against a rise in gilt yields. Henderson Strategic Bond and M&G Optimal Income are preferred fund choices.

2009 was the year in which the economic balance of power shifted tilted even further towards Asia and the emerging markets. Pemberton says exposure on a long term basis is essential but valuations are starting to look a little stretched and any corrections can be quite savage. He would look to buy on pullbacks.

Pemberton says First State Asia Pacific Leaders Fund and JPMorgan Emerging Markets Fund are good solid choices, while Allianz RCM BRIC Stars is a higher octane fund choice.

With traditional long-only assets facing more of an uphill struggle next year there will be an increasing role for absolute return funds. HFM Columbus has been long time supporters of the Blackrock UK Absolute Alpha Fund, and also believes the newly launched Jupiter Absolute Return Fund looks attractive given the manager Philip Gibb’s long term record.

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