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Thomas Becket, CIO, PSigma Investment Management

Tom Becket, Chief Investment Officer, PSigma Investment Management picks Six Funds for 2012

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The four key themes for our investment strategy in 2012 are “Quality”, “Yield”, “Recovery” and “Volatility”. Perhaps the two key decisions for our portfolios will be when do we start to reduce the cash weighting we have been amassing since the early summer and when do we shift the balance in our equity weighting from “Quality” to “Recovery”? says Tom Beckett, chief investment officer, PSigma Investment Management…

I read in a recent piece of research that the only things now certain in life are “death, taxes and volatility”. Sadly we fully expect the levels of extreme volatility that have plagued markets in 2011 to afflict us again next year. That means that we will have to remain both diverse and hyperactive in our portfolio, ensuring that we adjust our investment strategy to reflect the evolving investment environment and maximise the opportunities as they present themselves. Despite our expectation for another bumpy year ahead, we are optimistic about the potential returns on offer from asset markets in the coming years. Periods of deep uncertainty and high scepticism often lead to good returns and we are hopeful that this will be the case again.
 
Here below are some of our key portfolio constituents as we head in to the New Year and our key fund picks for investors in 2012.
 
The Cautious Investor – Henderson Credit Alpha
The dislocations that have appeared in corporate credit markets over the last six months have left opportunities that have rarely been seen before. However, many investors are rightly shying away from taking aggressive "long" risks in credit markets in such uncertain conditions, so the Henderson Credit Alpha fund could be a less “risky” way of benefitting from such opportunities. The fund’s managers have an excellent track record of exploiting credit opportunities, with low volatility, by taking both long and short positions in individual companies. This forms part of our “volatility” theme in our fund and could well be a fruitful strategy in 2012, in an environment where the strong get stronger and the weak get weaker.
 
The Balanced Investor – Legg Mason US Equity Income
With 5-year US Treasuries yielding a pathetic 0.875% and cash earning next to nothing, US "baby-boomer" investors are desperately starved of income, so it is no surprise that there is a great deal of talk about US equity income. Companies have rightly recognised the intense "hunt for yield" in global markets and have started to increase their dividend payouts to investors, most recently evidenced by General Electric’s dividend increase announcement last week. However, with payout ratios still low and US corporate profits at record highs, there is potentially still plenty more room for collection of extremely high quality US companies, dividends to increase. At this time it is possible to buy a trading on low multiples and yielding in excess of 4%. With such investment opportunities on offer, it is hard to be too bearish about equity markets in the next few years. The Legg Mason US Equity Income fund will be the next addition to our portfolios later in the month.
 
The Contrarian Investor – Schroder Income Maximiser
It has been a year when there was very little agreement in financial markets; most investors were either very bearish or very bullish. However the one place where there was a uniformity of opinion was the deep hatred of UK consumer cyclicals. It is obvious that the UK economy is an extremely difficult position; too much debt, too little growth, zero confidence. However, ultimately one has to try and work out what prices are cheap enough to compensate for the risks and start buying back in to the shares of banks and UK retailers. We are not brave enough to make that call aggressively yet, but are happy to inject some UK cyclical exposure in to our portfolio through the Schroder Income Maximiser fund, which is overweigh both in financials and consumer discretionary names. We hold the fund in bar-bell with our core position in the mega-cap focussed Investec UK Special Situations, Invesco Income and Artemis Income.
 
The Inflation-Proofing Investor – M&G Corporate Inflation-Linked Bond Fund
Given the inflationary pressures that we can envisage further out in the decade (and perhaps they will be with us sooner rather than later), we are aiming to "inflation-proof" portfolios whilst insurance is still relatively cheap. In our fund, the preferred method remains the M&G Corporate Inflation-Linked Bond fund. We currently see a relative value opportunity in the asset class, with higher yields on offer relative to government index-linked issues, as corporate credit risk is being shunned by many investors. Given the high quality focus of the portfolio, this could be an excellent investment should we be plagued by a “stagflationary” environment, as the high quality companies that they invest in are more likely to fare better than weaker businesses.
 
The Optimistic Investor – River & Mercantile UK Equity Recovery
If the predominantly bearish consensus is wrong next year and the global economy accelerates, then there is every chance that many investors will be caught with their portfolios too defensively positioned. Our view is that with an unprecedented number of risks in the financial system and so much uncertainty over growth, it pays to be focussed on quality assets at this time. However, we recognise that if the sky clears in 2012 then the recovery potential in equities is potentially huge, so we have dedicated a small allocation of our portfolio to "recovery" assets. One such fund is River & Mercantile UK Equity Recovery. This fund served us incredibly well in 2009 and the first half of 2010 and we believe that there is a chance that it could snatch the "yellow jersey" again next year. The manager of the fund argues that he has only once before seen his portfolio trading at such a low valuation, in late 2008/ early 2009, but at that time the prospects or the world were even more uncertain. If he is right, then next year could be a surprisingly good year for equity markets and we will be pleased that we have held some firepower through this fund.
 
The Investor with a Lot of Fingers Left – Neptune Japan Opportunities
Another year, another dose of pain in Japan. At least next year cannot be as bad surely, or are we once again catching falling knives in Japan? The galling thing this year is that Japanese equities were outperforming until the tragic earthquake and subsequent Tsunami in March. Ever since those sad days it has been back to normal for Japanese equities, confounding we few rare bulls who like the asset class. With the yen in such painfully-high territory and Japan’s bond market teetering on the edge, we are hopeful that Japanese equities might finally be allowed to break higher after 20 years of abject misery. Cheap and uncheerful is a good starting point for Japanese stocks, but we would not recommend betting the house on this unloved asset class. However, we are confident that 2012 will be a year of outperformance from Japanese stocks and this is reflected by our overweight stance towards Japanese equities, of which the Neptune Japan Opportunities fund is a key holding.

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