Investment outlook 2019: another roller-coaster year?

2018 turned out to be a roller-coaster year. The FTSE 100 began January at a level of 7,648 before falling below 7,000 in March. It then soldiered on, shrugging off everything else that was thrown at it (a little like Theresa May, one might say) and reached an all-time high in May of 7,877. At the time of writing it has fallen to 6,744*.

Only 3% of UK funds make positive returns

There are 399 UK equity funds, but only 11 managed to stay in positive territory – three of which are on the Chelsea Selection. The top performing fund of the 399 was Liontrust UK Micro Cap which returned 5.79%**.

The other Selection funds in positive territory were TB Evenlode Income (2.53%**) and LF Livingbridge UK Micro Cap (2.52%**) - which has now been renamed LF Gresham House UK Micro Cap.

2019: time to rebalance?

We believe investors could be well-served by taking a look at the make-up of their portfolios and perhaps rebalancing any biases – intentional or otherwise - that may have crept in.

Developed markets favoured for the short term

Rising interest rates in America should support the US dollar and keep it strong. This could be bad news for emerging markets who are still to feel the true impact from the trade war tariffs. Their economies could start to slow and see inflation pick up.

Long term investors may like to take advantage of cheaper emerging market shares (the asset class has been topped up in the VT Chelsea Managed funds this year), but they may have to be patient for the rewards, as 2019 might not be the year we see them recover. In the shorter term we prefer developed markets, in particular Japan and Europe, where valuations are more attractive than the US on a relative basis.

Will value investing make a comeback?

With the exception of one or two very short periods, growth stocks and funds have outperformed value for the past decade. This could well continue but, as we continue into an interest rate rising environment, growth stocks could become less attractive and value stocks could make a come back. We think it prudent to be 'style-neutral' at this point – which could mean investors need to top up on value holdings if they have favoured growth investments in the past few years. The value-style holdings in the VT Chelsea Managed funds have also been increased in the past few months.

Finally, that pesky B-word

The biggest risk to the UK stock market going into 2019 remains Brexit. If we get a 'hard' exit, small and medium-sized companies are likely to be hit harder than larger ones as they are more domestically-focused. So for the coming year at least, we prefer funds with a higher weighting to larger companies than we perhaps would do normally.

Funds to consider for 2019

Some examples of funds on the Chelsea Selection that complement our thinking are:

JOHCM UK Dynamic

This fund is all about 'corporate change'. The manager scours the market for undervalued companies that are making positive improvements to their businesses. The fund currently has 57%* invested in larger UK companies.

Man GLG Japan CoreAlpha

This fund is unashamedly tilted heavily to the contrarian value style of investing. The team look for out-of-favour companies that have been impacted by shorter-term and resolvable issues. Its process has consistently worked well in the tricky Japanese market.

Investec Global Special Situations

This is a high conviction, contrarian value fund focused on buying companies that are out of favour and which have fallen 50% relative to their index. It is one of a number of funds that are run by the highly-regarded and well-resourced Investec Value team.

Schroder European Alpha Income

This is a flexible and pragmatic fund which offers something a bit different from the standard European equity income portfolio. While many peers will invest in the standard dividend aristocrats and have a bias towards quality growth companies, this fund has no such style bias.

VT Chelsea Managed Balanced Growth

If you want someone else to do the decision making for you this fund is perhaps worth a look. It will reflect the current views of the Chelsea fund research team and will be dynamically managed over the course of the year.

*As at 10 December 2018
**Source: FE Analytics, 1 January 2018 to 10 December 2018, total returns in sterling.