More often than not, the best funds from one year turn out to be the worst in the following one. But if the pundits are right, 2007 could prove an exception to the rule. Many of 2006’s top performers were invested in emerging markets, and many now expect these regions to produce the best returns in 2007. “Most of the good economic news in 2007 will come from emerging markets,” says Stephen King in The Independent. Engaged in a process of “economic catch up” and with large current-account surpluses, they are “no longer dependent on the hot money inflows which all too often reversed during the 1990s”. Here, we look at the funds the experts say you should be buying this year, both home and abroad.
Best funds: love Russia and China
The Russia and Greater Russia Fund and China Fund, both managed by Robin Geffen of Neptune, turned £1,000 invested in January 2006 into £1,489 and £1,394 respectively by year end. Geffen expects the trend to continue as both economies become more consumer driven. Russia looks particularly attractive, with the country’s Economic and Trade Ministry forecasting growth of 6.8%-6.9% next year. And with initial public offerings (IPOs) expected from state banks Sberbank and VTB in 2007, the RTS Russian index looks good. Interested investors should stick with the Neptune fund, says Mark Dampier of Hargreaves Lansdown in The Sunday Times, and should also consider Jupiter Emerging Opportunities, which has half of its portfolio invested in Russia.
Best funds: buy into Europe and Japan
Among developed markets, continental Europe looks attractive, trading on 13 times company earnings compared to its historical long-term average of 14.5. With a lower debt burden than the UK and growth forecast almost to double to 2.5% this year, it’s no surprise that the sector is the most popular among fund managers, as a recent Merrill Lynch survey shows. Darius McDermott of Chelsea Financial Services backs JPM Europe Dynamic Fund, which gained 29.8% for 2006, in The Sunday Times.
Despite a disappointing year in Japan, experts remain bullish on its long-term prospects. With a robust banking sector, and both GDP and wages on the rise, Tim Cockerill of Rowan & Co tells What Investment that he remains keen. Brian Dennehy at Dennehy Weller recommends the Axa Framlington Japan Fund in The Sunday Times. However, given that funds underperformed in 2006, investors may be better off looking at investment trusts, many of which are now trading at decent-sized discounts and should offer better returns. JP Morgan Fleming Japanese Investment Trust (9.1% discount) and Fidelity Japanese Values (7%) are two such trusts.
Investment funds to avoid: over-hyped property
Prospects look less attractive for commercial property. It was the most popular investment area in 2006, which should set alarm bells ringing with sensible investors. Yet the sector’s popularity looks set to continue this year, boosted partly by the conversion of many listed property firms to Reits – low-tax investment trusts that offering high dividends. “A huge amount of money has gone into commercial property this year and my feeling is that will carry on,” says Mark Dampier of Hargreaves Lansdown in the FT. “But I don’t particularly like property. I think it’s over-hyped and some of my clients are putting too much money there. Some want to put over 50% of their portfolio into property and that makes me nervous.”
Funds to avoid: ignore ‘contrarian’ fund managers
Equally worrying is the number of fund managers who have suddenly gone ‘contrarian’ and begun plugging the US as this year’s top market. John Chatfield Roberts of Jupiter, for example, tells The Sunday Times that although there are concerns over the outlook for the economy, he believes they are overplayed, and has increased his weighting there. And he’s not the only one. Nearly a third of the 14 tipsters consulted by The Daily Telegraph tipped the US as their top market for 2007 – the individual managers might think they’re being contrarian, but the truth is that there’s something of a consensus building that the US is worth investing in next year, and one we aren’t sure we agree with. UK-based investors should note that, even though the Dow Jones rose 16% in 2006, the dollar plunge meant that in sterling terms the gain was only 2%. With the US housing market still in the grip of a slowdown that could well turn into something far worse, and the twin deficits still looming over the dollar, those currently betting on the US seem foolhardy, rather than brave.
Best funds: a good year for gold
Anatole Kaletsky in The Times reckons the biggest risks to the global economy in 2007 “stem not from economics but from geopolitics: most plausibly an outbreak of full-scale war in the Middle East, perhaps precipitated by a ‘pre-emptive strike’ by Israel against Iran”. He may be brushing off economic dangers rather too casually, but there’s no doubt that geopolitics could be the source of some of this year’s nastiest surprises. And the two investments most likely to benefit directly are gold and oil. Gold is the ultimate safe-haven investment and will also benefit from the dollar’s continued weakness as central banks and investors look to swap their dollars for something more reliable. As for oil, any disruption in the Middle East could send the price surging again – for example, Iran’s threat to shut the straits of Hormuz would prevent a fifth of world oil from making its way to market.
One of the easiest ways to profit is via exchange traded commodities in oil and gold (see www.etfsecurities.com for more details). Or Merrill Lynch Gold and General, JP Morgan Natural Resources and Investec Global Energy, which all invest in commodity-related stocks.