How my fund tips have fared

This time last year I was more jittery than I need have been – but the broad thrust of my arguments have stood the test of time.

I avoid too much navel-gazing on the success, or otherwise, of the investment ideas on these pages. Most of the strategies I discuss are for investors with a time horizon of decades – so 12 months of returns doesn’t tell us much. But I do think it is worth reviewing my articles from this time last year, to see whether the broad thrust of the argument has changed.

Last week, I looked at income-producing assets, including real estate investment trusts, and concluded there’s still some upside, although total returns might be down on past years. This week, I want to look at equities and bonds generally. The last year has been pretty grim – the Barclays Fixed Income Multiverse (bonds globally) is down 3.3%, while the MSCI World (global equities) is down 4%.

I’m not a Japan bull – yet

So what next? I don’t think we’ll see crude oil bottom until it hits $20 a barrel for West Texas Intermediate (around $25 for Brent). I think we are entering the capitulation phase, where we’ll get some nasty corporate failures and messy writedowns. The sector could be the biggest investment opportunity of the decade – but only when we’re near the bottom, and we’re not there yet. I’ll be watching closely for a tipping point. I’ve also – unlike most at MoneyWeek – been cautiously sceptical about Japan.

I accept that Prime Minister Shinzo Abe’s changes are real, and that many companies are changing their behaviour, but I still don’t quite believe Japan has escaped deflation. That said, the MSCI Japan index is up more than 7% over the last year. However, I’m still underweight Japan, with one exception – Japanese dividend-orientated stocks tracked by Coupland Cardiff’s new investment trust, CC Japan Income & Growth Trust (LSE: CCJI), mentioned here a few weeks back.

On the UK, I’ve always thought the domestic recovery robust, but I was far more worried than I had to be about elections and the Scottish referendum. Perhaps the EU referendum will be a damp squib too, though I’m not so sure. My concern about resource prices and global investor sentiment towards UK assets made me very bearish on the large-cap FTSE 100, but I was far more bullish on the mid-cap FTSE 250, a cleaner way of investing in the UK recovery. This has played out well – the FTSE 100 is down 8%,while the FTSE 250 is up 7%. I think this will continue next year.

Stick with the eurozone – and Asia

On the more optimistic side, I’ve long thought the eurozone a good bet compared to expensive US stocks. This year, the Dow Jones Eurostoxx 50 index of continental mega-caps is up 3%, but various funds discussed here have done much better. Henderson’s European Focus Trust (LSE: HEFT) is up around 8%, BlackRock’s Greater Europe (LSE: BRGE) is up 13% and Jupiter European Opportunities (LSE: JEO) is up 26%.

Another stand out has been smart beta, low-volatility funds (which passively track stocks whose share prices are less volatile than average). S&P 500-based versions are up by just under 5%, while European versions based on the MSCI Europe index are up 19%. Stick with these in 2016 – as investors grow more cautious on growth prospects, such stocks, many of them defensive, with strong balance sheets, should outperform.

I’ve also been fairly optimistic on emerging markets. My core view has been to short Brazil, Russia and India (where investors have overestimated the pace of reform), and go long Asian stocks (excluding Japan and India). This hasn’t proved a great strategy, but the Asian Total Return Trust (LSE: ATR) – regularly mentioned here – is roughly flat on the year, versus benchmark losses of 3.5%. Again I’d stick with this strategy.

As for bonds – I view them as expensive, and suggested focusing on investment-grade US corporate credit. This has produced meagre gains of just under 1%, not bad compared to US high-yield credit losses of not far off 5%. So if you have to own bonds, stick with these.

The tech boom has further to go

As for US equities – there’s lots to be scared about. Debt levels are rising as share buybacks continue. Interest rates are rising too, which might drive the dollar even higher – bad news for profits. Most importantly, valuations look toppy. But don’t sell everything yet. US equities may well stay at elevated levels – perhaps switch to low-volatility trackers instead.

I also believe this extraordinary cycle in the US tech sector might have another year or so to run, despite the general view that tech is a giant bubble (again). We’ve seen the back of some of the more ludicrous initial public offerings, with many unicorns (private businesses valued at $1bn-plus) now being forced to revise down their estimates for future public valuations. I wouldn’t add new money to the sector, but gains might continue into the first half. On our return in January, I’ll update you on how to survive 2016 – which I think might be even trickier than 2015. Happy Christmas and see you in the New Year!

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