Three long-term investment ideas for the brave

Each week, a professional investor tells MoneyWeek where she’d put her money now. This week: Rebecca O’Keeffe, head of investment at Interactive Investor.

From stagnant global manufacturing and sliding commodity prices to Federal Reserve interest-rate hikes, the macroeconomic landscape remains tricky for investors to navigate. However, I remain relatively optimistic on prospects for equities over the coming months, not least because the stockmarket is relatively unloved. Rallies typically come to an end when everyone is fully invested, and as a result there is limited scope for further purchases. Today, many investors are still sitting in cash on the sidelines, suggesting that there is plenty of scope for prices to rise further.

On top of that, history suggests that investing over the winter tends to be more favourable than in the summer – between 1 November and 30 April, stocks tend to be less volatile, sentiment more positive, liquidity is strong and hence performance versus the rest of the year is, on average, better in risk-adjusted and absolute terms. Taking this into account, I have a preference at this time of year for high-beta (ie, risky) ideas.

My first choice is the Axa Framlington Biotech fund (Axa-IM.co.uk). The biotech sector as a whole is down nearly 20% since its July highs. Yet an ageing population, combined with rapid advances in science, including genome sequencing and personalised medicine, make this ever-expanding industry attractive over the long run, and this fund has a good track record. With more than 85% exposure to US equities, Axa’s fund is inevitably exposed to wider sentiment affecting the region, including the impact of a stronger dollar as the Fed starts to hike rates.

My second investment is based on the theory that, in a world that is gradually moving beyond the global financial crisis, investors can benefit from investing in countries in which the political backdrop is improving. In India, Narendra Modi has now been in power for 18 months. He has worked hard to introduce a raft of pro-business policies aimed at boosting economic growth. After a strong rally in 2014, the Indian equity market slipped back in 2015 as investors became frustrated at the perceived lack of progress. But given the labyrinthine complexity of India’s bureaucracy, this judgment is probably premature. With Modi’s reform policies gradually taking effect, and aided by the sharp fall in energy prices over the past year, there is scope for India’s economy to outperform significantly in 2016. Several India funds are available, including options from Jupiter, Kotak, Franklin and Fidelity.

My final investment choice is the River & Mercantile UK Smaller Companies fund (RiverandMercantile.com). Chancellor George Osborne’s recent Autumn Statement was very positive towards small and mid-cap businesses, and by making buy-to-let mortgages less attractive has raised the prospect of money being invested in equities instead. Over the past year, UK small-cap stocks have significantly outperformed their large-cap counterparts, which are much more exposed to global growth concerns. Despite this outperformance, I still think small caps offer good prospects over the next few months as money flows into the smaller companies sector via venture capital trusts and other tax-efficient products. River & Mercantile’s fund consistently delivers solid performance.

My choices deliberately look at long-term trends in combination with short-term opportunities. They are definitely not low risk and won’t appeal to everyone. But while it is vital to be able to sleep well at night, taking too little risk can be as much of a threat to your wealth as taking too much, assuming your investment horizon is sufficiently long.


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