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What’s the big idea? Selectors search for 2017’s big winners

Leading investment professionals and asset allocators go public with their best bets for the year ahead.

Looking for new winners

The past 12 months have provided shocks, surprises, despair and periods of euphoria, but what has been your stand-out investment bet and which assets do you expect to power performance next year? What managers have served you best over this period and who are you predicting to outperform in 2017?

These comments originally appeared in the December/January edition of Citywire Selector magazine

Thomas Romig, Assenagon (Germany)

One of our investments that has worked out so far, is an allocation in Japanese stocks which we have held since July 2016. Strategies that appeal to us in this segment include the Tokio Marine Japanese Equity Focus and Man GLG Japan CoreAlpha funds.

Investors have regained an appetite for Japanese equities, because the yen has been pulling back since August and we think this sector could power portfolio performance in the future, due to growth in the US economy and a stronger dollar, which means a weaker yen.

Elsewhere we have invested in the Metzler European Small and Micro Cap fund, also since July this year and this has yielded returns well above the MSCI Europe, thanks in particular to a good rebound in the UK microcaps.

Ernest Low, AXA Life Insurance Singapore (Singapore)

Markets started to fall in mid-2015 and had bottomed out by February 2016. In the year to the end of October 2016, EM equities have been the best-performing space. My first bet, to start putting money back into equity markets from mid-2016, has been paying off. The second one, which is a bias towards EM since 2015, is more long term and hasn’t been fully realised yet.

Global equities have outperformed EM equities for the past five years. There is a possibility that emerging markets have finally bottomed out and are poised for a multi-year outperformance cycle over global equities. While EM economies continue to see a general slowdown in growth, barring exceptions such as India, the overall picture is that things may be getting ‘less bad’.

My preferred funds for global emerging markets include Fidelity Emerging Markets, Goldman Sachs Emerging Markets Core Equity Portfolio, Aberdeen Global Emerging Markets and Wells Fargo Emerging Markets Equity Income. Some of them have underperformed MSCI EM index recently but I am hopeful that they may outperform in the years ahead. For those confident of prospects in Asia, I like the Schroder Asian Growth and PineBridge Asia ex-Japan Small Cap Equity funds.

Espen Seidel, Finansco (Norway)

One of our most positive surprises came from our sector rotation ETF, Ossiam Shiller Cape S&P 500. US equities have been the place to be invested, despite lofty valuations. This ETF invests in the cheapest sectors of the S&P 500 based on the Cape Shiller valuation metric. Both absolute and relative performance has been good.

The biggest shock to our portfolio was the massive sell-off in high yield bonds. We had a substantial allocation to Nordic high yield and took a severe beating last winter. In the end, we decided the market was oversold and increased our exposure to this segment. Despite substantial drawdowns in the period, the Storm Bond fund is up 6% over the last 12 months and one of our best-performing investments.

Lately we have reduced Nordic high yield in favour of equities. We still like to search for idiosyncratic themes with a low correlation to world events. For the first time, we have invested in frontier markets and searched for experienced managers with moderate AUM and specific exposure to domestic growth. We finally decided on the Coeli Frontier Markets fund where we expect that exposure to fast-growing economies with few common risk drivers will serve us well in 2017 and beyond.

David Agar, AAM Advisory (Singapore)

This year has been a white-knuckle ride and shows no signs of slowing down. We expect continued market volatility as Brexit negotiations and French elections vie with US political developments as the key drivers of global economic sentiment. The rise of populism has so far not had a broadly negative impact on the markets, but specific sectors and regions have been hit.

Until the US election result, our overweight allocation to Asian equity had been relatively successful. Our positions in PineBridge’s Asia ex-Japan Small Cap Equity fund and JP Morgan’s Vietnam fund have provided good returns.

In the middle of the year, we established a small position in US smaller companies via Chicago-based Driehaus Capital Management, the appointed managers for the offshore VAM funds. We entered this sector a little early, but its Micro Cap Growth fund is one of our top performers over the last six months.

Given our concerns about the macro-backdrop, and the expectation of turbulence in the fixed-income markets, we have been searching for multi-asset managers who have demonstrated an ability to navigate changing economic fundamentals. We have been using Old Mutual Global Investors’ range of risk-targeted solutions to manage risk and provide a more active approach to asset allocation.

Johnni Ulrich Jacobsen, Skandia AM (Denmark)

Heightened market volatility during the past year has made us increase our exposure to equity managers positioned in non-cyclical companies with robust business models. This has stabilised our portfolios and boosted performance.

The approach has paid off particularly for our high-conviction global equity manager and our Japanese manager, both from ValueInvest. However, we are also keenly aware of flows into stocks categorised as bond proxies, so we have focused on managers that invest in companies able to deploy their free cashflow into attractive projects.

Within fixed income we have preferred a flexible emerging market debt approach where our manager from Aberdeen has been able to create excess return by allocating between local currency, hard currency and to some extent EM corporates. A flexible, hands-on approach in EM countries, where the political environment changes rapidly, has proved a good choice in a market that has been out of sync with fundamentals.

We expect the increased political uncertainty to continue in 2017 fuelled by both monetary decisions and political events, such as the Italian referendum and uncertainties in the wake of the US election. For this reason we continue to favour managers with a low down-capture ratio. Also, we expect to see some interesting opportunities within the parts of the emerging markets where growth is led by domestic consumers and typically behaves in non-cyclical patterns.

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