Following an unpredictable 12 months, investors are turning their attention to opportunities in 2021.
Square Mile-based Tom Stevenson, investment director for personal investing at Fidelity International, shared with City A.M. what his fund picks are for 2021.
“None of us possesses a crystal ball. However, as I put my picks together at the end of 2020, investors have regained their risk appetite,” Stevenson said, pointing out that November was one of the best months ever in the markets, “largely on the back of hopes that widespread vaccinations will help us get back to normal in 2021.”
While this optimism is largely felt across the City, Stevenson does think “the after-effects” of the pandemic are likely to remain with us throughout 2021. How we spend and how we save has changed, he continues, with certain themes becoming increasingly popular with investors.
“Three of these are reflected in my picks. First, I expect sustainability to continue to drive performance as it has throughout the pandemic. Companies that score highly on environmental, social and governance factors should continue to be rewarded by investors.”
Moreover, in an environment of continuing monetary stimulus, interest rates will stay low and investors will be hungry for income, Stevenson said.
He expects the less popular markets in 2020 to benefit from their relatively attractive valuations and for the “out of favour value style” to gain ground on the growth stocks which have led the field for so long.
With this in mind, Stevenson has chosen five funds for the year ahead.
Foresight UK Infrastructure Income Fund
The first pick combines the focus on sustainability with the delivery of an income. The Foresight UK Infrastructure Income Fund aims for a 5% annual income, which it achieves by investing in other investment companies that own real assets in the renewable energy and infrastructure sectors.
“This is an attractive alternative asset class which should benefit from income investors diversifying their holdings away from shares and bonds. The fund might also provide some protection against inflation, were that to start to return next year,” Stevenson said.
Stewart Investors Asia Pacific Leaders Sustainability Fund
“Many market strategists expect non-US markets, in particular those in Asia and Emerging Markets, to outperform in the year ahead. So, my second sustainability-focused pick is the Stewart Investors Asia Pacific Leaders Sustainability Fund,” Stevenson noted.
This fund focuses on companies that contribute to, and benefit from, economically and environmentally sustainable development.
It looks for ‘socially useful’ businesses and manages risk by restricting its search to mainly large and mid-sized companies.
Brown Advisory US Sustainable Growth Fund
Stevenson’s third pick reflects the sustainability theme. The Brown Advisory US Sustainable Growth Fund invests in businesses with a sustainable business advantage. It holds a relatively concentrated portfolio of 30-40 stocks.
“The managers have a strong valuation discipline, which prevents them paying over the odds, which is an important consideration in the US market as it continues to hit new highs,” Stevenson said.
Fidelity Special Situations Fund and Fidelity UK Select Fund
His final pick is a double-header. “I am keen to have some exposure to the out-of-favour UK stock market in 2021 so I have chosen two funds to play the UK theme because I remain uncertain about whether the apparent rotation from the growth investment style to value will continue. There have been many false dawns on this front,” Stevenson said.
If value does continue to gain in popularity, then the Fidelity Special Situations Fund would be an obvious beneficiary. Managed for six years by Alex Wright, the investment style of the fund continues to reflect the contrarian approach of its first manager, Anthony Bolton.
“Alex focuses on finding unloved companies entering a period of positive change,” Stevenson observed.
“If, on the other hand, a more defensive, growth style prevails in 2021 then I can think of no better a fund with which to play the UK than the Fidelity UK Select Fund.”
Stevenson calls Aruna Karunathilake “a manager who focuses on quality and growth,” adding that he wants to own good businesses for the long term and performs best when strong brands and robust balance sheets are in vogue.