Commentary
If you’ve read February’s newsletter you will be well aware of the market rebound in January.
The worst December for nearly 90 years was followed by the best January in 30 years. This point was illustrated beautifully in the latest heatmap where January's upward momentum is the complete inverse of December’s risk-averse slump.
What it means is that the market is now roughly back to just below where it was at the start of December. Those who’ve sat on the sidelines in cash haven’t missed much but the bulls are now trying to push the market higher, despite the initial resistance.
When it comes to the BOTB this month there has been an increase in exposure to equities, which you’d perhaps expect, but the increase is not radical. The 80-20 Investor algorithm factors in longer-term momentum, not just one-month momentum, so it looks for established trends. Despite January’s rally, we are still well below the recent highs and haven’t convincingly broken out of the downtrend, which isn’t to say that we won’t but there remain headwinds to be mindful of. The increase in equity exposure reflects the fact that the likelihood of an Armageddon scenario in stock markets, that was a distinct possibility for investors at the start of the year, has reduced.
There are some notable consistencies between the new BOTB and last month’s BOTB (no Japanese or European equity exposure) while some stark differences have emerged (beyond the actual funds that are included). There has been a notable jump in the property exposure within the selection, however, that is somewhat of a red herring. Of the exposure to property only around 6% is in direct property funds. You will notice that the number of UK Direct Property funds has all but vanished as many are starting to post negative returns as we approach Brexit. But beyond the UK, the global property exposure is almost exclusively in shares of property companies, particularly in the US. While volatile in nature, these funds have outperformed most other equity sectors because their momentum has been fanned by falling bond yields. When bond yields fall investors tend to go in search of yield from property (via REITs in particular in the US). While the REITs (real estate investment trusts) may invest in and lease property you are essentially buying a share in a company when you invest in a REIT. That means that while the direct US equity exposure of the BOTB is stated as near 6% when you take account of the US equity via property shares this pushes the BOTB’s US exposure up towards 15-17%.
One fund that is notable in its absence this time is the Thesis TM Sanditon European Select which made a lot of money (by shorting European equities) when the market tumbled but obviously lost money in the recent rebound. The only reason why the fund was screened out was because of the investment risks associated with it for the return it was producing. It’s still in positive territory since October. If the market collapses I envisage the fund returning rather swiftly to the BOTB.
The BOTB has 25 funds now (up from 24 last month) which still reflects the attractiveness of cash but that has somewhat dimmed. However, there are still few attractive investment propositions outside of bonds and cash until the stock market breaks higher and out of the downtrend we’ve been in since October. Emerging markets assets have performed well due to the fall in the value of the dollar.
With the volatility in markets still elevated it would be prudent to keep an eye on the weekly updates of the BFBS tables given that the BOTB is updated once a month.
At the foot of this article you can see how the 80-20 Investor selection has continued to outperform the professional fund managers as well as the market since its launch four years ago.
Below I list this month's selection in full with the 8 funds that regained their place in black while the new additions are in green. As usual, I have included the full list sorted alphabetically by name and then by risk category.
February's Best of the Best Selection - (A-Z by fund name)
(funds unchanged from last month are in black while new additions are in green)
| Name | Sector | ISIN Code | Risk |
| Baillie Gifford Emerging Markets Bond | Global Emerging Markets Bond | GB00B39RMQ20 | Medium risk |
| BlackRock Emerging Markets | Global Emerging Markets | GB00B4R9F681 | High risk |
| BlackRock European Absolute Alpha | Targeted Absolute Return | GB00B4Y62W78 | Low risk |
| Fidelity Global Enhanced Income | Global Equity Income | GB00BD1NLJ41 | Medium risk |
| Fidelity Global Property | Property Other | GB00B7K2NZ09 | High risk |
| First State Global Listed Infrastructure | Global | GB00B24HJL45 | Medium risk |
| FP Henderson Rowe FTSE RAFI Emerging Markets | Global Emerging Markets | GB00B4TW6408 | Medium risk |
| HSBC Global Property | Property Other | GB00B28PP161 | Medium risk |
| Invesco Asian Equity Income (UK) | Asia Pacific Excluding Japan | GB00B4JR4R48 | High risk |
| Janus Henderson Fixed Interest Monthly Income | Sterling Strategic Bond | GB0001920486 | Low risk |
| JPM Emerging Markets Income | Global Emerging Markets | GB00B56DF680 | High risk |
| L&G Emerging Markets Government Bond (US$) Index | Global Emerging Markets Bond | GB00B7MJV331 | Low risk |
| LF Seneca Diversified Growth | Mixed Investment 40-85% Shares | GB00B7FPW579 | Medium risk |
| LF Seneca Diversified Income | Mixed Investment 20-60% Shares | GB00B7JTF560 | Low risk |
| M&G Global Listed Infrastructure | Global | GB00BF00R928 | Medium risk |
| Newton Asian Income | Asia Pacific Excluding Japan | GB00B0MY6Z69 | Medium risk |
| Newton International Bond | Global Bonds | GB0006779655 | Low risk |
| Premier Global Infrastructure Income | Global Equity Income | GB0031637738 | High risk |
| Royal London International Government Bond | Global Bonds | GB00B45XHL18 | Low risk |
| Royal London UK Government Bond | UK Gilts | GB00B881TW52 | Low risk |
| Santander Sterling Government Bond | UK Gilts | GB00BSTLRD18 | Low risk |
| Schroder Global Cities Real Estate Income | Property Other | GB00B50MLC91 | High risk |
| Standard Life Investments Global Real Estate | Property Other | GB00B774LD38 | Low risk |
| Standard Life Investments Global REIT | Property Other | GB00B7MR5W47 | High risk |
| TIME Investments Commercial Freehold | UK Direct Property | GB00BLRZPX27 | Low risk |
February's Best of the Best Selection - (grouped by risk)
Here is February's shortlist grouped by their risk category (funds unchanged from last month are in black while new additions are in green):
| Name | Sector | ISIN Code | Risk |
| Standard Life Investments Global Real Estate | Property Other | GB00B774LD38 | Low risk |
| L&G Emerging Markets Government Bond (US$) Index | Global Emerging Markets Bond | GB00B7MJV331 | Low risk |
| Newton International Bond | Global Bonds | GB0006779655 | Low risk |
| TIME Investments Commercial Freehold | UK Direct Property | GB00BLRZPX27 | Low risk |
| LF Seneca Diversified Income | Mixed Investment 20-60% Shares | GB00B7JTF560 | Low risk |
| BlackRock European Absolute Alpha | Targeted Absolute Return | GB00B4Y62W78 | Low risk |
| Royal London International Government Bond | Global Bonds | GB00B45XHL18 | Low risk |
| Janus Henderson Fixed Interest Monthly Income | Sterling Strategic Bond | GB0001920486 | Low risk |
| Santander Sterling Government Bond | UK Gilts | GB00BSTLRD18 | Low risk |
| Royal London UK Government Bond | UK Gilts | GB00B881TW52 | Low risk |
| M&G Global Listed Infrastructure | Global | GB00BF00R928 | Medium risk |
| LF Seneca Diversified Growth | Mixed Investment 40-85% Shares | GB00B7FPW579 | Medium risk |
| HSBC Global Property | Property Other | GB00B28PP161 | Medium risk |
| FP Henderson Rowe FTSE RAFI Emerging Markets | Global Emerging Markets | GB00B4TW6408 | Medium risk |
| First State Global Listed Infrastructure | Global | GB00B24HJL45 | Medium risk |
| Newton Asian Income | Asia Pacific Excluding Japan | GB00B0MY6Z69 | Medium risk |
| Baillie Gifford Emerging Markets Bond | Global Emerging Markets Bond | GB00B39RMQ20 | Medium risk |
| Fidelity Global Enhanced Income | Global Equity Income | GB00BD1NLJ41 | Medium risk |
| Premier Global Infrastructure Income | Global Equity Income | GB0031637738 | High risk |
| Schroder Global Cities Real Estate Income | Property Other | GB00B50MLC91 | High risk |
| Standard Life Investments Global REIT | Property Other | GB00B7MR5W47 | High risk |
| JPM Emerging Markets Income | Global Emerging Markets | GB00B56DF680 | High risk |
| BlackRock Emerging Markets | Global Emerging Markets | GB00B4R9F681 | High risk |
| Fidelity Global Property | Property Other | GB00B7K2NZ09 | High risk |
| Invesco Asian Equity Income (UK) | Asia Pacific Excluding Japan | GB00B4JR4R48 | High risk |
The funds that dropped out of the Best of the Best Selection
For reference, the funds from last month that dropped out of the 80-20 Investor Best of the Best list are listed below. Many of them remain in the Best funds by Sector selection:
| Name | Sector | ISIN Code | Risk |
| Artemis US Absolute Return | Targeted Absolute Return | GB00BMMV5N27 | Low risk |
| AXA Sterling Index Linked Bond | UK Index Linked Gilts | GB00B02Y6B22 | Medium risk |
| Fidelity Global Dividend | Global Equity Income | GB00B7GJPN73 | Medium risk |
| Fidelity Short Dated Corporate Bond | Sterling Corporate Bond | GB00BDCG0G22 | Low risk |
| Janus Henderson Inst Overseas Bond | Global Bonds | GB0007673055 | Low risk |
| L&G Global Health & Pharmaceuticals Index Trust | Global | GB00B0CNH387 | High risk |
| Man GLG Corporate Bond | Global Bonds | GB00B0118B85 | Low risk |
| Premier Defensive Growth | Targeted Absolute Return | GB00B832BD89 | Low risk |
| Schroder Global Healthcare | Global | GB00B76V7Q08 | High risk |
| Standard Life Investments Emerging Market Debt | Global Emerging Markets Bond | GB00B8K56P77 | Medium risk |
| Standard Life Investments UK Real Estate | UK Direct Property | GB00BYPHP536 | Low risk |
| Thesis TM Sanditon European Select | Targeted Absolute Return | GB00BNY7Y722 | Medium risk |
| Threadneedle Emerging Market Bond | Global Emerging Markets Bond | GB00B817DW83 | Medium risk |
| Threadneedle Global Bond | Global Bonds | GB0001533685 | Low risk |
| Troy Asset Management Ltd Trojan Global Income | Global Equity Income | GB00BD82KP33 | High risk |
| Vanguard UK Inflation-Linked Gilt Index | UK Index Linked Gilts | GB00B45Q9038 | Medium risk |
The Asset mix
The current asset mix of the new Best of the Best Selection is shown below with last month's figures in brackets:
- Global Fixed Interest 16% (16%)
- Alternatives 14% (19%) - includes absolute return strategies & property
- UK Corporate Fixed Interest (i.e UK bonds) 0% (4%)
- Emerging Market Fixed Interest 7% (15%)
- North American Equities 6% (9%)*
- European Equities 0% (0%)
- Japanese Equities 0% (0%)
- Property 26% (8%)*
- UK Equities 4% (0%)
- Gilts 7% (8%)
- Cash 4% (6%)
- Asia Pacific Emerging equities 12% (5%)
- Other international equities 0% (10%)
- Asian Equities 4% (0%)
*of the property exposure only around 6% is in direct property, the rest is invested in equities of property companies (such as REITs) around the globe. As such they are actually equities and around half of this is based in the US. Therefore the BOTB has an overall US equity exposure of around 14-17% taking this into account.
80-20 Investor's outperformance continues
As you know the Best of the Best Selection is the shortlist of the best funds highlighted by our 80-20 Investor algorithm split into high, medium and low-risk categories. This shortlist is updated at the start of every month.
The green line in the chart below (click to enlarge) shows how a portfolio would have performed since inception (in August 2014) if it had been split equally between the Best of the Best Selection funds and then switched each month when each new shortlist was published. I have also charted the performance against that of a FTSE 100 tracker fund (the black line) and the average cautious managed fund (blue line) and the average managed fund with up to 85% equity exposure (red line). In reality, the 80-20 Investor's asset allocation typically lies between these two as it usually has 60-85% exposure to equities at any one time. So they provide a good comparison of how fund managers with a similar remit have fared over the same period.
As you can see, since launch in August 2014 the 80-20 Investor portfolio has HUGELY outperformed the average managed fund and the market.
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