80-20 Investor Best of the Best Selection – February 2019 Update

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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