Investment ideas for 2011 – Our research team’s top choices

By ADRIAN LOWCOCK 29/12/2010

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As the FTSE 100 passes through the psychologically important 6,000 point barrier our research analysts give their personal recommendations for 2011.

Compared to the start of the year the outlook for UK plc has improved, the economic recovery has been stronger than anticipated and the coalition government has got off to good start. Stephen Marriott, Senior Research Analyst, covers the UK sector and has selected two funds for 2011,one for Growth and the other for Income.

Typically investing in FTSE 350 stocks (large and mid sizes companies) John Wood follows a focused, bottom up and concentrated approach to stock selection. The fund has underperformed in the last couple of years on account of its quality bias; however, the manager is currently targeting UK blue chips with overseas growth potential – an area of the market I believe to offer very good value at the moment. Incidentally as a by-product of this strategy the fund is currently yielding 4% (although the fund has no income target).

It’s been a difficult time for equity income fund managers, as typical income producers, such as banks and pharmaceutical stocks have been out of favour, and there was also the loss of BP’s dividend. However, Adrian Frost has managed to steer a steady course through these choppy waters and over three years the fund is ahead of the market (to 1 December 2010). The managers distinguish themselves by following a clearly defined process that focuses on free cash flow yield, whilst maintaining a flexible investment approach. The fund also utilises the rules in this sector to the fully by investing up to 20% in European equities. Currently the fund is yielding 4.8% net. Buy for capital and dividend growth potential.

Many investors will look upon Japan with caution, too many false dawns and too many disappointments, however whilst the Japanese economy continues to falter the stock market is in rude health and looks relatively cheap. Of the developed markets Japan is our favourite pick. Research Analyst for Japan, Mark Lane, gives his choice for the sector:

This portfolio has a strong bias to large companies , which the manager, Stephen Harker, believes are undervalued and offer the best potential to outperform the Japanese market. The portfolio can take an aggressive sector positioning and as a result it may differ from the Topix index. Currently Harker’s big bets are in domestically focused Japanese banks, which represent about 16% of the portfolio. The fund may underperform if the banking sector fails to recover.

The second round of Quantitative Easing in the US and extension of the generous tax cuts originally implemented by George Bush junior has raised some concerns of the health of the US economy and the governments ability to reduce the huge amount of debt it owes. On the other hand the third year in a president’s term tends to be good for stock markets, as a weakened president cannot pass as many new laws allowing companies to focus on their businesses. In addition, in a land where the consumer is king, investors ignore the US consumer’s ability to spend their way into growth at their peril. Simon Moore, Senior Research Analyst and our US specialist gives his choice for what could be the contrarian play of 2011.

Managed by Aled Smith, the fund seeks to identify stocks that represent the best value regardless of the sector or company size. As such this fund can vary significantly from the benchmark (S&P 500) Smith does not impose economic overviews and instead is a stock picker. Today there are gaping differences between countries in terms of growth, inflation, deficits, interest rates, borrowing problems and political intervention. This favours large international companies with experienced management, strong cash flow, global sales force and easy access to funding. Many of these leading companies are American and are held by this fund.

Global funds are an important tool for new investors looking to achieve a well diversified portfolio from the start which can also be used effectively by investors looking for core holding in their portfolio which they can later diversify into sector specialists. Research analyst, Tom White explains his choice for the sector.

The BP oil spill earlier this year highlighted the danger of relying too much on the UK for income generation. One way of diversifying exposure is through a global equity fund such as Aberdeen World Growth & Income. The managers are currently nervous about the economic recovery, particularly in the west, but are more confident about the companies they own. The fund has a bias to Asia and emerging markets where they believe the recovery will be stronger, and the fund’s focus on quality stocks means it should prove resilient should the world’s economic troubles deepen.

The sector gained popularity in the latter half of 2009 and start of 2010, but as prices rose and cash flowed into the sector the income generated started to fall. Whilst some areas are looking fully valued, Rob Harley, our property specialist believes there are still investment opportunities within the sector.

This fund invests globally in real estate investment trusts (REITs) and other types of property companies. It is managed by Jim Rehlaender of specialist property security managers, European Investors Incorporated (EII). The fund does not own physical property so is able to actively switch between countries and sectors. This makes it more nimble than “bricks and mortar” funds. Currently 40% of the fund is invested in the US and has survived the US residential mortgage crisis and resulting lending hiatus. Investors will also benefit from exposure to the US dollar, along with other currencies as the fund is not hedged back into sterling.

For more fund choices for 2011 visit our ISA ideas page on the website or alternatively call one of our Investment professionals on 020 7189 9999.

Values delayed by at least 15 minutes.
Source: Financial Express