3 Attractively Valued Funds

Marcus Brookes: Hello.

Wall: So what's your first fund?

Brookes: Well, an area that we find really attractive at the moment is European equities. It's an area I think where quite a few investors are still relatively scared, because maybe the European problem hasn't been sorted. That means for us it's on a Shiller P/E discount that we think is something we can go for.

Now, that means, if you are looking to get exposure to that area, you really need to have a cyclically biased fund possibly with a value tilt. In our analysis, an in-house fund, the Cazenove European Income fund absolutely fits that bill. It's managed by a guy called James Sym. It's under a lot of people's radar, because the fund is only about 18 months old now. It is growing quite rapidly. It has done very well. It's pretty much top decile since it's been launched, and it has got a very pronounced style bias. It's got this value bias, it's an all-cap strategy, it's not a traditional income fund that super save large cap blue-chip basket. So very, very different. In many ways it's a European recovery fund and we think that's absolutely appropriate for the current market environment.

Wall: But presumably it won't be appropriate forever. So this is one that's suitable for now for next year, for the next two years?

Brookes: Well, the way it's currently positioned, absolutely suitable for now. It's had a fantastic run, so maybe it's too little bit evolved, but I'd say everything is going to be fine.

Now, the manager James Sym is not a form value guy. He will rotate that portfolio, but of course he'd got to get it right. So, the decision is to how long you hold. I think he's going to look it very closely.

Wall: That is a Cazenove fund, but you don't have to hold Cazenove funds, do you? Your second fund isn't an in-house fund?

Brookes: No. So the other area we've really like is Japan. Again, another area where people are, I think, still pretty pessimistic about Japan and very skeptical about all the reforms that Mr. Abe is trying to bring in. To us actually this is the catalyst that Japan needed.

It was undoubtedly a cheap stock market, because everyone kind of given up on it. With Mr. Abe coming in, Three Arrows going to be reform, even the labor market. Suddenly that means Japanese companies are going to be able to properly compete on in the world; Honda, Sony, Panasonic and so forth.

For us that leads us to the [Gold rated] GLG Japan CoreAlpha fund. Managed by Steve Harker, this has got quite a good, again, Japanese recovery type bent to it. It is large cap this time. Again, a slight value bent to it. It's got Japanese financials in there, some of the exporters, which will clearly benefit from the weak yen policy, which I think Mr. Abe's policy is generally are. The yen has gone from ¥76 against the dollar to ¥102. So already buying a Honda car is a third cheaper than it used to be. So, we can see Japan turning around, and I think Steve has got the right portfolio for that environment.

Wall: That stock market has rallied significantly this year though. Why do you think it will continue, is this not it?

Brookes: It can continue. I mean, I think to put in perspective though, the topics, even after this rally has underperformed the S&P 500 by about 80% since the lows of '09. So I completely understand from a perspective of stock market it's already up 45% or so, it doesn't look like the newest idea out there. But in a longer term context actually Japan was so lowest, I think we still got something to play for.

Wall: Presumably a good active fund manager can stock select anyway. They are not exposed to the entire market.

Brookes: Absolutely. Japan has been one of those areas where going passive hasn't really been the right way to go. Active stock pickers have been fantastic. There are times to have earn the more mid and small cap type funds, and indeed they're doing quite well at the moment as well. But the large cap rally bent we think is the right place to be, that's the bit that's cheapest.

Wall: So, Europe, Japan, and what's your third selection?

Brookes: Something a bit off the wall, rather than just going completely long-only and hoping for some sort of macroeconomic turnaround. A slightly more flexible alternative fund would be the Majedie Tortoise fund managed by a guy called Matthew who's been running it now for four or five years. It's bit of a tricky one for listeners to this to actually invest in, because it's closed. But there's every chance that it may add more capacity, it may open up. I mean it's something for Majedie to discuss.

Now, what I like about this is, it's a fund that can be quite directional. So if the markets are going up, it can actually go pro-market. But equally, if the manager is going to be cautious, which actually he's just starting to, he can pull that net position down. Currently they are flat. So the returns of this fund now are not going to be dependent on the direction of markets.

So if we do have a wobble it should be okay. He can take it negative, which for me, I think it's really valuable. So, if the market actually goes down, he can make money. Clearly, he's got to get the calls right, but for most funds that's unusual. They very rarely actually go net negative, and this guy has got a good record of doing it, made money in 2008 for instance.

Wall: 'Tortoise' suggests this is a slow climber, is that the case?

Brookes: Well, Tortoise was a brand chosen by the fund group to suggest this is slow growth. This is not going to be wringing about all over the place trying to shoot for 100% type returns. Now, actually Matt has done a really, really good job over the last year and the fund is up about 25%, which is unusual. But he has done very well at saying emerging markets look like they're expensive, and about to rollover, get away from that and go to more developed market, pick up some of these fantastic returns from being more directional and now just taking profits and becoming more net neutral, if you like. I think if you can do that consistently and compound those returns defending tough times, I think it’s a really stunning proposition.

Wall: And a great diversifier.

Brookes: Great for a fund of funds, yes, absolutely.

Wall: Marcus, thank you very much.

Brookes: You are welcome. Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.