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The one top tip for investors in 2017: ‘go niche’

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Investors should ‘rethink the obvious’ and consider more niche equity and bond opportunities next year, according to one investment expert.

Darius McDermott, managing director of fund platform Chelsea Financial Services, believes the volatility seen in both equity and bond markets this year will increase in 2017, and says the only solution is for investors to opt for more specialist investments.

“With no major asset class looking particularly attractive right now and markets too complacent for my liking, my first tip for 2017 is a simple one: make sure your portfolio is diversified,” McDermott said.

“However, I don’t think the usual rules will apply to that diversification, given bonds yields are already at very low, or even negative levels, and that stock markets are moving very much in tandem at the moment. So my second tip is to rethink the obvious and specialise more.”

Three niche equity ideas

The first specialist sector McDermott likes is infrastructure, which he says has come to the fore as government policy around the world has begun to shift from monetary to fiscal stimulus.

“Many projects are backed by governments and long in tenure, making the sector less volatile than the wider market,” he said. “Yield can also be found. I like VT Infrastructure Income and First State Global Listed Infrastructure.”

He says the insurance sector is less talked about but offers similar characteristics.

“Many contracts are a legal requirement, so demand is steady, making the industry less volatile generally. A more modest but steady yield is also available. I like Polar Capital Global Insurance.”

On a country-specific basis, India is still his long-term favourite.

“The recent cash crackdown to tackle fraud has led to a slight sell off, but government policies are pro-business and it is an oil importer, not exporter, with a big domestic economy and fewer ties with the US than many other emerging markets. I like Ashburton India Equity Opportunities and GSAM India Equity Portfolio.”

For more, read: Is now the time to unlock India’s potential?

Two niche bond ideas

When it comes to bond investing, McDermott favours two extreme ends of the spectrum.

“Bonds with short duration would be less sensitive to rising yields and inflation – if it starts to come through. And cash made from maturing bonds can be put to work straight away into others with higher yields. I like AXA Sterling Credit Short Duration,” he said.

“At the other end of the scale, a higher yield may potentially compensate for the impact of any capital losses and inflation. I like Aviva Investors High Yield Bond and GAM Star Credit Opportunities, which are yielding 4.9% and 5.4% respectively.”

One niche alternative idea

McDermott also picks targeted absolute return funds, which he says can add diversification to a portfolio.

“It’s an area that always attracts negative headlines, but there are some very good funds to be found in this space. I like Premier Defensive Growth, which may be a good one-stop shop for nervous investors with smaller pots of money, and Smith & Williamson Enterprise.”

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