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Written by: Darius McDermott
16/10/2020
It seems that as each day passes, the chance of a second national lockdown look more and more likely. But here are four global funds which are taking advantage of the changes in society.

Similar events are happening in other parts of the world and it’s the one thing the global economy really hadn’t bargained for. The only certainty is it will have long-term ramifications for all of us as optimism of a swift economic recovery has been replaced by fears of recession turning into depression.

The interesting thing is that this has come at a time when many global stock markets have recorded strong returns, to the point where many of them have recouped the majority of those losses from February and March.

However, it is not uncommon for the stock market and the wider economy to move in different directions, with plenty of historical evidence supporting the trend. The most prominent of these is that markets are forward looking. For example, when you buy a company its value not only reflects what is happening right now, but also what is forecast to happen next year, the year after, and so on. By contrast, economic data tells you about what has happened in the past.

The support provided by central banks has also spurred markets on in recent months. Not only have numerous central banks cut short-term interest rates to record lows and pledged to buy government bonds, but there has also been a large fiscal response – such as the furlough scheme in the UK to tackle unemployment concerns. These measures helped lower the cost of borrowing and raised business confidence.

The stock market also does not represent the wider economy. Take technology stocks, many of which have driven strong returns in the US and emerging markets in particular. The S&P 500 in the US, for example, hit a record high in August 2020, amid the backdrop of this pandemic – much of which was courtesy of the FAANGs (Microsoft, Amazon, Apple, Google and Facebook).

These firms represent 20% of the S&P 500 Index, yet their combined revenues in 2019 amounted to only 4% of US economic growth.

Stock markets have settled down more recently, but I suspect a second lockdown (on some sort of global scale) would see an increase in volatility – purely as a result of sentiment, and I would not rule out another fall for markets.

That does not mean there will not be opportunities for investors. Because of Covid-19 we know there are certain areas which are structurally challenged – the likes of leisure, travel and retail – and will continue to be for the next couple of years. By the same token, the likes of technology and healthcare have been flourishing – and I expect there will be other sectors which will benefit from what is likely to be the biggest catalyst for change in our lifetime.

These are the opportunities that only active fund managers can take advantage of at an early stage, particularly a fund which has a “go anywhere” mandate. Here are four global funds with can take advantage of these changes in society.

Baillie Gifford Global Discovery

Douglas Brodie and his team take an unusual approach when looking for investments when building their 75-150 stock portfolio. They don’t use generic screens to create lists of potential stocks, nor do they use broker research.

Instead, the team thinks about the kinds of companies it would like to invest in and undertakes fundamental stock research to find opportunities. They look for businesses doing something very different in their space, which may well be loss-making at that point in time, so long as the team can see future potential.

Guinness Global Innovators

Managers Matthew Page and Dr. Ian Mortimer have identified nine core innovation themes through reading and research. These are: advanced healthcare; artificial intelligence and big data; clean energy and sustainability; cloud computing; internet, media and entertainment; mobile technology and the internet of things; next generation consumer; payments and FinTech; robotics and automation. Companies with exposure to these themes are included in the managers’ universe. The portfolio is made up of 30 equally-weighted stocks.

Rathbone Global Opportunities

James Thomson looks for innovative growth companies of all shapes and sizes: these should be differentiated, scalable and have sustainable growth, while shaking up their industries. There are no restraints on geography or sector, but Thomson tends to have a bias towards mid-sized companies in developed markets, which he describes as his ‘sweet spot’.

The fund is a concentrated portfolio of 40 to 60 holdings and has a defensive bucket of holdings that are less economically sensitive, with slower and steadier growth prospects for risk management purposes.

Morgan Stanley Global Brands

The investment team behind Morgan Stanley Global Brands have a mantra: ‘don’t lose money’, which will possibly be as comforting to investors as the familiar names that can be found in what is a high conviction portfolio of just 25-30 names. These will primarily be media, consumer discretionary and health care services companies. The managers deliberately avoid banks, utility, telecommunications and energy companies.

Darius McDermott is managing director, Chelsea Financial Services and FundCalibre

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