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TD Direct CEO: four investment themes I’m excited about right now

Paloma Kubiak
Written By:
Paloma Kubiak

The first six months of the year have been wrought with market volatility and uncertainty so investors need to look for opportunities where they can. Michelle McGrade of TD Direct Investing explains the investment themes she’s excited about and why.

With ongoing concerns about China, the global market sell-off in February, the oil market slump and the possibility of a Brexit, my advice to investors is to sit on their hands for the time being and stay invested, and to look for opportunities elsewhere.

However it’s not all doom and gloom for the global economy, with growth projected to reach 2.9% this year, as developed economies continue to recover and the outlook for emerging markets improves. As a result, the second half of the year could be more buoyant.

Here are four investment themes I’m excited by, and why, both for the more cautious and higher risk investor. Though, as ever, it’s essential to hold a diversified portfolio. A range of investments across these four themes would provide a balanced portfolio which I believe will grow, but also protect capital.

Disruptive growth

Disruptive growth is an area where the prospects for investment growth look enticing. Newer, more forward-thinking companies, are challenging the big, established major players across a range of industries, shaking up their relevant market sectors by adopting different business models and making use of cutting-edge technologies. This is driving them to succeed at business, while simultaneously making them attractive companies to invest in.

One such example is Uber, which is revolutionising the taxi industry across the world. Another is China’s largest internet search company Baidu, which is now expanding its business to include areas such as online taxi services and food ordering.

Many large cap companies which have led the way in disruptive technology, such as Amazon and Google, are now on high multiples. There are also good examples in the UK such as Next, which was an early adopter of online shopping, and the fast food delivery service Just Eat. Look for fund managers who have the same focus in their funds, or at small-cap funds which invest in companies which are often at an earlier point in their business cycle and are typically more agile, embracing disruptive technologies.

Disruptive growth is likely to be one of the real trends to follow in 2016 and beyond. The status quo is being challenged in many industries and I believe investment portfolios can benefit from this power shift.

Ethical and sustainable investing

Sustainable investors typically invest in innovative, growing companies delivering products or services which benefit society, as well as those leading their industries in environmental, social and governance (ESG) performance. Increasingly companies with a sustainable focus are also proving to be more operationally efficient and hence better investments.

We have seen a good example in Germany, where traditional fossil fuel energy providers like RWE are losing huge market share to innovative companies such as solar energy firm SunPower.

Income funds

Income remains high on the list of priorities for many investors, whether it be to help pay for their current lifestyle, or to provide for themselves in retirement. With cash in the bank not an option given the low interest rates, funds targeting income may offer a better alternative.  For those who don’t need the income, this is an effective way to grow your wealth. An option here is to buy the accumulation units of a fund and effectively reinvest the income.

Companies in the UK have a long established track record of paying dividends. Some commentators believe UK dividends are under threat, but the market is dynamic and changing. While some of the troubled oil and commodity companies may struggle to maintain their dividends, others such as banks are starting to resume dividend payouts.

Alongside equities and bonds, there are also other income sources such as infrastructure, property and high yield bonds. TD has shied away from traditional bond funds because interest rates could remain lower for longer. They could also rise when we least expect it, and in that environment bond funds are likely to struggle to maintain their capital value.

Capital preservation

When the market is shaky, absolute return funds are an interesting option for the more cautious investor. This is because these funds aim to deliver positive returns irrespective of market conditions through diversification across a range of asset classes and have the ability to short where appropriate.

Despite these funds being low risk, they could still provide a better return than cash.

Michelle McGrade is the chief investment officer at TD Direct Investing