They have also been focused on a limited range of companies – a handful of US mega cap technology companies. That theme is starting to wobble as investors fret about valuations and the influence of the new US administration. There are plenty of alternative growth options without the baggage of the mega caps for those willing to be more adventurous. Here are our ideas:
1. UK smaller companies
Lots of investors have been calling an imminent change in fortunes for UK smaller companies. However, for the time being, it hasn’t materialised – or, at least, only in a lacklustre way. In the meantime, UK smaller companies continue to deliver strong earnings and profitability, and look cheap relative to their history.
Our pick would be the Premier Miton Tellworth UK Smaller Companies Fund, managed by Paul Marriage. He points out that when small cap indices recover after a period of being out of favour, they can often deliver some punchy growth.
He is encouraged by recent merger and acquisition activity in the sector, saying: “The inherent value in many businesses has been highlighted by the high level of incoming M&A. The message here is that if UK market participants are not prepared to value businesses at a higher multiple, then there are other buyers, both trade and private equity, from all over the world who are prepared to pay more than 40% over the current share price.”
How life insurance can benefit your health and wellbeing over the decades
Sponsored by Post Office
He says M&A activity is often an early indicator of recovery. Government policy encouraging UK pension schemes to invest more in their domestic market may also give the market a boost. It would only take a little capital coming out of the mega caps and going into UK smaller companies to make a significant difference to the sector.
2. Emerging markets
Emerging markets have been overlooked in recent years. Investors haven’t felt the need to take the risk on smaller economies while there has been so much growth on offer from the ‘safer’ US market. However, as the dollar declines, China recovers (China is 30% of the MSCI Emerging Markets Index) and valuations in the Indian market come down to more attractive levels, it could be a hotspot for growth in 2025.
We like the Invesco Global Emerging Markets Fund, managed by a four-strong team. Co-manager William Lam points out that emerging markets are generating exciting innovation: “World-leading manufacturing and technology companies in North Asia include the ‘picks & shovels’ of AI-related growth. China, India, Southeast Asia and Latin America are the hotbeds of consumer demand growth, including innovative internet and e-commerce businesses.
“Exposure to rising incomes and a growing middle class is also accessible through well-capitalised financials, while commodity producers play an important role in the energy transition. Asia and emerging markets have some of the most exciting investment opportunities in the world and provide diversification benefits.”
3. Healthcare
Healthcare has been in the doldrums. Investors have been fretting about the impact of a Republican administration on healthcare spending in the US. However, it appears that Donald Trump has his attentions elsewhere, and the sector has started to recover since the start of the year.
There is plenty to interest investors in the healthcare sector. James Douglas, manager of the Polar Capital Global Healthcare Trust, says: “We believe the healthcare sector is poised to recover for a number of reasons. It is highly innovative, and we’re seeing the adoption of cutting-edge technologies and the development of products and services to address unmet medical needs. We see multiple sources of durable long-term growth, with emerging markets particularly compelling. We’re starting to see the development of AI and machine learning to help drive efficiencies and better outcomes.”
The trust has a large cap bias and covers a range of sectors, including biotechnology, pharmaceuticals and healthcare equipment. It has proved a less volatile choice than some of its peers over time, and is poised to benefit from a broader recovery in the sector.
4. Japanese smaller companies
Japan has been one of the big success stories of recent years. Corporate governance reforms, an improving economic backdrop and cutting-edge technology have helped lift the Japanese market. However, the revival was relatively narrow, and did not include many of the small and mid-cap stocks in the region. We think there is scope for this part of the market to catch up.
Baillie Gifford Shin Nippon Trust has struggled in this environment. Manager Praveen Kumar invests in exciting small businesses with a strong runway of growth. These include companies such as specialist semiconductor group MegaChips and sports equipment group Yonex. The market hasn’t been very interested in these types of companies, but Kumar believes there is huge potential for these businesses.
The trust has started to tick higher in the very short term. It may finally be time for a catch-up from this unloved part of the Japanese market. Japan may also benefit from being out of Donald Trump’s firing line, at least for the time being.
5. Alternative innovation
The ideal for any investor is to buy into a company at the start of its growth trajectory, when it is small and the runway of growth is longest. This is the ambition of the IFSL Marlborough Global Innovation Fund, run by Guy Feld. It is predominantly a mid- and small cap fund, with its highest weightings in the US (42%) and UK (22%), with the technology sector accounting for over half of the portfolio.
Feld turns up exciting growth opportunities that other innovation or growth managers tend to overlook. The fund’s performance has been underpowered as investors have favoured large companies over small companies, but it looks ripe for a revival.
So forget those large caps and the California tech bros. There is plenty of growth to be found elsewhere, and without the sky-high valuations.
Juliet Schooling Latter is research director at FundCalibre and Chelsea Financial Services
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
