1. Follow the regions where central banks are engaged in money printing programmes – but consider neutralising the currency exposure

“In recent years a number of central banks have engaged in extraordinary stimulus measures, known as Quantitative Easing. Where these programmes have been put in place, QE has proved a decisive factor in driving stock markets higher by pushing down yields on bonds and therefore encouraging investors into riskier asset classes in search of returns. QE has also enabled companies to refinance debt cheaply and in doing so boost profits. However, while providing a supportive tailwind to stock markets, QE programmes also provide downward pressure on the currencies of the regions, so investors seeking to benefit from these stimulus programmes might want exposure to local stock markets – but not the currencies.

“While the US has now completed its QE programme and is largely expected to start increasing interest rates again this year, there are two major regions where significant stimulus programmes will be in place this year; Japan and the Eurozone. Japan has been expanding its monetary base for some time now, aggressively expanding its stimulus programme in April 2013 and accelerating it further in October 2014. With Japan clearly committed to this course and reformist Prime Minister Shinzo Abe having secured a further electoral mandate at the end of 2014, Japan continues to be one of the developed world equity markets with significant potential for further gains. A weaker Yen is boosting the competitive position of Japan’s exporters and the global slump in energy prices should also benefit the country which has been a major net importer of energy since the closure of its nuclear reactor programme in 2011. A fund that provides access to large Japanese companies such as Nintendo, Honda, Canon and Sony, but which hedges the exposure to the Yen back into Sterling, is the GLG Japan CoreAlpha Equity I H GBP fund. Over the last three years this fund has delivered an 89 per cent return compared to 33 per cent from the non-currency hedged version.

“The Eurozone is another region where investors could benefit from stimulus measures. There have been a lot of negative headlines about the Eurozone of late, as it faces anaemic rates of growth, the spectre of deflation and a showdown with Greece’s new government. Yet we are upbeat on European equities, as at last the European Central Bank has announced that it too will introduce a massive stimulus programme which will start in March. This will see the ECB commence asset-purchases of at least €1.1 trillion as it aims to achieve an inflation rate close to 2 per cent. Western Europe is also a major net importer of energy, so we believe reduced oil and gas prices should also benefit European economies. A fund which provides exposure to European shares, but hedges exposure to the Euro back into Sterling is the Artemis European Opportunities I Hedged fund. The fund has significant (19 per cent) exposure to healthcare companies, with major holdings including global giants Novartis, Roche and Novo-Nordisk, while its financials exposure includes the likes of Swiss fund manager, GAM, and Zurich Financial Services.”

2. Don’t box yourself in within the UK market – following a ‘multi-cap’ approach

“Unsurprisingly, the UK tends to be the first port of call for most UK-based ISA investors, and over the last year it has been funds in the UK Equity Income sector that have proved the most popular of all. Yet investors need to take care that they do not layer up exposure to the same underlying companies through repeat investing into funds that each are fishing predominantly in the FTSE 100 Index. Dividend growth has been slowing of late and there are headwinds facing some of the sectors heavily represented in the FTSE 100 such as oil and gas which represent 14 per cent of the index. Let’s not forget that there are almost 650 companies on the main London Stock Exchange and more than 1,000 on its junior sibling, the Alternative Investment Market. We therefore like funds that hunt right across the whole universe of opportunities, selecting attractive companies irrespective of whether they happen to be large, medium sized or small.

“For income seekers, a fund that has such an approach is the Standard Life UK Equity Income Unconstrained fund, managed by rising star Thomas Moore. The fund is currently 40 per cent invested in FTSE 100 companies, 45 per cent in mid-caps and 6 per cent in smaller companies, with a further 9 per cent not in these indices. Its top holdings range from telecoms giant BT to specialist bank Close Brothers and travel firm TUI. Absent are the large oil and gas companies – the fund has just 0.9 per cent invested in these areas. The fund is currently yielding 3.9 per cent.
“Another fund that pursues a multi-cap approach, but with a growth rather than income objective, is the Liontrust Special Situations fund. This is 36 per cent invested in the FTSE 100, 31 per cent in the FTSE 250 and 26 per cent in small-cap and AIM. The managers target growth companies that possess strengths that are difficult for competitors to replicate and which should be more robust investments across the economic cycle. Top holdings include Compass, Advance Computer Software and Emis.”

3. Pursue a ‘value’ approach when investing in the USA

“The US stock market has sky-rocketed since 2011 sending the S&P 500 Index repeatedly to new highs. With the US anticipated to continue to post robust GDP growth and the Dollar expected to strengthen as monetary policy normalises, it is easy to see why investors might be tempted to hold US equities in their portfolio – after all, let’s not forget that US-listed companies represent around half of all global equity markets by market-cap, so every diversified portfolio should probably have some exposure to the US.

“Yet the nagging concern is that US equities look expensive compared to history, so investors should tread with a little care and not throw caution to the wind. One approach is to invest through funds that have a style-bias that places a strong emphasis on investing in companies that can be purchased at attractive valuations while avoiding those trading on very high multiples or placing too much hope on the future earnings that don’t exist today. One such fund that pursues this approach is the Dodge & Cox Worldwide US Stock fund, which is managed in San Francisco. For those preferring a passive approach to US equity markets, the Powershares FTSE RAFI US 1000 UCITS ETF tracks an index that weights companies based on fundamental factors such as revenue, cash flow, dividends and assets rather than market-capitalisation, and this leads it to having a more natural ‘value’ bias.”