The multi-manager team at Columbia Threadneedle, who look after people’s life savings on behalf of independant financial advisers (IFA), have shared the key themes and areas for investors to consider in 2023.

Here are three they’re excited about for the year ahead:

1) Value investing

Value vs growth is a typical debate for investors. Value investing is where the market believes stocks are undervalued while growth investing taps into companies which offer strong earnings growth.

According to Rob Burdett, head of Multi-Manager at Columbia Threadneedle, “our value managers are excited about what they see”.

Burdett says “there is quite a lot to go for on the value side”, but adds that it “doesn’t mean growth is dead”.

He explains that now could be a challenging time for those high-growth companies needing capital to grow “because of the cost of everything”, adding that it means they need to have healthy cash flow balance sheets and better capital than competitors if they’re to survive the ups and downs and risk of recession.

“For the last 20 years, the missing link in the economic growth spurt has been productivity, and so perversely, you tend to get CapEx spend during a recession. If labour is getting more expensive, then investing in machinery and improving efficiency actually in the long run gives you better returns.

“You have to be a decent company to be able to afford that. Cash flow returns are really important,” he says.

Burdett adds: “On the flip side, for growth leaning towards tech, the cost of capital is much more expensive now. For the last 10 years every dream has been fulfilled, every mistake has been forgiven and that’s very much not the market now.”

He says this means that for those disruptive companies, “they won’t have such a long life to prove their worth to the market”.

In light of this, Burdett says there are quite a few reasons why value could outperform, but says it will be “very stock specific”.

“It might be market share gain and losing less earnings”, or it could be companies being on a “lower rating” so investors would see a “relative gain”, he adds.

Meanwhile, the earnings of value companies have kept their PE ratios roughly the same as they were at the beginning of the year, so there is “still something to go for in value generally”.

2) Small caps

The team said “small caps were a terrible place to be” last year. Its markets and sector monitor revealed the UK FTSE Small Cap was up 23% in 2021, but down 13.5% in 2022, while the IA UK Smaller Companies was up 22.9% in 2021 but down 25.7% (GBP) in 2022.

By comparison, the FTSE 100 returned 14.3% in 2021, but 0.9% in 2022.

Burdett says they were at a relatively cheap level compared to previous market peaks but says: “This is probably one of the things we got wrong in expecting that a cheaper valuation would protect us more than it did.”

He adds: “Small cap was pretty disastrous on a relative basis, but now it looks super cheap, exacerbated by outflows of certain funds and areas but potentially [showing] signs of it bottoming.

“The long-term long-run returns tend to be much stronger. The simplistic argument is that medium-term returns are less confident of being a feature this year”.

This suggests there is optimism of returns, though Burdett cautions: “We think it will be but [we are] less confident than value doing well.”

He adds that the team “see some of the latent potential where our funds are positioned”.

3) Fixed income

Anthony Willis from the team says “there is definitely some opportunity” in fixed income.

He says that virtually every market lost money last year whether it was equities or bonds, with investors suffering “lots of pain in 2022”.

Luckily, fixed income was an asset class they were underweight in last year “which was very helpful”. However, Willis adds that fixed income is “somewhere where we are now moving to overweight”.

Willis explains that the “bad news” for fixed income in terms of interest rates and inflation is actually much more priced in, but adds that active management will be important to navigate this sector as there is “a lot of dispersions from returns on fixed income”.

Kelly Prior, investment manager in the team says fixed income saw a huge amount of volatility over the last year, but they added to their fixed income allocation in Q3 2022 as they saw spread broadening out, while “we continue to see that as an opportunity”.

Prior adds that it is very much about the individual managers who are “looking under the bonnet, finding the right debt, and lending to the right companies” as that’s what’s really going to matter in terms of lending to the right companies.

She says that investors were not being paid to differentiate between the good and the bad companies, adding that “there is a lot of mispricing out there” so investors are getting paid a decent income now.

While fixed income has been volatile “there is an awful lot to go for now”.

She says: “One of the things we’re leaning into is shorter duration, high yield, for instance.”

Prior lists Jonathan Golan, portfolio manager at Man GLG who focuses on corporate bonds and dynamic credit strategies as somebody “who really does quality underwriting there and is very focused”.

Elsewhere, she says with the different interest rate policies around the world, top down managers “who are playing the different interest rate curves around the world”, also provide the team with another layer which they can add into their fixed income allocation.