Summer seems well and truly over, but the UK market until very recently has taken the autumnal weather very much in its stride, with the FTSE 100 index largely weaving sideways between 7350 and 7450 over the past couple of months.

However, it fell to below 7,300 following the mid-September meeting of the Bank of England’s Monetary Policy Committee, as the pound strengthened by more than 1.5 cents on the hint of a possible rate rise in “the coming months’. A stronger pound makes life harder for export-oriented blue-chips that comprise the index.

At Interactive Investor, Lee Wild commented: ‘Following an exhausting 2,000-point rally between February 2016 and the record high in June this year, equity markets have extended their pause for breath, moving largely sideways over the summer months.

‘Both the FTSE 100 and broader FTSE All-Share index rose less than 1% in August, though North Korean sabre-rattling tested investors’ nerves. Concerns that Kim Jong-un could nuke Guam, the US west coast or anywhere in between began a rollercoaster ride through the month, as enthusiastic buyers took advantage of each sell-off.’

However there has been more excitement on the UK’s alternative market, AIM, adds Wild: ‘Perhaps the biggest story to pass under the radar in August was the AIM market’s break above 1,000 for the first time since summer 2008. It’s easily outperformed the other domestic indices in 2017 so far, rising 20% in the past eight months.

Further afield, a number of commentators have highlighted the high valuation of the US market. Money Observer makes the point that the S&P 500 index’s CAPE ratio (which compares companies’ average annual earnings over 10 years (adjusted for inflation) with their share price) has only been higher on two occasions –1929 and 1999, in each case shortly before financial catastrophe struck.

However, emerging markets rewarded investors in August. ‘Despite Indian growth disappointing at 5.7%, emerging markets had a good month with both China and Russia performing well – the Hang Seng was the best performing of the major markets increasing by 2.25% over the month,’ reports Ben Yearsley of Shore Financial Planning.

When it came to fund sectors, riskier assets – notably China and global emerging markets funds – were pipped at the post by Japanese Smaller Companies (Japan saw its strongest growth since 2015).

Meanwhile the five poorest performers included both UK All Companies and UK Equity Income. UK fund managers, among other tribulations, have had difficulty navigating the year’s aggressive style rotations between growth and value.

 

Top-performing sectors

Japanese Smaller Companies           +6.7%

China                                                   +5.2%

Global Emerging Markets                   +4.8%

UK Index Linked Gilts                         +4.7%

Global Emerging Markets Bonds        +4.0%

 

Bottom-performing sectors

Targeted Absolute Return                  +0.6%

Protected                                            +0.4%

UK All Companies                              +0.2%

UK Equity Income                            +0.2%

Sterling High Yield                              +0.1%

 

Similarly, Japan, emerging Europe and wider emerging markets funds all figured among the 10 top performers in August:

 

1  Invested Global Gold                                              10.6%

2  Invesco Perpetual Japanese Sm Cos                    10.2%

3  Neptune Russia                                                      9.7%

4  Baillie Gifford Positive Change                               9.1%

5  Legg Mason Japanese Equity                                9.0%

6  Inv Perp Emerging European                                 8.2%

7  JPM Emerging Europe Equity                                7.9%

8  Jupiter Emerging European Opps                          7.6%

9  Jupiter GEM                                                            7.6%

10 Argonaut Absolute Return                                     7.6%

 

Among the worst fund performers, by far the most noteworthy aspect was the presence of Neil Woodford’s eponymous equity income fund in second to bottom place, having lost 4% over the month.

Despite its abysmal performance, however, Woodford Equity Income continued to rank among the most-bought funds on the Interactive Investor website, coming third behind Fundsmith Equity and Lindsell Train Global Equity. Clearly some investors appear to see Woodford’s current dip in fortunes as a longer-term buying opportunity.

Investment trust top performers over the month of August were a more eclectic collection, featuring a range of asset classes, though natural resources featured most prominently.

 

1  European Real Estate Inv Trust                             11.4%

2  Baker Steel Resources Trust                                 10.1%

3  Lazard World Trust Fund                                        9.9%

4  Apax Global Alpha                                                  9.7%

5  City Natural Resources High Yield                         8.7%

6  The Biotech Growth Trust                                      7.2%

7  Atlantis Japan Growth Fund                                   7.2%

8  BlackRock Frontiers                                               6.9%

9  Henderson Alternative Strategies Trust                 6.2%

10 BlackRock World Mining Trust                              6.1%

 

Among the month’s biggest investment trust fallers was another UK equity income stalwart, Edinburgh Investment Trust, run by Invesco Perpetual’s Mark Barnett, which was down 5.5%.

In part, says Andrew McHattie in the Investment Trust Newsletter, that’s because its biggest holding, BAT, put on a poor show recently, but it was exacerbated by a widening of the discount as investors shunned its disappointing performance.

Looking ahead, broker Stifel sees opportunities still to exploit among emerging market investment trusts, as the region continues to enjoy strong growth, particularly in terms of technology businesses. Tech is  now the single largest sector in the MSCI Emerging Markets index.

‘Over the last two years, the emerging market trusts have delivered strong returns yet they continue to languish at double digit discounts as investors focus on developed markets,’ says the broker. It highlights four emerging markets trusts as good value:

1 Templeton Emerging Markets – ‘the fund with the most tech-heavy portfolio, as over 30% of the portfolio is allocated to the sector’.

2 JPM Emerging Markets – net asset value total returns of 35% over the year to 4 September yet trading on an 11% discount; again, overweight tech.

3 Aberdeen Emerging Markets – ‘trades on a 13% discount, has undertaken a number of positive structural changes and faces a continuation vote in the next few months’.

Although UK equity income funds have had a torrid time recently, they rightly remain a core element of most UK investors’ portfolios. FE Trustnet’s Lauren Mason picked out the most successful UK equity income managers in terms of the winning combination of five-year income and total returns.

FE Trustnet took the 73 funds with a five-year track record within the IA UK Equity Income sector and calculated the total return and the income paid out by each on an initial £10,000 investment over five years.

The average total return was 70.5%, compared to the FTSE All Share and sector average (which incorporates new funds into the data as they are launched) returns of 63.7 and 67.5% respectively, while the income payout from the 73 funds was £2,603, based on an initial £10,000 investment.

FE Trustnet identified the four managers who achieved the biggest outperformances of the elite FE Alpha Managers:

 

Martin Turner, CF MIton UK Multi Cap Income                       127.5% 5yr return       £3,077 income

Chris Reid, Majedie UK Income                                                             103.3%                          £3,553

Siddarth Chand Lall, Marlborough Multi Cap Income               100.9%                           £2,933

Mark Slater, Slater Income                                                                          89.3%                             £2,843

 

Finally, as inflation once again features on the agenda, with the latest CPI figures standing at 2.9%,  but little sign of cash rates rising anywhere near meaningfully enough to beat it, Darius McDermott of FundCalibre suggests some investments to outpace inflation.

1  higher yield

‘Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation poses a problem because it erodes the real return you receive – just like cash,’ says McDermott.

He suggests looking for funds with high enough yields to cushion you against rising prices.Schroder High Yield Opportunities, yielding 6.18% and TwentyFour Dynamic Bond on 4.76% ‘are worth a look’.

2  Inflation-proofing

‘Some companies do better than others in inflationary environments. Cash generation and pricing power can provide a buffer for a company, enabling it to self-fund its operations and offset rising costs by passing them on to customers,’ says McDermott. Evenlode Income is one fund that looks for such companies.

Alternatively, consider infrastructure. ‘Assets owned by infrastructure funds, such as toll roads, have pricing that is linked to inflation,’ with First State Global Listed Infrastructure his tip.

3  UK equities

If you’re prepared to ‘place your faith in UK plc’, McDermott suggests City of London investment trust, which ‘has a yield of 3.91% and a fantastic record of raising dividends over more than 50 years’.