Man in the mirror

Our analysts take a deep dive into their own output and dig out their favourite pieces of the year…

In an age where it is impossible to navigate Regent Street without endless detours around young women gurning into iPhones invariably held at a 35-degree angle above their heads to ensure the best possible jawline for their Instabarf feed, vanity seems to be very much in vogue.

With that in mind, it is with no small degree of self-regard that our analysts have been trawling through their output this year, seeking to find the one article that—in their view—best reflects the wit, genius, and perspicacity that is their native lot.

Among their choices, you will find a valiant defence of Old Blighty, a fierce attack on the lazy consensus that passive funds will dominate the future, something about potatoes, and a clever analysis of the false sense of security that higher interest rates bring to those keeping their assets in cash.

Despite the effort, originality, and thought that has gone into these articles, however, the statistics tell us that—as usual—our readers’ remained steadfast in their preference for the same articles that dominate every year – lists of trusts we rate highly for income and growth, ideas for your ISA, and wildly untrustworthy stilton-fuelled predictions of next year’s top performing investment trust (the next of which will be published next week).

In the hope that these far more fascinating insights get the airing they deserve, and with the very best wishes for the Christmas season, we present here the team’s favourite stories from a year which, on balance, we’d all probably like to forget.
 

William Heathcoat Amory

 
On the surface, 2023 seems like just another year. Stock markets have been led by the same mega-cap stocks that seem to always lead the market. This time it is AI as the theme, but the same winners win… According to Morningstar, the ‘magnificent seven’ now constitute 29% of the S&P 500’s aggregate market capitalisation, a situation that hasn’t existed since at least 1980. Can this situation continue? Possibly. Is it likely? The weary contrarian in me wants to say no. One consequence of mega-caps’ continued dominance of the leaderboard is that passive investment strategy also continues to dominate in terms of performance and asset gathering. In equity markets, this brings unknown consequences, and surely increasingly opens the door to rational capital asset allocators (active managers), rather than those relying purely on what has done well in the past (market capitalisation-weighted passives).

In this article, ‘Back to basics’, I examine the case that what worked last decade won’t necessarily work this decade and that the lessons of previous decades (i.e. 2000s and before) may be worth mugging up on. Certainly, as I highlight in the article the macroeconomic environment of the 2020s could not be more different to the 2010s. I argue that the new era is likely to be represented by active management being rewarded more—in an environment of weaker companies not surviving—but also the potential for policy mistakes by central banks. The recent AI splurge may in time be seen as the last gasps of a dying era. Finding truly diversified and idiosyncratic risks in a portfolio seems the only sane thing to do if that is the case. In the words of Harry Markowitz who died this year, diversification is the only free lunch in investing. Many investors may find that their portfolios over the last decade have become dangerously narrow, and what may seem diversified, is in fact not at all.

We would argue that two underappreciated aspects of portfolio construction will come increasingly to the fore in the rest of the decade. Firstly, with higher interest rates and an end to ‘free money’, the potential for managers to add alpha could be on the rise given poor companies will suffer and strong ones should perform well and gain market share from the weak. Secondly, diversification of returns could become increasingly important, given the number of potential economic eventualities from economies around the world has expanded. We highlight several trusts which one might consider. BlackRock Frontiers (BRFI) was not one of them but seemed to highlight exactly the points made above in its recently announced annual results, which we commented on here. In our view, the trust’s performance was eye-catching, having delivered a NAV total return of 14.3% in sterling (but 25.1% in USD) over the 12 months to 30/09/2023, representing substantial outperformance of the benchmark index, which was down 3.9% in sterling, the MSCI Emerging Markets Index (+2.2%) and the MSCI Frontier Markets Index (-2.6%).

Aside from the strong growth potential, frontier markets are also interesting because each of their economies and stock markets tends to be relatively uncorrelated to others. We think the results reported for 2023 represent yet a very definitive ‘proof of concept’ for the trust. The manager reported on a number of disparate secular growth trends driving companies in the portfolio, such as the domestic growth in the Middle East and the success of Kaspi.kz in growing the e-commerce and payments industries in Kazakhstan. All this has helped deliver strong returns from multiple uncorrelated sources while many key benchmark indices have been weak. I think BRFI really stands out in the investment trust space as having a unique investment universe and represents a highly active proposition, making full use of the investment trust structure by investing in less liquid markets and companies. As the results highlighted, with world equity markets attention focused on other things, there are lots of underappreciated and exciting opportunities capable of very strong returns elsewhere.
 
William Heathcoat Amory

 
William Heathcoat Amory is a co-founding partner of Kepler Partners LLP and leads the Kepler investment trust research team. William has over 20 years of experience as an investment company analyst. Prior to co-founding Kepler Partners in 2008, he was part of the Extel number 1 rated research team at JPMorgan Cazenove.
 

Thomas McMahon

 
The note I enjoyed writing the most in 2023 was the strategy article I wrote just after getting back from my summer holiday. ‘UK OK, HUN?’ – a marmite headline in the office – was pretty cathartic and I think it expressed something quite a few people had been thinking, judging by my bags of fan mail (OK, three emails, one from my mum). I think the negativity surrounding the domestic economy had become, well, absurd, frankly, and slightly pathetic. We’re in the same boat as our peers, and perhaps even in a slightly better cabin. It’s hard to be optimistic about the state of the UK economy, but hopefully, as we enter 2024, we can have a more realistic sense of the size of our problems. The British economy is stumbling along, inflation is too high and interest rates are a drag on activity. But we’ve been through worse and by the end of next year the outlook should be much brighter.

 
Thomas McMahon

 
Thomas is Investment Trust Research Manager and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.
 

Ryan Lightfoot-Aminoff

 
My pick for a favourite article of the year is ‘You say potato’ – our breakdown of the UK equity income sector. We like to cover a lot of ground in our strategy articles; we have broad macroeconomic pieces and articles on discount disparities. These all help provide insight into the investing landscape and help build a considered view, though I felt this article was enjoyably ‘back to basics’ and offered straightforward, actionable information that helped differentiate a sector where each trust claims to be different. One eyebrow-raising moment for me was seeing two trusts investing in the same asset class with a correlation of 0.57: Finsbury Growth & Income and abrdn Equity Income. This insight would be very helpful when putting together an income portfolio and provides far more insight than could be gleaned from the chair’s statement in an annual report. UK equity income is one of my preferred investment areas for 2024, and having the information on the disparity in the sector has been integral in deciding what trust picks I’ve gone for. Hopefully, the stock selection help of this article stacks the chips in my favour.

 
Ryan Lightfoot-Aminoff

 
Ryan joined Kepler in August 2022 as an investment trust research analyst. Prior to this, he spent seven years as a senior research analyst at Chelsea Financial Services where he worked on fund selection for their retail clients and on their multi-asset fund range. He holds an MSc in Finance & BA in Accounting & Finance from the University of the West of England.
 

Alan Ray

 
In December Thomas McMahon’s article ‘Fool’s Gold’ neatly outlined why investing in cash may appear like a simple decision when savings rates have increased so much, but once one factors in inflation, the value of cash in real terms is likely to be going down. When markets become turbulent, it’s a rational decision to invest in more cash, but as time passes, we all need a reminder of this very fundamental truth, and in my view, this article was very well-timed. Whilst the article specifically looks at equities and how they can generate real returns, the sector also has many trusts, such as the renewable energy trusts, that were owned by investors as bond proxies during the zero interest rate era, which are really nothing of the kind, with distinct equity characteristics that mean they can also generate real returns. I think this will be a theme we will continue to develop over 2024.

 
Alan Ray

 
Alan joined Kepler in October 2022. He has worked in the investment funds industry for over 25 years. The first half of his career was as an investment trust analyst, leading a highly-rated sell-side research team. More recently he has worked in corporate advisory and investment banking roles, with a focus on alternative asset classes.
 

Nick Todd

Over the course of 2023, discounts across a range of sectors have remained stubbornly wide. This is particularly true across the UK smaller companies sector which has been exposed to headwinds facing the UK businesses and consumers, resulting in an increase in negative sentiment and a lack of enthusiasm from investors for UK-listed equities.

Ryan’s article ‘Time to take the plunge’, looked at the challenges faced by the sector born from the typically less diversified, more niche exposures these companies have, in addition to the difficulties faced in raising capital during periods of tighter lending standards. He looked at the stark disparity between small-cap and large-cap performance globally, highlighting the poor relative performance of UK small caps since the start of 2021. That said, this relative underperformance has flattened out this year which leads us to question as to whether we have reached a bottom and are due a recovery —particularly in this beaten-up segment of the UK equity market.

As the uncertainty of rate decisions has begun to ease there have been shoots of a recovery, alongside the added benefit of the investment trust structure offering an additional premium for taking an early risk. History tells us that UK small caps have done particularly well following a period of difficult performance, with data since 1955 showing that every time the Numis Smaller Companies Index has had a negative calendar year, it has been followed by positive returns over the subsequent three years, with an average return of 84.4%.

Ryan’s article also highlighted that the underperformance of smaller companies relative to large caps over 12 months is typically followed by positive returns over three to five years, with the worst relative performance leading to the strongest period of subsequent returns. The underperformance of the Numis Small Cap plus AIM ex IT Index relative to the FTSE 100 in the 12 months to 18/12/2023 was 6% and with many discounts across the sector still close to historically wide levels, the opportunity may still be there for long-term investors to capitalise before wider investor sentiment towards the sector gains momentum.

 
Nicholas Todd

 
Nicholas is an Investment Trust Research Analyst and joined Kepler in May 2022. Previously he was an Investment Analyst at a discretionary fund manager, where he was responsible for fund selection and asset allocation for a range of multi-asset model portfolios. He has an economics degree from the University of Kent and a Masters in Investment and Finance from Queen Mary, University of London.
 

Joe Licsauer

 
Given Jurassic Park is one of my favourite film franchises, it’s no surprise that I was drawn to one of my teammate’s articles – ‘Fallen Kingdom?’. Quality of the movie aside, I think Ryan does an excellent job here and highlights an interesting point that the UK market, given the trials and tribulations over the last few years, is often overlooked, and perhaps underestimated versus other markets, like the US for example. Whilst there’s no argument that the UK is still under pressure from structural issues affecting its long-term future, the UK market is home to a well-diversified list of businesses that have stood the test of time and remains a good breeding ground for highly innovative, growing firms. Over the course of 2022, the UK was the best-performing major market, a year when almost all other asset classes fell, and, whilst performance hasn’t been as strong this year, historically low valuations for UK equities are presenting quite an opportunity to access the market. Whilst of course there needs to be some caution around this, given there are plenty of reasons valuations have fallen of late, Ryan’s final remarks ring true to me—if sentiment improves, this would provide a tailwind for the numerous exciting investment opportunities and show that, far from heading towards extinction, the UK could be at the dawn of a new age.

 
Josef Licsauer

 
Josef is an Investment Trust Research Analyst and joined Kepler in September 2023. Prior to this, he was an Investment Analyst at Hargreaves Lansdown, where he was responsible for fund research across a number of sectors including Japan, Europe and Alternatives. He obtained a first-class degree in Business and Management from the University of the West of England. He also holds the Investment Management certificate.
 

David Kimberley

 
As readers well know, the Kepler analyst team are a clever bunch, which makes picking an article of the year no mean task. I had leaned towards some of my colleague Alan Ray’s coverage of alternatives or Ryan Lightfoot-Aminoff’s UK small-cap piece from August. However, the one that sticks out in my mind is Thomas McMahon’s ‘UK OK, HUN’ piece despite (or perhaps because of) its irritating title. Having graduated from university a month before Brexit, my career to date has aligned with a period of near-relentless pessimism about the UK. There seems to be an almost gleeful masochism that many, particularly in the media class, have come to engage in, resulting in almost unceasingly negative sentiment towards the country, which often doesn’t jive with reality. Thomas’s piece puts some much-needed perspective on this. Things aren’t amazing but also aren’t as bad as they are made out to be. And much like Ryan’s August piece, it highlights just how attractive valuations in the UK stock market are today.

 
David Kimberley

 
David is an investment writer for Kepler Trust Intelligence. Prior to joining Kepler Partners, he helped build the communications and editorial team at Freetrade, a retail stockbroker, and worked as a financial journalist in the Middle East. David has a BA in history from University College London.