Ryan Lightfoot-Aminoff
I chose Global Smaller Companies (GSCT) as my pick for 2023 on the premise that smaller companies would benefit from a bounce back in markets in the second half of the year. Using the classic excuse of “not wrong, just early” the recovery has come too late in the year to win me any office kudos, with my pick in the middle of our analysts’ group. For 2024, it is tempting to stick with GSCT. It looks like, in my opinion, interest rates have peaked meaning this headwind will have ended and sentiment should improve. This would be supportive of smaller companies’ outperformance next year. However, with the impact of previous rate rises still to be felt, and some not-quite-red-but-maybe-dark-orange economic warning lights, I think the lower-risk profile of equity income could be a more reasonable place to seek returns next year. This is especially true of the UK, where valuations are very depressed which provides a value opportunity from a market with a strong dividend-paying mindset. On a broader note, higher interest rates could herald a new era for companies paying dividends, as their history of generating free cash flow will be a key benefit in a tighter funding environment. As such, my choice is Shires Income (SHRS). Managed by Iain Pyle and supported by Charles Luke, SHRS is a UK equity income trust with a small and mid-cap bias but has a couple of idiosyncratic features that I think will be supportive in 2024. The trust is combining with stablemate abrdn Smaller Companies Income which will grow the asset base and help attract investors. This will contribute to the closing of the c. 8% discount. Furthermore, one stand-out feature is the allocation to preference shares which supports the high income—SHRS yields over 6% at the time of writing. These fell in the past couple of years due to their bond-like properties but a change in the interest rate narrative would become a tailwind. For all these reasons, I believe SHRS offers the best upside potential in a depressed UK market, with the comfort of a high, dependable income offering plenty of opportunity in 2024.
Ryan Lightfoot-Aminoff
Joe Licsauer
Having only joined the Kepler research team in September this year, I was unable to submit a pick for 2023. That said, I did something similar at my old firm and picked a fund that invested in Japan. Having taken a lot of stick for falling into the old adage around Japan – Dawn of a new (or really false) era – I ended up sitting in the top quartile of picks. Many of the reasons I went for a Japanese pick then are still true today, so, I’ll be keeping true to the Bushido code and will pick another Japanese fund to outperform in 2024 – CC Japan Income & Growth (CCJI).
Lead manager Richard Aston has been investing in Japan for a long time. He targets businesses that can grow both capital and dividends steadily over the long term, a strategy which has proved successful over time and has rarely underperformed the market. Being fixated on high-quality companies, whilst also paying attention to valuation, sets CCJI apart from peers in the sector, which are typically emulating a higher growth approach. Another factor that sets CCJI apart from peers is the focus on business-growing dividends. The dividend culture in Japan is improving quickly, as companies are recognising the importance of shareholders. Richard wants to find management teams and businesses that are united on this front as it has the potential to lead to long-term success, but also some resilience in times of market stress, as evidenced during the pandemic when roughly 60% of Japanese companies were able to avoid cutting or suspending dividends.
All in all, CCJI is a differentiated trust in the sector, with a highly experienced manager and proven approach to investing in Japanese companies. On top of that a mixture of low valuations, long-term structural changes, such as corporate governance reform, and the welcome return of modest inflation, paint an encouraging outlook for the economy and a potentially exciting environment to invest in. In my view, Richard has positioned CCJI’s portfolio well to benefit from these changes and the current macroeconomic backdrop, as well as being well-equipped to take advantage of opportunities as they arise in the market.
Josef Licsauer
Jo Groves
As a new joiner to Kepler, I’m spared the ignominy of justifying my questionable choice for 2023. In all honesty, I wouldn’t have foreseen the stellar recovery in the ‘magnificent seven’ this year and, being prone to past performance bias, would no doubt have brought up the rear on my ‘hero to zero’ steed. As a result, I’m going to leave the more sophisticated analysis to my esteemed colleagues and base my pick principally on the simple metric of valuation.
On this basis, I find it hard to look beyond the current valuation of UK equities, which are trading below both their long-term average and their US peers. As of 30/11/2023, the MSCI UK Index was trading on a trailing price-earnings ratio of 11.3x, less than half the 23.9 price-earnings ratio of the MSCI USA Index, and a challenging macroeconomic backdrop has weighed even more heavily on UK small caps.
As a result, my pick for this year is Rockwood Strategic (RKW) as a consistent top performer in the UK small-cap sphere, rewarding investors with a five-year share price total return of 136.7%, significantly above the IT UK Smaller Companies average of 31.4% (as of 18/12/2023). The trust invests primarily in companies with recovery potential, rather than being dependent on the broader economic environment, and takes an active role in instigating operational and management changes. I believe that M&A activity should also continue to prove a tailwind for RKW’s returns in 2024. Whilst past performance is no guarantee of future performance, I believe RKW is well-positioned for the year ahead, particularly if the long-awaited rerating of UK equities comes to fruition.
Jo Groves
David Kimberley
I was leaning towards Rockwood Strategic (RKW) too, but my pick instead is Bellevue Healthcare (BBH). Managers Brett Darke and Paul Major have not held obesity plays Novo Nordisk and Eli Lilley, which have driven returns for the healthcare sector over the last 12 months. This has meant relative performance has suffered. However, Paul and Brett make a convincing case that these drugs are not as effective as they are made out to be and that they will come under price pressure in the near term. They have some track record here as they refused to buy Moderna and BioNTech during the pandemic, which temporarily hurt relative performance. The former has fallen close to 90% since its pandemic peak, with BioNTech also trading close to 75% below its equivalent high.
At the same time, BBH—which runs a concentrated portfolio of 35 stocks or less—has seen its holdings perform poorly, despite delivering good financials. Of the 13 companies in the portfolio that released Q3 results in October, 11 hit or beat their earnings forecasts. Only two were below forecast. I think low valuations on the back of strong performance cannot continue forever. Despite a very strong pick up in performance since the start of November, the trust’s discount remains far wider than its historical average. Combined with valuations that look compelling in the underlying portfolio, it’s plausible that an unwinding of the obesity stocks trade and the end of rate hikes could prove more favourable for BBH next year. Finally, I like the defensive characteristics that BBH offers. The trust ultimately invests in companies that help reduce costs and/or provide better care for patients. It is hard to imagine such companies losing their appeal, regardless of demographic trends. That we are in an increasingly elderly world, where governments are desperate to reduce healthcare spending, only enhances the appeal.
David Kimberley
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