Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

If you are a golfer, you will know that the scorecard doesn’t always tell the whole story. It kindly doesn’t let on about the ball that bounced back off a tree onto the fairway or the scuffed shot that dribbled into the hole.

Investing statistics can also be misleading. Look at the performance of last year’s fund recommendations and you would be tempted to think 2020 had been a boring year.

Two of the four picks have managed gains of around 5% since we published just before Christmas 2019. The other two are down, respectively by 2% and 11%. Please remember past performance is not a reliable indicator of future returns.

If you had put an equal amount into all four picks you wouldn’t be far off where you started. What you wouldn’t appreciate from the headline numbers is what an extraordinary roller-coaster ride it has been.

So, before setting out my fund picks for 2021, a quick recap. The worst performer by far in 2020 was the Liontrust UK Growth Fund. I hoped for some clarity on Brexit which did not arrive, and I did not foresee the underperformance of the relatively Covid-exposed UK market. Having been down as much as 32% in March, the fund has recovered well though.

Artemis Global Emerging Markets also suffered during the worst of the market falls this year. But it has now recovered almost all the lost ground.

The two funds that performed best, and almost in line with each other, are coincidentally both from Fidelity. Global Dividend and the Select 50 Balanced Fund had recovered their losses by the summer and have edged ahead since then. The Select 50 Balanced Fund, in particular, has given investors a smoother ride thanks to its spread of assets and investments in different parts of the world.

I make my selections for 2021 only too aware that none of us possesses a crystal ball. The pandemic has reminded us that the best an investor can hope to do is prepare their portfolio for the unexpected.

As I put my picks together this year, investors have regained their risk appetite. November was one of the best months ever in the markets, largely on the back of hopes that widespread vaccinations will help us get back to normal in 2021.

The return of animal spirits makes me nervous because the best time to invest is when most people think it is a bad idea. However, there are good reasons to believe that a combination of pent-up consumer demand, a re-opening of shops and restaurants and a renewed desire and ability to travel will be supported by continuing fiscal and monetary support next year. That could be a potent mixture for markets.

In addition to this positive overall outlook, three themes are reflected in my picks. First, I expect sustainability to continue to drive performance as it has throughout the pandemic. Companies that score highly on environmental, social and governance factors should continue to be rewarded by investors.

Second, in an environment of continuing monetary stimulus, interest rates will stay low and investors will be hungry for income. Third, I expect the less popular markets in 2020 to benefit from their relatively attractive valuations and for the out of favour value style to gain ground on the growth stocks which have led the field for so long.

My first pick reflects the sustainability theme. The Brown Advisory US Sustainable Growth Fund invests in businesses with a sustainable business advantage. It holds a relatively concentrated portfolio of 30-40 stocks. The managers have a strong valuation discipline, which prevents them paying over the odds, which is an important consideration in the US market as it continues to hit new highs.

Many market strategists expect non-US markets, in particular those in Asia and Emerging Markets, to outperform in the year ahead. So, my second sustainability-focused pick is the Stewart Investors Asia Pacific Leaders Sustainability Fund. This fund focuses on companies that contribute to, and benefit from, economically and environmentally sustainable development. It looks for ‘socially useful’ businesses and manages risk by restricting its search to mainly large and mid-sized companies.

The third pick combines the focus on sustainability with the delivery of an income. The Foresight UK Infrastructure Income Fund aims for 5% annual income, which it achieves by investing in other investment companies that own real assets in the renewable energy and infrastructure sectors. This is an attractive alternative asset class which should benefit from income investors diversifying their holdings away from shares and bonds. The fund might also provide some protection against inflation, were that to start to return next year.

My final pick is a double-header. I am keen to have some exposure to the out-of-favour UK stock market in 2021 because this year we really should start to get some clarity about Britain’s post-Brexit future. The UK market has underperformed for many years, but notably since the 2016 referendum and this makes it look interesting from a contrarian perspective.

I have chosen two funds to play the UK theme because I remain uncertain about whether the apparent rotation from the growth investment style to value will continue. There have been many false dawns on this front.

If value does continue to gain in popularity, then the Fidelity Special Situations Fund would be an obvious beneficiary. Managed for six years by Alex Wright, the investment style of the fund continues to reflect the contrarian approach of its first manager, Anthony Bolton. Alex focuses on finding unloved companies entering a period of positive change.

If, on the other hand, a more defensive, growth style prevails in 2021 then I can think of no better a fund with which to play the UK than the Fidelity UK Select Fund. Aruna Karunathilake is a manager who focuses on quality and growth. He wants to own good businesses for the long term and performs best when strong brands and robust balance sheets are in vogue.

I am viewing Special Situations and UK Select as flip sides of one UK recommendation and will be holding both this year. Indeed, I will hold all of the above funds in my ISA and SIPP through 2021. I believe in eating my own cooking when it comes to my annual fund picks.

More on Brown Advisory US Sustainable Growth Fund

More on Stewart Investors Asia Pacific Leaders Sustainability Fund

More on Foresight UK Infrastructure Income Fund

More on Fidelity Special Situations Fund

More on Fidelity UK Select Fund

Five year performance of last year’s fund picks

As at 3 Dec

2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Fidelity Global Dividend 16.4 12.6 8.7 11.2 7.7
Fidelity Select 50 Balanced - - - 7.6 5.5
Liontrust UK Growth 10.2 15.5 3.3 8.6 -6.0
Artemis Global Emerging Markets 30.0 25.7 0.0 4.0 1.3

Past performance is not a reliable indicator of future returns

Source: FE, 3.12.15 to 3.12.20, Basis: bid to bid with net income reinvested in GBP. Excludes initial charge.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. The Fidelity UK Select Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. The Fidelity Special Situations Fund and Fidelity UK Select Fund can invest in overseas markets, so the value of investments can be affected by changes in currency exchange rates. Both funds use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered:

UK; Asia and EM; North America; Funds; ESG investing

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