Managers at Swiss & Global and GAM set out views on what they see as "unusual fund opportunities" in a variety of sectors.

Let’s talk about UFOs. No, not unidentified flying objects and little green men from Mars, but what investment firms GAM and Swiss & Global Asset Management reckon are “unusual fund opportunities”. In an industry that just loves acronyms, this is one of the more memorable ones.

A roster of fund managers at the firms lined up to say what they think from everything from healthcare to technology. Here are some of the views:

Technology
“We have increased our exposure to Chinese internet companies, which currently present more attractive valuations than their US counterparts. These companies are reaching an inflection point where they are beginning to monetise their products and solutions effectively.

The new business models in the tech space operate in two stages: land grab, then monetisation. Investors often underestimate the value of the network effect for tech companies, as illustrated by the incredulous response to the price Facebook paid for Whatsapp. If a tech firm’s user base is reaching critical mass, they have great potential to start monetising that network.”

Mark Hawtin, fund manager, GAM Star Technology

Health
“The health sector is at the beginning of a new product cycle and companies’ product pipelines are currently extremely robust, creating particularly attractive opportunities for investors. Recent developments in the treatment for hepatitis C demonstrate the extent to which this innovation can benefit investors. Around four million people suffer from the illness in the US and most do not even know they are infected. Conventional treatment methods are only partially effective and involve strong side effects.

New therapy approaches offer increased effectiveness and improved tolerance. The ability to take new treatments orally enables patients to more easily integrate treatment into everyday life. These new forms of treatment will also result in significantly lower costs for the healthcare system. Companies that bring this type of innovation to market can expect high demand, immediate gains in market share and high pricing power.”
Christophe Eggmann, fund manager of the JB Health Innovation Fund

Eggmann later went into more detail for this publication about his views on the sector.

If you look at what’s driving returns over the long term, and in any type of asset class, where you see the highest returns is where there is innovation. It is not surprising that healthcare firms invest so much in innovation…there is patent protection and there are regulatory requirements which represent high barriers to entry.

He argued that regulations actually help drive innovation by forcing firms to meet the regulatory standards and does not see this as reducing, or squeezing development by imposing costs.
There is a lot of free cashflow for shareholders in some parts of healthcare investment, which makes the area attractive for people seeking income.

Returns tend to be higher than for the stock market as a whole and yet with, on average, lower volatility. For instance, the MSCI Total Return World Healthcare Index has risen 6.4 per cent per year since 2000, while the MSCI Total Return World Index has delivered a gain of 3 per cent. The former index has achieved a standard deviation from the mean – the usual volatility measure – of 12.7 per cent, while the broader market has had a volatility of more than 16.5 per cent.

The fund has had a substantial overweight in drug companies over the past two years, since that is where much innovation has come from; the firm has cut a small amount of its overweight stance in biotech to take profits on recent gains.

Healthcare firms are, on average, trading at a share price premium of 10 per cent compared to the market as a whole; healthcare hit a trough in 2009 where the forward price-earnings ratio was 10 times; it is now 18 times forward earnings, so there has been a significant re-rating sector. The median value of such stocks over the past 25 years in P/E terms has been 18 times forward earnings; Eggmann reckons a share price premium of 20 to 25 per cent would be justified. In 1999, healthcare was at a P/E of 35 times forward earnings with a share premium of 45 per cent. “It is not a scenario that it will go back to these levels,” he said.

Luxury
“Multi-channel retail strategies are currently one of the big topics for luxury companies. Businesses are seeking to capitalise on the growth in digitally literate, social media savvy consumers who are looking for convenience and efficiency to complement their luxury experience. This allows firms to align their offering across different geographies and increase availability, with major developments in e-commerce platforms helping to extend brands’ reach. Digital and multimedia solutions are attracting the big spenders of tomorrow.”
Scilla Huang Sun, fund manager of the JB Luxury Brands Fund

Junior bank debt
“Bond investors have realised that high-yield bonds no longer provide what their name suggests, but all is not lost. There are specialist areas that still offer interesting potential returns. One such niche is the lower-rated debt of high-quality investment grade companies. Investors can gain exposure to strong companies with robust balance sheets and leading market positions through bonds offering higher coupons and potential for capital appreciation.

Despite some significant recovery, we believe bond issues remain mis-priced following the financial crisis and many financials are more robust than consensus would suggest. Regulatory pressure also introduces a dynamic that they must continually strive to be more safe and solid. Other interesting areas in the investable universe include brokers, insurance and re-insurance companies, asset managers and advisory firms. Many of these names remain undervalued, having been tarred with the same brush as banks.”  
Anthony Smouha, fund manager, GAM Star Credit Opportunities

European equities
“The economic recovery in Europe is slowly taking hold on sustainable factors such as a domestic demand pick-up in the core and an export renaissance in the periphery. European companies still generate 45-50 per cent of their overall revenues domestically, and this makes us confident that the earnings cycle should also finally start to move upwards after two disappointing years. In our base case, we see 30-40 per cent cumulative earnings growth for the SXXP over the next three years.

As bottom-up stock pickers, our highest conviction ideas are SAP, Michelin, Arkema, SKF and Kingfisher. In the case of Kingfisher, the European home improvement retailer, the asymmetry we see is the underappreciated recovery in the UK DIY market. There is typically a six to nine-month lag between a housing recovery and large scale spending on DIY, and we expect Kingfisher to benefit disproportionately as of the second half of 2014.”
Can Elbi, fund manager of the JB Europe Focus Fund

Emerging market equities
“There has been a definite emergence of companies profiting from ‘higher needs’ in the emerging markets. Consumer discretionary rather than consumer staples are one of our primary investment areas as individuals look to illustrate their social status through their purchases. Great Wall Motor, China’s top SUV provider, is one such play. While general car sales are not demonstrating significant growth, the status now attached to owning an SUV in China has been a huge benefit to the company. The growing gaming industry in Macau can be accessed through companies like Galaxy Entertainment, enabling investors to benefit from significant increases in disposable income across the Asia region.”
Enrico Camera, fund manager, GAM Emerging Alpha

African equities
“The size of sub-Saharan Africa’s economy more than tripled from 2000 to around $1.33 trillion in 2012, spurred by increased demand for its minerals and oil. It is important to understand that the African growth is not simply a matter of rising commodity prices. With rising educational standards, the continent is structurally changing and increasingly taking advantage of new economic opportunities. While economies such as Nigeria and Zambia are dominated by commodities, lower commodity prices could benefit consumption driven economies such as Kenya that are net importers of commodities.

The continent’s future growth will inevitably be driven by its consumer population. Combined consumer spending reached $860 billion in 2008 and is forecast to reach $1.4 trillion by 2020, creating exciting future investment opportunities. We maintain our overweight exposure to Egypt, where the removal of the former president Mursi last summer was a strong catalyst for a re-rating of the market. Egypt still faces some challenges in terms of politics and budget allocation and implementation, but if change is executed well and in a timely manner we should see a return to sustainable growth.”
Tommaso Bonanata, manager of the JB Africa Focus Fund

Emerging market bonds
“The outlook for emerging market bonds is stabilising. On a broader level there are still outflows in the asset class, but the indiscriminate selling of the so-called fragile 5 has created some very attractive buying opportunities for selective investors. We for instance like Brazilian bonds in local currency, which achieve yields of up to 13 per cent. Interest levels have fallen by 70 to 80 basis points in recent months and the currency has appreciated slightly.

By contrast, caution is urged for Turkish government bonds in view of absent rebalancing and the forthcoming election at the end of the month. Within the segment of hard-currency bonds we see opportunities in Indonesian government bonds. Additionally many eastern European countries, which went through a strong rebalancing, are the biggest beneficiary of the European normalisation.”
Enzo Puntillo, Head/CIO Fixed Income, Swiss & Global Management

Convertible bonds
“Optimistic sentiment in global credit markets is currently being tested somewhat; extra protection across the credit spectrum should help to limit draw-downs. An area that has done well, but maintains the potential to repeat its success, is convertible bonds. The threatened great rotation out of cash and some bonds into equities has indeed happened in every major country. Many industry practitioners agree that equity values are somewhat stretched in various areas, hence our application of equity protection when deemed appropriate.

Momentum and inflows could take equity indices higher to levels comparable to the price action of 1997, supported by interest rates that are still very low, and may have low terminal values the next hiking cycle.

That said, convertible bonds have performed exceptionally well relative to other fixed income instruments in past rising rate environments, so there are precedents to support our optimism for this sector of the bond universe now.”
Tim Haywood, fund manager of the JB Absolute Return Bond Fund