Save & Spend: Top tips for 2008

Last year five experts tipped investment fundsto pick for 2007 one for the UK and one for overseas. Kate Hughes finds out how their choices fared and gets some fresh selections for 2008

2007 was a year of unprecedented situations, but the roller-coaster is far from over. With the problems in the markets surrounding the US sub-prime mortgage crises, high levels of volatility worldwide are expected to continue.

A year ago one of the biggest headaches for UK investors internationally was the strength of the pound. These days we could be facing the domestic and global fall-out of a US recession. But the general view among economists is that despite a slowdown in the UK and US economies, the world economy will continue to grow strongly next year, with Asia and Eastern Europe filling in the confidence gaps.

"Outside the US, Europe and the UK areas, economic conditions and confidence levels in emerging Asia, Latin America and Eastern Europe have remained much more buoyant," John Greenwood, chief economist at Invesco Perpetual, says.

But that resilience has yet to be tested by a significant downturn in economic activity in the core developed economies that comprise the epicentre of the global mortgage finance crisis.

Since the outbreak of the crisis in August, financial markets have been shaken from their high levels of risk tolerance to a much more subdued assessment ofthe outlook.

"As the losses from the sub-prime debacle percolate more widely and more financial institutions write down their assets to more realistic values, the willingness to grant credit to borrowers is decliningas banks tighten theirlending conditions," Mr Greenwood adds.

"When credit and money slow or contract sharply, this has a direct impact on asset prices and spending of all kinds in subsequent months. The global economy is heading for that kind of tipping point."

Now more than ever, the right fund selection is critical. A year ago we asked four financial advisers and a fund of funds manager to select two funds that they believed would perform well in 2007 one investing at home in the UK, and one overseas. Here, we take a look at how their picks have fared over the past 12 months compared with the index, as well as asking our panel to make their selections for 2008.

Juliet Schooling, head of research, Chelsea Financial Services

* HOME: NEPTUNEEQUITY INCOME

In 2006 Ms Schooling backed the ever-popular Schroder UK Alpha Plus, which once again had a good year. It came in towards the top of the class, ranking 42 out of 307 funds in the IMA UK All Companies sector, growing 6.24 per cent, compared to the average sector growth of 0.68 per cent over the year.

For 2008, she has plumped for a change tothe Neptune Equity Income fund.

There were few UK fund managers who emerged without a few bruises when the US sub-prime crisis impacted upon the UK economy. "However, those who did survive untainted have bolstered their reputation," she says. "Neptune Equity Income was one of the few to achieve this."

* AWAY: JUPITER EMERGING EUROPEAN OPPORTUNITIES

Ms Schooling picked Artemis European Growth as the overseas fund of choice for 2007, whichdid not fare well and sitstowards the bottom of the pack, with the best fundsin Europe excluding theUK outstripping itsperformance by an extra50 per cent.

This year she suggests the Jupiter Emerging European Opportunities fund, because she feels that emerging markets will cool in 2008, which could leave Russia as "one pocket of light". A booming economy with cheap company valuations is the major draw. Elena Shaftan holds approximately 50 per cent of the fund in Russia, and is a very highly regarded for her stock-picking ability, Ms Schooling adds.

Gavin Haynes, managing director, Whitechurch Securities

* HOME: PSIGMAINCOME

Mr Haynes also did well with Schroder UK Alpha Plus in 2007, and this year recommends Psigma's Income fund.

The threat of higher interest rates followed by problems in the financial sector may have resulted in most equity income funds underperforming. In spite of this, Mr Haynes favours the Psigma Income investment philosophy as a core element for UK equity exposure. "This area is trading at a cyclical low, and I believe that the changing economic outlook should favour a defensive bias. A recovery in out-of-favour areas would also boost this area of the UK market. The fund is currently skewed towards mega caps and I believe this will be a strong performer in 2008," he says.

* AWAY: BAILLIE GIFFORD JAPANESE

In 2007, Mr Haynes suggested the Skandia Global Securities Property Fund, whose management is outsourced to LaSalle. It was hardly the best year for property funds or for this fund; the average growth was -17.18 per cent, but the fund's growth dropped by over 20 per cent. But Mr Haynes feels much better about Baillie Gifford's Japanese fund.

"Many investors have understandably thrown in the towel over Japan as market and Japanese fund returns have not been good over the past two years," he admits. However, it does now appear that there are some key reasons to invest in Japan. "Profit margins and returns on equity are at multi-year highs, and Japanese domestic investors are showing signs of returning back to their own market and this could be a recovery play for 2008."

Geoff Penrice, Bates Investment

* HOME: SCHRODER UK ALPHA PLUS

Mr Penrice is banking once again on the Schroder UK Alpha Plus for a repeat of the first-class performance of 2007.

"This is essentially a 'best ideas fund' which primarily invests in large UK companies. The fund has had consistent good performance, having returned 166 per cent over the last five years," he says.

"As UK economic growth is expected to weaken next year, larger companies will perform well compared to smaller companies. The fund aims to provide capital growth through the selecting of a relatively small holding drawn mainly from large to medium-size companies. This is an aggressive fund which results in above average volatility as well as greater potential for growth."

* AWAY: BARING JAPAN GROWTH

Last year the Bates team backed the Martin Currie North America fund, which had a great year in 2007, with growth of 12.61 per cent compared to a sector average of 7.82 per cent. With the Baring Japan Growth fund as his pick for 2008, Mr Penrice says there is considerable potential for growth in the Japanese market. "This is an aggressively managed fund and has a high level of volatility," Mr Penrice concedes, but he is confident of the potential for good returns.

Nick Greenwood, chief investment officer, Iimia

* HOME: HERALDINVESTMENT TRUST

Mr Greenwood's 2007 pick, Artemis Alpha, did OK for a UK investment trust. It may have lost 2.38 per cent, but came in the middle of the pack, which lost 8.5 per cent on average.

His choice for 2008, the Herald Investment Trust, specialises in the technology and media sectors with a small cap bias, which, he believes is the key to returns over the short term. "The private equity houses can no longer borrow cheaply and buy up mature companies with dependable cash flows and load them up with debt, paying themselves a handsome dividend in the process. Therefore investors' focus will return to companies that can actually grow their profits," Mr Greenwood says.

* AWAY: THE BIOTECH GROWTH TRUST

Aberdeen All Asia was solid in a successful sector which spans Asia Pacific, including Japan, and grew by 12.29 per cent, just above average growth of 10.62 per cent.

Meanwhile, the major pharmaceutical companies have evolved into distributors over the past decade and have lost much of their ability to invent new compounds. In order to maintain their product range, they need to acquire biotech companies which have the intellectual capital but lack distribution capability. However, Mr Greenwood adds: "In the post credit bubble environment, pharmaceuticals have begun to find favour. Buying exposure via the Biotech Growth Trust on a wide discount offers considerable scope for returns."

Stephen Marriott, research analyst, Bestinvest

HOME: LIONTRUST FIRST GROWTH

The Bestinvest team's UK pick for 2007 was Rensburg UK Managers Focus, which, compared to Schroder's UK Alpha did poorly, and lost 2.25 per cent compared to a slight average sector growth of 0.68 per cent.

This year Mr Marriott's pick is the Liontrust First Growth fund.

He says: "The fund offers core exposure to FTSE 350 stocks. With a likely economic slowdown ahead of us, I think that large cap will continue to be the place to be next year, as has been the case since the middle of this year, following the US-led credit crunch.

"Typically larger companies fare better in this type of environment relative to smaller companies."

* AWAY: TEMPLETON GLOBAL EMERGING MARKETS

Mr Marriott will struggle to better last year's choice in 2008. The Artemis Global Growth fund romped home very near the top of the global growth sector for performance.

His pick for the coming year is Templeton Global Emerging Markets. He says the fund has an emphasis on companies with strong earnings and cash flow characteristics.

"Emerging marketshad another year of strong gains. As long as growth opportunities are scarce, emerging markets will continue to attract money," he adds.