Since the Recommended Funds list was updated in July 2011, most of our picks on the Recommended Funds list were able to prove their worth by demonstrating resilience during the extremely volatile markets in the second half of 2011.

In fact, four of our Recommended Funds made it to the top performing funds lists of 2011. However, one particular fund lagged its peers and posted an underperformance for the year. While the S&P 500 index registered a total return of 3.1%, BNP Paribas L1 Opportunities USA posted a decline of -18.3% in 2011 (returns in SGD terms). However, we do not believe the fund should be written off on the back of a poor year. We explain why we think BNP Paribas L1 Opportunities USA is suitable for investors who are:

1. Sceptical about US Financials

Though benchmarked against the S&P 500 index, the investment strategy allows the fund manager, Francois Moute, to take an unconstrained approach in his portfolio construction. Bearish on the US financials sector, Moute did not hold any company operating in the financials sector for the whole of 2011. The fund is likely to continue this ‘no-financials’ trend and so investors who are wary of the US financials sector will have their views aligned with the manager’s when they invest in this fund.

2. Bullish on Materials and Gold

While the fund is underweight financials (zero-weight to be exact), it is heavily overweight on the materials sector. On the fund’s latest factsheet (dated 30 November 2011), the fund had 44.88% of its portfolio invested in the sector, compared to the 3.57% held by the benchmark. Unfortunately, this large active weight backfired when the materials sector posted the second-worst return among the ten GICS (Global Industry Classification Standard) sectors, resulting in the fund underperforming the benchmark despite making the correct call on the financials sector.

Based on the fund’s factsheet (dated 30 November 2011) and past correspondences, the manager is also very positive on gold; three of the fund’s top ten holdings are in gold mining companies. In fact, Newmont Mining Corp and Barrick Gold Corp are the fund’s largest two holdings at 6.06% and 4.97% of the portfolio respectively. While soaring gold prices were the talk of the town for the better part of 2011, stock prices of gold miners did not track the upswing in gold spot price. The NYSE Arca Exchange Gold BUGS Index, which tracks the equity prices of the 15 largest gold production companies listed publicly, returned -13.0% in 2011. This further compounded the negative return on the fund. Though our Research Team has been consistently negative on the prospects of gold as an asset class, investors who would still like some gold exposure can consider gold mining companies as opposed to financial products that track the prices of gold (see 3 Disturbing Facts About Gold). In addition, gold miners stand to benefit more should higher gold prices translate to stronger cash flows and increased earnings for these companies.

3. Do Not Always Want Full Exposure

According to the fund’s investment policy, the portfolio may reduce its exposure to the US market by allocating up to 25% of its portfolio to cash or other money market instruments. Hence, when the manager is bearish on US equities in general, he has the liberty to reduce the fund’s exposure and hence minimise any losses that may arise due to market movements. Such a strategy may pay off for the fund should 2012 continue to witness volatile equity markets.

Conclusion

As discussed earlier, the fund manager Francois Moute takes active sector and stock selection when constructing his portfolio. As such, this fund will be suitable for investors who are looking for active management in their US equity exposure. Investors who have existing holdings in US funds that track the benchmark more closely can also include this fund in their supplementary portfolios to benefit from the strong upside potential as the materials sector benefit from a stronger global economy in 2012.

The Research Team currently has a 4.0 star "very attractive" rating on the US equity market. For more updates, please visit Research.

Related Articles

Top Funds Review 2011: South-East Asia Equity Funds Outperformed
How This Overlooked Sector Can Double US GDP Growth (Part 1)
How This Overlooked Sector Can Double US GDP Growth (Part 2)
Key Investment Themes and 2012 Outlook