Bombed out assets set to bounce back

Neil Woodford, the country's biggest fund manager with £15 billion under management at Invesco Perpetual, warned last week that he expected the economy to remain in the doldrums for several more years. Nevertheless, investor confidence is back in the black, according to the Investment Management Association (IMA). Its survey last week showed that more than half of investors think now is a good time to put money into investment products.

Advisers suggest dipping a toe into bombed-out sectors such as commercial property and hedge funds, treating any short-term price falls as buying opportunities. Sanjeev Shah, the manager of the Fidelity Special Situations fund and successor to Anthony Bolton, said: "The financial crisis and the recession have created exceptional stock-picking opportunities. While the market has risen quite a way in a short time, I would still say that there is good value to be found in areas such as financials and retailers.

"There may be a setback in the short term. but for mid to long-term investors like myself, the opportunity to find cheap shares have not been so plentiful in years."

Here, we look at a few of the assets that you should consider buying - and show how to distinguish the genuine opportunities from the "dash for trash"

Commercial property

Investors who ploughed billions into commercial property funds close to the peak of the market have seen returns slump by nearly 30% over the past 12 months, according to data firm Trustnet. However, price falls have pushed yields up to 7.8%, according to the Investment Property Databank. The yield shows the rental income from commercial property as a proportion of the price, so yields rise as prices fall (assuming rents remain the same). With yields pushing 8%, many analysts believe that the sector is again starting to look attractive.

Adrian Lowcock of investment adviser Bestinvest, has begun slowly to increase clients' holdings in the sector, predicting the end of the downturn in prime commercial property within the next six to nine months. He is particularly keen on both the Schroders Global Property Securities fund and SWIP's Property Trust.

"The Schroders fund is global, but the SWIP trust invests in UK bricks and mortar," he said. "Bricks and mortar has suffered a heavy fall in values and has some catching up to do with the rises we've seen in the shares of listed property companies."

Rental income could still come under pressure, however, as tenants such as retailers go bust. James Sullivan, of investment adviser and manager PIL Invests, said: "Yields may be attractive, but they are worth nothing if the property remains unoccupied.

"The key is to ensure you invest in high-quality assets let on long occupational leases to financially sound tenants."

He recommends specialist property funds including the Acumentum I Fund, where properties are let to blue-chip tenants on long leases, or the City & Provincial High Income Opportunity Fund.

Real estate investment trusts (REITs), which are listed companies that in turn invest in commercial property, are also being tipped. Their shares have been trading at a big discount to the value of their underlying property assets (called the net asset value), but Peter McGahan of Worldwide Financial Planning, the financial adviser, believes this could mark the bottom for the sector.

"A number of Reits have had rights issues recently - issuing shares to raise cash to buy up cheap distressed assets. This could signal the end of the lull in the property market," he said.

"I would expect the discounts on Reits like Hammerson, currently trading at a 57% discount to its net value, to narrow dramatically, offering real opportunities for investors. This will happen long before the value of the actual commercial property assets increases."

Banks

Banks appear to have turned the corner here and in the US. Lloyds Banking Group, formed from the merger of Lloyds and Halifax Bank of Scotland, last week repaid £2.5 billion of £4 billion government funding, while in America, 10 banks have repaid the US government $68 billion of their bailout cash. Black Rock, the world's biggest fund manager following its purchase of Barclays Global Investors, now describes financials as "one of the best buying opportunities investors will ever see".

Alistair Hibbert, manager of the Black Rock European Dynamic Fund, said: "It is becoming clear that investors' expectations at the end of last year were perhaps too pessimistic.

"First-quarter profits were higher than expected and default rates are nowhere near the levels predicted at the height of the gloom last year.

"In the most favourable scenarios, many banks could double or treble their earnings over the next few years. Although risks remain high, we believe that the risk of the worst-case scenarios has diminished significantly over the year to date."

His focus is on European banks, with his top ten holdings including Spanish Banco Santander, which owns Abbey in the UK, Axa and Credit Suisse.

However, other managers also see opportunities among UK banks. Ian Lance, manager of the Schroders Income Fund, said that despite a sharp rebound over recent months, there was still significant value in share prices.

He said: "These companies made significant mistakes between 2005 and 2007 and their profitability is, therefore, likely to remain very depressed into 2010, but we believe their share prices are still being weighed down by the market's focus on what is essentially a very short-term view. As long-term investors, we believe names such as Barclays and Lloyds are fundamentally good businesses, with the potential to generate good returns over time."

Investors seem to agree. Broker TD Waterhouse said that Lloyds accounted for nearly a third of its top ten trades last week, following heavy buying the prevcious week ahead of the deadline for its open offer. This was where it offered existing shareholders 0.6213 new shares for every existing one at an offer price of 38.43p, in order to repay the Treasury some of its bailout cash.

However, some brokers urge caution following the strong run of the past three months - Barclays has jumped 327%, Lloyds is up 72% and Royal Bank of Scotland has gained 80%.

Charlotte Black of Brewin Dolphin, the broker, said: "We think there is value in the longer term in Lloyds and RBS, but there remains great uncertainty in the near and medium term."

An alternative way into banks is to buy their bonds through a fund. Richard Woolnough, manager of the £3.2 billion M&G Corporate Bond fund, has increased his holdings in the sector from as low as 8% in September 2008 to about 22% - although that is still lower than the index. Woolnough said: "While I am finding several attractive opportunities, there remains a limited number of banks to which I am comfortable to lend."

Mining stocks

Commodities have surged over the past three months as optimism about the global economy, and particularly China, has risen. Chinese investment in fixed assets (such as factories) soared 33% in the first five months of the year in the latest sign that the world's third-largest economy is back on track.

Oil has leapt 70% over the past three months to more than $70 a barrel, while the Goldman Sach commodities index, which includes metals as well as energy, has jumped 47%.

However, analysts caution against chasing the oil rally as there is still a danger that crude could fall back if the economic recovery is more anaemic that anticipated.

Oil and mining companies could be a better alternative - Royal Dutch Shell and miner BHP Billiton have rallied only 10% and 14% over the past three months and still offer attractive yields of 6.72% and 4.35% respectively.

You can gain exposure to mining companies through a fund such as JP Morgan Natural Resources, managed by Ian Henderson, whose top ten includes BHP as well as Rio Tinto and Peter Hambro Mining. His fund is up 75% over the past six months, although down 31% over 12 months.

Platinum, which is a vital component in the manufacture of catalytic converters for cars, could present a better buying opportunity than gold as the motor industry begins to recover. It has slumped 40% over the past year compared with a 8% jump in gold to $954 an ounce.

Similarly, natural gas, the price of which traditionally follows that of oil, has infact dropped and exchange traded funds which track the price of gas are down 10% over the past three months, according to Ben Yearsley of Hargreaves Lansdown, the financial adviser.

Healthcare

You would not normally buy "defensive" shares such as drugs stocks and telecoms when going into an economic recovery but analysts have said that they are offering outstanding value.

They are trading at their cheapest levels for 15 years, having been left behind in the recent recovery.

Adrian Cattley, strategist at Citigroup, the investment bank, said that defensive stocks were trading at a premium of up to 70% to cyclical stocks such as housebuilders and retailers at the end of 2008. Now, they are trading at a 20% discount. "Many of these stocks also have significant exposure to superior growth from emerging markets and most have strong balance sheets, so won't need to refinance," said Cattley.

He tips Vodafone, Glaxo Smith Kline and household goods group Unilever. "Never before have investors had the opportunity to buy Glaxo or Vodafone at their current ratings," he said.

Hedge funds

Hedge funds plunged 16% last year as managers were caught out by the credit crunch and investors rushed to pull out their cash. However, professionals are now starting to move back into the sector.

Dirk Wiedmann of Rothschild Private Banking & Trust, said: "We are becoming more positive about hedge funds and are increasing our holdings. Performance has improved this year and the level of client redemptions is falling. In the current environment, we think managers that can go both long and short [profit from rising as well as falling] should perform particularly well."

He particularly likes "global macro funds", which generally take an overview of economic trends and are well placed to benefit from rising interest rates and foreign-exchange movements.