BUFFET AND ROGERS ADVISE TO BUY FUNDS: A SELECTION OF MUTUAL FUNDS AND ETFs FOR 2022

In this article:

What strategy to choose for 2022: passive or active? Why investments in ETFs and mutual funds may win in 2022 What mutual funds or ETFs to buy in 2022: for major stock indices; for China and other emerging markets; for bonds; thematic.

What will 2022 be like for investors?

2022 could be even more unpredictable for investors than the previous year. The main themes will remain inflation and its consequences, possible new strains of the coronavirus, and new "black" and "white" swans, as Bloomberg does not exclude. Saxo Bank's "shocking forecasts" for 2022 suggest that markets may be driven by women investors, and scientists will come up with ways to rejuvenate cells, among other things.

Demand for "dreams, ideas, and technologies of the future" will decrease, and investors will pay attention to companies that can generate stable profits here and now, believes Kirill Komarov, head of the investment analytics department at Tinkoff Investments.

"Diversification of investments in 2022 is not just a good recommendation, but a mandatory approach for investors. Stock-picking remains for those who have a lot of experience, are ready to devote more time to analyzing securities than usual, and most importantly, are prepared for the fact that even after careful analysis, there is still a high probability of decline," said Renat Malin, Director of Investments at Sber Asset Management. What strategy to choose for 2022 - passive or active?

Photo: Shutterstock Photo: Shutterstock

When deciding on an investment strategy - active or passive - a private investor should remember that successful investments can be made when investing in what they understand well, shared the opinion of the famous American investor Jim Rogers at a meeting of the RBC Pro Investor Club. "Many studies have shown that index investments perform better than active investments. Therefore, most people prefer to invest in ETFs that track indices. And it's quite obvious that such investments outperform any investors - both professional and non-professional," added Jim Rogers.

Index investments: what they are and why they are becoming increasingly popular. Sberbank, Moscow Exchange Index, ETF, mutual funds, Investments Photo: Shutterstock

Berkshire Hathaway Chairman Warren Buffett also advises private investors to buy funds. "Most investors will likely win simply by buying the S&P 500 index for the long term, rather than picking stocks themselves, even if they are Berkshire Hathaway stocks. The average person is unable to pick stocks on their own," he said at a shareholders' meeting of the financial conglomerate.

The advantage of passive investments is that they do not require choosing the timing or moment for investment. They are relevant for any phase of stock markets or economic cycles. However, investing in funds only makes sense in the long term. "The fundamental principles of passive investing are time horizon and regularity: the longer the investment horizon, the better the result you can get. One year is the minimum recommended investment horizon, so we advise looking at a broader horizon, not just for 2022, but for three to five years and even more," emphasizes Malin.

What will happen to the S&P500 index in 2022. Expert forecasts S&P500, Banks and finance, Stocks, Forecasts Photo: Michael Nagle / Bloomberg

Why investments in ETFs and mutual funds may win in 2022

Exchange-traded funds (ETFs) represent a diversified set of securities within a particular investment idea. By purchasing shares of four or five mutual funds, an investor gets a ready-made portfolio that will be invested in dozens, or even hundreds, of securities simultaneously. Moreover, investors do not need to possess deep knowledge of financial instruments to manage such a portfolio.

In 2022, the balance between independent trading on the stock exchange and trust management will come to a ratio of 50/50, as it already works in Western countries, says Eugene Gorbunov, head of the investment products and technologies department at Open Brokerage.

In 2021, investors invested more in equity funds than in the past 19 years. The managing director of the CARF fund, managing director of Cresco Capital Andrey Syrchin does not believe that 2022 will be very good for passive investments, index funds, and the market as a whole: "We saw all the growth in 2021. The American markets gave more than 20% growth, and it is unlikely that we will see similar dynamics going forward. I believe it is reasonable in 2022 to invest in actively managed funds and absolute return funds. That is, in funds that will specifically seek returns rather than just an idea and a single direction."

2022 will be a year of active development for exchange-traded and open-end mutual funds in Russia.

In Russia in 2022, two innovations are planned that will allow for the development of the ETF and mutual fund segments in the financial market.

No later than April 1, 2022, the admission of foreign non-sponsored ETFs to Russian exchanges is expected. Their appearance will provide new opportunities for clients to diversify portfolios and strengthen competition in the industry. Russian platforms may see about 500 foreign ETF funds.

The second innovation, being worked on by the Bank of Russia, may be the introduction in 2022 for the owners of units the ability to receive intermediate income (dividends and coupons) from securities included in the funds. Currently, within mutual funds, coupons and dividends are reinvested.

"Market participants expect that from February 2022, investors in funds will have the opportunity to receive profits on the spot - dividends and coupons will immediately appear in their accounts just like when directly investing in securities. Upon receiving such intermediate income, the term for receiving tax benefits for long-term investments will not be interrupted. It is expected that the mechanism may be implemented when creating new funds. Accordingly, new products will appear on the market, so-called funds for rentiers," said Eugene Gorbunov.

Mutual Funds and ETFs for Major Stock Indices

Passive investing in broad indices makes sense in 2022, as they typically represent the largest, most reliable, and highest-quality companies, according to Kirill Komarov. But he warns that investors need to be prepared for more moderate returns in 2022 — they will clearly be weaker than in 2020 and 2021.

First and foremost in 2022, it is worth considering funds based on major stock indicators — the Moscow Exchange index and the S&P 500 index, say experts at Sber Asset Management. "We expect that the US stock market will continue to grow due to a decrease in inflationary expectations, recovery of the global economy, and a weakening of the impact of lockdowns," says Renat Malin. "Speaking about the Russian stock market, we want to highlight potentially high dividends of companies traded on Russian exchanges. It is important to note that Russia is more resilient and macroeconomically compared to other emerging economies in general and in each industry in particular."

Top 5 by yield for the year ETFs and mutual funds on the Moscow Exchange tracking the S&P indices or the MOEX index:

1. Sberbank "S&P 500 Index" SBSP
2. VTB "Fund of Shares of American Companies" VTBA
3. VTB "MOEX Index Fund" VTBX
4. Tinkoff "MOEX Index" TMOS
5. Sberbank "MOEX Total Return Index" SBMX.

In 2022, there is a good chance for Chinese stocks to rebound, according to Kirill Komarov. "Regulatory pressure is gradually decreasing, and more and more analysts are expressing positive views on the prospects for Chinese stocks. In early 2022, we may see enough positivity to change the dynamics of Chinese indices to positive. As a bet on such an outcome, one can use ETF KWEB. As a less risky option, TPAS (Tinkoff PanAsia) and TEMS (Tinkoff emerging markets) are suitable - they include only a part of the fund from China. Moreover, other emerging markets are included in the compositions, which in 2022 have serious chances to outperform the dynamics of the S&P500 - if the situation with vaccines normalizes and investors do not want to risk in the overheated IT sector of the USA, then they will turn their attention to emerging markets," the expert added.

Moscow Exchange has started trading ETFs on stocks of companies from developing markets. Financial consultant Vladimir Vereshchak specifies the interest in technology companies in China: "Due to another round of strict regulation from the government, they became outsiders in 2021. Therefore, they are likely to be among the leaders in 2022. At least now the companies are so cheap that it would be a sin not to take them. China is the world's second-largest economy. It recovered faster than many countries from the initial pandemic shock: the worst GDP growth rate was recorded at the end of March 2020, not the end of June, as it was, for example, in the USA. And reforms aimed at de-monopolizing business and strengthening moral principles in society in the long term should benefit it. Accordingly, ETFs such as FinEx China (MOEX: FXCN) and/or Emerging Markets Internet & Ecommerce (NYSE Arca: EMQQ) are suitable, which include not only shares of Chinese technology companies but also shares of companies from South Korea, India, the Netherlands, Singapore, and other countries: providing services via the Internet, retail trade, broadcasting, media, internet advertising, games, travel, social networks."

Director of analysis of financial markets and macroeconomics at Alfa-Capital Vladimir Bragin, on the other hand, notes that the situation on emerging markets is likely to be not very favorable. Speaking about China, he drew attention to the fact that securities of Chinese companies available to foreign investors look very vulnerable due to possible pressure from the USA.

Top 4 by yield for the year ETFs and mutual funds on the Moscow Exchange made up of shares of companies with developing economies (excluding Russia):

1. FinEx "Shares / Kazakhstan" FXKZ
2. VTB "Shares of Developing Countries Fund" VTBE
3. Alfa-Capital "Chinese Stocks" AKCH
4. FinEx "Shares / China" FXCN.

Regarding conservative investments, which include bonds and corresponding funds composed of them, experts surveyed by "RBC Investments" gave diametrically opposite opinions.

Renat Malin is confident that the bond market in 2022 will be more attractive for investment than the stock market, but this trend will become more pronounced closer to the second half of the year. He explains this by the fact that the slowdown in inflation will allow the Central Bank to begin easing monetary policy. This, in turn, will contribute to the reduction of yields on federal loan bonds (OFZs), which will lead to an increase in bond prices and a double-digit total return in this asset class. "Even before the increase, the OFZ market took into account the size of the Central Bank's key rate at 8.5%. This means that the tightening of monetary policy is already largely built into current prices and will likely have a limited impact on the bond market. Therefore, the long-term bond market looks interesting, and the additional attractiveness to it is added by the likely slowdown in inflation in 2022. Therefore, exchange-traded funds on corporate bonds and OFZs look attractive," the expert noted.

Vladimir Bragin believes that Russian bonds, which had a very unsuccessful 2021, should be approached with caution. "If in the first quarter of 2022 the Central Bank keeps inflation under control, then in anticipation of a rate cut, a wave of speculative purchases in ruble funds may begin. If you catch such a wave, you can win on it," the expert believes. Regarding Eurobonds and dollar debt instruments - if anything is to be taken now, it is only selectively and in funds with a good manager and strategy, Vladimir Bragin adds and explains why: "The situation with indices is a little better now than in 2020, but it is clear that the Fed will raise the rate, which can lead the market to a more normal state - this will be an unpleasant process for those who hold Eurobonds."

Андрей Сырчин is categorical and confident that bond funds will decline amid decreasing liquidity and rising interest rates: "Therefore, we have sold all bond portfolios."

At "Открытие" Investment Company, despite the challenging situation in the Russian bond segment, they expect a double-digit yield in 2022 and consider it justified. "The lower the prices now, the higher potential yield we can expect. And if we look at history, the worst year in the bond market is usually followed by the best - as it was after the crises of 2008 and 2014," explained the positive forecast by Evgeny Gorbunov.

Top 5 by yield for the year ETFs and mutual funds on the Moscow Exchange with the main asset category "Bonds":

1. "Alfa-Capital Managed Bonds" AKMB
2. FinEx "Eurobonds of Russian issuers with ruble hedge" FXRB
3. FinEx "Short-term US government bonds with ruble hedge" FXMM
4. VTB "American corporate debt" VTBH
5. Sberbank "MOEX ruble corporate bonds index" SBRB.

In 2022, the problem of semiconductor shortage in the world will continue to persist, and companies in the sector will continue to earn record profits, believes Kirill Komarov. "The sector has shown a yield of 27% annually over the past ten years. And with the growth of digitization in our lives, this trend will only continue. Therefore, among thematic funds, we would currently prefer the semiconductor sector," the expert noted.

Analysts have also mentioned the potential growth in alternative energy sectors. "For investment in it, you can use the Renewable Energy Producers fund from Global X (NASDAQ: RNRG), which includes more than 40 companies engaged in electricity generation from renewable sources (water, wind, sun, heat of the earth's depths, biofuels) in more than ten countries around the world (USA, Canada, New Zealand, Brazil, Austria, Denmark, Portugal, Thailand, Hong Kong, France, etc.)," points out Vladimir Vereshchak. Kirill Komarov adds that the green energy theme will remain quite hot, but one should be especially cautious when investing in it, as the risks of individual companies are very high: "Therefore, thematic funds will help reduce risks and participate in the strongest trend of the next 30 years."

Gold ETFs are recommended as the only investment by Andrey Surchin. "And also, if high inflation continues, ETF Commodites: coffee, cotton, and possibly oil," the expert added. FinEx "Gold" (FXGD) is traded on the Moscow Exchange.

Top 5 ETFs and mutual funds on the Moscow Exchange allowing investment in gold and gold mining companies:

1. FinEx Gold ETF FXGD
2. "VTB - Gold Fund. Exchange" VTBG
3. "Tinkoff Gold" TGLD
4. "ATON - Gold Miners" AMGM
5. "Alfa-Capital Gold" AKGD.

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