Where will you prosper in 2013?

The New Year is the perfect time to review your portfolio, so Emma Dunkley asked the experts for their tips

Although you can't predict what the future has in store, the turn of the year is as good a time as any to take a look at how your investments are set for the next 12 months.

With interest rates still at rock-bottom and returns on government bonds languishing at the very low end of the scale, getting your portfolio into shape and making your money work harder should definitely be at the top of your New Year's resolutions list.

While it's unlikely the global economy will grow substantially in 2013, there are some green shoots and a sense of cautious optimism for the next year. “We come out of the traps in 2013 feeling more confident about equities,” says Gary Potter, the fund of funds manager at Thames River. “Over the past few years people have been weaned off equities and other 'risk assets'. But you need to put to one side the biases of those years.”

Rather than look into your rear-view mirror and invest in what has done well in the past, it's important to focus on the road ahead, otherwise you could end up in a nasty crash. “To continue to base your investment strategy with reference to more recent experiences could be quite damaging – people are going to have to embrace some risk next year,” adds Mr Potter.

Government bonds, for example, have done well in the past as the eurozone crisis escalated and investors flocked to safe-havens. However, investing in Western government bonds now could actually be dangerous.

“Government and corporate bonds should be handled carefully,” says John Chatfeild-Roberts, the chief investment officer at Jupiter. “Yields on bonds issued by Western governments such as the US and UK are low but could come under pressure in an inflationary environment where interest rates start to rise.”

Ironically, government bonds are supposed to offer risk-free returns but now just offer return-free risks, says Darius McDermott, the managing director of Chelsea Financial Services. “They are giving next to nothing in terms of current yield on 10-year bonds and just a 1 per cent rise in interest rates would lead to a 9 per cent capital loss on the gilt index. And if yields return to normal levels quickly, the potential capital losses are quite frightening.”

Even though corporate bonds and lower-quality debt are looking slightly better in terms of price and the returns on offer, they're still not great. However, if you're really keen to put some of your money into bonds, then Mr McDermott recommends “strategic bond funds”, which are run by managers who have the flexibility to invest in different types of debt. In particular, Mr McDermott cites the Henderson Strategic Bond fund and the L&G Dynamic Trust.

But 2013 is being viewed as the year for equities, especially dividend-paying companies as people hunt for some form of income. “I still think in all of next year, high quality income generation will be a key feature, because interest rates are so low,” says Mr Potter. For equity income, Mr Potter tips the JO Hambro UK Equity Income Fund, run by Clive Beagles and James Lowen.

It's the UK's smaller companies that have come into their own in 2012 – up around 22 per cent – and are ripe for future gains. Mr Potter recommends the Cazenove Smaller Companies fund, managed by Paul Marriage and John Warren, which aims to grow your money over the long-term.

Don't think you should just stay rooted to home turf though, as you could end up missing out on potentially superior returns abroad. “Given the huge amount of money already in UK equities, I'd again say global dividend funds are worth a look to add an extra level of diversification,” says Mr McDermott. He recommends the M&G Global Dividend fund and the Newton Global Higher Income fund.

A more leftfield or contrarian investment – perhaps not for the fainthearted – is Japanese shares. The land of the rising sun has had many false dawns and is arguably the least loved developed market among UK investors. But the recent election of Prime Minister Shinzo Abe has been warmly welcomed, and bodes well for boosting the country's ailing economy. With this in mind, now could be the time to snap up shares while they're on the cheap.

“Japan is an area we like for next year,” says Gavin Haynes, the managing director at Whitechurch Securities. “Many have thrown the towel in, because it's been a perennial underperformer. But valuations are looking attractive. We've seen change in the political backdrop, combined with a weakening yen – it will be significant this year.”

Mr Haynes recommends the Jupiter Japan Income fund, managed by Simon Somerville, which aims to grow your money and income.

Europe is also still looking cheap and attractive, says Mr Haynes, who recommends the Henderson European Special Situations fund managed by Richard Pease.

Meanwhile, Trevor Greetham, the asset allocation director at Fidelity, is upbeat on the world economy and expects the trend to favour US and emerging market stocks. “US stocks have outperformed Euro Area stocks by around 50 per cent since the middle of 2007 and policy differences still lead us to favour the US,” says Mr Greetham. “US property prices are rising, banks are willing to lend and unemployment is falling.”

But, as the experts concede, despite these pockets of opportunity, 2013 won't be plain sailing. Although equities in certain regions are tipped to do well, there are definitely headwinds on the horizon that could make it a rocky ride, including any relapse in Europe's debt crisis, as well as tax and spending changes in the US.

What to avoid

Aside from Western government bonds, the experts warn of other areas you should be wary of next year. “Opportunities remain in carefully selected corporate bonds but again, rising interest rates would create a headwind for them,” says John Chatfeild-Roberts at Jupiter.

Property as an investment is also an area in which to tread carefully. “We think commercial property is going to struggle,” says Gavin Haynes, the managing director of Whitechurch Securities. “We are not completely negative but we still think it'll continue to be an area where returns are fairly staid next year.”

Gary Potter at Thames River says: “My worries are that those funds that have taken lots of money could be disappointing … it's about the price you pay.”

Emma Dunkley is a reporter for citywire.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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