Several names are sitting on double-digit gains as we get off to a solid start
To help with your planning Shares has canvassed the views of a number of independent financial advisers and other experts to identify the ideal funds to fit four popular themes.
From seeking the best ways to play global markets, to building up a pot of money for your child or grandchild, we have it covered in this article.
Global growth
Seeking geographic diversification on a five to 10-year view
Scottish Mortgage Investment Trust (SMT)
Scottish Mortgage Investment Trust (SMT) invests in a concentrated portfolio of global equities with the aim of maximising the total return, while also generating above-inflation growth in the dividend. It is managed by James Anderson and Tom Slater of Baillie Gifford and is the largest investment trust on the market with a value of £3.4 billion.
Kieran Drake, a member of the research team at Winterflood Investment Trusts, says that Scottish Mortgage has an unconstrained approach where the managers look to invest in businesses that will change the way their sector operates.
‘They select companies that they expect to deliver strong growth and have a tried and tested approach with an excellent performance record. Scottish Mortgage is also the largest closed-ended fund that invests in listed equities, which ensures there is plenty of liquidity.’
It is a highly focused portfolio of 53 holdings with the top 10 accounting for just over half of the assets. Anderson and Slater try to find companies that can make truly massive returns over the long-term. Many of these are currently in the technology sector with major holdings like Amazon (AMZN:NDQ), Facebook (FB:NDQ) and Alphabet (GOOGL:NDQ) (formerly known as Google) changing the way we live our lives.
Other key holdings include: Baidu (BIDU:NDQ), the leading Chinese language based internet search engine; Alibaba (BABA:NYSE), the massive Chinese e-commerce company that recently reported sales of $14.3 billion on Singles Day, which is their equivalent of Black Friday; and Tesla Motors (TSLA:NDQ), the maker of next generation electric cars.
These sorts of disruptive companies have the potential to generate asymmetric returns with much greater upside than downside. They won’t all pay off but the fund has an excellent track record with a five-year return of 100.4%, which is more than double its FTSE World benchmark. There is also a modest yield of around 1.1%.
Fundsmith Equity (GB00B4LPDJ14)
Fundsmith Equity Fund (GB00B4LPDJ14) was launched by Terry Smith on 1 November 2010 and has been one of the top performers in the Investment Association’s Global Sector, which has helped it to attract £4.3 billion of assets under management. Smith is a controversial figure. He created the fund to offer a no-nonsense approach to managing investors’ money and takes a long-term view when it comes to his holdings.
Patrick Connolly, a certified financial planner at independent financial adviser Chase de Vere, says that Smith’s investment philosophy is simple but effective. ‘He only invests is good quality, large companies, which benefit from repeatable earnings. He doesn’t overpay and then he does nothing. He doesn’t try to time markets, trade frequently or panic and there are many sectors that he avoids entirely.’
It is an extremely concentrated portfolio with just 28 different holdings. These include US-listed multinationals like Microsoft (MSFT:NDQ); Pepsico (PEP:NYSE); the tobacco company Philip Morris (PM:NYSE); and Johnson & Johnson (JNJ:NYSE) which makes health care products. There are also UK companies like Sage (SGE) and Imperial Tobacco (IMT), as well as others based in Continental Europe.
‘Smith has a preference for international businesses and market leaders, looking to buy companies that are today’s rather than tomorrow’s winners. The result is a fund which tends to keep up with the market during the good times, but to provide better protection during the bad times,’ explains Connolly.
The holdings have an average market value of £58.8 billion and on average were founded in 1908. By the end of November 2015 the fund had an annualised return of 17.4%, which is equivalent to a monthly gain of 1.4%.
Lindsell Train Global Equity (IE00B644PG05)
There is a risk that a global fund could become too diversified to beat its benchmark, but that is certainly not the case with Lindsell Train Global Equity (IE00B644PG05), which holds between 20 and 35 stocks with very low portfolio turnover.
The managers are careful about what they buy and will only invest in exceptional companies that can demonstrate long-term durability in terms of their cash flow and profit.
Danny Cox, a chartered financial planner at Hargreaves Lansdown, says that Nick Train, Michael Lindsell and James Bullock are first class stock pickers with a long-term track record of adding value.
‘It is a highly concentrated fund, but the managers have shown that they can add value via their asset allocation and stock selection. Being in the right place at the right time really pays off.’
The top 10 holdings account for 61% of the portfolio with most being listed in either the US, UK or Japan. They include: Diageo (DGE), which owns well-known drinks brands like Johnnie Walker, Smirnoff and Guinness; Unilever (ULVR), the company with dozens of internationally popular food and cleaning products such as Marmite, Persil and PG Tips; and the brewer Heineken (HEIO:AMS).
Lindsell Train Global Equity was launched in March 2011 and has been one of the top performing funds in the global sector. It has comfortably beaten its MSCI World benchmark over the last three years and has attracted more than £1.1 billion in assets under management.
Smaller company funds
Experts recommend best ways to get diversified
exposure to junior end of market
AXA Framlington UK Smaller Companies (GB0030310741)
The £221.4 million AXA Framlington UK Smaller Companies (GB0030310741) fund is one of the top performers in the sector over the last five years with a return of 142.5%. It was launched in April 2001 and since 2012 has been managed by Henry Lowson.
The fund has been recommended by Martin Bamford, managing director of Informed Choice, Chartered Financial Planners, who says that it has a consistent performance track record, with first quartile returns over the past one, three and five years.
‘Henry Lowson is a relatively young fund manager with a great future ahead of him. The fund aims to deliver growth by investing in smaller UK quoted companies, with a focus on stock selection.’
Lowson has put together a relatively concentrated portfolio of 80 holdings with the top 10 accounting for 20.2% of the assets. He thinks that smaller companies are attractively valued and that the balance sheets look strong with improving cash flow that will be sufficient to fund expansion and to increase dividends.
His largest holding is 4imprint (FOUR), which is a leading international direct marketer of promotional products. The company aims to deliver profitable organic growth and has increased its turnover and operating profit in each of the last five years. It issued a positive trading update in October 2015 and has a market value of £350 million.
Another key holding is Redcentric (RCN:AIM), a £284 million provider of IT and cloud-based services. The company reported a healthy set of results for the year ended 31 March 2015 and is forecast to grow strongly over the next couple of years.
The same is also true of the RPC (RPC) which designs and makes rigid plastic products for packaging and other markets and is the third largest weighting in the portfolio.
Henderson Smaller Companies Investment Trust (HSL)
The £504 million Henderson Smaller Companies Investment Trust (HSL) aims to maximise shareholder returns by investing in smaller companies that are quoted in the UK. It is run by Neil Hermon, who looks for businesses with strong management, a competitive advantage and robust financial structure.
Drake says that the manager has a good, consistent record of outperformance and has beaten his benchmark in 11 out of the 12 years that he has been in charge of the fund with the only exception being 2008/09.
‘He has a stock picking approach where he looks for quality companies, while not over paying for the shares. He also tends to have a relatively higher weighting in the mid-caps that has been beneficial.’
It is a relatively diversified portfolio, which is typical of many smaller company funds, with 111 holdings, of which the top 10 account for 22.8% of the assets. The main sector weightings are General Industrials, General Finance and Consumer Services that together make up 71.5% of the exposure.
Its largest holding is the housebuilder Bellway (BWY), which has been a strong contributor to the outperformance. Taylor Wimpey (TW.) has also done well for the fund, but had to be sold when it was promoted to the FTSE 100 index. Both stocks have benefited from the recovery in the housing market, as has kitchen supplier Howden Joinery (HWDN).
A key position in the industrial sector is E2V Technologies (E2V), which designs and manufactures a range of high tech gadgets for use in satellites, healthcare and defence. The company has grown its turnover and earnings consistently over the last three years and is forecast to continue to expand.
Henderson Smaller Companies has the lowest base fee of its peer group and tends to be more liquid because of its larger size. It has an excellent performance record and a 2% yield, which is good for a fund that invests at the small cap end of the market.
Marlborough UK Micro-Cap Growth (GB00B02TPH60)
This small cap growth fund is managed by the highly respected team at Hargreave Hale, which is led by Giles Hargreave. It is a specialist investment boutique that concentrates on smaller companies, with Marlborough UK Micro-Cap Growth (GB00B02TPH60) being one of the top performers in the sector since it was launched in 2004.
Darius McDermott, managing director of Chelsea Financial Services, says that its big brother, the Marlborough Special Situations Fund (GB00B907GH23), has now become too big to invest in the very smallest companies, so the micro-cap fund has somewhat taken over in this space.
‘It invests in firms with disruptive technologies or companies that are leaders in niche markets. The managers use their vast array of industry contacts and their in-house team to uncover the best new ideas. They will continue to hold and often add to their best-performing stocks.’
Two-thirds of the fund is invested in companies worth less than £250 million, with most of the rest in the £250 million to £1 billion bracket. The largest holdings all account for between 1.2% and 1.9% of the portfolio and include: Staffline (STAF:AIM), a £414 million cap recruiter; the £127 million cap NAHL (NAH:AIM), a UK consumer marketing business that focuses on legal services; and Next Fifteen Communications (NFC:AIM), a digital communications group with a market value £159 million.
The managers aim to generate a total return in excess of that achieved by the FTSE Small Cap index over the medium to long-term and they have easily achieved this during the period since launch. Portfolio turnover is a modest 24%, which suggests that they keep the trading to a minimum so that there are no unnecessary transaction costs borne by the fund. It is highly diversified with around 250 holdings.
Funds for a junior ISA
Ideas for parents or grandparents wanting to give a child
a financial boost in later life
Fidelity Allocator World Fund (GB00BC7GXD89)
Informed Choice’s Bamford says that when investing for children, you typically have time on your side, which means you can afford to take bigger risks for the opportunity of greater rewards. ‘The fund I particularly like for this within a Junior ISA is the Fidelity Allocator World Fund (GB00BC7GXD89) that is available within the Fidelity Junior ISA.’
The Fidelity Allocator World Fund is a fairly new product that aims to provide long-term capital growth by investing mainly in the global equity markets using other funds. Almost all of the exposure is created via passively managed index trackers to keep the cost to a minimum with the managers looking to add value via their asset allocation decisions.
‘The fund dynamically invests in index-tracking funds and other tracking investments, so costs are kept low with ongoing charges of 0.6%, including the Fidelity servicing fee for the Junior ISA wrapper. It invests in global equities, so the risk profile and chances of losses are reasonably high, but so is the potential for gains over the longer term,’ explains Bamford.
Just over half of the portfolio is invested in North America via the Fidelity Index US Fund (GB00B8G3MY63) and iShares Core S&P 500 (IVV). This is followed by an 11.5% weighting in the Eurozone using the Fidelity Index Europe ex UK Fund (GB00BQT3TG00), with the other major holdings including Fidelity Index UK (GB0003875324) and Fidelity Index Emerging Markets (GB00BHZK8F45). It has had a fairly modest start with a one year return of 1.54%.
BACIT (BACT)
BACIT (BACT) is a £487 million closed-ended fund that invests in a portfolio of leading long-only and alternative investment funds across various asset classes. It is unique as it has agreed not to bear the impact of the underlying management charges or performance fees, but instead will donate 1% a year to charities, most of which are devoted to the fight against cancer. This is a welcome move and should also benefit investors by reducing the impact of the charges on their returns.
About 46% of the fund is invested in the UK and Europe where the managers believe that GDP expectations are too low. A further 17% has been allocated to Asia Pacific and 9% to emerging markets. There is a significant underweight in the US, which only accounts for 7% of the portfolio. Some of the largest fund holdings like Woodford Patient Capital Trust (WPCT) are available to private investors, but many are not.
Mick Gilligan, head of fund research at Killik & Co, says that it is a diversified fund with exposure to lots of different markets.
‘It is an all-weather fund that can deliver in all market conditions so the timing of the exit would not be as critical as for a pure equity mandate. The fact that the underlying managers are not charging fees means that the positive compounding effect over such a long timeframe should be sizeable.’
BACIT was created on 26 October 2012 and has generated an annualised return since inception of 8.56%. It has produced positive gains in 64% of the months with a maximum drawdown (worst peak to trough loss) of just 4.59%. Over half of the portfolio is invested in hedge funds.
CF Woodford Equity Income (GB00BLRZQ513)
Neil Woodford is probably the best known fund manager operating in this country and he is certainly one of the most successful. Between 1988 and 2014 he consistently delivered market-beating returns via his Invesco Perpetual Income and High Income funds and is now repeating the performance at his own company, Woodford Investment Management.
CF Woodford Equity Income (GB00BLRZQ513) was launched in June 2014 and uses the same strategy that he perfected while at Invesco Perpetual. The fund aims to provide a reasonable level of income together with capital growth and has been one of the top performers in the sector over the last year.
Hargreaves Lansdown’s Cox says that UK Equity Income is a good place to start when investing for children as you are buying dividend paying companies and when you reinvest the income it will help to compound the returns.
‘Woodford is a manager with a proven track record of adding value via stock selection over and above his investment style. You are sticking with a long-term winner.’
The biggest overweight in the fund is the Health Care sector, which accounts for a third of the portfolio but only 8% of the FTSE All-Share benchmark, with the largest holdings including AstraZeneca (AZN), Roche (RO:SWX) and GlaxoSmithKline (GSK). The latter has recently reported better than expected third quarter results, yet the margins remain well below those of its peers, hence the huge latent potential.
Another key area is the Tobacco sector with large holdings in Imperial Tobacco (IMT), British American Tobacco (BATS) and Reynolds American (RAI:NYSE). These have continued to perform well, as has BT (BT.A) after the provisional approval of its purchase of the mobile network provider EE. The fund is yielding an attractive 4%, which will automatically be reinvested if you buy the accumulation units, and has attracted an impressive £7.7 billion in assets under management.
Income funds for retirees
Robust selections for anyone wanting a steady stream of cash during the golden years
F&C MM Navigator Distribution Fund (GB00B23Y3F84)
F&C MM Navigator Distribution Fund (GB00B23Y3F84) invests in a portfolio of open and closed-ended funds. It operates in the Mixed Investment 20% to 60% Shares sector and has an attractive historic yield of 4.6% with quarterly dividends.
Chelsea Financial Services’ McDermott says that it’s a really good multi-manager fund, run by Rob Burdett and Gary Potter along with their team of six, which is one of the industry’s most experienced and talented teams.
‘They are long-term investors that focus on finding less well-known, specialist funds and the majority of their returns have come from these fund picks, as opposed to asset allocation. Normally they have between 25 and 35 individual funds, balancing diversification and risk.’
The largest holdings include RWC Global Enhanced Dividend (LU1055784315), which uses covered calls to boost the income; BlackRock Continental European Income (GB00B3ZW3465) that has built up a good track record since it was launched in May 2011; and Ardevora UK Income (IE00B3TGCG95) which has a really unusual investment approach.
‘Meeting managers is central to their process and the team meet over 500 fund managers per year. They are particularly looking for funds that provide a sustainable and high yield, which makes it a very interesting product for income seekers. The diversification and focus on sustainable yield means that it is less reliant on a few big companies generating the yield and less at risk from those who may need to cut their dividends,’ explains McDermott.
It is a popular approach that has enabled it to attract over £1.1 billion in assets under management. The main downside is the higher cost due to the double layer of fees resulting from the multi-manager mandate with the fund having ongoing charges of 1.47%.
JPM Multi-Asset Income Fund (GB00B4N20S86)
The JPM Multi-Asset Income Fund (GB00B4N20S86) aims to provide income by investing in a global portfolio of income generating securities such as shares, bonds and Real Estate Investment Trusts (REITs). It operates in the Mixed Investment 20% to 60% Shares sector and currently has 49.2% in the stock market including REITs and preference shares.
Connolly says that the fund looks to achieve the best possible risk-adjusted income, which can be taken monthly, quarterly or reinvested for growth.
‘The current yield is 3.6% and while income is the main objective, the fund also targets capital preservation and low volatility by investing in around 1,500 underlying holdings. This diversified approach should mean that investors can hold the fund for the long-term and not suffer from any nasty surprises.’
Just over half of the portfolio is listed in the US, with 17% in Continental Europe, 10% in the UK and 8% in the Emerging Markets. The largest holdings are all less than 1% and include: Unibail-Rodamco (UL:EPA), a pan-European REIT that invests in shopping centres in Europe’s capital cities, as well as convention and exhibition centres in Paris; Occidental Petroleum (OXY:NYSE), an oil & gas exploration and production company that operates in the US and Middle East; and well-known US companies such as Microsoft (MSFT:NDQ), Altria (MO:NYSE) and Wells Fargo (WFC:NYSE).
The fund was launched on 30 June 2009 and has generated an annualised return since inception of 8.74%. Its primary objective is to maximise the yield, so it will not necessarily keep pace with its multi-asset benchmark, but this hasn’t stopped it from attracting £437.6m in assets under management.
Ground Rents Income Fund (GRIO)
Ground Rents Income Fund (GRIO) aims to provide secure, long-term performance by investing in long-dated UK ground rents. These contracts are created whenever a building is sold on a long lease and represent the money paid by the lessee to the owner of the freehold. They normally last for 99 years or more and generally increase in line with inflation or by a set amount every
few years.
GRIO holds a diversified portfolio of ground rents including freeholds and head leases of residential, retail and commercial properties located throughout the UK. Its major holdings include state of the art accommodation blocks in Manchester, Leeds, Liverpool and Birmingham. These are yielding between 2.94% and 4.44% with 68% of the income being index-linked.
Killik & Co’s Gilligan says that income growth is more important than a high starting yield for someone just entering retirement.
‘The pay-out ratio on UK equities has gone up a lot so we could see some dividend cuts in the next few years. The Ground Rents Income fund is the closest that you can get to a nailed on income stream. It is very secure because it is unlikely that a leaseholder will default.’
The £103 million fund floated on the market in August 2012 and aims to generate consistent income for shareholders. It is structured as a REIT, which means that it has to distribute at least 90% of its income profits by way of dividends. These are paid on a quarterly basis with the annual amounts for the last 3 years being 2.8p per share, 3.8p and 3.53p. The distribution for the current year is forecast to be 3.8p, which gives it a prospective yield of 3.3%.
