Finfluencers are growing in popularity, particularly among younger investors.
Financial influencers or ‘finfluencers’ are everywhere on social media. Just open up your preferred app of choice and you will soon find a well-edited video (usually shot in some far-off luxury location) of someone telling you how they make money.
But this is far from credible. It is well known that scammers use this technique to get people to invest with them, while even those that do what they propose – give you tips and trades to make – are rarely offering sound financial advice.
Although it may seem like common sense to not take advice on your finances from social media influencers, it is becoming a growing concern for the City watchdog: the Financial Conduct Authority (FCA) this week took action against these posts.
It is by no means an easy feat however. There has been a surge in recent years of people promoting speculative investments – particularly cryptocurrencies. And people are listening.
According to data from the FCA’s Financial Lives Survey, one in six investors use social media to research investment ideas or get updates on their assets – a figure that rises to a shocking 50% of people aged 18 to 24.
In its latest guidance, there were no new rules or penalties imposed by the FCA for people who post misleading content on social media.
While regulated individuals have strict rules to follow – particularly pertaining to financial advice – online it is a different story. But that does not mean there are no repercussions for those that try it.
Laura Suter, director of personal finance at AJ Bell, noted: “The FCA has warnings for finfluencers, who are often dishing out advice on social media even if they don’t have a commercial arrangement with a finance company. The regulator is reminding these finfluencers that they could face up to two years in prison and an unlimited fine if they break the rules.”
Of course, not all finance-related content on social media is bad. There is a lot of good content from credible sources out there that can help people get to grips with their finances and start making smarter choices.
But it is a real Wild West online. If in doubt, remember: investing should be a long-term game of getting rich slowly; rather than taking big bets on speculative investments. Anyone with a camera can purport to be a financial expert, with no evidence that they know what they are doing.
As a general rule I would never trust anything finance-related I see on social media, particularly from traders or people not affiliated with an FCA-regulated company.
I’ll stick to the boring – investing in my stocks and shares ISA and savings into my current account – over taking advice from someone online. It may not make me rich in a hurry, but it will certainly lower the risk of losing it all in an instant.
FE fundinfo has nominated 60 of the best managers running funds for UK retail investors across 12 categories.
Fundsmith’s Terry Smith is up against stiff competition from the likes of Fidelity International technology specialist Hyunho Sohn and Stewart Investors’ David Gait for the title of overall Alpha Manager of the year in 2024, according to FE fundinfo.
They will compete against Julian Fosh and Anthony Cross, who lead Liontrust’s Economic Advantage team, and Robin Parbrook, who runs Schroder Asian Discovery and Schroder Asian Total Return, all three of whom have been nominated for the second year running in the headline category.
The awards also showcase up and coming talent, with five managers nominated for the best new Alpha Manager accolade after being rated as Alpha Managers for the first time this year.
The nominees are Jacques Hirsch from Carmignac, Mark Mandel from Wellington, Jeroen Brand from Neuberger Berman, Charles Somers from Schroders and James Bullock from Lindsell Train.
In total, FE fundinfo has chosen 60 nominees over 12 categories for its upcoming awards, all of whom already have an Alpha Manager rating – meaning they are amongst the top 10% of managers overseeing funds for UK-based retail investors.
Some of the best-known managers in the running include: James Thomson of Rathbone Global Opportunities; Tom Slater, who manages Baillie Gifford American and the Scottish Mortgage investment trust; Mike Fox, who runs a range of sustainable investment strategies for Royal London Asset Management; and Richard Woolnough of M&G Corporate Bond.
Nominees were chosen based on their Alpha Manager scores, with the five highest scoring investment professionals in each asset class category being put forward.
Those scores – and the Alpha Manager ratings – look at funds managers’ performance across their entire careers, based on risk-adjusted alpha (using the Sortino ratio) and consistent outperformance of their benchmark, with a track record length bias to reward longevity.
The Alpha Manager of the Year nominees have the best scores overall but FE fundinfo also considered managers’ styles and took into account how difficult it was for managers in different asset classes to beat their peer groups.
While nominees have been selected in recognition of their track records across their entire careers spanning different firms and products, the winners will be chosen for their 2023 performance alone.
Charles Younes, deputy chief investment officer of FE Investments, said that last year equity market performance became highly concentrated into the largest stocks and there was a style rotation into growth, technology and artificial intelligence – whereas cyclicals and value outperformed in 2022.
To succeed in fixed income, managers needed to have been short duration in the first half of 2023 then add duration in the second half, which was “a big game changer”, Younes recalled. This shift in dynamics meant that “for strategic bond managers it was a bit more difficult to generate alpha.” Meanwhile, managers were rewarded for being long credit in both 2022 and 2023. “This is a gift that keeps on giving. Never short the credit market, never give away your coupon,” he noted.
“Market uncertainty is rapidly becoming the norm for fund managers, with wars in Europe and the Middle East, record high interest rates, and political instability around the world. The Alpha Manager Awards recognise the best of the industry, highlighting the achievements of fund managers who have faced these challenges head on and helped unlock value for their clients in unpredictable times,” Younes said.
A full list of the nominees in each category is below.
The platform highlights funds worth considering before the ISA deadline next week.
Personal Assets Trust, BlackRock Continental European Income and Baillie Gifford Global Alpha Growth are all funds worth considering for any last-minute ISA allowances, according to AJ Bell head of investment research Paul Angell, but which you buy will depend on your tolerance for risk.
The ISA deadline is fast approaching. Savers only have one week left to make the most of the £20,000 ISA and the £9,000 junior ISA allowances available to them.
But it is imperative that the money is not just added and forgotten about, remaining uninvested for years. As such, below Angell highlights options for investors ranging from the cautiously minded to those willing to be a bit more adventurous.
Cautious investors
For those unwilling to stomach heavy losses, bonds could be a good option at present and the AJ Bell head of investment research’s first suggestion is the £1.2bn TwentyFour Corporate Bond fund headed by Chris Bowie and Gordon Shannon, who are part of a five-person team.
“The managers of this risk-aware sterling corporate bond fund target superior risk-adjusted returns versus peers and the fund is therefore often cautiously positioned within its peer group,” said Angell.
Performance of fund vs sector since launch
Source: FE Analytics
With a yield of around 6% its income “is still attractive” even in the face of higher interest rates from savings accounts and Angell said the fund should be able to deliver this level of return over the next 12 months, with the additional benefit of capital gains on top should rate expectations fall.
For those that want some equity risk but still want to rest easy at night, Angell also highlighted Personal Assets Trust managed by FE fundinfo Alpha Manager Sebastian Lyon.
“This is a defensively managed multi-asset investment trust where the experienced manager puts a high degree of emphasis on capital preservation. The trust is long-only, with concentrated equity holdings and low turnover,” he said.
It typically invests in equities, government bonds and gold, and shifts between them depending on market opportunities.
“At the time of writing, the trust is defensively positioned, with the bulk of the trust held in government bonds, mostly inflation linked, with 10% in gold bullion and 25% in equities. The trust is not typically geared, and a discount control mechanism (DCM) is in place. This DCM keeps the trust’s share place trading close to its net asset value (NAV),” said Angell.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Although the fund is less volatile than the market, because it does invest in stocks there is no guarantee it will protect capital, although its long-term performance has been far less volatile than both the market and peers, while making decent returns.
Balanced investors
One notch up the risk scale, Angell suggested balanced investors should be looking to invest in equities solely. His first selection was the £1.5bn BlackRock Continental European Income fund managed by Andreas Zoellinger and Brian Hall.
It currently yields 3.64% and has been an above-average performer in the IA Europe Excluding UK sector over the past decade, as the below chart shows.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“This European equity fund is managed with a concentrated approach without reference to its benchmark. The fund’s manager looks to identify quality companies with a high but sustainable dividend yield coming from a strong balance sheet and stable earnings,” he said.
“In addition, the fund will also look to identify opportunities in companies that have the opportunity to deliver long-term dividend growth but may currently yield less than the broader market. The result is to build a diversified portfolio that offers both a reliable and growing income over time.”
Those unsure of investing regionally could look towards a thematic play such as the £2.2bn Polar Capital Global Insurance fund managed by Nick Martin and Dominic Evans.
“This fund has many of the elements that make for a great specialist strategy. A genuine niche in market exposure (non-life insurance businesses), an experienced and specialist team and committed corporate backing from Polar Capital,” said Angell.
The fund, which has been the best performer in the IA Financials and Financial Innovation sector over the past decade, focuses on book value growth.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The managers target at least 10% book value growth each year, which Angell said should, over time, lead to an equivalent share price growth and therefore a doubling of capital returns for the fund every seven to eight years.
Now could be a good time to get into the sector, he added, as there are two structural tailwinds for the insurance industry. “Firstly, increased risk complexity within the insurance market, such as cyber risk, increases the premiums charged. Secondly, higher risk-free interest rates boost the investment yields earned within investment portfolios,” said Angell.
Adventurous investors
Lastly, for those with long time horizons who can afford to take more risk, Baillie Gifford Global Alpha Growth could be a good option.
The £2.8bn fund has had a torrid three years but is ahead over the long term and remains a strong option, according to Angell. It managed by Malcolm MacColl and Spencer Adair, as well as Alpha Manager Helen Xiong – the same team behind the Monks investment trust.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“This is a long-term global equity strategy invested in growth-oriented companies. The fund therefore follows the investment style that is firmly embedded throughout Baillie Gifford,” he said.
“The investment process is entirely driven by bottom-up stock research stemming from a belief that companies which have the potential to grow at a faster rate and on a more sustainable basis than their peers are positioned for higher long-term returns.”
Another fund struggling over the short term but with an enviable long-term record is Worldwide Healthcare Trust. Managed by OrbiMed, the world’s largest specialist healthcare fund management company, the £1.8bn trust has a growth approach to what is traditionally a more defensive industry within equity markets.
Managed by Sven H Borho and Trevor Polischuk, Angell said three and five-year returns have been “disappointing” thanks to the portfolio’s large weightings within emerging markets and the emerging biotech sector.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“The trust has also swung to a 10% discount over the period. However, the managers believe that fundamentals within biotech remain attractive, with supportive valuations and increasing M&A expected across the sector, particularly given the increased investor attention towards innovation within drugs and related technology,” he said.
Invesco multi-asset manager David Aujla argues for a blend of active and passive approaches and for using passive investments proactively to express a view.
With ISA season approaching, it is natural to think about where – and how – to invest for the new tax year. In terms of the where, I must admit I am a little biased. As a multi-asset fund manager, it will be no surprise to you that I believe in a diversified multi-asset portfolio.
But how should we invest? Should we invest in passive funds or active funds?
I think there are good reasons for both approaches, and we can arguably get the best of both worlds by combining both.
The case for passive
Passive funds – arguably one of the most significant innovations in investment history – have gained increased investor attention in recent years. Their lower costs coupled with strong market performance during most of the post global financial crisis period are two key factors that have contributed to their exponential growth, particularly exchange-traded funds (ETFs).
But passive exposure does not always need to be all about cost. Passive funds can often provide an implementation advantage for portfolio constructors. For example, rather than investing in actively managed government bond funds, I instead generally prefer to access the asset class via the use of ETFs.
Active government bond funds are harder to find these days, and when you do find one, they offer limited ability to manage interest rate risk yourself. With ETFs, I can be more selective about what part of the yield curve I target, and therefore be more precise in managing interest rate sensitivity. I can also make a regional call on which bonds to own more or less of.
In some cases, the ‘market’ tends to outperform the average active manager, with US equities being the most prominent example. It is a highly efficient market that can prove difficult to persistently outperform. However, it is now heavily concentrated, with the top five stocks accounting for more of the S&P 500 index than they have done for decades.
With passive funds you don’t just have to own the ‘market’ – you can invest in passive funds with a bit more nuance. For example, an S&P 500 equal weight ETF would reduce that concentration issue. Or for those who believe that those top stocks currently dominating the index will continue to drive performance, perhaps a Nasdaq ETF would suit.
When discussing the merits of passive funds, I tell people that I don’t believe in passive investing, but I do believe in passive investments. I just think they need to be used actively because the nature of markets can (and does) change over time.
The case for active
While passive investments typically track or replicate a given index, active investments are run by managers who select specific investments based on an assessment of their intrinsic value. Rather than ‘owning the market’ they aim to ‘beat the market’.
Deviating from the market inherently means taking active risk, which is often expressed as either active share or tracking error. Generally speaking, the higher the active share or tracking error is, the higher the likelihood that your performance will be different to the market. There is no guarantee that it will be positively different, but the potential is there.
Active investments may be perceived as more attractive in periods when future returns from markets are not expected to be high. It’s worth remembering that since the market trough during the financial crisis, global equities have delivered around 12% annualised for sterling investors. With some equity markets at or close to all-time highs, it would be fair to question how repeatable those returns are over the next few years. Active investments may be needed to generate a higher return than the market can provide.
A further appeal of active management is that, unlike passive investing, it recognises the innate inefficiency and irrationality of markets and their participants. This can be particularly powerful in more specialised areas such as small and mid-caps or emerging markets.
Both of these areas tend to be under-owned and under-researched relative to their larger and more developed counterparts. This relative lack of efficiency creates a richer hunting ground for active managers to generate outperformance. Again, there is no guarantee that they will, but I would argue that they have a greater chance of doing so than in more efficient markets.
I think it also pays off to be more active when investing in corporate bonds, whether it be in the investment grade or the high yield space. There is a significant gap between the highest and lowest quality companies in this space and higher interest rates mean that many of those companies will likely need to refinance at higher costs. Understanding a company’s financial fundamental position by interrogating its business model and financial statements has become more important than it has been for quite some time.
The case for a blended approach
Active investments and passive investments have their own pros and cons. I think that by combining both approaches, your portfolios can benefit from the potential advantages that each have to offer.
In this regard I do put my money where my mouth is. The Summit Growth multi-asset funds that I manage are designed with this very idea in mind and typically have a broadly even split between active and passive underlying funds.
The chart below shows the active/passive breakdown by asset class of the ‘balanced’ portfolio within the range.
Source: Invesco as at 31 December 2023. Data shown is representative of Invesco Summit Growth 3 Fund (UK) used for illustrative purposes.
My aim is to deploy our ‘active risk’ where we have a stronger chance of being rewarded, and to use passive funds (in my case ETFs) where it provides us with a portfolio advantage, for example allowing us to better manage duration.
The chart above is just one example of how an investor can blend the two approaches. Depending on market conditions and other considerations such as cost, any number of blends may prove effective.
Having flexibility is the key. The next few years are likely to see a more unpredictable market environment than we have been used to for much of the past 15 years. I think a blended approach gives investors a better toolkit to navigate it. Something for us all to bear in mind as we consider our next ISA investments. As for me, I’ll be going for a blended multi-asset fund!
David Aujla is a multi-asset strategies fund manager at Invesco. The views expressed above should not be taken as investment advice.
QuotedData identifies five catalysts for the widening discounts of investment companies.
Investment companies are notoriously cheap, with more than 30% currently trading at double-digit discounts, as a recent study showed.
Yet there is no single headwind that has caused this phenomenon, and no silver bullet that will get discounts back to more normal levels, according to QuotedData analyst David Johnson.
A combination of factors are weighing down on the industry as a whole, including changes in investor behaviour, higher interest rates and cost disclosure rules.
Discounts over the past five years have been widening “virtually across the board”, he said, with only a few sectors bucking the trend – namely India, China, country specialists, hedge funds and insurance. The latter has had the greatest re-appreciation over the past five years, as shown in the table below.
Source: QuotedData
Below, Johnson identified five trends that are responsible for the discount epidemic.
Investors’ behaviour and risk attitudes
Rising global interest rates have led to a huge shake-up in investor behaviour and this can also be seen in the trust world. For example, higher yields on bonds and interest rates on cash deposits have diverted money that might otherwise have been invested in trusts, explained the analyst.
“The biggest impact that the sell-off in risk assets has had is the greater scrutiny around unlisted assets, with rising rates leading to increased uncertainty around the sector, and thus wider rates,” he said. “It has also placed pressure on indebted trusts, with Digital 9 Infrastructure being one such example.”
The trust is in managed wind down after facing a period of heightened uncertainty and share price volatility.
Performance of fund against sector and index over 5yrs
Source: FE Analytics
Consolidation in the wealth management industry
There has been a wave of consolidation in the UK wealth management industry, historically a major buyer of investment trusts, and the surviving players preside over much larger pools of assets than before.
The most notable example was Rathbones, the largest single holder of trusts with £6.5bn invested, according to the Association of Investment Companies. It acquired Investec last year, ballooning its books to £100bn. Another more recent case is Waverton’s merger with London & Capital.
“This can be problematic for their investment trust exposure,” Johnson explained. “At these sizes, mammoth asset managers encounter more difficulties in utilising investment trusts because these vehicles have smaller market caps and sometimes liquidity issues.”
Passive investing
The rise of passive investing has shaken the traditional asset management industry, but the quakes have hit investment trusts particularly hard.
Retail investors looking for a more user-friendly investing experience have flocked to exchange-traded funds (ETFs), which are also cheaper. ETFs don’t have the complexities of discounts, which adds to their appeal.
“Passive investments added competition in the retail space, with investors being given ever-increasing choice, as well as a greater number of simpler investments to buy,” Johnson said.
Concentration
Global performance has been highly concentrated in recent years, with US mega-cap technology leading the way and a newly emerged group of stocks, the so-called Magnificent Seven, spurring the US market almost single-handedly.
“This unfortunately means that regions such as the UK and Europe have not produced competitive returns when compared to other investment products available, reducing their demand,” said the analyst.
This has not been a headwind for all trusts, however. Some have been able to take advantage of it, one example being JPMorgan Global Growth and Income – a £2.6bn portfolio which has been able to issue shares and currently trades on a 0.82% premium.
With a FE fundinfo Crown rating of five, the strategy is managed by FE Alpha Managers Timothy Woodhouse and Helge Skibeli, flanked by Rajesh Tanna.
Performance of fund against sector and index over 5yrs
Source: FE Analytics
Fee disclosure rules
Current regulations on cost disclosure treat trusts the same way as open-ended funds, which, has been argued, results in trusts looking more expensive than they actually are.
In fact, because they are traded instruments, their share price already reflects the market’s assessment of their financials, including fees – but the regulation requires them to disclose their fees “on top”, with the result that a significant portion of the UK’s investor base no longer invests in the sector or is divesting.
“The issue around fee disclosures has hindered the competitiveness of investment trusts, especially as asset management consolidation and the rise of ETFs has increased the volume of low-cost investment opportunities,” Johnson concluded.
Trustnet and the lang cat reveal which of the major fund platforms offer the best value for buying funds, trusts or a mixture of both.
With nine days to go until the end of the tax year on Friday 5 April, investors don’t have long if they want to make full use of this year’s £20,000 ISA allowance.
For people who intend to open a stocks and shares ISA, a key decision is which platform to use and costs are usually a significant factor in that choice.
Fees differ according to whether investors prefer to use open-ended funds, investment companies, shares, or a mixture of all three, as well as how many trades they intend to make every year and the size of their portfolio.
Below, we have looked at the cost of platforms for a range of portfolio sizes. Although new investors can put in a maximum £20,000 this year, we have added much larger pots so investors can see which platform is cheaper should they continue to save each year and their investments grow.
Best platforms for funds
For lump-sum investors who only want to use open-ended funds, the cheapest platform for a £5,000 to £15,000 ISA would be Close Brothers Asset Management’s self-directed service, as the table below shows.
For investors with £25,000, Barclays is just as cost effective as Close Brothers, according to platform research specialist, the lang cat.
For a larger sum worth anything from £50,000 to £500,000, Halifax Share Dealing is cheaper. It has a flat annual charge of £74, regardless of the portfolio size.
How much it costs to invest lump sums in funds with different providers
Source: the lang cat, data to 17 Dec 2023. Some of the rows are left blank because those platforms focus on shares and don’t accommodate funds.
The charges in the table above show the cost of investing a lump sum for a year and making four transactions (buys or sells) during that year. Calculations include ongoing platform fees, any additional wrapper charges and trading where applicable.
The colour-coded heat map reflects whether charges are cheap (green) or expensive (red) relative to competitors.
Of the three largest platforms in the UK – AJ Bell, interactive investor and Hargreaves Lansdown – AJ Bell is the cheapest for those with less than £50,000 to invest.
Interactive investor works out cheaper for investors with larger cash pots thanks to its flat fee structure, which is reduced for smaller pots but is still the most expensive for portfolios up to £15,000.
Hargreaves Lansdown meanwhile charges a flat 0.45% charge on most portfolios, which is much more expensive than its rivals when investing more than £15,000.
Best platforms for investment trusts
Savers who prefer to use investment trusts are charged differently from fund investors, as the next table illustrates.
Execution-only share dealing platform X-O is the cheapest venue for ISAs of all sizes if they invest exclusively in trusts. It has no annual fees and charges a flat £5.95 per trade.
The table below assumes four transactions in a year, so costs will be higher for people who want to trade more often and vice versa.
Elsewhere, savers with relatively small nest eggs of £5,000 would be better off choosing funds on most platforms, whereas for wealthier savers, trusts are more cost effective.
Among the ‘big three’, AJ Bell is once again the cheapest for all portfolios, while Hargreaves Lansdown and interactive investor change position depending on pot size.
How much it costs to invest lump sums in trusts with different providers
Source: the lang cat, data to 17 Dec 2023. Some rows are left blank because those platforms don’t offer investment trusts.
Best platforms for flexibility
For investors using a mix of funds and investment companies, costs vary and the table below shows charges for a 50/50 split.
Investors starting out with a £5,000 lump sum should use Close Brothers if cost is their main concern, while AJ Bell, Bestinvest and Willis Owen are also competitively priced.
Close Brothers is the cheapest provider for ISAs worth £15,000. However, for £25,000 portfolios, Freetrade and Fidelity Personal Investing prove more cost effective.
For portfolios of £50,000 or more, Freetrade takes pole position, closely followed by Fidelity Personal Investing, while Halifax Share Dealing also offers great value.
How much it costs to invest equal amounts in funds and trusts
Source: the lang cat, data to 17 Dec 2023.
Cost is not the only reason to choose a platform. Investors may prefer the technology and user experience of a certain provider or might find best buy lists to be a useful part of the service.
Some platforms are more conducive to investing directly in shares alongside funds and trusts. The frequency at which an investor wishes to trade is another factor to include in calculations.
The chief investment officer explains why he is overweight mid-caps, was “frustrated” by his strategic bond managers and how career risk is a real problem.
Going against the grain is no easy feat – especially when it involves being underweight the US – but IBOSS chief investment officer Chris Metcalfe believes it is the right choice, arguing that too many managers are concerned about “career risk”.
His fund range has taken some extremely counter-consensus positions, including around half the weighting to American companies as his peers.
His Core MPS Portfolio 4, for example, has around 26% of its equity portion invested in in American stocks, while the average fund in the IA Mixed Investment 40-85% Shares sector has around 41.1% of its stock allocation to the US market.
Source: IBOSS
“I would rather have difficult conversations. We have a duty to clients to not chase markets up. Our duty is to the client not to the benchmark,” he said.
“I think we are still right to not have a 40-50% weighting to one country – I don’t care which one it is,” he added, noting that no country is infallible.
Metcalfe said even America has had periods where it has struggled. This was the case in the decade from 2000 to 2010 when the US market “went nowhere” – something he described as the “lost decade” for these stocks. During this time the S&P 500 lost 14.1%, although the period includes both the tech bubble and the financial crisis.
Another area he sees a clear sign of career risk is in the bond space. For much of the past decade his model portfolios have used passives, but he has been adding active managers in recent years.
Previously, with low interest rates and little inflation, active managers were unable to add much alpha and had few tools to work with.
“We think there is a real opportunity for the strategic bond managers and corporate bond managers to harvest volatility. Now they have credit quality and duration to play with so they have a full toolkit,” he said.
This worked well during the bond rout towards the end of last year, when the IBOSS’ low-risk portfolios in particular did well.
However he admitted to being “frustrated” with some of the strategic bond managers who “didn’t go as short duration as they could have done” before interest rates started to climb two years ago.
“Again that comes to career risk. When the bond market started selling off they were still buying 10-year treasury yielding 0.5% because everybody was,” he said.
Some of Metcalfe’s positions have caused him to field difficult questions from clients. One such call was not owning Baillie Gifford American when the fund was flying – but he said calls for the fund to be added to the portfolio have gone silent since its drop in recent years.
“We have thousands of clients so get a lot of feedback, which is nearly always pointing out what we got wrong. For quite a few years it was why are we not invested in Baillie Gifford American. Those emails stopped but we didn’t get any saying ‘thank goodness you didn’t invest because its down 40%’,” he noted.
Instead, three years ago he bought M&G North American Value, which at the time sat in the 75th percentile of the IA North America sector.
Performance of funds vs sector and benchmark over 3yrs
Source: FE Analytics
“There were a lot of raised eyebrows at the time. It would have been easier to just increase the S&P 500 index tracker. To us it looked to be full of opportunity and since we brought the fund in it has been third percentile in the US,” he said.
Another contrarian position is to UK mid and small-caps, where the fund has a relative overweight position through funds such as Fidelity UK Smaller Companies, WS Gresham House Multi Cap Income and Polar Capital UK Value Opportunities.
Metcalfe said the UK is “second to China in needing some better PR” to attract investors back, noting that it has been a hard sell since Brexit.
“Even if we get good data, by the time it gets to the front pages it is generally negative again,” he said.
Performance of indices over 3yrs
Source: FE Analytics
Yet this is where the opportunity lies. “The above chart of the FTSE 250 versus the FTSE 100 shows how much the UK has come off. It is pretty well positioned in both relative and absolute return terms,” Metcalfe concluded.
Vanguard recommends a simple checklist to help investors pick the right investment strategies for their ISAs: goals, balance, cost and discipline.
Vanguard Asset Management has come up with four tried and trusted principles to help investors choose the right strategies for their stocks and shares ISAs, and to manage their portfolios on an ongoing basis.
James Norton, head of financial planners at Vanguard in the UK and Europe, said the four steps are goals, balance, cost and discipline.
The starting point is to understand why you are investing and what the money is for. Is it for a deposit on a property in five years or are you saving towards your retirement in 30 years’ time?
Those goals will determine the next point, balance, which is synonymous with diversification and asset allocation. Norton thinks investors should begin with global equities and global bonds, although the allocations to each will depend on an investor’s time horizon and risk appetite.
“A really great starting point for all investors is a low-cost, globally diversified equity index fund and for some people that is all they need,” he said.
Investors might choose an exchange-traded fund (ETF), which can be bought and sold during the London Stock Exchange’s opening hours, just like shares, or a passive fund with daily liquidity.
Some investors add actively-managed equity funds, but Norton thinks that involves greater risk. “The fact of the matter is that some managers have outperformed but the majority haven’t and you risk that underperformance in the potential of making higher gains,” he said.
Investors can still express a view through their choice of passive vehicle. For instance, the Vanguard ESG Global All Cap ETF excludes ‘sin stocks’ such as alcohol and tobacco, while the Vanguard LifeStrategy 100% Equity fund has a home bias, with 25% in UK equities. The fees are 0.24% and 0.22% per annum, respectively.
Unless investors have a very long time horizon and/or a considerable predilection for risk, Norton recommends adding fixed income. “Equities are volatile. They’re the engine for growth but portfolio volatility can be mitigated by holding some fixed income.”
After a couple of difficult years for bonds and an aggressive rate hiking cycle, yields are now relatively high. “We think the outlook for fixed income is much, much better than it has been for many years,” he said.
Bonds issued by governments, supranational organisations and corporations with a good credit rating will provide better diversification against equities than high-yield bonds which have equity-like returns, Norton explained.
“The quality of fixed income is important because fixed income is there to act as the buffer, the safety value if equities perform less well. And what you tend to find is that if equities sell off, then low-quality fixed income can perform badly as well.”
As with equities, Norton believes fixed income exposure should be low cost and globally diversified.
Cash is crucial, too. Before they start investing, people need to have sufficient savings for emergencies, he noted.
The third step in the four-point plan is cost, including fund fees and platform fees, so investors should shop around. The inverse relationship between costs and performance is counterintuitive because “in most areas of life, the more you pay, the more you get”, Norton added.
Discipline is the fourth and final step. “This is the hard bit because this is about behaviour,” Norton said.
“So you’ve thought about your goals, you’ve created the portfolio, you’ve implemented it at low cost. But then you need to have the courage of your convictions and stay the course. Don’t get distracted by the noise.
“There are so many professional pundits who have strong views and convictions on what sector is going to perform better, whether you should sell the US and buy emerging markets or go short on this and long on that. And actually, if you’ve done the first three steps and you consciously do nothing or occasionally rebalance the portfolio, you’ll be better off than most investors.”
This is because long-term strategic multi-asset funds tend to outperform short-term tactical asset allocation, Norton said, and market timing is notoriously difficult. “We firmly believe at Vanguard that investors should concentrate on what they can control.”
One of the strongest forces in investing is reversion to the mean. The US certainly has its strengths, but you have to pay for it. If you want something cheaper, then you can invest in Europe at half the price.
Over the past few years, cyclical forces have had acute influence on markets. The world has become consumed by cyclical trends and discussion has focused on the impact of these cyclical forces on the outlook for both economies and investment markets.
We counter that these cyclical trends are now returning to more normalised long-term levels and it is structural growth trends that should be driving portfolio construction for the future.
In our view, cyclical pressures that spiked inflation over the last two or three years, caused by a global pandemic and the war in Ukraine, are broadly over. We are in a period where interest rates have normalised. If you look back over history, the median base rate in the UK has been around 5%, which is roughly where we are today. Without causing a deep recession and increasing unemployment, central banks around the world have brought down headline inflation.
They have achieved this because variables in the market have improved. These include global supply chains opening up while energy and food prices have come back down after the impact of Covid and the start of the war in Ukraine.
You can ask why central banks are not reducing interest rates given that headline inflation is moving down towards the magical figure of 2%. In our view, central banks are not cutting interest rates today because they are now more concerned with secular forces that we believe will keep inflation above 2%, maybe even 3% or 4%, for at least the next decade.
And what are these forces? De-globalisation, even though it is far from our favourite word, mitigating climate change, ageing populations and innovation.
Geopolitical risk has been rising over the past few years, certainly since Donald Trump became US president, and global trade started moving sideways during the global financial crisis. This means we saw globalisation starting to break down 15 years ago.
We have seen periods of globalisation followed by de-globalisation during the course of history, so what can we expect? To answer this, here are some more words beginning in D: disengagement, division and diversification.
Disengagement is all about the US, which has obviously been the leader in terms of the global economy, disengaging from the rest of the world. The US can do this because it has energy independence and food security.
Post the financial crisis, we have seen greater differentiation in the speed of economic growth between countries, with the US benefiting from being a leader in innovation. The power of innovation was shown when ChatGPT gained 100 million members within two months of its introduction.
The US has also benefited from demographics in terms of having a younger population than the rest of the developed world. An even greater benefit for the US has been flexibility in its workforce and the ability for people to move states for work.
The fragmentation in globalisation means we should expect central banks to have their own national agenda going forward and not raise and reduce interest rates in sync.
What does this all mean for portfolios? It brings us back to a strong case for diversification.
Admittedly, 2022 wasn't a great year for diversification. And a basket full of US equities, especially large and mega caps, would probably have been the best way to invest over the last decade or so.
We have seen very narrow leadership in recent years, developed markets outperforming emerging markets, and the rise of technology, passive investing and concentrated indices.
But one of the strongest forces in investing is reversion to the mean. The US certainly has its strengths at the moment, but you have to pay for it. If you want something cheaper, then you can invest in Europe at half the price. You can invest in the UK at almost a third of the price. There are cheap valuations to be had in emerging markets, Asia and Japan.
The challenge is that there are so many investment opportunities with attractive valuations at the moment. We believe the biggest opportunity today might be in income. The increased level of income means investors in a balanced portfolio can now reduce the risk they take to generate the same return from equities.
And if you're an active manager, you've got to be doing something different, but it is a very big call not to have a market weighting in the ‘Magnificent Seven’. Once we start to see some of the concentration reduced and a broadening of the market leadership, then active managers are likely to be rewarded in terms of their stock picking.
John Husselbee is head of multi-asset at Liontrust. The views expressed above should not be taken as investment advice.
Four UK equity specialists are flying the flag for their own industry by buying shares in asset and wealth managers.
Several portfolio managers own stakes in other investment firms, ranging from their direct competitors to wealth managers, platforms and alternative asset specialists.
This gesture of support for their industry may come as a surprise given the well-publicised challenges the UK’s listed active managers are facing. Risk appetite has waned in the past two years as investors sheltered in cash and, although this is starting to change, unpopular asset classes such as UK equities are still seeing outflows. Mid-size active managers are also facing competition from passive strategies, global behemoths and specialist boutiques.
Yet within the financial services industry there are several bright stars, as fund managers reveal below.
Polar Capital
Polar Capital is known for thematic investing and has a well-diversified range of funds, including artificial intelligence, smart energy and healthcare strategies. Some of its funds are attracting inflows, even though overall the firm is still in outflow mode, said Dan Green, manager of the FTF Martin Currie UK Smaller Companies fund. Polar Capital is one of his top 10 holdings.
Green thinks Polar Capital’s fund range is well placed to attract flows when sentiment improves and investors increase their equity allocations.
Until then, it has a strong balance sheet so will be able to continue paying dividends. The current yield is more than 10%, which is rare for a small-cap stock, Green said. “You’re being paid to wait for things to improve.”
Green added Polar Capital is well managed by chief executive Gavin Rochussen, who was previously successful at the helm of JO Hambro Capital Management.
Ashmore Group
Shares in emerging market debt specialist Ashmore Group peaked at £5.70 in February 2020 and are currently at trading around £1.97, a 65% fall over the past four years.
Simon Murphy, manager of the VT Tyndall Unconstrained UK Income fund, started investing in Ashmore in September 2022 at around £2.10.
Investors got spooked by interest rate hikes and became more risk averse, so emerging market debt has been “deeply out of favour” and Ashmore has experienced a lot of outflows, Murphy said.
“It will benefit when emerging markets get back into favour again. It is a bull market operator. When emerging markets do well, the firm does very well, and when emerging markets struggle, it struggles,” he explained.
“We are yet to make any money on this investment, although we have had several substantial dividends during our 18 months of ownership so far. We make investments typically with a three-year time horizon and we are still optimistic that we will generate a good return on this investment during that time.”
Ashmore has about £450m in excess cash on its balance sheet and a dividend yield of more than 7%. The dividends are not fully covered by earnings but Ashmore is committed to using its cash reserves to support dividend payments while it waits for markets to recover, Murphy said. “I think I bought it at the right price. I have a lovely dividend yield while I wait.”
Tatton Asset Management
Businesses that solve problems for their customers are likely to be successful, said Eric Burns, fund manager at Sanford DeLand Asset Management. Tatton Asset Management allows financial advisers and wealth managers to cheaply outsource discretionary fund management, with fees starting from just 15 basis points.
Tatton brought in monthly average inflows of £150m during the year to 30 September 2023, recently hitting its growth target of £15bn in assets, and the business is very scalable, according to Burns. Tatton is his second largest holding, worth 6.7% of the CFP SDL Free Spirit fund.
Given the challenging market conditions in 2022 and 2023, Tatton has “been through a really good stress test over the past few years so it’s really hard to see anything that would derail it. It would take a truly black swan event,” Burns concluded.
Intermediate Capital Group
Intermediate Capital Group started out as a mezzanine debt provider but has branched out into senior debt, equity, real estate, water and other alternatives, said Alexandra Jackson, manager of the Rathbone UK Opportunities fund. “It has done very well at acquiring teams and launching products across the alternatives space.”
Alternative investment managers have fewer competitors and less fee pressure than managers of publicly-traded securities, she added.
The stock is not without its risks. Intermediate Capital Group tends to be quite exposed to credit spreads and general credit stress and when spreads blow out, it tends to underperform, Jackson said.
Murphy has held Intermediate Capital Group since March 2022. “The shares had fallen sharply from a peak of £23.80 in November 2021 to £14.00 (-40%) when I started buying, driven by fears over the impact of rising inflation and interest rates. The share price went on to fall as low as £10.00 in September 2022,” he said.
“They have been recovering very nicely since and are currently at £19.88, which is up 40% from when we initially started buying again and we are still optimistic for further gains in due course.”
This is a strong franchise paying a 5% dividend yield, Murphy added. It has delivered 16.5% compound dividend growth per annum for nine years and has benefitted from demand for alternative investments.
Intermediate Capital Group has transitioned from investing using its own balance sheet to managing closed-ended funds. Fee income from committed and invested capital is a high-rated, “better” source of revenues compared to assets on the balance sheet, he concluded.
Shares in investment firms vs FTSE All Share over 5yrs
Source: FE Analytics
The investment platform suggests three funds to grow wealth or provide a regular income for pension investors.
The deadline to use this tax year’s £60,000 self-invested personal pension (SIPP) allowance is fast approaching on Friday 5 April 2024. With days to go, Hargreaves Lansdown has suggested two funds that would suit pension savers’ long-term horizons and deliver capital growth, alongside an income fund for those old enough to access their pension.
Kate Marshall, lead investment analyst at Hargreaves Lansdown, recommended Legal & General Future World ESG Developed Index and Schroder Asian Alpha Plus to grow wealth over the long term, alongside Artemis Income to provide a regular income in retirement.
Artemis Income
There are several reasons to add an income fund to a SIPP portfolio, Marshall said. “You can either take the pay-outs to supplement your income (if you’re old enough to access your pension) or, if you are targeting growth and aiming to build your portfolio for longer, reinvesting dividends can help grow your pot at a faster rate thanks to the effect of compounding.”
The £4.7bn Artemis Income fund has delivered top-quartile performance over one, three and five years, and is comfortably ahead of its benchmark and sector over 10 years, as the chart below shows.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
FE fundinfo Alpha Manager Adrian Frost, together with co-managers Andy Marsh and Nick Shenton, focus on UK companies with robust cashflows that can pay a sustainable level of income throughout different economic cycles.
Investors could use this UK-focussed fund as the bedrock of an income portfolio, potentially alongside bond funds and/or a global equity income strategy, Marshall said.
Legal & General Future World ESG Developed Index
The £2bn Legal & General Future World ESG Developed Index fund is a cost-effective passive strategy offering regional diversification across developed equity markets.
It tracks the Solactive L&G ESG Developed Markets index, which incorporates environmental, social and governance (ESG) screens, giving investors a chance to align their SIPP with their values and achieve “long-term growth in a responsible way”, Marshall said.
“It won’t invest in tobacco companies, pure coal producers, makers of controversial weapons or persistent violators of the UN Global Compact Principles. It invests more in companies that score well on a variety of ESG criteria, such as the level of carbon emissions generated and number of women on the board. If companies score poorly on these measures the fund reduces exposure,” she explained.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Schroder Asian Alpha Plus
Multiple factors are driving growth in Asia but the region’s mix of developed and emerging markets can be volatile, “so a long investment horizon is essential,” Marshall said.
“Rapid industrialisation, growing populations and a desire to succeed have helped transform countries in the Asia region. Domestic consumption is set to be a key driver of growth over the coming years, helped by a young and growing population, and rising wealth. Continued innovation from companies at the forefront of technology based there could also provide exciting growth opportunities for investors,” she explained.
Abbas Barkhordar and Richard Sennitt, who manage the £1.3bn Schroder Asian Alpha Plus fund, believe that Asia is “a stock picker’s paradise”, Marshall continued. “Since Asian markets tend to be less researched than developed markets, there is plenty of opportunity to uncover hidden gems.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The asset management house lays out its reasons for remaining bullish.
BlackRock is going into the second quarter with a pro-risk stance as it expects the market to look past sticky US inflation and continue to perform strongly.
Equities have had a good start to 2024 as investors eye rate cuts from the world’s central banks, with the MSCI AC World index gaining 8.4% so far to outpace government bonds and commodities.
However, the latest US inflation print saw the consumer price index rise from 3.1% to 3.2% - a slight move, but one that caused some investors to worry the Federal Reserve would be pushed to delay cuts to interest rates.
Performance of indices over 2024 so far
Source: FE Analytics
At its meeting last week, the Fed lifted its growth and inflation forecasts but reiterated its intention to make three quarter-point rate cuts later in 2024. This was enough for BlackRock, which said in its latest update that it remains pro-risk in on a six- to 12-month tactical view.
Wei Li, global chief investment strategist at the BlackRock Investment Institute, said: “We see stock markets looking through recent sticky US inflation and dwindling expectations of Fed rate cuts. Why? Inflation is volatile but falling, Fed rate cuts are on the way and corporate earnings are strong.”
In the very near term, BlackRock sees the backdrop as being more supportive for risk-taking with US inflation well below its high of 9.1% and economic growth holding up. Meanwhile, expectations for S&P 500 earnings growth for 2024 have been revised up to about 11%, according to LSEG data.
“Against that backdrop, we remain tactically overweight US stocks. We think upbeat risk appetite can broaden out beyond tech as more sectors adopt [artificial intelligence] AI and as market confidence is buoyed by recent Fed messaging and broadly falling inflation,” Li explained.
“We still prefer the AI theme even as valuations soar for some tech names. Stock valuations are supported by improving earnings, with the tech sector expected to account for half of this year’s S&P 500 earnings.”
Li also put the ‘soaring valuations’ of tech stocks into context, as price-to-earnings ratios have fallen thanks to improved earnings – in sharp contrast to the dot-com bubble, when they surged.
BlackRock’s systematic equities team also analysed 400 metrics related to valuations and other features; it found that the number of metrics “flashing red” now is 50% lower than when the dot-com bubble burst in 2000.
The asset management giant has also gone more overweight Japanese equities, which is now its highest-conviction tactical view. The firm likes Japan because of its solid corporate earnings, shareholder-friendly reforms and supportive policy from the Bank of Japan.
Savers continue to pile money into VCTs.
Four venture capital trusts (VCTs) have closed their fundraisings after reaching capacity in the past week, according to data from Wealth Club.
Albion VCTs, Octopus, Apollo and Hargreave Hale AIM have joined British Smaller Companies VCTs, Foresight Enterprise, Northern VCTs, Octopus AIM and Unicorn AIM in filling up their allocations.
Alex Davies, founder of Wealth Club, said although it has been a slower year than in the previous two “boom years”, sales are well above the average of the past decade.
“Several popular VCTs have already filled and others are rapidly approaching capacity. Once those targets are reached the managers will shut their doors for this tax year. If you spot a VCT you like, do it now before it’s too late,” he said.
“Those planning on taking advantage of a quieter tax year and leaving it to the last minute should beware. Many VCTs actually close before the tax year end to give them time to get all the paperwork in order. Moreover as the deadlines get closer, many popular VCTs will sell out.”
Last week Trustnet covered why investors may wish to buy VCTs, including the generous tax breaks and potential returns on offer from investing in smaller businesses.
Ben and Zoe want to take the plunge and start investing in global equities.
It can be difficult to gauge the best time to put your money into markets, particularly at present with stocks approaching all-time highs in the UK and US.
The prevailing advice is to put cash to work as soon as possible, so that you can get the most from compounding returns. Yet in reality, things get in the way, which means money can sit on the sidelines for far longer than anticipated.
This has been the case for Ben and Zoe (not their real names) who have £60,000 in a stocks and shares ISA with Hargreaves Lansdown. It has been sitting in cash for the past three years because they have struggled to find time to invest it; like many couples in their mid-to-late forties, life is frenetically busy with work and raising their children.
They both have good jobs and have paid off their mortgage so have no immediate demands upon their savings and want to put the money to work in a small number of funds.
Ben’s corporate pension is invested in a passive global equity fund which has performed phenomenally for the past decade and he is keen to replicate that strategy with the ISA. He describes himself as a medium-risk investor.
Lena Patel, a chartered financial planner with ISJ Independent Financial Planning, said high-rate taxpayers such as Ben should first make sure they are topping up their pension allowances and benefiting from the 40% tax relief. “There are not many investments where you get 40% tax relief straight away.”
Patel advises her clients to keep six months’ worth of net income in cash in case of emergencies or redundancy, so she suggested that Ben and Zoe might want to keep some of their ISA savings accessible in cash unless they already have such a buffer.
But with some £60,000 sat idle, even after this there is likely to be plenty left over to invest. The next question then is what these ISA savings are for. Do Ben and/or Zoe want to take early retirement? Are they saving for their children to go to university or for a deposit on their first homes? These factors will impact the time horizon for their ISA investments.
Presuming that they won’t need to draw on these savings for the next decade or so, especially if they have a cash buffer for emergencies, then a low-cost, passive global equity fund would deliver long-term growth, Patel said. In a worst case scenario, they would still be able to access the money if needed because passive equity funds are very liquid.
Equity market valuations are quite high currently however, particularly in the US, which dominates global indices. For this reason, Ben and Zoe may wish to drip feed their savings, Patel said.
She recommended investing the majority of the ISA now because “it’s better to have time in the market rather than timing the market” but to drip feed next year’s ISA allowance via monthly contributions to benefit from pound cost averaging.
Not all experts were concerned about market timing. Although global funds do have a large allocation to the US equity market, they also include more attractively valued markets and companies, and save investors the trouble of having to decide where to allocate money, said James Norton, head of financial planners at Vanguard in the UK and Europe.
“The nice thing about a global index fund is you’ve got today’s winners, but if they start to underperform, then you’ve got tomorrow’s winners as well,” he said.
Darren Cooke, a chartered financial planner at Red Circle Financial Planning, pointed out that investing everything in stocks is not usually considered medium risk.
“Ben could look for a multi-asset fund that blends global equity with fixed interest, which would be a traditional way of reducing risk. That said, that hasn't worked out very well over the past two years as fixed interest funds have proved to be just as risky as stock markets,” he said.
Ben’s pension fund has benefitted from a global stock market rally driven by economic stimulus and cheap borrowing costs, whereas going forward, economic and capital market outcomes look very different, said Ernst Knacke, head of research at Shard Capital.
He expects rising volatility, burgeoning risks and structurally lower market valuations. “Risks include significant debt monetisation, currency devaluation and an inflexion point in global demographics, which will lead to a material rise in government liabilities,” he said.
Therefore, by investing the ISA in passive global equities, Ben is unlikely to replicate the success of his pension fund.
Instead, Knacke suggested diversifying into gold, inflation-linked government bonds and managed futures to “provide stability and protection during macroeconomic environments associated with monetary devaluation and anaemic growth, whilst ensuring the portfolio maintains a positive expected return in real terms.”
For the equity piece, Knacke prefers using active managers to take advantage of secular themes or deeply undervalued equities. “Within the equity space, we see very compelling opportunities in Japan, Asia and emerging markets. More locally, UK smaller companies are both deeply undervalued and under-owned. Managers that we believe offer compelling exposures include Zennor Japan, Prusik Asian Equity Income, Veritas Asian and Heptagon Kopernik Global Equity.”
He also highlighted the Eagle Capital US Equity fund – “a concentrated, large-cap, US equity strategy with a robust process and excellent team”.
Given Ben and Zoe’s long-term mindset, Knacke also recommended tapping into thematic growth opportunities such as artificial intelligence and the intersection between health sciences and technology through funds such as Polar Capital Artificial Intelligence and Polen Capital Global Growth.
A final consideration for Ben and Zoe is whether they might benefit from working with a financial adviser, who would probably have encouraged them to invest their ISA sooner. By staying in cash, Ben and Zoe avoided the ravages of 2022 but missed out on last year’s gains.
Cooke said: “Not investing will have cost them a pretty penny, particularly as Hargreaves Lansdown doesn't pay very good rates on cash held in its ISAs. At least an adviser would make sure they use ISA allowances each year and invest the money, not leave it sat in cash. That alone would have paid an adviser’s fees over the past three years.”
The fund platform has kicked several well-known but underperforming ‘dog’ funds off its buy list, including Ninety One Global Environment and Baillie Gifford Global Discovery.
Bestinvest has expelled Fundsmith Equity and Lindsell Train UK Equity from its Best Funds list, shortly after they appeared in its ‘Spot the Dog’ report for the first time.
The investment platform has introduced a new policy of kicking dog funds out of its Best Funds list to avoid confusing non-advised investors, said managing director Jason Hollands. “Being suspended from the list does not mean we advocate selling or switching these funds and is effectively a pause.”
This new policy led to the ejection of several well-known funds in the latest Best Funds report, including Baillie Gifford Global Discovery, Ninety One Global Environment, CT Responsible Global Equity, Liontrust UK Ethical and Premier Miton UK Growth.
Fundsmith Equity and Lindsell Train UK Equity’s investment processes “have delivered strong long-term returns”, Hollands conceded. They “remain unchanged but have lagged markets over the past few years for style reasons”.
If either fund escapes this summer’s Spot the Dog list, “we will likely reintroduce them to the Best Funds list if our research team continues to have confidence in the funds,” he added.
Terry Smith’s £25.6bn Fundsmith Equity flagship is not managed with reference to any benchmark but it has fallen behind the MSCI World index over three years, as the chart below shows, and has underperformed the index in each of the past three calendar years – the criteria required to become a ‘dog’ fund. However, it remains well ahead of its peers in the IA Global sector.
Performance of fund vs MSCI World and sector over 3yrs
Source: FE Analytics
Fundsmith’s quality-growth style struggled in 2022 as interest rates shot up. Then in 2023, when the ‘Magnificent Seven’ mega-cap technology stocks dominated US and global equity markets, Fundsmith Equity failed to keep up.
It currently holds two of the Magnificent Seven within its top 10 – Microsoft and Meta Platforms. Other large holdings are Novo Nordisk, L’Oreal and medical technology company Stryker.
Meanwhile, Nick Train has apologised for poor performance and expressed his disappointment. The £3.8bn Lindsell Train UK Equity fund’s relative performance was hampered by a lack of exposure to oil and mining companies, while top 10 holdings Burberry and Diageo disappointed last year.
Performance of fund vs benchmark and sector over 3yrs
Source: FE Analytics
Style factors have hurt several of the other dog funds, with growth strategies in particular struggling in a rising rate environment.
Baillie Gifford Global Discovery focuses on smaller companies, which have trailed their larger brethren during the past couple of years.
It has also been a difficult period for sustainable investing, especially for renewable energy-related stocks. “Share prices in this part of the market soared during the pandemic and have had to make a painful adjustment ever since. At the same time, renewable energy companies have struggled with rising costs, which have forced them to shelve key projects,” Hollands said.
The Best Funds list is published twice a year and this time Bestinvest expelled 17 funds including Rathbone Ethical Bond, Aubrey Global Emerging Markets Opportunities, Findlay Park American, AXA Framlington UK Mid Cap, JPM Japan, Barings Europe Select Trust, iShares FTSE 250 ETF, HICL Infrastructure and SDCL Energy Efficiency Income.
Although Bestinvest has now established a clear link between its name-and-shame Spot the Dog list and its Best Funds universe, the criteria are very different.
Bestinvest chooses its favourite funds by looking for characteristics beyond performance, such as concentrated portfolios, long-term horizons, capacity constraints and clear objectives. Bestinvest prefers managers with long-term track records and skin in the game who pay attention to environmental, social and governance (ESG) criteria. They must not hug their benchmarks and should instead focus on growing wealth. Nowhere does it state performance is a factor for inclusion.
Using this checklist, Bestinvest has whittled the investment universe down to 122 funds, ETFs and investment trusts that it believes should beat their peers and benchmarks. The list includes 30 investment trusts, 30 passive strategies for cost-conscious investors and 16 sustainable investment strategies.
In today’s rebalance, Bestinvest added four actively-managed funds: JPM Global Macro Sustainable, Brown Advisory Global Leaders Sustainable, GQG Partners US Equity and NB Private Equity Partners.
Hollands described JPM Global Macro Sustainable Hedged as “an absolute return strategy that might suit investors wanting an ESG-tilted portfolio”. It is a rare find, given that sustainable absolute return funds are “relatively thin on the ground”.
The fund aims to deliver positive returns over cash in varying market environments through investments in sustainable equities and bonds, as well as currencies and gold, with derivatives also used where appropriate. It currently has 50% in fixed income, 37% in equities, 12% in cash and cash for margin calls and 1% in gold.
The $659m Brown Advisory Global Leaders Sustainable strategy joins its larger sibling, the $3bn Brown Advisory Global Leaders fund, in the Best Funds list. Co-managers Mick Dillon and Bertie Thomson look for high-quality companies that are leaders within their industry or country.
“It’s a fairly concentrated portfolio of 30-40 companies that the managers feel combine exceptional outcomes for their customers with strong leadership, so they can generate high and sustainable returns on invested capital. These are companies with strong economic moats and high free cash flow generation,” Hollands said. “The portfolio is very similar to the sister fund, but with negative screens applied to meet sustainability criteria.”
The $1.4bn GQG Partners US Equity fund is managed by three FE fundinfo Alpha Managers: Brain Kersmanc, Rajiv Jain and Sudarshan Murthy. GQG stands for global quality growth, which sums up their investment style, Hollands said.
“The aim of the fund is to outperform the S&P 500 across the cycle, but with lower volatility. The portfolio is focused on high-quality, large-cap US companies with durable earnings growth. It’s a fairly concentrated, high conviction portfolio, with no constraints on sector exposure,” Hollands explained.
NB Private Equity Partners, managed by Neuberger Berman (NB), focuses on companies that should benefit from long-term secular growth trends. Key sector exposures are technology, finance, business services, consumer and e-commerce. The private equity trust is tilted towards North America and is trading at a 25% discount to its net asset value.
“Long-term performance has been excellent,” Hollands said. “The underlying portfolio is relatively mature with the average holding having been backed for five years. The current portfolio consists of 87 companies, with NB typically co-investing alongside other private equity managers.”
Bestinvest also introduced four passive strategies to its best buy list: SPDR MSCI World Technology ETF, SPDR S&P 500 ETF, UBS FTSE RAFI Developed 1000 Index and Vanguard UK Short-Term Investment Grade Bond Index.
Very few strategic bond funds are genuinely unconstrained. In fact, different cohorts of the sector are attempting to deliver entirely different outcomes in entirely different ways.
Within the world of fixed income, strategic bond funds are exciting. Not everyone will agree, but those with a penchant for the intricacies of bond investing will know where I’m coming from.
A key reason for this is that theoretically they are unconstrained, with managers enjoying great flexibility to move between the various corners of the fixed income asset class as opportunities present themselves.
However, for anyone who has allocated to funds within the sector, it soon becomes clear that not all strategic bond funds are created equal, and very few, in practice, are genuinely unconstrained. In fact, different cohorts of the sector are attempting to deliver entirely different outcomes in entirely different ways.
This, in and of itself, is no bad thing. Greater diversity equals greater choice. However, fund buyers must be sure footed in their selections.
Crucially, buyers must decide exactly what they’re looking for in a strategic bond fund. As this, by itself, could be an array of things: total return, outperformance of a specific index, low correlation to risk markets, high income, any combination of the four, or something else entirely. Once decided, selectors have a yardstick by which to go out and assess the competition accordingly.
Undertaking a review of the sector however can require a fair bit of digging, as many funds either do not state a benchmark or give the sector as their benchmark (unhelpfully sidestepping the issue of the variability of funds therein).
Having been disappointed by their desk work, the next step for fund buyers is to ask fund managers if there is an index/composite of indices that they look to outperform over time. If this aligns to the selector’s desired exposure profile, they can then assess the historical risk profile/allocations of the fund to ascertain whether it has provided a reasonable appropriation of the risk of their stated index. If this stacks up, and relative performance looks solid, they may just be onto a winner.
By way of an example, in the instance that a strategic bond fund is being used as part of a diversified multi-asset portfolio, a likely key feature of the fund will be to provide diversification from risk assets.
Investors should therefore be looking for a fund that is always within a few years of the duration of a core bond index, thereby excluding those funds that have been down at the lower end of the duration range (as many in the sector have been), or those that have oscillated wildly in their duration exposure (which few in the sector do).
Alternatively, when building an income portfolio, rather than diversifying the risks, allocators will likely want a fund that’ll boost the portfolio’s overall level of income. In this case, searching for funds with an income and risk profile akin to a credit index is likely preferable.
Whatever an allocator’s desired risk profile, once confident they’ve found a fund that meets this, with a good manager at the helm, they’re likely good to go. From there, allocators can happily monitor the fund’s exposures and performance versus the agreed target, whilst keeping an eye out for other funds with similar, or complementary, risk profiles to either challenge, or add, to the incumbent.
Some might say I’m missing the whole point of the sector here, that managers should be free to swing the exposure of their funds as they see fit, without being held accountable to any index. However, from my experience, very few funds in the sector are actually managed this way, and besides, why would investors want a fund with an entirely unpredictable risk profile anyway.
Paul Angell, head of investment research at AJ Bell. The views expressed above should not be taken as investment advice.
Trustnet reveals which European funds delivered the best returns while diverging significantly from their benchmark.
Seven European equity funds managed to deliver top quartile returns in the past 10 years by ignoring their benchmark and offering something significantly different.
Research by Trustnet identified funds with a high tracking error that beat their benchmarks and sit in the top quartile of the IA Europe Excluding UK sector. We ruled out funds that use their sector as a benchmark.
Man GLG Continental European Growth has been the best performing benchmark-agnostic fund in the IA Europe Excluding UK sector, returning 206.1% to investors over 10 years (to 31 December 2023) with a tracking error of 8.98.
Managers Rory Powe and Virginia Nordback invest in established European leaders but also in emerging winners in both new and existing industries.
The fund is concentrated, with the top 10 holdings accounting for over 60% of the portfolio, according to FE Analytics.
Analysts at FE Investments said: “This top-heavy weighting can lead to greater volatility if several of its companies fall at the same time, and as such the fund is a punchy way to invest in Europe. Powe is a dedicated investment manager who learns from any mistakes and, although the starting point of a qualitative screen is unusual, it shows the manager’s dedication to the bottom-up process.
“The emerging winner’s bucket of the portfolio has acted as a drag on performance, starting from 2021. To react to the change in interest-rate environments, the portfolio manager has significantly decreased the exposure to these names, which continue to sit at its lowest level. The fund has been a consistent performer through time but is best suited to a patient, long-term investor as it will be subject to bouts of volatility.”
Two funds from BlackRock – BlackRock Continental European and BlackRock European Dynamic – also made it to the list.
Analysts at Rayner Spencer Mills Research (RSMR) suggested using the former as a core European ex-UK fund, while the latter would be more suitable for investors seeking higher alpha.
Jupiter European, managed by FE fundinfo Alpha Manager Mark Heslop and Mark Nichols, is another top quartile fund with a high tracking error.
The managers look for companies with strong business models, benefiting from drivers of secular growth and boasting sustainable returns on capital.
Heslop and Nichols gain exposure to secular growth opportunities based on trends such as demographics, emerging wealth, the environment, consumer behaviour and data/digitalisation.
Analysts at RSMR suggested using Jupiter European as a complement to a tracker of a more benchmark-aware fund.
Source: FE Analytics
While not the best performer among the top quartile funds, WS Ardtur Continental European has the highest tracking error in the list.
It has a value bias and typically consists of 20 to 30 positions. It is also one of the few funds in the IA Europe Excluding UK sector that has ‘ticked all the boxes’ since 2021, scoring well against a variety of performance and risk metrics.
Further top quartile funds that have strayed from their benchmark in the sector include Quilter Investors Europe (ex UK) Equity Growth and SVM Continental Europe.
IA Europe Including UK
Three funds have achieved the same feat in the IA Europe Including UK sector, including two portfolios from the Comgest stable: Comgest Growth Europe Opportunities and Comgest Growth Europe Smaller Companies.
The former fund invests in European companies capable of delivering above-average quality earnings growth that FE fundinfo Alpha manager Franz Weis and co-managers Eva Fornadi and Denis Callioni find to be attractively valued.
Source: FE Analytics
Comgest’s smaller companies fund seeks to identify high quality and growing small- and mid-cap businesses.
Analysts at Square Mile said: “The portfolio can have some sizeable positions at the stock, sector and country level. This can be a double edged sword at times, as the concentration in the portfolio can be a good thing when stock selection is working right.
“However, it can also add to the fund's volatility, already an inherent feature when investing in smaller companies, as usually the share price performance of smaller companies is more volatile than their larger peers. They are also more vulnerable to sharp declines during weaker periods.
“More broadly, we would expect this fund to do well when the growth style is in favour, but lag in more value or cyclically driven markets.”
Finally, Candriam Equities L Europe Innovation has been the best performing of the benchmark-agnostic top quartile funds in the IA Europe Including UK sector.
Fund selectors reveal which strategies they would pick to build an allocation to emerging markets.
Building an allocation to emerging markets is no simple feat, as the asset class encompasses a range of regions with significantly different structures and drivers.
Moreover, emerging markets and Asia ex-Japan share a lot of overlaps. For instance, China, India, Taiwan and South Korea account for nearly 73% of the MSCI Emerging Markets index and over 84% of the MSCI AC Asia ex-Japan.
As a result, investors may face the dilemma of whether to consider emerging markets and Asia ex-Japan as two distinct asset classes or club them together.
Below, we asked experts how to build an exposure to those dynamic and growing economies.
Federated Hermes Asia ex-Japan Equity, M&G Global Emerging Markets and L&G Global Emerging Markets Index
For Chris Rush, IBOSS investment manager at Kingswood Group, there is no reason to separate emerging markets and Asia ex-Japan given the overlap between the two sectors. Therefore, he uses a combination of funds across both sectors.
His first choice is Federated Hermes Asia ex-Japan Equity, managed by FE fundinfo Alpha Manager Jonathan Pines since launch in 2012.
Rush highlighted the fund’s track record, showing the management team’s ability to navigate an “extraordinarily wide variety of market conditions”.
The fund currently has overweight positions in China and South Korea, which are arguably the least popular regions among emerging markets as both have fallen from their respective peaks in 2021. While going against the grain it is not without risk, Pines believes it has opened significant opportunities for investors.
Rush said: “Ultimately, we want our active managers to make active decisions on behalf of our clients and us. The combination of a proven track record and the ability, willingness and confidence to invest in unloved areas of emerging markets lead us to rate the fund and the team highly.”
His second pick is M&G Global Emerging Markets, managed by Michael Bourke since 2018.
Again, Rush highlighted the fund’s track record, but also Bourke’s willingness to extensively move the positioning, which has had a positive impact on total returns for investors.
Like the Federated Hermes fund, M&G Global Emerging Markets takes a big punt on South Korea but adds Latin America into the mix as well, with overweights in Mexico and Brazil.
Rush said: “We believe the combination of two active managers willing to back their convictions but with differing views on where the opportunity lies is a potentially potent combination.”
Performance of funds over 10yrs vs benchmarks
Source: FE Analytics
Finally, he complemented those two active portfolios with L&G Global Emerging Markets Index, a tracker fund. Emerging markets and Asia indices are not “entirely stuffed with expensive assets”, he said.
“We believe that a passive fund can complement the active positions of the funds mentioned above, maintain broad exposure to the region and reduce costs,” Rush said.
“For example, M&G and Hermes are markedly underweight in India relative to the index, while the L&G fund has a 22% allocation to Indian companies. Though many Indian companies do look expensive, they have done so for some time and India is of the top-performing indices over recent years.”
FSSA Asia Focus and Redwheel Next Generation
Ben Yearsley, director at Fairview Investing, also sees Asia and emerging markets as one asset class and combined funds from both sectors.
He selected FSSA Asia Focus, which is a quality growth strategy managed by FE fundinfo Alpha Manager Martin Lau and Richard Jones.
“For a core Asian/emerging markets holding, I think the quality growth style is the place to be for long-term investors. You’re in the biggest growth market with extremely favourable demographics, so why wouldn’t you buy growth?” Yearsley asked.
“This fund will always have India and China has the key components – normally more India, though in recent times Chinese valuations have tempted the team back in.”
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
To complement FSSA Asia Focus, Yearsley chose Redwheel Next Generation Emerging Markets Equity, a fund launched in 2019.
He said: “The fund sits in between frontier and emerging markets and invests in the larger more liquid frontier markets and the smaller emerging market countries. As such, crossover with FSSA will be limited. It is more growth at a reasonable price rather than the quality growth approach of FSSA.”
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
UTI India Dynamic Equity & FFSA Greater China Growth
Unlike Rush and Yearsley, Darius McDermott, managing director at FundCalibre, chose to focus on the two Asian giants: India for aggressive growth and China as a value play.
McDermott said: “India boasts the fastest-growing major economy globally, fuelled by a growing young population on the cusp of entering the workforce. This ’demographic dividend’ translates to a compelling structural growth story, with a young workforce boosting productivity and consumption.
“Unsurprisingly, India has been a top performer in emerging market portfolios, reflecting its rapid economic expansion. However, the Indian stock market currently trades at a premium compared to its historical average, indicating potential overpricing.”
To leverage India’s long-term prospects, he suggested using UTI India Dynamic, which offers an exposure across the market-cap spectrum.
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
On the other hand, China offers almost the exact opposite set of characteristics. While hosting some of the world's leading companies such as Tencent or Alibaba, Chinese equities are currently trading on low valuations, as a result of the economic slowdown in China and geopolitical tensions with the West.
McDermott said: “While China may require more patience from investors due to potential volatility, investing in undervalued assets with solid fundamentals offers the potential for significant long-term returns.”
To get exposure to the cheap Chinese equities, he pointed to FSSA Greater China Growth, managed by Martin Lau and Helen Chen. The fund is not a pure China play, as it also invests in Hong Kong and Taiwan.
In an interview with Trustnet last year, Lau explained that Taiwan is more export-oriented than the China A-share market, while Hong Kong is “well regulated, very transparent and quite mature”.
Performance of fund over 10yrs vs sector and benchmark
Source: FE Analytics
McDermott concluded: “These two approaches are complementary for several reasons. First, by combining a high-growth market like India with a potentially undervalued one like China, you diversify your portfolio's risk profile.
“India's aggressive growth potential can act as a counterweight to any stagnation in China's maturing economy. Conversely, China's value proposition offers a hedge against any downward corrections in India's potentially overheated market.”
Other fund managers are bullish on the prospects for Bank of Ireland, Unicredit and Deutsche Bank.
Terry Smith, manager of Fundsmith Equity, revealed he has found a bank in which he is considering investing at the fund’s latest annual general meeting.
This is a volte face, as the manager of the £25.4bn global equity open-ended fund has long shunned the banking sector.
Smith used to be a banking analyst but said as recently as last year that he categorially “never invest[s] in banks” because they have “massive leverage” and “inadequate returns”.
“Even if the bank you are invested in is well run it can still be damaged or destroyed by a general panic in the sector,” he wrote in the Financial Times shortly after the collapse of Silicon Valley Bank (SVB) in March 2023.
Smith also highlighted that banks are increasingly facing the threat of being disrupted by fintech companies.
Fundsmith declined to comment on Smith’s change of heart or to reveal which bank he is considering investing in.
Other managers are also taking a renewed interest in the sector.
Julian Bishop, co-lead portfolio manager of the Brunner Investment Trust, said many banks are in a much better shape than they were 10 years ago. He took the Irish market as an example as he recently added Bank of Ireland to his portfolio.
“Ireland has been dealing with a very tough crisis in its property sector. Whenever that happens, the banking sector gets into problems because they're financing it and the value of their collaterals collapses,” he said.
“When you get a crisis, the regulator is accused of being asleep at the wheel and has to up its game. It has to force banks to hold more capital, to de-lever, take less risk and improve their credit standards, etc.”
However, Bishop explained that the Irish banking sector has improved markedly since the European sovereign debt crisis.
“There were four main banks in the Irish market, but two of those have basically pulled out. So, the market structure has improved,” he said.
“At the macro level, household debt to GDP in Ireland was 93% 10 years ago versus 2.6% today. In 2013, non-performing loans were at 21%, while they are at 3.6% today. The capital ratio has improved from 9% in 2013 to 15% today.”
Performance of stock since listing
Source: FE Analytics
While Bank of Ireland was a loss-making company 10 years ago, it has been rebuilding its balance sheet and now boasts a return on tangible equity of 15%, according to Bishop.
He added: “Bank of Ireland has only been able to return about 6% of the current market cap over the past 10 years, but we think it can return over 40% of its market cap through dividends or share buybacks over the next three years. It’s an incredible return and a lot lower risk than it was in the past; that's absolutely worth considering.”
The Cashflow Solution team at Liontrust is also positive on banks in Europe, many of which have reported growth in their annual dividends and announced share buyback programmes.
Samantha Gleave, co-manager of Liontrust European Dynamic, holds Italian bank UniCredit. “It's enjoying a recovery in its earnings and there’s been quite a lot of self-help at that bank. It’s been prompted by the arrival of a new CEO a couple of years ago, who has taken out excess costs, rationalised the business and returned cash to shareholders,” she said.
Performance of stock over 5yrs
Source: Google Finance
Other bank holdings include Mediobanca, also from Italy, Banco Santander in Spain and Germany’s Deutsche Bank, which Gleave described as a “deep value play”.
She said: “Deutsche Bank is one of the few contrarian value stocks in the portfolio. It's trading on a very attractive valuation and the new CEO is engaged in a very significant cost restructuring programme.”
Performance of stock over 5yrs
Source: Google Finance
European banks proved their resilience last year during the banking crisis in the US, Gleave continued.
“One of the big differences between Europe and the US is that European regional banks have been heavily regulated since the global financial crisis, whereas regional banks in the US haven’t been. I think that is why the banking crisis that we've seen in the US didn't unfold in Europe,” she explained.
Two Schroders funds take the lead in the strategic and corporate bond sectors.
Bonds have been a tricky place for investors to make money over the past few years as rising interest rates have forced prices higher and left many funds nursing losses.
But with yields now higher than they have been for more than a decade, fixed income is viewed by many as an attractive option.
For those interested in the asset class, picking the right fund is imperative. To that end, Trustnet has looked at the three main Investment Association sterling bond sectors over five years, looking at their rolling 12-month returns. Overall there are 61 periods in total.
Schroders stood out for having delivered the most bang for investors’ bucks over that time. The asset management house topped the IA Sterling Strategic Bond and Sterling Corporate Bond sectors for funds with the highest average alpha, or the highest active returns generated on top of their benchmarks’ passive growth (beta).
Beginning in the strategic sector, the first up was a fund that stood out heads and shoulders from the crowd – the five FE fundinfo Crown-rated Schroder Strategic Credit, which had a remarkable average alpha of 21.78 measured against its benchmark, the ICE BofA Sterling 3-Month Government Bill index.
The strategy is a flexible, short-dated corporate bond fund managed by Peter Harvey, who focuses on the higher-quality end of sub-investment grade credit – historically resulting in an “attractive” income stream, according to Square Mile analysts.
“The mindset is one of minimising drawdowns, which is reflected in the manager's ‘cash plus’ performance target. To this end, the fund also has the flexibility to invest in bonds issued by governments or government agencies as well as investment grade bonds,” they said.
“The fund can suffer substantial volatility at times of credit stress, but Harvey, who has managed the fund since its launch in 2006, has proved himself adept at maintaining the fund's value over longer time periods and has delivered an impressive dividend profile on the fund.”
The current yield is 6.29% and in the past five years, the fund has returned 19.1%, 10 percentage points more than the average peer, as the chart below illustrates.
Performance of fund against sector and index over 5yr
Source: FE Analytics
It’s a big jump down to the next-best strategy, Royal London Sterling Extra Yield Bond, which had an average alpha of 5.36 against the FTSE Actuaries UK Conventional Gilts Over 15 Years index, but stood out for its higher yield of 6.9%.
More than 30% of its exposure is to unrated bonds, while the rest is predominantly on the lower investment-grade spectrum (B to BBB).
In the list, the strategy with the highest frequency of positive alpha was Invesco Sterling Bond, which avoided negative alpha territory in 53 of the 61 periods in consideration.
Source: FinXL
At the bottom of the table, Marks & Spencer High Income has an average alpha of -2.33 and failed to produce positive alpha in any month over the past five years. In the whole sector, four more strategies had negative average alphas – Man GLG Strategic Bond, Baillie Gifford Strategic Bond, Janus Henderson Strategic Bond and HL Multi Manager Strategic Bond, all of which are benchmarked against the sector average.
In the corporate bond space, it was again a Schroder fund to take the lead – the quality core investment-grade bond fund Schroder Sterling Corporate Bond managed by Daniel Pearson and Julien Houdain, which maintained a 2.89 average rolling alpha against the ICE BofA Sterling Corporate & Collateralized index.
The investment philosophy is based on the view that there are no shortcuts to producing returns and that in order to deliver exceptionally, the team needs to implement a disciplined, iterative process and employ Schroders’ “significant resources” as their “distinct advantage” over most of their competitors, RSMR researchers explained.
“Security selection and credit quality decisions within the framework of investment themes are typically more important drivers of excess returns than other factors. The mandate is wide-ranging and there are no positioning constraints relative to the fund’s benchmark index,” they said.
Source: FinXL
The second and third place are both Quilter’s, which stood out with its Corporate Bond and Investment Grade Corporate Bond funds, whose management is the responsibility of Premier Fund Managers and Invesco Asset Management, respectively.
Pimco Asset Management didn’t shine, with two of its strategies among those with the worst average alphas.
Moving over to high-yield, only two funds had an average alpha greater than 1 - GS Europe High Yield Bond Portfolio (2.46 against the ICE BofA European Currency High Yield Constrained Hedge GBP index) and Aegon High Yield Bond (1.23 against the sector average).
The former is a €131.5m vehicle led by Fiona Macnab, who is focused on sub-investment grade bonds primarily issued by European companies; the latter has “consistently impressed” Square Mile analysts for “the acumen of comanagers Tom Hanson and Mark Benbow and the active mantra they pursue within the fund,” they said.
“We view this as a higher risk option within the IA Sterling High Yield sector, as, the managers employ a high conviction strategy, with a focus on taking on credit risk where it is rewarded.” It currently yields 7.21%.
Source: FinXL
M&G Global High Yield Bond, Baillie Gifford High Yield Bond and Royal London Global High Yield Bond were the bottom three.
IA Sectors previously in this series: UK Equity Income, UK All Companies, Global, Global Equity Income.
Elliott Investment Management has disclosed a 5% stake in the investment trust.
The activist investor building a stake in Scottish Mortgage may well be aiming to stop the investment trust from pouring money into “bonkers ideas” but some analysts believe this could be the wrong move at the wrong time.
Elliott Investment Management, a prominent US investment firm known for its activist approach in influencing company management to unlock shareholder value, recently disclosed a 5% position in Scottish Mortgage.
This has led to speculation about the firm’s intention for the investment. Scottish Mortgage has very strong long-term track record, but as can be seen in the chart below, has struggled in recent years as higher interest rates weighed on growth stocks.
Performance of Scottish Mortgage vs sector and index over 20yrs
Source: FE Analytics
The trust unveiled a massive share buyback plan to narrow the discount on 15 March 2024. Its share price leapt as a result, narrowing the discount to its underlying assets from circa 13-15% to 8%.
Of course, this could be the simple explanation for Elliott’s holding – to profit from a narrowing discount – but it may also have more activist designs.
Dan Coatsworth, investment analyst at AJ Bell, said: “Part of Scottish Mortgage’s share price weakness was down to the rising interest rate environment as that negatively affected valuations of companies where the story is more about future cash flow than jam today. But as the share price fell, there were also suggestions that Scottish Mortgage had been taking too many wild bets on blue-sky companies, ones that had an idea but were miles off making any money.
“It is feasible to suggest that Elliott could call on Scottish Mortgage to focus more on companies that already generate profit or at least have a growing revenue stream rather than simply a concept. That could spell an end to the bonkers ideas which Scottish Mortgage previously bought into, such as flying taxis and 3D-printed rockets. Having fewer unquoted stocks would mean in theory that its portfolio has more liquidity, should it need to exit any positions quickly.”
That said, Coatsworth suggested Scottish Mortgage and its manager Baillie Gifford would be reluctant to “fiddle” with an investment process that has successfully delivered for investors over the long run.
While critics might point out that this past performance was in an investment environment dominated by ultra-low interest rates, the trust can counter this with the argument that private valuations have come under pressure and this has created the opportunity to hunt for more bargains.
Meanwhile, some believe that private companies are becoming more confident about floating on a stock market – as demonstrated by the recent successful listing of social content website Reddit.
“Scottish Mortgage’s model is built around backing high-risk, early-stage ideas. If it reduced unquoted exposure and focused on more profitable businesses there is a danger it could get lost in the crowd of generic tech funds and trusts,” Coatsworth concluded.
“Perhaps what it needs to do is better communicate the risks associated with the trust and make it clear that it is prepared to make bold decisions in the hope of achieving outsized returns. Investors need to understand what they are buying, particularly as there is a fear that many don’t appreciate it could experience more setbacks than a bog-standard equity fund.”
Jupiter’s Pidcock: Australia is ‘ridiculously under the radar’ and gets overlooked out of ‘laziness’.
Getting out of China before its stock market collapse and going overweight India have helped the £1.5bn Jupiter Asian Income fund to outperform over the past few years.
Jason Pidcock, head of strategy, Asian income at Jupiter Asset Management, has helmed the fund since its inception, leading it to top-quartile performance over one, three and five years.
Below he tells Trustnet why he wishes he had even more tech, how other investors are too lazy to look at Australia and why he doesn’t invest in China.
Performance of fund vs sector since inception
Source: FE Analytics
What is your investment process?
We are top-down, so we think carefully about which countries we comfortable investing in and then which sectors; after that we try to pick the best companies.
We then think about the political system and demographics, which are very different throughout the region, as well as liquidity. That leaves us with five preferred countries: Australia, Taiwan, India, South Korea and Singapore, in order of the size of our allocation.
The idea of the fund is that it will generate superior total returns over time and income will be a significant part of that. We do say the fund will always yield 20% more than the benchmark so we want companies that have an ability, as well as a willingness, to pay dividends.
How should investors use your fund?
A lot of investors use it as a core Asian fund. It has enough diversification that you don’t necessarily need anything else. Some investors use it to reduce their overall weighting to China. Others own it because they like the income story.
The strategy has a low beta so it has typically outperformed when markets have fallen and it often has a shallower drawdown. Because of that, we always keep it fully invested. Even if we're feeling relatively cautious on markets in the short term, we ought to outperform if markets do fall, so we are never tempted to run up a large cash position.
Why don’t you invest in China?
We've been underweight China for many years. We entered July 2022 with only 6% of the fund in three Chinese stocks. That was the month when the heads of the UK and US security services made an unprecedented joint statement sending a message that they see China as our political foe. That was something we couldn't ignore.
Sure enough, three months later in October 2022, the US started implementing its restrictions on technology sales to China. They basically gave us a three-month warning. We took notice of that warning. We don't think anybody else did. And since then, China has underperformed significantly.
Where did you invest instead?
The flip side of taking money out of China meant that we had more money to invest elsewhere so we actively topped up India and Indonesia. As China kept falling, those markets were rising, so we feel that it has served clients well.
Going forward, there will be times undoubtedly when China has trading rallies, but in the past 30 years, whenever China has had a trading rally, it hasn't lasted that long and it's given most of it back afterwards. In the past 30 years in US dollar terms, returns from China have been dreadful. It's one of the worst performing markets in the world.
What’s your largest sector exposure?
We have a 30% exposure to technology, having added to it in January 2024, and with hindsight I wish I’d put more in tech. There will be an enormous replacement cycle for all types of technology as they get upgraded to artificial intelligence (AI) compatible versions. Asian companies will be at the forefront of that.
Why is Australia your largest market?
Australia accounts for 28% of the fund and has many large, liquid companies with good corporate governance paying attractive dividends.
Australia is ridiculously under the radar given how big an economy and a market it is. Australia is the only market that's come close to matching the returns of the US since the year 1900, yet global and Asian investors tend to shun it, I think, out of laziness.
People dismiss it as being a commodity-linked economy. Its biggest chunk of exports are commodities but it has a great variety of them and their prices do not all move in sync.
The biggest reason we invest in Australia is demographics. It has got one of the fastest growing populations in the world, faster even than India in percentage terms, because of high immigration.
What have been your best investments recently?
Semiconductor company MediaTek was one of our best performers last year and year to date, and it is one of our biggest holdings. Last year its total return was 71.7% versus 25.1% for the Taiwan Stock Exchange, in sterling terms. MediaTek sells more chips for smartphones than any other company by volume.
Taiwan Semiconductor Manufacturing Company (TSMC) has been phenomenal. TSMC is an essential supplier to Nvidia and their share prices are correlated. Apple is another huge customer.
TSMC is not expensive; it trades at a consensus forecast 2025 price to earnings (P/E) ratio of 16.5 times compared with Nvidia on 36.6 times, according to Bloomberg. TSMC’s valuation is lower than it otherwise would be, were it not for Taiwan’s political risk. Its shares are trading in New York on a 20% premium over the Taiwan-listed stock which we own. Year-to-date, TSMC shares are up 27.3% in sterling terms.
The fund’s largest holding, Hon Hai Precision in Taiwan, is up 30.7% year-to-date in sterling terms, versus 8.2% for the Taiwan Stock Exchange. Hon Hai (known as Foxconn internationally) is the largest electronic contract manufacturer in the world and the largest manufacturer of servers, and its sales are increasing significantly because of AI.
Which stocks have detracted from performance?
HDFC Bank in India has been a great long-term performer but it recently de-rated. Investors have gravitated towards cheaper, lower-quality banks. Last year, HDFC’s total return was flat whereas the Sensex index rose 13.3%, according to Bloomberg.
Dexus, a real estate and infrastructure manager in Australia, and Link REIT in Hong Kong have been detractors. With hindsight we should have sold out in 2019, if I’d known Covid was coming. Dexus returned 0.6% last year versus 8.3% for the AS51 index in sterling terms. Meanwhile, Link REIT lost 20.9% while the Hang Sang index fell 15.2%.
Thai beverage is our smallest holding. Tourism hasn’t recovered as fast as we’d hoped so beverage sales haven’t picked up.
What do you do outside of fund management?
I spend my weekends walking my three dogs and managing the woodland that I own. There are always things to do; branches fall down, fences need repairing and dog proofing.
The information contained within this website is provided by Web Financial Group, a parent company of Digital Look Ltd. unless otherwise stated. The information is not intended to be advice or a recommendation to buy, sell or hold any of the shares, companies or investment vehicles mentioned, nor is it information meant to be a research recommendation.
This is a solution powered by Digital Look Ltd incorporating their prices, data, news, charts, fundamentals and investor tools on this site. Terms & Conditions. Prices and trades are provided by Web Financial Group and are delayed by at least 15 minutes.
© 2024 Refinitiv, an LSEG business. All rights reserved.
Barclays Investment Solutions Limited provides wealth and investment products and services (including the Smart Investor investment services) and is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange and NEX. Registered in England. Registered No. 2752982. Registered Office: 1 Churchill Place, London E14 5HP.
Barclays Bank UK PLC provides banking services to its customers and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register No. 759676). Registered in England. Registered No. 9740322. Registered Office: 1 Churchill Place, London E14 5HP.