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IC Top 100 funds 2013

Using performance and fees data, along with other factors such as the tenure of the manager and consistency of returns, Moira O'Neill picks her top 100 actively managed funds
IC Top 100 funds 2013

There are 2,500 open-ended funds available for sale in the UK, plus another 400 or so investment trusts. The choice is daunting. That's where our Top 100 Funds comes in - we have done the work for you.

We are not remunerated for inclusion by the companies behind our Top 100 Funds. Our selections are completely independent. See the introduction for more on how we chose the funds.

We have provided the TIDM codes for investment trusts, plus the ISIN codes for the open-ended funds. For consistency’s sake, we have used the retail accumulation share classes where possible. However, if you are an income seeker you may want to buy income share classes. Or if your platform does not offer the share class I have specified you may want to use another one.

Bear in mind that it's very rare for a fund manager to beat a benchmark consistently across the investment cycle. Some funds in this list will race ahead when times are good, but fall sharply when markets take a tumble. Others will preserve value in tough times, but lag benchmarks in stock market booms. So think about the timing of your purchases. Buy into market dips and trim your holding in a fund after it has had a good performance run - or in the case of investment trusts is trading at a significant premium.

You can view our Top 100 Funds selection from 2012 here.

 

View the investment trusts that made it into our Top 100 Funds 2013 in Excel.

View the investment trusts that made it into our Top 100 Funds 2013 as a PDF.

 

MONEY MARKET FUNDS

Money market funds use their bulk buying power to get better rates of interest from bank deposit accounts. A cash investment tends to be seen as a far lower-risk, lower-return option than bonds or equities. It can be a useful tool for highly risk-averse investors, or as a temporary home for your money in between longer-term decisions. It is not aimed at investors who are seeking long-term capital growth. Investors in money market funds may lose out to inflation or, in the worst-case scenario, suffer capital losses.

Here are two money market funds that we like. They do not make good returns relative to other fund sectors, but they are not meant to - their purpose is to preserve rather than grow your assets.

Changes: We trimmed this selection from three funds to two to allow us to introduce extra income ideas.

Fidelity Cash Fund (ISIN: GB0003330528) is one of the largest and longest running money market funds. It offers a high level of security, but its low-risk approach means its yield is lower than some of its peers. The objective is to maintain capital value while producing income. It invests in money market instruments, other short-term investments and transferable securities. The fund may invest in derivatives for the purposes of efficient portfolio management, although is unlikely to do so.

Premier UK Money Market Fund (ISIN: GB0007061152) aims to provide a return in line with money market rates while maintaining its capital value. It doesn’t take excessive risks. It invests in UK deposits and short-dated money market instruments. It may also invest in other deposits and money market instruments, transferable securities, collective investment schemes, bonds, warrants, cash and near cash. The fund may also borrow and may enter into stocklending and underwriting arrangements.

You can read more about money market funds here.

 

BOND FUNDS

Most investors should have a portion of their portfolio allocated to fixed income in the form of government or corporate bonds - especially if income is your objective. We think strategic bond funds are the best one-stop option for your bond exposure, as they have the ability to invest across the spectrum of bonds, both government and corporate, depending on market conditions.

A downside to the broad investment mandate of strategic bond funds is that they can be very different to each other in terms of underlying investments and risk. Strategic bond funds can also make use of derivatives such as swaps for protection and asset allocation, as well as extra hedging. Plus some have the ability to allocate a portion of the portfolio to equities – so if you want pure bond exposure double check the strategy and holdings.

Changes: Following concerns about liquidity in the bond markets we have dropped a couple of the bigger bond funds from the list - M&G Corporate Bond fund and M&G Strategic Bond fund. This also reduces our bond fund list’s reliance on one fund manager - M&G. We have also dropped Investec Monthly High Income in favour of some alternative income sources in this area.

Advisers are increasingly directing investors to non-traditional sources of alternative fixed income. These include investment trusts that invest in forms of debt other than corporate and government bonds – for example, corporate loans and asset-backed securities (ABS). We have introduced a couple of funds in this space. It’s also important to point out that investors who want to do their own bond allocation can use the now much wider range of exchange-traded funds in this area.

M&G Optimal Income (ISIN: GB00B7FM9R94) is a fully flexible bond fund, allowing investment across a broad range of fixed-income assets according to where the fund manager, M&G’s bond guru, Richard Woolnough, identifies value. It is a very large fund and, although it will be at least 50 per cent invested in debt instruments, Mr Woolnough may also invest in other assets, including collective investment schemes, money market instruments, cash, near cash, deposits, equities and derivatives. Derivative instruments may be used for both investment purposes and efficient portfolio management. Fund profile here.

Legal & General Dynamic Bond Trust (ISIN: GB00B1TWMM97) aims to provide a combination of income and growth and has a very experienced manager in Richard Hodges. It will invest between 80 per cent and 100 per cent in bonds and/or derivatives and/or cash. The bonds that the fund invests in may be investment-grade (rated as lower risk) or sub-investment-grade (rated as higher risk). The bonds held may be issued by companies or governments and may be issued in the UK or overseas. Fund profile here.

Henderson Strategic Bond (ISIN: GB0007495293) aims to provide a return by investing in higher-yielding assets including high-yield bonds, investment-grade bonds, government bonds, preference shares and other bonds. The fund may also invest in equities. It is managed by fixed-income veteran John Patullo, who is also Henderson's head of retail fixed income. Fund profile here.

NEW ENTRANT: Jupiter Strategic Bond (ISIN: GB00B2RBCS16) has built up a good track record under the management of Ariel Bezalel. A new entrant to the Top 100 Funds, the fund aims to achieve a high income with the prospect of capital growth, by seeking out the best opportunities within the fixed-interest market globally. This is achieved via investment in assets including high-yield bonds, investment-grade bonds, government bonds, preference shares and convertible bonds. The fund doesn’t use derivatives for investment, but does use them for efficient management of the portfolio, for example, to hedge exposure to euro-denominated bonds back into sterling. Fund profile here.

M&G UK Inflation-linked Corporate Bond Fund (ISIN: GB00B7FV9F40) invests in a spread of fixed-interest securities that should perform well when inflation is high or rising. The fund aims to protect the value of capital and income from inflation by generating a return consistent with or greater than UK inflation over the medium to long term. Fund profile here.

M&G International Sovereign Bond (ISIN: GB00B7J76C49) invests primarily in investment grade sovereign debt securities denominated in the currencies of the major industrialised nations, with the exception of the UK. The fund may also invest in other assets, including government and public securities, collective investment schemes, other transferable securities, other debt instruments, cash and near cash, deposits, warrants, money market instruments and other derivative instruments. It aims to maximise total return and was shortlisted for Best Bond Fund at our Fund Awards 2012. Fund profile here.

Kames High Yield Bond (ISIN: GB0031425233) aims to maximise total return (income plus capital) by investing in a portfolio of predominantly high-yield bonds, selected investment-grade bonds and cash. The fund may also hold sterling and other currency-denominated bonds hedged back to sterling. It has a more aggressive investment approach than some other high-yield bond funds. Fund profile here.

New City High Yield Fund (NCYF) is one of the longest established trusts focusing on debt. It aims to provide investors with a high gross dividend yield and the potential for capital growth by investing in high-yielding fixed-interest securities. Fund profile here.

NEW ENTRANT: NB Global Floating Rate Income (NBLS) launched in April 2011 and targets senior corporate loans. It aims to provide shareholders with regular dividends, at levels that are sustainable, while growing the capital value of its investment portfolio over the long term by mainly investing in floating rate senior secured loans. Fund profile here.

NEW ENTRANT: Henderson Diversified Income (HDIV) aims to provide shareholders with a high level of income and capital growth over the long term by investing selectively across fixed-income asset classes, including secured loans, high-yield and investment-grade corporate bonds. It has performed strongly in recent years as investor appetite for yield has resulted in a recovery in loan prices. The fund is managed by John Pattullo and Jenna Barnard, who run a number of successful open-ended bond funds at Henderson, including another IC Top 100 Fund, Henderson Strategic Bond. Fund profile here.

 

WEALTH PRESERVATION

For most investors, preserving their hard-earned assets is a priority. Many funds with 'cautious' in their name have lost investors money, plus many so-called 'absolute return' funds have not lived up to their names. So you have to tread carefully. Our selection of five funds that we think stand the best chance of preserving your capital has not changed from last year:

RIT Capital Partners (RCP) is an investment trust that invests globally across a wide range of assets to prioritise preserving investors' capital over profit maximisations. Fund profile here.

Personal Assets Trust (PNL) is a global investment trust that has been very successful at limiting the downside. Its cautious approach means performance can lag when markets are rising, but long-term performance has been strong. The fund aims to protect and increase shareholders' funds over the long term and uses the FTSE All-Share index as its comparator for the purpose of monitoring performance and risk. Fund profile here.

Newton Real Return (ISIN: GB0001642635) is one of the few absolute-return funds that has delivered on its goals. It delivered positive returns even during the financial crisis in 2008. It invests predominantly in a portfolio of UK and international securities. But it may also invest in deposits, money market instruments, derivative instruments, forward transactions and collective investment schemes. Fund profile here.

Ruffer Investment Company (RICA) is conservatively managed but has delivered well on its investment objective. It looks to generate annual absolute returns after all expenses of more than twice the Bank of England’s base rate through investing in internationally listed securities and bonds. The fund won Best Global Growth Fund at the IC Fund Awards 2013. Fund profile here.

Invesco Perpetual Distribution (ISIN: GB00B1W7J089) aims to achieve a balance of income and capital growth through a portfolio of primarily UK equity and fixed-interest securities. In pursuing this objective, the fund managers may include investments that they consider appropriate, which include transferable securities, money market instruments, warrants, collective investment schemes and deposits. It is cautiously managed, employing the talents of Invesco Perpetual’s fixed-interest team, comprising Paul Causer and Paul Read, together with Neil Woodford covering UK equities. Fund profile here.

 

Kames High Yield Bond can hold sterling and other currency-denominated bonds hedged back to sterling.

 

UK EQUITY INCOME FUNDS

Dividends are important for equity investors seeking income. But for growth investors they can also be reinvested to boost growth over time, so UK equity income funds can be used as core holdings. Investors with large direct holdings in FTSE 100 companies should watch any overlap with their existing portfolio.

We've tried to avoid equity income funds with a list of top 10 holdings that reads too much like the top income payers in the FTSE 100 index.

Changes: We have dropped Trojan Income Fund as it has soft-closed to investors, with a raised minimum investment and an initial charge of 5 per cent. We have also dropped Artemis Income which is a good reliable fund but we felt that there were better opportunities elsewhere in funds that investors would struggle to replicate themselves, such as new entrants Fidelity Enhanced Income and Lowland Investment Company.

NEW ENTRANT: Fidelity Enhanced Income (ISIN: GB00B3KB7799) is a traditional, defensive UK equity income fund with a similar composition to the Invesco Perpetual Income and High Income funds. But it is smaller and more nimble than these huge funds. It also uses a covered calls derivative strategy whereby the fund can boost its yield to around 7 per cent by forgoing some potential future capital growth in exchange for a higher level of income. Fund profile here.

Schroder Income Maximiser (ISIN: GB00B0HWHK75)'s objective is to provide income with potential for capital growth primarily through investment in equity and equity-related securities of UK companies. The fund will also use derivative instruments to generate additional income. The portfolio is made up of UK equities along with a covered call strategy. The fund regularly enters into contracts under which it effectively agrees to exchange the profit on any stock exceeding a level of, say, for example, 10 per cent, for an agreed fee. This premium is used to boost the income on the fund. Fund profile here.

Unicorn UK Income (ISIN: GB00B9XQFY62) has delivered strong returns by hunting in the UK smaller company universe for high dividend yields. It aims to provide a high and rising income from a portfolio of UK equities and to deliver a gross yield at least 10 per cent greater than the yield produced by the FTSE All-Share Index. Fund profile here.

Acorn Income Fund (AIF) targets income and capital growth, by investing primarily in smaller UK companies. It has the management talent of John McClure, who also manages Unicorn UK Income. The portfolio is split 80 per cent in equities and 20 per cent in fixed interest. The fund also has high levels of gearing, making it a high-risk choice. Fund profile here.

City of London Investment Trust (CTY) aims for long-term growth in income and capital from a broad spread of large blue-chip and medium-sized UK-listed companies – plus it has scope to invest in overseas stocks. It is managed conservatively and is noted for having the longest record of raising dividends among all investment trusts. Despite concerns that it is too ‘index-like’ it is good for those wanting predictability of income and returns. Earlier in 2013 it removed its performance fee, making it a very cheap option. Fund profile here.

NEW ENTRANT: Lowland Investment Company (LWI) is a highly volatile fund, but over the long term it has made very strong cumulative returns as well as some income. It aims to give shareholders a higher than average income return with growth over the medium to long term from a portfolio of UK equities. Fund profile here.

Murray Income Trust (MUT) aims to achieve a high and growing income combined with capital growth through investment in a portfolio primarily of UK equities, with some small exposure to overseas equities. It invests in good-quality household-name companies with strong competitive positions and balance sheets, boasts an experienced board and “is conservative, with a small c”. Fund profile here.

Perpetual Income & Growth (PLI) is a dividend hero for income investors. It aims to provide shareholders with capital growth and real growth in dividends over the medium to longer term in the UK equity and fixed-interest markets. It is managed by Mark Barnett, a senior member of Invesco Perpetual's UK team. Fund profile here.

 

OVERSEAS EQUITY INCOME FUNDS

We believe that investors should diversify their income sources and reduce their reliance on UK dividends. For example, Asia and North America are good hunting grounds for income-seekers.

Changes: We have introduced three more funds that invest for income on a global basis.

M&G Global Dividend (ISIN: GB00B39R2L79) aims to deliver a dividend yield above the market average, by investing mainly in a range of global equities. It aims to increase distributions over the long term while also maximising total return (the combination of income and growth of capital). The fund's exposure to global equities may be gained through the use of derivatives and it may invest across a wide range of geographies, sectors and market capitalisations. Fund manager Stuart Rhodes chooses companies on their merits rather than by sector or geography. Fund profile here.

NEW ENTRANT: Newton Global Higher Income (ISIN: GB00B5VNWP12). The fund's objective is to achieve increasing annual distributions, together with long-term capital growth from investing predominantly in global securities. It focuses on sustainable dividends, reinforced by its strict yield discipline, which Newton says has given it notable resilience in difficult market conditions. Fund profile here.

NEW ENTRANT: Lazard Global Equity Income (ISIN: GB00B24DPX62) aims to generate substantial income as well as long-term capital growth. It invests in global securities, seeking to diversify its income stream through exposure to a portfolio of high-yielding securities, primarily comprising equities, a proportion of which may be in emerging markets. Fund profile here.

NEW ENTRANT: Threadneedle Global Equity Income (ISIN: GB00B1YW3W13) aims to achieve a high and growing income over the long term combined with prospects for capital growth. The investment policy is to invest no less than two-thirds of the gross assets of the fund in global equities. Income will be in the form of dividend distribution. The managers also have the ability to invest up to one third of the total assets of the fund in derivatives, forward transactions and other securities (including fixed interest securities and money market securities) deposits and cash. Fund profile here.

Newton Asian Income (ISIN: GB00B0MY6Z69) offers income and growth from Asia Pacific non-Japanese equities. It may also invest in collective investment schemes and has one of the longest track records among income funds focused on the Asia Pacific ex-Japan region. Fund profile here.

Aberdeen Asian Income Fund (AAIF) aims to provide investors with a total return, primarily through investing in Asia Pacific securities, including those with an above-average yield. It has a very good performance record, but often trades at a premium to the underlying net asset value. Fund profile here.

JP Morgan US Equity Income (ISIN: GB00B3FJQ045) aims for long-term capital growth as well as income from the world's largest economy. The fund is managed by Clare Hart and Jonathan Simon out of New York.

NEW ENTRANT: Middlefield Canadian Income (MCT). If you're looking for both a new source of income and a relatively safe haven then consider the attractions of Canada via this investment trust. It aims to provide shareholders with a high level of dividends and capital growth over the longer term, by investing in companies and real estate investment trusts (Reits) domiciled in Canada. Fund profile here.

 

UK EQUITY GROWTH

Many investors choose to stick with what they know best - their home market. Here are some funds that are working hard to boost their investors' capital by investing in UK companies.

Changes: We've dropped M&G Recovery as its performance record has become less impressive in recent years and the fund has become very large. We've added four new funds to the sector.

Edinburgh Investment Trust (EDIN) aims to achieve capital growth that exceeds the FTSE All-Share index and dividend growth that exceeds the UK inflation rate. We think it is the best way to access the talents of Invesco Perpetual’s star manager, Neil Woodford. It is a good core holding and is cautiously managed. However, it could equally sit in the UK Equity Income section as it is a good source of income. Fund profile here.

Liontrust Special Situations (ISIN: GB00B0N6YF70) is a growth fund that invests primarily in a concentrated portfolio of medium-sized and smaller UK companies’ shares. The managers look for three key qualities in the companies they buy. The first is intellectual property in the form of patents, branding and copyrights, all of which enhance pricing power beyond other companies, they argue. The second is a strong distribution network - as these are valuable and difficult to replicate. And the third is high contracted recurring revenue - they want 70 per cent of income to come from regular contracts. They won’t consider a stock unless they have at least one of these qualities and their best stocks possess all three. Fund profile here.

Marlborough UK Micro Cap Growth (GB00B02TPH60) aims to provide a total return of capital and income in excess of that achieved by the FTSE SmallCap Index (excluding investment companies) over the medium to long term. It invests primarily in UK companies that have a market capitalisation of £250m or less at the time of purchase. A considerable proportion of the portfolio will be invested in smaller companies with a market capitalisation of less than £150m at the time of purchase. Managed by Giles Hargreave, the fund was shortlisted in the Best UK Equity Growth Fund category at the IC Fund Awards 2012. Fund profile here.

Standard Life UK Smaller Companies Trust (SLS) aims to achieve long-term capital growth through investing in small UK quoted companies. It is managed by Harry Nimmo, one of the best small company fund managers, and was shortlisted for Best UK Equity Growth Fund at the IC Fund Awards 2013. Fund profile here.

BlackRock Smaller Companies Trust (BRSC) aims to achieve long-term capital growth for shareholders through investments mainly in smaller UK quoted companies. Its manager, Mike Prentis, is highly regarded in the industry and the trust’s track record is impressive. It was shortlisted for Best UK Equity Growth Fund at the IC Fund Awards 2013. Fund profile here.

NEW ENTRANT: Henderson Smaller Companies Investment Trust (HSL). Launched in 1887, the trust has been managed by Neil Hermon since 2002. It aims to maximize shareholders’ total returns by investing in smaller companies quoted in the UK. It won Best UK Equity Growth Fund at the IC Fund Awards 2013 for its strong performance and excellent communications to investors. Fund profile here.

Finsbury Growth and Income Trust (FGT) favours undervalued companies with strong brands or powerful market franchises, looking for attributes such as the ability to prosper through business cycles for many years; grow earnings every year; and generate earnings growth without making heavy balance sheet investment. Fund manager Nick Train holds shares for the long term regardless of short-term volatility, aiming for a doubling or more in value over time. This results in extremely low portfolio turnover, which saves on transaction costs and has contributed to excellent performance. It won Best UK Equity Income Fund at the IC Fund Awards 2013 because we felt it had delivered a clear message to investors and had given excellent value for money in terms of performance. Fund profile here.

NEW ENTRANT: Capital Gearing Trust (CGT) aims to achieve capital growth in absolute terms through investments in closed-end funds and other investment vehicles. It invests in equities or property, with a willingness to hold cash, bonds, index linked securities and commodities when appropriate. It was shortlisted for Best UK Equity Growth Fund at the IC Fund Awards 2013.

NEW ENTRANT: Old Mutual UK Mid Cap Fund (ISIN: GB00B1XG7999) is one of the best-performing UK equity funds from the UK Equity Income and UK All Companies fund sectors over the past decade. It aims to provide capital growth from investing primarily in a portfolio of medium-sized UK companies. Medium-sized companies are defined as those companies on the FTSE Mid 250 Index. Typically at least 80 per cent of the invested assets will be held in companies meeting this definition. Fund profile here.

NEW ENTRANT: Ecclesiastical UK Equity Growth (ISIN: GB0008445982) is a multi-cap UK equity fund that has a bias to small and mid-cap stocks, around 50 per cent of the fund. It aims to achieve long-term capital growth with a reasonable level of income. The fund’s manager, Andrew Jackson, believes that small- and mid-caps are an important source of under-researched and undervalued opportunities. This fits his approach of looking for out-of-favour or undervalued investments, which can demonstrate a distinct and sustainable competitive advantage. Fund profile here.

 

GLOBAL GROWTH

A good global growth fund can be a core holding for your portfolio. Global funds have the greatest potential for growth as they can find opportunities in all parts of the world.

Changes: We have dropped M&G Global Basics fund from the list because performance had not been great. We have also dropped Cazenove Multi-Manager Diversity because we wanted to reduce the list’s reliance on multi-manager funds. In their places, we have introduced Law Debenture Corporation and Fundsmith Equity Fund.

Murray International (MYI) is an investment trust with a joint goal of achieving income and capital growth through investments predominantly in worldwide equities. The views of fund manager Bruce Stout have proved prophetic and have been a key driver of performance. The trust won Best Global Income Fund at the IC Fund Awards 2012 and again at the IC Fund Awards 2013, where we said it was "the clear winner on cost and performance". Fund profile here.

British Empire Securities & General (BTEM). The trust's manager - John Pennink since 2002 - has a clear focus to invest in undervalued assets on a global basis. He favours companies with little or no debt and relatively low volatility in their share price, as well as tangible fundamental value. Fund profile here.

F&C Global Smaller Companies Investment Trust (FCS) is the only investment trust to specialise in smaller company investment on a global basis. It has a focus on identifying undervalued companies with strong growth potential and has an excellent performance record. It won the hotly contested Best Global Growth Fund category at the IC Fund Awards 2012 and was shortlisted in the same category at the IC Fund Awards 2013. Fund profile here.

Scottish Mortgage Investment Trust (SMT) is a high-conviction global portfolio targeted at growth stocks. The trust aims to maximise total return, while also generating real dividend growth, from a focused and actively managed global portfolio. The company aims to achieve greater returns than the FTSE All World Index (in sterling terms) over a five-year rolling period. It also has very low costs. Fund profile here.

Unicorn Mastertrust (ISIN: GB0031218018) is an open-ended fund that invests for growth in a globally diversified portfolio of investment trusts – a good introduction to investing in the investment trust sector. Fund profile here.

F&C Managed Portfolio Growth (FMPG) is another investment trust that invests for growth in a globally diversified portfolio of investment trusts – making it an easy way into the investment trust sector. Fund profile here.

Lindsell Train Investment Trust (LTI) has a global mandate but runs a concentrated equity portfolio of between eight and 25 holdings. It also holds a 25 per cent stake in its parent fund management company, Lindsell Train. Fund manager Nick Train likes to invest in well-known consumer brands. Fund profile here.

NEW ENTRANT: Law Debenture Corporation (LWDB) is an independently run investment trust managed by James Henderson of Henderson Global Investors. The trust aims to achieve long-term capital growth in real terms and steadily increasing income growth through globally and industrially diverse equities, but has a large proportion invested in the UK. The trust is also a leading provider of independent fiduciary services. It was shortlisted for Best Global Growth Fund at the IC Fund Awards 2013.

NEW ENTRANT: Fundsmith Equity Fund (ISIN: GB00B4LPDJ14) is managed by Terry Smith and invests in a concentrated portfolio of between 20 and 30 companies on a global basis. The fund aims to be a long-term investor in its chosen stocks, which are high-quality businesses with advantages that are difficult to replicate. It will not adopt short-term trading strategies. Its performance has been good since launch in November 2010. Fund profile here.

 

NORTH AMERICA

We struggled to find funds that invest in large-cap US equities and beat the index. However, there are a couple of good actively managed investment trusts in the US smaller companies space.

Changes: We've dropped JP Morgan American investment trust (JAM) as we felt it hadn't added a great deal of value over recent years. Instead, we recommend that investors use a low-cost exchange traded fund for US large-cap exposure.

F&C US Smaller Companies (FSC). Fundamental research and company analysis lies at the heart of this trust’s portfolio. The fund’s manager, Robert Siddles, seeks to exploit the entrepreneurial spirit of small and mid-sized companies listed in the USA. With a highly defined and rigorously applied investment philosophy and process, he aims to focus on quality long-term investments that have delivered a solid track record. Fund profile here.

NEW ENTRANT: JP Morgan US Smaller Companies Investment Trust (JUSC) provides access to potentially faster-growing smaller US stocks. The fund’s management team seeks out companies that have a sustainable competitive advantage and are run by competent management teams with a record of success and that are good stewards of capital. They also focus on owning equity stakes in businesses that trade at a discount to their intrinsic value. Fund profile here.

 

 

JAPAN

Japan is a major economy so a balanced portfolio would have some exposure.

Changes: We've dropped Schroder Japan Growth because we felt its remit was too similar to Baillie Gifford Japan Trust and have introduced a second Baillie Gifford fund that focuses on smaller companies instead.

GLG Japan Core Alpha (ISIN: GB00B0119933) is a sound choice for getting core Japan exposure into your portfolio. It boasts a sturdy and proven process and an accomplished management team. The fund’s manager Stephen Harker invests in large cap Japanese companies with a contrarian strategy and focus on value. Fund profile here.

Baillie Gifford Japan Trust (BGFD) aims to pursue long-term capital growth principally through investment in medium to smaller sized Japanese companies which are believed to have above-average prospects for growth. It has a good reputation and a decent track record. Fund profile here.

NEW ENTRANT: Baillie Gifford Shin Nippon (BGS) aims to achieve long-term capital growth, principally through investment in small Japanese companies believed to have above-average prospects for capital growth. Fund profile here.

 

A balanced portfolio needs some exposure to Japan.

 

EUROPE

Europe has been a no go area for many investors because of its sovereign debt problems and the perception that it does not offer good returns. But there are still some good opportunities over on the continent. These are the three funds that we think are best positioned to benefit.

Jupiter European Opportunities Trust (JEO) is a good way to access smaller companies. Fund manager Alexander Darwall describes himself as a "pan-European investor". He takes a bottom-up approach to stock selection, focusing on the company rather than the country it is domiciled in or – for that matter – the market it is listed on. Fund profile here.

Fidelity European Values (FEV) aims to achieve long-term capital growth from a concentrated portfolio of between 50 and 60 Continental European stock markets. The fund's manager seeks companies based on their prospects for producing dividends and dividend growth as this indicates steady structural growth. The portfolio will generally have low turnover with a typical holding period of three to five years. Fund profile here.

NEW ENTRANT: European Assets Trust (EAT). This investment trust aims to achieve growth of capital through investment in a diversified portfolio of quoted small and medium-sized growth businesses in Europe, excluding the UK. A high distribution policy has been adopted and dividends have been paid mainly out of capital reserves. The manager picks high-quality businesses with high and sustainable returns on capital that are backed by strong balance sheets. He also looks for companies run by management with strong track records in capital allocation and that trade in industries with high barriers to entry. Fund profile here.

 

ASIA

Asia is a region full of opportunity and the arguments for investing in Asian equities remain compelling – for example, the growth of middle-class consumers in India and China, or the existence of well-established companies in Singapore and Korea with large exposure to the budding markets of Indonesia, Vietnam and Thailand. Many funds invest across Asia while excluding investment in Japan. We have added one fund to our selection.

Aberdeen Asian Smaller Companies Investment Trust (AAS) aims to maximise total return to shareholders over the long term from a portfolio of smaller quoted companies in the economies of Asia and Australasia, excluding Japan. It has a successful fund manager in Hugh Young, good performance and a proven investment process. Fund profile here.

First State Asia Pacific Leaders (ISIN: GB0033874214) aims to achieve long-term capital growth by investing in large and mid-cap equities in the Asia Pacific region (excluding Japan, including Australasia). It follows a bottom-up process to seek out good-quality companies across the region. Fund profile here.

Edinburgh Dragon Trust (EFM) aims for long-term capital growth through investments in the Far East excluding Japan & Australasia. It has a strong performance record and does not let market indices dictate how much should be held in a particular market or sector. Fund profile here.

NEW ENTRANT: Pacific Assets Trust (PAC) aims to achieve long-term capital growth through Asia Pacific and Indian subcontinent (ex Japan, Australia and New Zealand) equities. Since top Asian equity managers First State have run Pacific Assets Trust there has been a marked turnaround in performance, resulting in some of the best returns in its sector. Fund profile here.

 

Asia is a good hunting ground for income seekers.

 

EMERGING MARKETS

If you look away from the UK and Europe, the world has plenty of thriving, fast-growing markets. However, these emerging markets are high risk, being traditionally the hardest hit when there is a wider market sell-off. So your first move should be into a highly diversified global emerging markets fund.

Changes: We’ve dropped First State Global Emerging Markets Leaders Fund as, although this is one of the best funds of its type, the managers are soft-closing it to new investors in September 2013 by imposing high charges. In its place we have introduced Lazard Emerging Markets Fund.

Templeton Emerging Markets (TEM). This investment trust is managed by emerging markets veteran Dr Mark Mobius, one of the pioneers of emerging markets investing, and has posted stellar long-term performance for investors. The trust seeks long-term capital appreciation through investment in companies operating in emerging markets or stocks listed on the stock markets of such countries. It was shortlisted for Best Global Emerging Markets Fund at the IC Fund Awards 2013. Fund profile here.

Utilico Emerging Markets (UEM) aims for a long-term total return by investing in infrastructure, utilities and related sectors, mainly in emerging markets. It tries to reduce risk by investing in companies and sectors offering essential services, monopolies and companies with a unique product or market position. Fund profile here.

NEW ENTRANT: Lazard Emerging Markets Fund (ISIN: GB00B24F1P65) is smaller and more nimble than giant funds such as First State Global Emerging Markets Leaders. It could be considered a safe pair of hands in a volatile, high-risk/high-reward sector. The investment team assess stocks against their global peers and look for companies with both inexpensive valuations and high levels of financial productivity. The fund is likely to focus on, but not be limited to, Latin America, the Pacific Basin and Europe. Fund profile here.

Advance Developing Markets Fund (ADMF) is an investment trust that invests in other emerging markets investment trusts – so it is very highly diversified. Outsourcing its stockpicking allows the manager to concentrate on asset allocation. Fund profile here.

JP Morgan Global Emerging Markets Income (JEMI) is an investment trust that offers access to dividend-paying stocks in the MSCI Emerging Markets index. Fund profile here.

JP Morgan Chinese Investment Trust (JMC) has a good pedigree of investing in Greater China companies. Fund profile here.

BlackRock Emerging Europe (EST) aims to achieve long-term capital growth by investing in companies that do business primarily in eastern Europe, Russia, other Commonwealth of Independent States countries and Turkey. Fund profile here.

 

BlackRock Emerging Europe aims for long-term capital growth by investing in companies that do business in countries such as Russia.

 

FRONTIER MARKETS

Funds investing in frontier markets are ultra high-risk investments and not for the faint-hearted. However, they could reap big rewards for investors with long timescales.

Changes: We have dropped Investec Africa Opportunities from the list as performance hasn’t been impressive and we prefer to focus on funds that are more broadly diversified.

BlackRock Frontiers Investment Trust (BRFI) invests in a representative number of the MSCI Frontiers Index markets, meaning it has exposure to a wide range of frontier markets such as Nigeria, Iraq and Vietnam. The manager also looks beyond the MSCI Frontier Markets Index and includes shares from countries such as Saudi Arabia which has a well-regulated market. Performance has been impressive. Fund profile here.

Fidelity Emerging Europe, Middle East and Africa (ISIN: GB00B29TR993) takes a broader approach than specialist Africa funds. It aims to generate long-term capital growth by investing in the less developed countries of central, eastern and southern Europe, the Middle East and Africa. Fund profile here.

 

COMMODITY FUNDS

Commodities are a very high-risk and volatile investment area, but commodity funds can help to lower that risk through a diversified portfolio of stocks, meaning there is the potential for big returns and asset diversification for your portfolio. However, investors should only have a small portion of their portfolio dedicated to this area.

Changes: We have trimmed this list's exposure to commodity funds as it previously recommended four funds that focus on gold miners. As a result, we have dropped First State Global Resources Fund, BlackRock Gold & General and Smith & Williamson Global Gold & Resources from the selection.

City Natural Resources High Yield Trust (CYN) aims for capital growth and income from mining and resource equities and bonds issues by industrial and extractive companies. With its focus on gold miners and low costs it won Best Commodity Fund at the IC Fund Awards 2012. Fund profile here.

Investec Global Gold Fund (ISIN: GB00B749TM64) aims to achieve long-term capital growth, primarily through investment in equities issued by companies around the globe involved in gold mining and in related derivatives. The fund may also invest up to one-third in companies around the globe that are involved in mining for other precious metals and minerals. This fund won Best Commodity Fund at the IC Fund Awards 2013.

BlackRock World Mining Trust (BRWM) aims to maximise total returns to shareholders through a world-wide portfolio of mining and metal securities. Up to 10 per cent of the assets may be invested in physical metals and up to 10 per cent of the assets may be invested in unquoted investments. Fund profile here.

Sarasin Agrisar (ISIN: GB00B3QL6L00) aims to achieve capital appreciation through thematic investment in the longer-term trends within the global food and agricultural industry. Fund profile here.

 

Investec Global Gold Fund won Best Commodity Fund at the IC Fund Awards 2013.

 

PROPERTY:

Property is a good diversifier away from equities. But if you want real diversification then you need to invest in funds that invest directly in bricks and mortar.

Changes: The ISIS Property Trust is no longer available for new investment following its acquisition by IRP Property Investments. We have replaced it with TR Property.

M&G Property Portfolio (ISIN: GB00B89MXM58) is an open-ended property fund that invests in bricks and mortar rather than property shares and so provides better diversification when held alongside equities. Fund profile here.

F&C Commercial Property (FCPT) aims to provide an attractive level of income with the potential for capital and income growth from a diversified UK commercial property portfolio. Its modest expenses, good overall performance and a good yield history made it the winner of Best Property Fund at the IC Fund Awards 2013. Fund profile here.

UK Commercial Property (UKCM) aims to provide shareholders with an attractive dividend yield and the potential for capital and income growth through investment in a diversified portfolio of UK commercial property. It won Best Property Fund at the IC Fund Awards 2012 for its high income, reasonable costs and good fund manager commentary. Fund profile here.

Picton Property Income (PCTN) aims to achieve attractive income levels and capital growth potential through investment in property in the Isle of Man, Channel Islands and UK. It is at the riskier end of the property fund spectrum. Fund profile here.

NEW ENTRANT: TR Property (TRY) is a UK-based investment company, listed on the FTSE 250 index, which invests in a diversified portfolio of Pan European equities and UK direct property on behalf of its shareholders. It is a reliable income payer. Fund profile here.

First State Global Property Securities (ISIN: GB00B1F76L55) is invested in a global portfolio of property shares rather than bricks and mortar. It was shortlisted for Best Property Fund at our Fund Awards 2012. Fund profile here.

 

SPECIALIST/ALTERNATIVE

You might want to invest thematically or into areas that offer your portfolio diversification. Here are some funds that can do that.

Changes: We’ve dropped GLG Technology Equity Retail Fund as we felt that Polar Capital Technology Trust had lower charges and better performance. The two funds also had a similar emphasis on large caps and household names. We have introduced RCM Technology instead as it has a different remit. We have dropped 3i Infrastructure, replacing it with HICL Infrastructure which is much cheaper and more diversified regarding its holdings, plus is making investments overseas. We have also added two private equity trusts to the selection.

Worldwide Healthcare (WWH) seeks superior healthcare investment opportunities on a worldwide basis by investing in pharmaceutical, biotechnology and related companies with a focus on capital growth, rather than income. Fund profile here.

International Biotechnology Trust (IBT) offers investors a route into the new biotechnology-derived drugs and technologies that are emerging. It is focused on development-stage quoted or unquoted biotechnology companies with the potential for high growth. Fund profile here.

Jupiter Financial Opportunities (ISIN: GB0004790191) aims to seek out growth opportunities in financial services companies and to a lesser extent property-related companies on a global basis. The fund’s investment in UK companies will be equal to or greater than the UK weighting in the MSCI All Country World Financials Index, or any successor benchmark index. Investment in other countries is, however, unconstrained. Fund profile here.

Polar Capital Technology Trust (PCT) aims to maximise long-term capital growth by investing in a diversified portfolio of technology companies around the world. It has historically had an emphasis on large-cap technology companies. Fund profile here.

 

Polar Capital Technology offers access to a diversified portfolio of technology companies.

 

NEW ENTRANT: RCM Technology Trust (RTT) aims to achieve long-term capital growth through global technology companies. It has historically had an emphasis on mid and small-cap companies mainly based in the US. Fund profile here.

First State Global Listed Infrastructure (ISIN: GB00B24HJC53) invests in a diversified portfolio of listed infrastructure and infrastructure-related securities from around the world. It is a solid defensive play on infrastructure. Fund profile here.

NEW ENTRANT: HICL Infrastructure Company (HICL) aims to invest in infrastructure projects that are predominantly in their operational phase and yielding steady returns. It has low costs, a high yield and good record of return. Primarily invested in the UK, it has started to make a few investments overseas. Fund profile here.

BlackRock New Energy (BRNE) aims to generate long-term capital growth for its shareholders by investing globally in companies with a significant focus on alternative energy or energy technology. Fund profile here.

BH Macro Investment Trust (BHMG) makes very different returns to equities by investing all of its assets into the Brevan Howard Master Fund, one of the largest hedge funds in the world. This hedge fund aims to generate consistent long-term appreciation through active leveraged trading and investment on a global basis. Fund profile here.

Standard Life European Private Equity (SEP). Private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. This investment trust aims to achieve long-term capital gains through holding a diversified portfolio of private equity funds investing predominantly in Europe. Fund profile here.

NEW ENTRANT: Pantheon International Participations (PIN) aims to maximise capital growth by investing in a globally diversified portfolio of private equity funds and occasionally directly in private companies. The fund invests with leading private equity managers in the US, Europe and Asia, seeking to reduce investment risk through diversification of the underlying portfolio by geography, manager, maturity, investment stage and sector. It has low charges too. Fund profile here.

NEW ENTRANT: Graphite Enterprise Trust (GPE) aims to provide long-term capital growth through investment in unquoted companies both directly and through specialist funds. It takes a cautious, conservative approach to investing. The fund focuses on buyouts that are considered to be lower risk than venture capital and takes a conservative approach to managing its balance sheet. Fund profile here.

CATco Reinsurance Opportunities (ISIN: BMG1961Q1006) is an esoteric, insurance-based investment trust, offering returns that are uncorrelated to other markets, particularly equities. The trust makes its money by providing a backstop to the insurance industry. In exchange for a fee, or premium as it is called in industry terminology, CATco promises insurers it will make up the difference if claims relating to certain types of natural catastrophe exceed a given level in a year. Fund profile here.

 

ETHICAL/ENVIRONMENTAL

We toyed with dropping this section as it is difficult to find ethical funds that outperform their non-ethical rivals. However, as more and more investors are interested in aligning their ethics and social conscience with their investments we decided to keep a few recommendations in the selection.

Changes: We have replaced Rathbone Ethical Bond with Royal London Ethical Bond – the winner of Best Bond Fund at the IC’s Fund Awards 2013. We’ve replaced CIS Sustainable Leaders Trust with F&C Stewardship Growth not on reasons of performance but because a report from Fair Pensions ranked F&C top among ethical providers for its transparency levels, screening processes and stewardship and engagement.

Impax Environmental Markets Trust (IEM) focuses on cleaner and more efficient delivery of energy, water and waste. It invests globally, mainly in listed companies involved with technology-based systems, products or services in environmental markets. Fund profile here.

NEW ENTRANT: Royal London Ethical Bond (ISIN: GB00B4WSJK27) invests predominantly in investment-grade UK corporate bonds that meet predefined ethical criteria. The policy of the fund considers all of the following ethical issues: alcohol, armaments, gambling, pornography, tobacco, human rights, animal testing and the environment. While most ethical funds struggle to beat their non-ethical peers, this fund’s performance record was good enough to win Best Bond Fund at the IC Fund Awards 2013, beating its non-ethical peers.

New Earth Solutions Recycling Facilities Inv Sub Fund (IM00B3B2JG43) invests in UK recycling facilities. Its relatively high costs, inflexibility and high minimum investment levels mean this fund won’t be suitable for all investors. But if you are looking to introduce a small element of diversification into a predominantly equity-focused portfolio, it offers index-linked revenues in a growing industry, and has so far generated good returns. Fund profile here.

NEW ENTRANT: F&C Stewardship Growth (ISIN: GB0030833981). Having launched its first UK retail ethical fund, the F&C Stewardship Growth Fund, in 1984, F&C has a 25-year track record in running ethically-screened funds. The fund provides an investment medium for people who do not regard financial gain as the sole criterion for investment but look to wider issues. Investment is concentrated in UK companies with products and operations considered to be of long-term benefit to the community both at home and abroad, with the aim of achieving long-term capital growth and increasing income, with the emphasis on capital growth. Fund profile here.

 

Ethical funds are an ideal solution for investors who want to align their social conscience with their investments.