Markets posted double-digit gains in 2019 so finding active funds whose managers' can outperform their benchmarks looks far from straightforward. But there are ones which come out ahead over the longer term, while certain types of active funds can play an important role in an investment portfolio such as providing some protection against market falls and exposure to diversifying assets. Below are 10 funds that have stood out from their peers because of their ability to tap into equity growth and income, diversify or protect portfolios.
EQUITY GROWTH
Waverton European Capital Growth (IE00BF5KTH98)
Disappointing economic data and another year of Brexit-related uncertainty are among the many reasons investors have had to overlook European equities. But some funds that invest in the region have still tended to make good returns.
These include Waverton European Capital Growth. Shaun McDade, head of international portfolio management at MitonOptimal, describes the fund as a “sleeper” in that, although not well known, it has a consistent record of outperformance. Although the fund lagged its benchmark, MSCI Europe ex UK index, in 2019 this hadn't happened for 11 calendar years.
The fund’s managers, Charles Glasse and Chris Garsten, look for “growth at the right price”, and pick companies with five main characteristics. These are a high and rising return on equity, cash generation, earnings visibility, pricing power and shareholder friendly managements.
Mr McDade sums up the approach as “highly disciplined, sensible investing and a great alternative to the big Europe ex-UK names that tend to dominate the sector”.
The fund had around a third of assets in large-cap companies at the end of 2019, and its 10 largest holdings included Nestlé (NESN:VTX), Novartis (NOVN:VTX), Bayer (BAYER:BUD) and Deutsche Telekom (DTEX.N:GER).
Liontrust Special Situations (GB00BG0J2688)
The road to a trade deal between the UK and European Union is likely to remain rocky – meaning both risks and opportunities in the UK. So if you want to maintain some exposure to the home market and potentially take advantage of shifts in sentiment on UK equities, it is a good idea to do this via a fund with an established process and track record.
Liontrust Special Situations' managers, Anthony Cross and Julian Fosh, focus on companies that they believe benefit from barriers to competition that give them a "durable competitive advantage". This includes intellectual property, strong distribution channels and significant recurring business. The fund's holdings are based on its managers' best ideas. They also invest in companies of different sizes and this diversification could mitigate any Brexit-related volatility. The fund had 44.6 per cent of assets in FTSE 100 companies at the end of January, with 28.4 per cent in the FTSE 250 and 18.1 per cent in Aim.
The fund's performance has held up extremely well and it is ahead of the FTSE All-Share index and the Investment Association (IA) UK All Companies fund sector average over one, three, five and 10 years. The fund is notably large, with assets worth about £5.5bn, but its managers often hold high levels of cash to manage liquidity.
EQUITY INCOME
Threadneedle UK Equity Income (GB00BDZYJV10)
The UK is a rich source of yield, but the choice on offer can be overwhelming, with 86 funds in the IA UK Equity Income sector, according to data provider FE. But fierce competition has also resulted in high standards, so there are many good funds to pick from. These include Threadneedle UK Equity Income, run by Richard Colwell, of which the performance is ahead of its peer group average return and the FTSE All-Share index over one, three, five and 10 years. It had a historic yield of 4 per cent at the end of January.
Threadneedle UK Equity Income has a value tilt, with a focus on unloved stocks overlooked by the wider market, and ones that have experienced short-term volatility but show longer-term potential. However, there is a limit to how much of a value investment approach its managers will take. Meena Lakshmanan, partner and head of alternatives at wealth manager LGT Vestra, says: “[This fund] will never be out-and-out value as its manager is happy to run winners while they transform into cash compounders.”
Ms Lakshmanan adds that the fund tends to have a more defensive composition than the FTSE All-Share, something that has mitigated downside at times of market volatility.
The fund lost more than the FTSE All-Share and the IA UK Equity Income fund sector average during the final quarter of 2018, when markets sold off sharply. But it registered a smaller loss than both for the full 2018 calendar year, a period that proved difficult for all asset classes.
Veritas Global Equity Income (IE00B04TTW78)
The UK market mostly relies on just a few large dividend payers for income. So if you are worried about the risks that stem from this or Brexit-related surprises, one way to establish a more diversified source of yield is global equity income funds. These include Veritas Global Equity Income, which had an attractive running yield of 3.5 per cent at the end of 2019 in contrast to MSCI World index's yield of 2.3 per cent.
Marcus Brookes, chief investment officer at Schroders Personal Wealth, recently suggested that this fund could be an alternative if you have given up on bonds as a source of income.
"Veritas Global Equity Income Fund provides exposure to international equity markets while focusing on paying an income, which is especially welcome at a time of low bond yields," he said.
As with many equity income funds, if you invest in Veritas Global Equity Income you could sacrifice capital gains in exchange for a good yield. Although over one, three and five years, Veritas Global Income's total returns have compared favourably with the IA Global Equity Income sector average, they lag the returns of MSCI World index over these periods. This is probably because only 17.7 per cent of the fund's assets were invested in North America at the end of 2019. US equities, on average, tend not to yield much but have enjoyed strong share price growth and represented more than 60 per cent of MSCI World index at the end of January.
SPECIALIST EQUITIES
Polar Capital Biotechnology (IE00B42P0H75)
The advances made in medical science over recent years are good for society and could also benefit investors who back the right trends. Mr McDade at MitonOptimal believes that biotechnology shares are often perceived as being more risky than they are, creating opportunities for savvy stockpickers.
“Although the biotech industry has matured beyond recognition over the past decade there is still a widespread perception that it is a high-risk, ‘jam tomorrow’ proposition,” he says. “Instead, mature biotech companies have all the attributes of a conventional healthcare stock – including profits and yields – but are priced at a material discount to both the healthcare sector and broader market.”
Mr McDade’s team likes to get exposure to this sector via Polar Capital Biotechnology Fund, in part because its managers' “pragmatic approach” can smooth out what is sometimes a volatile return profile.
This fund can be relatively concentrated as it typically holds between 40 and 60 stocks. But its managers diversify it by investing across different regions and parts of the industry. The fund had 62.3 per cent of its assets in the US at the end of January, as well as investments in Denmark, the Netherlands, UK, Canada, Germany and Italy.
Schroder ISF Global Energy Transition (LU2016065943)
A growing focus on the environment has fed through into the asset management industry, meaning that new and existing funds are now more likely to take green issues into consideration. This might be a positive turn, but it also means that investors need to do more research when seeking a fund that meets their principles and investment objectives.
So Rachel Winter, associate investment director at Killik & Co, believes that new funds specifically focused on green issues are worth considering. One name that has caught her eye is Schroder ISF Global Energy Transition, which launched in July 2019. The fund aims to invest in companies that should benefit from the adoption of lower-carbon energy sources, and it focuses on areas including renewable power generation and energy storage. Ms Winter says that it could perform well as more companies and governments commit to becoming carbon neutral.
Although you might be tempted to back environmental funds with longer track records, Schroders benefits from deep resources and an experienced team. And Ms Winter adds: "We like the broad approach taken by the fund. Its investable universe is any company involved in the production and distribution of clean energy, the management of energy consumption, or the production of materials and technologies required to facilitate these activities. For example, rather than just buying shares in a wind farm company, this fund owns shares in a company that manufactures the blades for wind turbines. We also like that the fund invests in companies across the market capitalisation spectrum."
DIVERSIFYING ASSETS
Legg Mason IF Rare Global Infrastructure Income (GB00BZ01WT03)
Infrastructure is resilient against both inflationary pressures and periods of economic weakness, so can be a reliable source of total returns with limited correlations to equities. But strong demand for infrastructure investment trusts has resulted in them trading on what look like high premiums to net asset value (NAV). For example, the generalist infrastructure investment trusts monitored by broker Winterflood were trading on premiums to NAV of between 8.5 and 32.8 per cent, as of 24 February.
Holding illiquid assets in open-ended funds can lead to liquidity troubles, as the Woodford saga has demonstrated. But one way to get infrastructure exposure with better liquidity – without buying investment trusts at high share prices – is an open-ended fund that buys the shares of infrastructure companies. Although these kinds of funds have a greater correlation to equities than direct infrastructure investments, they can still provide a level of diversification.
Options include Legg Mason IF Rare Global Infrastructure Income, which invests in various types of infrastructure companies, including gas and water companies and airports. The fund looks to deliver both attractive dividends and total returns: it had a historic yield of 5.7 per cent at the end of January and has delivered a three-year total return of 38.8 per cent. However, investors considering this fund should remember that infrastructure company shares can be volatile and this fund is relatively concentrated, with just 38 holdings at the end of January.
Architas Diversified Real Assets (GB00BRKD9X30)
If focusing on infrastructure alone seems too narrow, investing in a broader range of 'real assets' may be more palatable. Architas Diversified Real Assets Fund offers exposure to many different areas, with exposure to asset-backed securities, infrastructure, commodities, property debt and renewable energy infrastructure at the end of January. It can invest directly in real assets, but focuses on real asset funds, meaning it is very well diversified. At the end of January, its 10 largest holdings were all funds.
Architas Diversified Real Assets' yield of 2.6 per cent at the end of January is not one of the highest, but its defensive characteristics may prove to be very useful. Analysts at fund ratings agency RSMR have praised its managers' "very sensible" investment process and high level of diversification. This fund should also provide some protection against inflation if this increases.
DOWNSIDE MITIGATION
CG Absolute Return (IE00BYQ69B30)
Targeted Absolute Return funds have had a difficult 18 months, both in terms of investor flows and performance. But Ms Winter at Killik & Co believes that CG Absolute Return, a less well known fund of this kind, is defying the broader trend and could serve investors well in choppy markets.
"The fund invests globally across a spread of asset classes and historically has achieved excellent returns, with far less volatility than the wider market," she explains. "During the last three years, the fund has experienced a maximum peak-to-trough drawdown of 2.8 per cent, which is far less than the 12.4 per cent drawdown experienced by MSCI UK Equity All-Share index. The fund has a relatively cautious positioning, with 33 per cent allocated to index-linked government bonds and 19 per cent to conventional bonds. It does not rely on expensive hedging or shorting strategies so is able to maintain a relatively low total expensive ratio."
Like many targeted absolute return funds, CG Absolute Return can invest in a wide variety of assets including equities, bonds, commodities and infrastructure. It tends to invest directly in fixed-income investments, but gets exposure to equities via other funds.
BNY Mellon Real Return (GB00BSPPWT88)
BNY Mellon Real Return has held up reasonably well, both in up and down markets. It aims for a return of cash plus 4 per cent a year over five years, before fees, and has a strong focus on capital preservation, as its asset allocation suggests. Analysts at The Adviser Centre, which rates funds, note that BNY Mellon Real Return has "a return-seeking core [of investments] and a series of offsetting risk positions" based on themes identified by its managers.
The analysts add that this flexible, multi-asset fund is suited to "cautious investors seeking to grow their capital in a conservative fashion", and its defensive elements are easy to see. The fund's 10 largest holdings at the end of January included US government bonds and physical gold exchange traded commodities (ETCs), which have performed well amid recent equity market volatility.
Recent performance shows that although this fund may not keep pace with rising markets, it should be able to deliver some capital gains while protecting your money when markets are falling. It made a total return of 12.4 per cent in 2019, a year in which some major equity markets were up by around 25 per cent. But in 2018, when several asset classes made significant losses, BNY Mellon Real Return only lost 0.2 per cent.
