The coronavirus pandemic and its effects have resulted in some very high market volatility this year and it is not impossible that there will be more. Although as an investor you cannot control events or markets, you can prepare for potential volatility and market falls by ensuring that you have a well-diversified portfolio. If you do this, when one area suffers badly hopefully not all of your assets will.
One of the best and often only ways for private investors to diversify is with funds, which can help you build core portfolio exposures such as bonds, and more unusual but useful assets such as infrastructure and private equity.
For most investors who hold equities it makes sense to diversify internationally, and the most tax-efficient and cost-effective way to do this is with funds. You also cannot directly invest in all overseas listed equities, including in important growth areas such as emerging markets. But you can easily access all these assets via funds, thousands of which are available to UK private investors. And this is where the IC Top 100 Funds comes in, as it tries to highlight what we and the expert panel think look like some of the better active fund options in a number of categories.
But the IC Top 100 Funds is not a personal recommendation or advice for you – just buying funds because they are on this or other best buy lists is not how you allocate money. You need to determine what your objectives and investment profile are, and then come up with a suitable asset allocation for these, which you could maybe use a few of the IC Top 100 funds to implement. There are strategy articles in the Money and Education sections, and other parts of the magazine and website, on how to go about setting an appropriate asset allocation.
The IC Top 100 Funds is not a substitute for doing your own research on a fund, but rather one of many sources of information you should consult.
It is also a selection from which to pick a few funds as, typically, an investment portfolio could be made up of anything between about one and 20 funds, depending on factors such as its size and the nature of the funds held. See more on this in How many portfolio holdings should you have? in the issue of 19 June.
Try to avoid duplication. In each category we highlight funds with different profiles to meet the needs of various types of investors. So pick the one that suits your investor profile and investment purposes best. For example, some of the global growth funds such as Lindsell Train Global Equity (IE00BJSPMJ28) are ways to get core exposure to large-cap equities in developed countries. Others, such as Jupiter Global Value Equity (GB00BF5DRJ63), take a value investing approach so are maybe a higher-risk, contrarian option. And some aggressively seek high growth over the long term via exposure to areas such as smaller or unquoted companies, for example ASI Global Smaller Companies (GB00BBX46522) and Scottish Mortgage Investment Trust (SMT).
An exception could be where you invest in two funds that hold different stocks to each other and do different things – as long as they are both suitable for your risk appetite and investment purposes. For example, you could hold one of the global funds focused on larger companies alongside ASI Global Smaller Companies. Or a growth-focused global fund alongside a value global fund.
We may include two funds that are similar to each other within a category because they are both good and to give you a choice. But this does not mean that you should hold both. For example, in the specialist equities section we have Polar Capital Technology Trust (PCT) and Allianz Technology Trust (ATT). They both have good performance records and their focus is similar. If you are having trouble deciding between them see Tech trusts for maximum growth: Allianz vs Polar Capital in the issue of 14 August.
Changes to the list
We have dropped 13 funds from last year’s selection and added 13. Reasons for dropping funds include persistent disappointing performance, or similarity with a category peer but not such good credentials. Please note that in categories where we have dropped a fund and added a new one, the new joiner is not necessarily a direct replacement for the one that was dropped. So do not sell a holding in a fund we have dropped from the list and replace it with one of the category’s new joiners, as it may have a very different profile.
More generally, just because we have dropped a fund doesn’t mean you should. We drop funds for many reasons, and it does not mean they are bad or unsuitable for you. We are putting together a best-of-breed list – not your investment portfolio.
We have also made some category changes. We used to have an ethical and environmental category, but now include the four funds that were in it alongside conventional ones that invest in the same types of assets. We think it is more appropriate to measure a fund’s performance and credentials against ones that invest in a similar area, and it makes it easier to compare them.
It also gives you a better idea of what segment of your portfolio the given ethical funds might fit into and what role they could play. So, for example, Stewart Investors Worldwide Sustainability (GB00B7W30613) now sits with the other global growth funds and Troy Trojan Ethical Income (GB00BYMLFL45) is with the other UK equity income funds.
Socially responsible investing (SRI), and taking environmental, social and governance (ESG) factors into consideration is also no longer niche. Many investors consider these issues and increasing numbers of fund providers are integrating them into their mainstream funds’ investment processes.
For all our selections across various sectors, see below: