- We set out some options for investors in different circumstances
- Young savers, income fans and those approaching retirement are all considered
Your Isa strategy and investments will vary wildly depending on your circumstances and goals. Below, we explore funds that hold appeal for different categories of investor.
Junior Isa – saving for children
Rathbone Global Opportunities (GB00BH0P2M97)
If you’re starting or in the early stages of building a Junior individual savings account (Jisa), its value is probably not large so it is not cost efficient to spread it across many investments. But you still need it to generate reliable growth from a well diversified portfolio. If the Junior Isa has at least five years before being cashed in, a good option could be Rathbone Global Opportunities.
This fund offers exposure to a good range of developed markets equities, albeit with a US bias because that is where its managers currently believe that the best growth opportunities are. But it is well diversified across industry sectors, with about a fifth of its assets in technology, 18.7 per cent in industrials and 17.6 per cent in financials stocks at the end of January. These include some well-known large US companies such as Alphabet (US:GOOGL) and Amazon.com (US:AMZN). However, as the fund’s managers aim to invest in innovative and scalable businesses that are growing fast and shaking up their industries, the fund also offers exposure to less well-known companies such as Sartorius Stedim Biotech (FRA:DIM) and Signature Bank (US:SBNY).
They are willing to invest in companies of all sizes, so Rathbone Global Opportunities can have a meaningful allocation to mid caps, an area that lead manager James Thomson has favoured in the past, but less so recently. It had 10.3 per cent of its assets in this area at the end of January. To reduce risk, Thomson and co-manager Sammy Dow also hold a defensive bucket of companies with slow and steady growth that should be less sensitive to the economy.
This approach has paid off: Rathbone Global Opportunities has a good long-term record of outperforming global indices such as MSCI World and FTSE World, and many other global equities funds.
Fidelity Asia Pacific Opportunities (GB00BQ1SWL90)
If you’ve managed to start investing in an Isa, as well as contributing to your workplace pension scheme, you may well have started it with a broad, diversified global equities fund. This is a good option early on when the Isa’s value isn’t great. However, as its size grows it makes sense to start adding smaller allocations to funds which diversify your main holding. If you don't need to draw on the Isa assets for five years or more, these should have the potential to deliver strong growth over the long term. As you will have smaller allocations to them than your main holding, they could be higher risk but with the potential to deliver even stronger growth than a broad global equities fund.
One option is an Asian equities fund. This region includes some of the most dynamic economies and arguably the greatest growth potential of all geographic regions. China and India, for example, are the countries with the world’s largest populations, where growing affluence is driving many areas such as consumer spending and financial services. Funds run well should be able to home in on the companies which benefit from this growth.
A case in question appears to be Fidelity Asia Pacific Opportunities. Since its launch in 2014 it has had a good record of outperforming Asian indices such as MSCI AC Asia Pacific ex Japan and the Investment Association (IA) Asia Pacific excluding Japan sector average.
Its manager, Anthony Srom, typically only has a small number of holdings so each one can meaningfully contribute to the fund’s overall performance. At the end of January, for example, Fidelity Asia Pacific Opportunities only had 31 holdings.
Srom selects holdings on the basis of investor sentiment, valuation and research. He is prepared to wait for his holdings to perform well and has an average holding period of more than two years. Although he has a broadly style-neutral approach, he will take contrarian and value positions.
A third of the fund’s holdings by value were listed in China at the end of January, and Taiwan and Hong Kong accounted for about another 30 per cent. About 30 per cent were tech companies, alongside significant exposures to materials and financials companies.
These included well-known names such as Taiwan Semiconductor Manufacturing (TAI:2330), but also companies not included in MSCI AC Asia Pacific ex Japan index, differentiating Fidelity Asia Pacific Opportunities from other Asian funds. At the end of January, these included some of the trust’s largest holdings such as HDFC Bank (IND:HDFCBANK) and Beijing Oriental Yuhong (CHI:002271).
ASI Global Smaller Companies (GB00BBX46522)
If you’re mid career, no doubt your responsibilities at work and possibly the size of your family have grown, leaving you with little spare time to research investments. However, the size of your Isa is also likely to have grown, meaning that you need to diversify beyond the mainstream, large-cap focused funds in which you probably initially invested. If the Isa is going to make a meaningful contribution to your retirement income or another long term goal, you need to build on the growth it has already achieved.
A good solution could be the ASI Global Smaller Companies fund. It is less likely to duplicate the exposures in any large-cap focused fund holdings. Smaller companies also offer even greater growth potential than larger ones so this fund could give your Isa an added boost, albeit with greater risk and at times great volatility.
Because ASI Global Smaller Companies invests across the world, it provides good diversification. At the end of January, half of the fund’s assets by value were listed in the US, with most of the rest in developed European countries. It also has good sector diversification, with about a third of its assets in industrials, 23.6 per cent in tech and over a fifth in consumer companies.
Key holdings included UK-listed multi-media company Future (FUTR), and US-listed data and analytics software company TechTarget (US:TTGT).
Monitoring ASI Global Smaller Companies is less labour-intensive than having to research and monitor various regional smaller companies funds. And although this high-risk asset class requires a lot of research, because ASI Global Smaller Companies is actively managed by a highly experienced and proven team, you don't have to worry about investment selection, and regional and sector balancing within your allocation to smaller companies.
The fund’s manager, Kirsty Desson, is part of a team which includes highly regarded smaller companies manager Harry Nimmo. They invest via a process that Nimmo helped devise which involves assessing the quality, growth, momentum and value of potential investments. They also examine the financial accounts of a potential investment, looking at the quality of its earnings to ensure business sustainability.
The road to retirement
TwentyFour Dynamic Bond (GB00B5VRV677)
As we noted last year, investors approaching retirement might be tempted to de-risk their portfolios, especially if they are considering buying an annuity. One option is to back a strategic bond fund as a source of diversified fixed income exposure.
Given how challenging the outlook now seems for bonds, this might sound like a contrarian, or foolish, suggestion. But if interest rate rises prove short-lived, inflation fades away or we see a hit to economic growth, bonds could once again confound the doubters even in the relatively short term. At the time of writing, US Treasuries had made a brief recovery on the back of Russia’s invasion of Ukraine, for example.
A highly diversified bond fund may still offer some shelter in different conditions, given that bond sub-sectors have different reactions to events. With this in mind, it’s worth considering TwentyFour Dynamic Bond.
The fund has a 'highly flexible approach' dictated by market conditions, with the investment team using a broad range of different bonds. The fund had a quarter of its assets in bank debt at the end of January, with 16.8 per cent in European high yield, 14.2 per cent in government bonds and similar weightings to asset-backed securities and US high-yield debt. It also holds emerging market debt and insurance bonds.
These components should have differing characteristics: government bonds are vulnerable to inflation but can rise in 'risk-off' environments, while high yield is more closely correlated to equities but less exposed to threats such as monetary tightening. While not ideal, this is one option for investors looking to de-risk and diversify as retirement nears.
Fund choice: Fidelity Global Enhanced Income (GB00BD1NLL62)
UK equity income funds have had a resurgent 2021, generating a combination of attractive dividends and impressive total returns. But we all know that strong performers can run into challenges. In the case of the UK market, some worry it has become too reliant on the likes of commodities for its substantial dividends.
While not writing off the various UK income funds favoured by our readers, we would make the case for diversification in these highly uncertain times. A global equity income fund or two could go a long way to spreading your risk.
One name that stands out for multiple reasons is Fidelity Global Enhanced Income. An open-ended fund, it lacks the revenue reserve facility that helped so many UK investment trusts get through the dividend cuts of 2020. But what it does have is the ability to write options as a way of boosting its income, helping it to achieve a trailing yield of 4.6 per cent as of the end of January. While such funds tend to sacrifice some capital gains when their holdings do well, they can also be less exposed on the way down, too.
The fund is also interesting in terms of where it puts cash to work. It had a limited allocation to the UK, just shy of 12 per cent of assets at the end of January. What’s more notable is that, unlike some of its peers, it doesn’t cling to the US for the sake of decent total returns, with just 27 per cent of assets dedicated to this market. Much of the fund’s remaining assets are spread across Europe, with small allocations to Japan and Taiwan. This US-light approach could be useful if you already have exposure to the world’s biggest market elsewhere in your portfolio.
Given its approach, it might seem unlikely that this fund shoots the lights out in terms of total return when compared with some peers or the MSCI World index. But it delivers in spades when it comes to income.
Fund choice: Ruffer Investment Company (RICA)
Our 'Road to retirement' fund suggestion could easily have outlined an option for investors who wish to keep portfolio growth ticking along while adding some defensive traits. Some good options do exist, both for those approaching retirement and investors further down the line.
Investors looking to combine capital preservation with an element of growth could look to Ruffer Investment Company. The investment managers look to generate positive total returns, and had nearly 40 per cent of the portfolio in equities at the end of January. They also pay close attention to any threats, and have had a particular focus on inflation in recent years.
With this in mind the team has opted to use a variety of potential diversifiers: around a fifth of assets were in inflation-linked bonds at the end of January, with other exposures to conventional fixed income, gold and market options. The fund also had a fairly high cash allocation, amounting to nearly 15 per cent of assets. The managers appear open to trying other assets that might work, and had a famous dalliance with Bitcoin earlier in the pandemic before selling on the back of hefty gains.
For some, names like these may form the core of a portfolio or a place to store a chunk of assets. Either way, it allows you to keep your money working hard while acknowledging risks on the horizon.