A well-managed active fund can be a good choice for an individual savings account (Isa) because with one holding you can access a diversified portfolio of tens or hundreds of securities, even if you only have a small amount to invest. Funds cover a range of investments, including areas you might not be able to access directly, such as emerging markets. Below are 10 recommendations from wealth advisers focused on five areas: growth, income, wealth preservation, diversification and contrarian opportunities.
GROWTH
41. Lindsell Train Global Equity (IE00BJSPMJ28)
“This is a developed market fund that invests in a concentrated portfolio of high-quality growth stocks with healthy balance sheets and strong, durable cash-flow generation,” says Jason Hollands, managing director at Tilney Group. “The fund is unconstrained in terms of its geographic and sector allocation. Its managers, Michael Lindsell and Nick Train, co-own the company that runs the fund. They take a long-term, buy-and-hold approach and do not get distracted by short-term market noise, so the fund has incredibly low turnover.
“The focus on businesses with repeatable cash generation means the fund does not invest in highly cyclical sectors. Instead, well-known brands dominate the fund and key holdings include Unilever (ULVR), Guinness owner Diageo (DGE), Heineken (AEX:HEIA), Nintendo (7974:TYO), PepsiCo (US:PEP) and Cadbury’s owner Mondelez International (US:MDLZ).
“The fund’s geographic allocation is very much an outcome of stock selection rather than an expression of macroeconomic views, and this has led to major differences with the benchmark global indices. For example, the US accounts for 34 per cent of Lindsell Train Global Equity’s assets, which is lower than more benchmark-aware funds. And it has much higher exposure to Japan and the UK, which account for 22 per cent and 28 per cent, respectively. That positioning should appeal to investors who are concerned about current high valuations of US stocks.”
42. Matthews Asia Funds Pacific Tiger (LU0594555756)
“Asia has better growth prospects generally,” explains Darius McDermott, managing director of Chelsea Financial Services. “And this is a high conviction, low turnover portfolio with an emphasis on domestically or regionally-oriented companies that stand to benefit from the long-term evolution and growth of the Asian consumer. Although the fund can invest across all market capitalisations, it tends to favour mid- and small-cap companies, which are under-represented in the indices relative to their large-cap peers.”
INCOME
43. GAM Star Credit Opportunities (IE00B54L8Q54)
Sheridan Admans, investment manager at The Share Centre, likes GAM Star Credit Opportunities because more than 40 per cent of its assets are in floating rate bonds. Unlike bonds that pay a fixed rate of interest, these have a variable rate that resets based on interest rate changes. “Floating rate notes notably provide insurance against an unexpected future rise in interest rates, while convertibles should also outperform in a rising rate environment,” says Mr Admans. “The fund’s manager, Anthony Smouha, aims to produce high income returns by investing predominantly in investment-grade or high-quality issuers.
“However, unlike most Investment Association (IA) Sterling Strategic Bond sector funds, GAM Star Credit Opportunities invests in the subordinated issues of investment grade companies. This style of investing assumes there is a small likelihood of default on a subordinated high-yield debt from high-quality issuers such as Vodafone (VOD), HSBC (HSBA) or Prudential (PRU), for example.”
GAM Star Credit Opportunities has a 12-month yield of 4.4 per cent.
44. Artemis Income (GB00B2PLJJ36)
Mr McDermott suggests Artemis Income, run by Adrian Frost and Nick Shenton, which yields 3.8 per cent. “Artemis Income has been a stalwart of the UK equity income sector for more than 15 years and has an excellent team, strong process and long-term track record,” says Mr McDermott. “This fund is a flexible, high-conviction portfolio of UK stocks that targets a rising income and capital gain. It’s run by an experienced and stable management team, who can and do invest up to 20 per cent of the fund in overseas stocks. This is an all-weather fund that shouldn’t greatly disappoint. Over the long term, it has been slightly less volatile than its sector peers.”
WEALTH PRESERVATION
45. Kames Global Equity Market Neutral (IE00BYZHZV94)
Dzmitry Lipski, investment analyst at interactive investor, says: “Kames Global Equity Market Neutral would be a useful portfolio addition for an investor wishing to protect capital against market uncertainly, with the possibility of generating positive stable returns. This fund aims to generate positive absolute returns over a rolling three-year period, with lower volatility than government bonds irrespective of market conditions.
“To achieve this, head of equity quantitative analysis Neil Goddin and investment manager Craig Bonthron construct a global market-neutral portfolio with beta close to zero. The focus is on achieving repeatable returns that are not correlated with equity market movements. They do this by holding a diverse selection of best stock ideas, which removes any style biases in the portfolio. The fund includes long and short equity positions for alpha generation, and a cash portfolio that will produce a return in line with current interest rates. The fund uses three distinct strategies for generating alpha: best-in-house ideas, pair trades and themes. The current volatility level of the fund is below UK government bonds and one-third of the volatility of global equity markets.”
46. Old Mutual Global Equity Absolute Return (IE00BLP5S809)
Adrian Lowcock, investment director at Architas, suggests Old Mutual Global Equity Absolute Return Fund run by Ian Heslop, Amadeo Alentorn and Mike Servent. It aims for capital appreciation while controlling risk, with absolute returns that have a low correlation to equity and bond markets. “This fund is systematically run using in-house quantitative tools,” says Mr Lowcock. “The system is constantly monitored with adjustments and improvements made regularly. Its managers believe that markets are not fully efficient, and stock prices often diverge from their fundamental value due to investors’ behavioural biases and style drifts. The investment process behind the strategy seeks to exploit these biases in a dynamic and efficient way, resulting in outperformance driven principally by bottom-up stock selection.”
DIVERSIFICATION
47. Invesco Perpetual Global Targeted Returns (GB00BJ04HL49)
“A lot of disparate asset classes and strategies can be grouped under the alternatives label, including private equity, infrastructure, gold and absolute return funds,” says Mr Hollands. “For many investors, a good overall low volatility option is a multi-strategy absolute return fund that is diversified across a wide range of underlying trades. My pick is Invesco Perpetual Global Targeted Returns, which aims for positive, inflation-beating returns over a three-year rolling period across all market environments with less than half the volatility of global equities. The fund is an umbrella for around 27 trades (excluding cash), which include currency, interest rate, equity, credit, commodity and volatility positions.”
48. TM Fulcrum Diversified Core Absolute Return (GB00BRTNY847)
Mr Lipski thinks TM Fulcrum Diversified Core Absolute Return is a good way to increase diversification. The fund is run by Fulcrum, a boutique fund management house. “While this is a complex strategy, the strength of the team’s expertise combined with a focus on risk and reduced volatility makes the fund an attractive absolute return option in the current market environment,” says Mr Lipski. “The fund aims for long-term absolute returns, typically inflation plus 3 to 5 per cent, in all market conditions over rolling five-year periods. Investors should expect lower volatility than equity markets and a focus on limiting downside risk without giving away upside returns.
“The fund’s managers aim to do this by running a global multi-asset portfolio of equities, fixed income, commodities, currencies and alternatives, and by employing directional, relative value and protection strategies that protect the fund against sharp market falls. The fund tends to be dominated by four or five medium-term themes, with the remainder in shorter-term tactical opportunities. [With £600m assets under management], the fund’s smaller size means the managers have greater flexibility when implementing their views.
“The fund has a well-constructed investment process, an experienced investment team, supportive resources and a solid risk management framework. Many members of its management team have impressive credentials as economists and investors.”
CONTRARIAN
49. Standard Life Investments UK Equity Income Unconstrained (GB00B7G8Q193)
Mr Hollands says: “Consensus opinion is sceptical on the UK market, principally due to political uncertainties stemming from Brexit and the weak position of the Conservative government, as well as a backdrop of gloomy forecasts. This has been played out through a consistent pattern of outflows from UK equity funds over the last year. These anxieties are especially apparent when it comes to more domestically-exposed stocks that are typically more abundant in the small- and mid-cap parts of the market. So my contrarian pick is Standard Life Investments UK Equity Income Unconstrained, which is managed by Thomas Moore.
“This is a multi-cap fund and, in common with other equity products managed by Standard Life, seeks to identify stocks with the scope for producing earnings surprises. The fund has a much greater bias to medium-sized and smaller companies than its typical sector peers, with around 44 per cent of its assets in mid caps and 11 per cent in smaller companies. Consequently, it has a greater UK domestic flavour than some peers, which are heavily invested in FTSE 100 companies with high international earnings.
“If the UK economy performs better than expected and political worries dissipate, UK equities could turn out to be the wild-card performer, in which case this fund could be a key beneficiary of improved sentiment.”
Standard Life Investments UK Equity Income Unconstrained has a 12-month yield of 3.9 per cent.
50. Franklin UK Smaller Companies Fund (GB00B7FFF708)
Mr Lowcock suggests Franklin UK Smaller Companies as a contrarian option because of its UK domestic focus.
“Managed by Richard Bullas and Paul Spencer, this fund’s approach is very much one of making long-term investments in companies with attractive risk/reward profiles,” says Mr Lowcock. “Its managers are willing to take a contrarian stance when market mispricing creates outstanding investment opportunities. While economic and industry drivers are important considerations, the fund is built from the bottom up with each stock included in the portfolio on its own merit.”
For the rest of our 50 Isa ideas and other associated Isa articles see below:
10 smart ways to boost your Isa
10 investment trusts for your Isa
The cheapest DIY platforms on which to hold your Isa
