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IC Top 100 Funds 2017

Leonora Walters presents our 2017 selection of the IC Top 100 funds
September 15, 2017

If you're an investor, the good news is that you have an absolutely massive choice of funds, with thousands of open-ended investment companies and unit trusts domiciled in the UK, hundreds of investment trusts listed on the London Stock Exchange and selected access to even more offshore funds via certain brokers. The bad news is, you’ve got to choose a few out of all of these!

For this reason, each year we collate the IC Top 100 Funds, to help you home in on some of the better performing funds with reasonable investment charges. Although you should hold investments in risk assets such as these funds for the long term, we review this list on a yearly basis. This is because the economic and market situation changes, and the situation can also change at individual fund level. For example, a fund manager could leave or underperform for a number of years, or a fund could increase its charges.

This year 14 new funds have joined the list for a number of reasons, including the prospect of good performance, and reasonable charges.

 

What this list is and isn't

The IC Top 100 Funds looks to highlight what seem to be some the best fund options in a number of sectors and asset classes that most private investors might include in their portfolios. We have divided the list into categories to try to make it clearer what a fund does and where it might fit into your portfolio.

Some of the IC Top 100 Funds could be used as core holdings, while ones focused on high-risk and esoteric assets should only account for a small portion of larger, well-diversified portfolios and be held over the long-term.

The IC Top 100 Funds is not a personal recommendation or advice for you; it’s an attempt to highlight what seem to be the best fund options within a number of categories. What you include in your portfolio primarily depends on one key factor – you! In particular, specifications such as the purpose of the money you are investing, your timescale and risk appetite.

Depending on your risk profile, it may be that a huge number of the IC Top 100 Funds are unsuitable for the asset allocation that fits your profile. In a few cases – for example, if you have a short timeframe or cannot afford to lose any money – it may be that investing in risk assets such as these is not the right strategy for you. However good a fund is, if it doesn’t fit in with your investment goals, risk appetite and asset allocation, then it isn’t appropriate for you.

Before you even think about putting your money into investments, you need to determine what your objectives and investment profile are, and then come up with a suitable asset allocation which you could maybe use some of these funds to implement. We run many articles on this issue, including in the Money section of the magazine, but if still in doubt seek professional advice from an independent financial adviser (IFA). You can find a qualified IFA at unbiased.co.uk.

 

Dos and don'ts

Do not buy all 100 funds! This is a selection from which you could pick a few. Typically a fund portfolio should be made up of anything between three and 15 funds, depending on factors such as its size. We regularly run articles on how investors with different amounts of money, timescales and risk appetites could construct a portfolio using funds. You can also see some suggestions on this in the weekly Portfolio Clinic.

This list is not definitive, it should form a small part of the extensive research you conduct before deciding whether to add a fund to your portfolio. This list also isn’t the be all and end all – we only have space for 100 funds – so consider things beyond it. We certainly do – we highlight other good funds in our articles and weekly tips.

This list doesn’t cover exchange traded funds (ETFs) which for some investors can play an important role in their portfolios, so have a look at our IC Top 50 ETFs for some suggestions.

Before you invest, make sure you understand how a fund works and exactly what its underlying assets are, together with the risks. Don’t sell a fund just because we dropped it from the list. We have excluded funds for a variety of reasons, including high charges and poor performance, but as we have a finite number – 100 – we cannot include every good fund. And some decisions were a close call.

If you hold a fund we have dropped there might be a number of reasons for you to stick with it, so only sell a fund after you have conducted thorough research on it and considered your personal circumstances. Selling can also incur tax and a trading charge.

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 don’t automatically sell a holding we have dropped from the list and replace it with one of the category’s new joiners without further investigation and consideration of your personal circumstances. The new fund in the list might be very different from the one that has been dropped, and the reason for its addition might have nothing to do with the one that was dropped.

Some of the investment trusts in the list are on relatively high premiums to net asset value (NAV). For example, at time of writing this was the case with Syncona (SYNC) and RIT Capital Partners (RCP). If this is the case it may be best to delay your purchase until the premium has reduced or moved to a discount, as long as the trust is still fundamentally a good proposition. We highlight such opportunities in our articles and weekly fund tips.

We have evaluated the funds’ costs on the basis of their ongoing charge. However, you will also have to pay trading and or holding costs on top of this. We chose the funds from a structure-agnostic perspective, but some platforms have different charging structures for investment trusts and open-ended funds, so you will also need to factor this in when deciding whether to invest in a fund.

And always remember that past performance is not a guarantee of future performance.

 

BONDS (9 FUNDS)

Bonds are not investors’ favourite asset class, and in recent years their yields have not been attractive. But many investors’ portfolios should have an allocation to assets other than equities, especially as cash offers such low rates. “Bonds continue to have a lot to offer income seekers – in a low interest rate world bonds offer a potentially less risky income than equities,” says Adrian Lowcock, investment director at Architas. “However, with yields so low and inflation having returned, there are risks, particularly to capital, so it is important to invest in bonds through a flexible manager.”

For this reason we continue to include many strategic bond funds in our selection. Their managers can invest across the fixed-income spectrum in an unconstrained way, going to the areas that look best and avoiding less desirable ones.

“Fixed income can be a complex area to cover, so I think it’s important to give managers the flexibility to take advantage of a shifting landscape,” adds Ben Seager-Scott, chief investment strategist at Tilney Group. “I think this is going to be particularly important as we move into an environment of tightening monetary policy.”

However, strategic bond funds can be higher risk than traditional corporate bond funds, so are not necessarily suitable for lower-risk investors.

Changes to the selection: We have dropped Henderson Strategic Bond (GB0007502080) because it is run by the same investment team as Henderson Diversified Income, but has not performed as strongly over one, three and five years. Henderson Diversified Income also has a higher allocation to alternative areas of fixed income, such as loans, and less in corporate bonds so it is potentially a better portfolio diversifier.

MI TwentyFour Dynamic Bond (GB00B57TXN82)

MI TwentyFour Dynamic Bond has beaten the Investment Association (IA) Sterling Strategic Bond sector average and broad bond indices such as Bloomberg Barclays Global Aggregate over one, three and five years. It also has an attractive yield of about 4.7 per cent.

“A highly professional team, running a very focused strategic bond fund,” comment analysts at FundCalibre. “This fund pays an attractive yield and is managed with an emphasis on credit risk to ensure protection of investors’ capital and income wherever possible. This fund differs from most strategic bond funds due to a consistent weighting to asset-backed securities (ABS), an area in which it specialises.”

The fund aims to provide an attractive level of income, along with the opportunity for capital growth, by investing in a broad range of fixed-income assets including investment-grade, high-yield and government bonds, and asset-backed securities. It also uses derivatives such as interest rate and credit derivatives to optimise or reduce exposures, with the aim of performing well in both rising and declining rate environments throughout the credit cycle. And it can use synthetic short positions for hedging, and to take advantage of deterioration of the market or specific issuers.

Jupiter Strategic Bond (GB00B544HM32)

Several panel members favoured keeping Jupiter Strategic Bond in the selection. This fund beats indices such as Bloomberg Barclays Global Aggregate over one, three and five years, and its sector average over five. It has a yield of about 3.7 per cent.

The fund aims for a high income with the prospect of capital growth by investing in higher-yielding fixed-income assets including high-yield bonds, investment-grade bonds, government bonds, preference shares and convertible bonds. The fund can also use derivatives, for example, to take long and short positions.

When selecting investments for the portfolio, the fund’s investment team forms a view on the global economy to determine how much risk they should take. They then select the countries and sectors they think are likely to offer attractive opportunities, taking a view of matters such as global monetary policy, the outlook for inflation, interest rates and economic growth. These views influence the positioning of the portfolio and the mix of bonds they believe suits those market conditions.

They also conduct thorough analysis on every company and government bond in which they invest, which includes meeting company managements. They like companies and governments that are committed to paying down their debts and have the financial strength to meet all their obligations to bondholders.

Jupiter Strategic Bond also has a very reasonable ongoing charge of 0.73 per cent.

Royal London Sterling Extra Yield Bond (IE00BJBQC361)

Royal London Sterling Extra Yield Bond is at the racier end of the risk spectrum of strategic bond funds, but has delivered very strong returns, placing it among the top few funds in the IA Sterling Strategic Bond fund sector over one, three and five years, over which periods it also beats indices such as BBgBarc Sterling Aggregate. It also has one of the highest yields in its sector at over 6 per cent.

The fund has a high risk/return profile because of its substantial allocation to high-yield bonds – nearly half of its assets. 

“Manager Eric Holt runs this fund from a bottom-up perspective and prefers to conduct his own fundamental analysis instead of relying on rating agencies to identify undervalued assets,” says Adrian Lowcock. “There is a focus on unrated investments (29 per cent of assets), which are often ignored by other managers and differentiates the fund from other UK corporate bond funds, but also means this fund is riskier and more like a high-yield bond fund.”

However, because it is a strategic rather than high-yield bond fund it could allocate away from these areas if there are problems, meaning it has greater flexibility and is arguably lower risk than the latter. And despite its risky profile it has made positive returns in each of the past five calendar years.

Royal London Sterling Extra Yield Bond aims for a gross redemption yield of 1.25 times the gross redemption yield of the FTSE Actuaries British Government 15 Year index. The fund is value-oriented and Mr Holt aims to exploit credit market inefficiencies by investing in a combination of investment-grade, sub-investment-grade and un-rated bonds. He looks for bonds with strong covenants that are usually backed by a charge on specific assets. The fund has a very low ongoing charge of 0.4 per cent.

 

Royal London Sterling Extra Yield is at the racier end of the risk spectrum, but has delivered very strong returns

 

Fidelity Strategic Bond (GB00B469J896)

Fidelity Strategic Bond is not one of the best-performing or highest-yielding funds in the Sterling Strategic Bond sector, although beats indices such as Bloomberg Barclays Global Aggregate over one, three and five years and makes steady positive returns in most years. This is a lower-risk fund that aims to be a core bond fund delivering regular income, low volatility and some diversification to other asset classes including equities. Its managers look to generate attractive risk-adjusted returns through combining multiple, diversified investment positions advised by in-house fundamental credit research, quantitative modelling and specialist traders.

“The fund’s exposure to high-yield strategies is normally limited to 20 per cent of the portfolio, with around 60 per cent in investment grade and 30 cent in government bonds, which makes the fund quite a balanced option within its sector,” according to analysts at FundCalibre. “With the corporate bond allocation, emphasis is put on bottom-up issuer selection and ensuring adequate diversity due to the asymmetric nature of returns.”

But unlike a corporate or government bond fund, it doesn’t have to stick with these low-risk areas if there is a problem with them and it can include some higher-risk assets to get better returns, because it is a strategic bond fund.

“It may be fully invested in government or corporate bonds or may invest up to 50 per cent in high yield,” comment analysts at Tilney Group. “However, high-yield allocation is likely to average 20 per cent over a market cycle, with 60 per cent invested in quality bonds and the remainder in government bonds. The fund may also invest in cash and index-linked bonds, and the mandate enables the manager to use fixed-income derivative instruments to express credit and interest rate views. We would place Ian Spreadbury among the more consistent and conservative fixed-income managers across his peer group.”

Most of the panel favoured keeping this fund

Royal London Ethical Bond (GB00B7MT2J68)

Royal London Ethical Bond is one of the best performing Sterling Strategic Bond funds so would make a good fixed-income addition for ethical or non-ethical investors with the risk tolerance for this type of fund. It is in the first quartile of the Sterling Strategic Bond sector over three and five years, and beats benchmarks such as Bloomberg Barclays Sterling Aggregate index over one, three and five years, all for a very reasonable ongoing charge of 0.56 per cent.

The fund is run by the same manager as Royal London Sterling Extra Yield Bond, Eric Holt, and mainly invests in investment-grade UK bonds. Mr Holt looks to exploit bond market inefficiencies and achieve outperformance from multiple sources including asset allocation, stock selection, and duration and yield curve management. He aims for a combination of income and capital growth over five to seven years.

Mr Holt looks at a bond’s covenants, structure and security, so he doesn’t just rely on credit ratings. A key criterion is whether a bond offers sufficient reward for its risk. This means the fund can hold credit bonds which are excluded from the credit benchmark, for example, un-rated bonds in which it has more than 16 per cent of its assets. The fund avoids bonds issued by companies involved with alcohol, armaments, gambling, tobacco, pornography and non-medical animal testing, as well as ones that have a high environmental or human rights impact.

Aberdeen Emerging Markets Bond (GB00B5V8SG93)

Aberdeen Emerging Markets Bond has a yield of over 6 per cent but doesn’t always make such high returns as its peers. However, it did particularly well in 2012 and is doing well year to date 2017, and tends to fall less than a number of its peers in harder markets.

This fund was launched in 2012, but its offshore sister fund which uses the same strategy has shown consistent results since 2001, according to FundCalibre.

Henderson Diversified Income Trust (HDIV)

Henderson Diversified Income beats its benchmark three-month Libor over one and five years with good positive returns, as well as a number of broad benchmarks. It currently offers a very attractive yield of over 5 per cent and pays quarterly dividends. Even though its board has recently decided to reduce the dividend going forward, the quarterly dividend will only fall from 1.25p to 1.1p, which it estimates will still offer a 4.7 per cent yield.

The trust invests globally in fixed-income assets including secured loans, government, high-yield and corporate bonds, unrated bonds, and asset-backed securities. It can also use derivatives. It is run by experienced managers John Patullo and Jenna Barnard, co-heads of strategic fixed income at Janus Henderson Investors.

The trust has been charging a performance fee which in its last financial year took its base ongoing charge of 0.98 per cent up to a relatively high 1.58 per cent. But the performance fee will be scrapped from 1 November, although the base fee will increase slightly from 0.6 per cent to 0.65 per cent. The trust has also recently changed its domicile from Jersey to the UK, which should cut its annual running costs and also help the ongoing charge to fall.

“The removal of the performance fee is positive for shareholders, despite the small increase in base fee,” comment analysts at Numis Securities. “The performance hurdle was not particularly challenging and the performance fee has averaged 0.51 per cent of net assets over the past three years. Henderson Diversified Income is an interesting vehicle to gain diversified exposure to credit markets and has delivered NAV total returns of 5.9 per cent a year since launch.”

City Merchants High Yield Trust (CMHY)

City Merchants High Yield is one of the better performing listed debt funds over the long term and has an attractive yield of over 5 per cent. The trust aims for both high income and capital growth, mainly from high-yielding fixed-interest securities. About two-thirds of its assets are in high-yield debt with 10 per cent in unrated securities, meaning this is a high-risk, albeit high-return option. However, it has no gearing (debt) unlike a number of investment trusts, reducing its risk profile.

Its portfolio strategy is based around three themes. Its managers, who include highly experienced Paul Causer and Paul Read, look to maintain a good degree of liquidity through cash or government bonds. They also look to invest in companies with predictable and recurring cash flows, and bonds where performance is more tied to company performance.

NEW ENTRANT: MI TwentyFour Monument Bond (GB00B3XVTT21)

MI TwentyFour Monument Bond invests in asset-backed securities (ABSs) focused on assets including residential mortgages – currently around two-thirds of its assets – commercial mortgages, automobile leases and loans, and small to medium enterprise loans. This makes it a good diversifier to more conventional fixed-income funds. The fund aims to provide an attractive level of income relative to prevailing interest rates, while maintaining a strong focus on capital preservation.

Over half its assets are in the UK with most of the remainder in Europe, although the fund can also invest in Australian ABS. It targets investment-grade bonds (which are considered less likely to default) rated at least BBB- or equivalent at the time of investment.

“These are assets with a very low level of historic default,” comment analysts at Killik. “The portfolio exposure is floating rate, meaning that if interest rates rise investors can expect to see their level of income rise, too, helping to insulate against capital falls when rates do begin to rise. There remain a number of attractions to investing in European ABS for an alternative source of yield within portfolios. Residential mortgage-backed securities (RMBS) entities are structured within segregated legal frameworks and are therefore largely immune to issues such as a default of the financial institution that originated them. Loss experience, particularly from the higher credit quality tranches in European RMBS structures, have remained incredibly robust even through the financial crisis and the more severe house price declines of the 1990s.” The fund has a yield of about 2.4 per cent and an ongoing charge of 0.8 per cent.

 

WEALTH PRESERVATION (7 FUNDS)

A fund that can limit downside in your portfolio can be a helpful inclusion in many balanced portfolios in all market environments. But with a very uncertain environment for reasons including an unclear future for the UK following the vote for Brexit and historically high equity markets, limiting downside is more important than ever. And with poor returns from low-risk bonds, investors need to find other ways to diversify the equity and higher risk portions of their portfolios.

Multi-asset funds that look to reduce volatility and downside are an option, as are absolute return funds that aim to deliver positive returns.

Changes to the selection: We have dropped Standard Life Global Absolute Return Strategies (GB00B7K3T226) on the suggestion of several members of the panel. Key concerns included the fund’s size, which is now over £20bn, even with some recent redemptions, and the fact that several of its original investment team have now left – only one of the five decision-makers on global absolute return strategies (GARS) has been involved from inception of the process – head of risk and structuring, Brian Fleming. The fund also hasn’t performed as strongly in recent years, making a negative return in 2016.

RIT Capital Partners (RCP) is a multi-asset investment trust that aims to deliver long-term capital growth while preserving shareholders’ capital. It invests in quoted and unquoted assets such as hedge funds which private investors could not necessarily access directly.

The trust has made positive returns in each of the past four calendar years, and over the first eight months of this year. Over longer periods it has made better cumulative returns than a number of other wealth preservation funds. It has been trading at a high-single-digit premium to NAV recently, however, so if you are going to invest it could be better to do this when it is on a lower premium or discount.

Capital Gearing Trust (CGT)

Capital Gearing Trust has delivered positive net asset value (NAV) returns in every calendar year since 2007. This is precisely what wealth preservation funds are supposed to do and in line with its aim of preserving shareholders’ real wealth and achieving absolute total returns over the medium to longer term. It has also made positive share price returns in eight of the last 10 years, including 2008 when the FTSE All-Share plunged 30 per cent but its NAV and share price returns were 5.76 per cent and 4.72 per cent, respectively. It also held up well in 2011 when major indices made negative returns.

Capital Gearing Trust has a zero discount/premium control policy, so purchases or issues shares to ensure that in normal market conditions its share price trades as closely as possible to the underlying NAV per share. This policy has been largely successful since it was introduced in August 2015.

Capital Gearing Trust mainly invests in other listed funds. Despite this, it has an ongoing charge of 0.89 per cent which is very reasonable for a fund of funds. It also has a number of direct holdings in government bonds, and fixed income overall accounts for more than half of its assets.

“While the significant allocation to bonds will mean that the fund is likely to lag strong equity market rallies, we believe it is an attractive vehicle for investors looking for low volatility long-term capital growth,” comment analysts at Winterflood. “It should also provide protection on the downside in the event of a market decline.”

Despite its name, it currently has no gearing which helps to lower its risk profile, though it has the ability to have gearing of up to 20 per cent of its NAV. It can also make use of derivatives.

Personal Assets Trust (PNL)

Personal Assets Trust has made positive NAV and share price returns in most years since manager Sebastian Lyon started running it in 2009, with the exception of 2013. This includes difficult years such as 2011 when its share price also held up well. The trust’s aim is to “protect and increase (in that order) the value of shareholders’ funds per share over the long term”.

The trust has less than half of its assets in equities and a substantial allocation to UK and US government bonds, mostly inflation-linked ones. It also has nearly 10 per cent of its assets in gold. And its strict discount control mechanism ensures its shares always trade close to NAV via share buybacks and issues.

“The zero-discount policy means that there is minimal discount volatility,” comment analysts at Numis. “Personal Assets is an attractive long-term vehicle for cautious retail investors, although it is likely to lag behind if the current bull run in equity markets continues.”

 

Personal Assets Trust has a substantial allocation to US government bonds

 

Newton Real Return (GB00B8GG4B61)

Newton Real Return makes positive returns in most years, including the last five calendar years, and in 2011 fell less than 1 per cent when broad equity indices went down more. The fund aims for a minimum return of one-month GBP Libor +4 per cent a year over five years before fees, and a positive return on a rolling three year basis.

It can be picked up on fund platforms for a very reasonable charge of 0.69 per cent or 0.79 per cent, depending which share class they offer.

The fund seeks to deliver a real return with a volatility level between bonds and equities via stock selection, shifting tactically between different assets and managing risk to preserve capital. It aims to maximise potential upside when markets rise and limit downside risks when they fall. It also has a core of predominantly traditional return-seeking assets with a capacity to generate capital and income, alongside an insulating layer of stabilising assets to try to hedge perceived risks and dampen volatility.

“Its manager Iain Stewart’s first priority is capital protection,” says Architas’s Adrian Lowcock. “He then looks to deliver returns of 4 per cent above cash a year over the longer term. Mr Stewart runs an unconstrained and flexible approach which initially uses Newton’s thematic research to identify opportunities and to position the portfolio appropriately. The fund then is constructed from two parts: a core element that invests in shares and bonds with a long-term perspective and low turnover. And alongside this it invests in cash, government bonds and derivatives to reduce risk.”

JPMorgan Global Macro Opportunities (GB00B4WKYF80)

JPMorgan Global Macro Opportunities only launched in 2013 but got off to a good start. Last year was not so good for the fund, which fell 3.2 per cent for reasons including being invested in more defensive equity sectors such as healthcare, telecoms and utilities, and being short sectors linked to economic growth, including materials, industrials and energy. However, its managers have rebalanced the portfolio and year-to-date performance is coming back strongly with the fund up 7 per cent as at the end of July, ahead of the FTSE All-Share and FTSE World indices.

Over three years it has also made a good cumulative return of 30 per cent. It targets a return of 7 per cent above cash gross of fees and an expected volatility below 10 per cent, annualised over the medium term.

The fund’s managers try to take advantage of mis-pricing of macroeconomic trends in markets, and invest the fund along the lines of themes they think will be the most prevalent over the medium term. It invests in areas including equity, fixed income, derivatives, currency and volatility, and can go short on the price of an asset falling.

“The team believes that global macro trends are the main drivers of returns for asset classes, and looks to identify and exploit these with the aim of delivering positive returns in all conditions with a priority on capital preservation,” says Adrian Lowcock. “Current themes include Japanese economic recovery, global political divergence and China in transition.”

Henderson UK Absolute Return (GB00B5KKCX12)

Henderson UK Absolute Return has made positive returns in each of the last seven calendar years, and positive cumulative returns over one, three and five years, which are particularly good over five years. This fund aims to achieve a positive absolute return over the long-term regardless of market conditions, and make more than zero over a rolling 12-month period.

The fund has two-thirds of its portfolio in shorter-term tactical ideas, which its managers believe could benefit from an earnings surprise. The remainder is in core holdings, where the managers think long-term drivers will either increase or decrease the share price over time. They have strict limits on its overall market exposure.

“The strategy and the team have a much longer track record [than this fund] running another identical mandate,” comment analysts at FundCalibre. “During that period, the returns have been remarkably consistent. We like this fund as, unlike many of its sector peers, it has achieved its stated aim, which is to provide equity-like performance, but with one-third of the volatility.”

Co-manager Ben Wallace has a successful track record going back to 2005 on a hedge fund with a similar mandate. “He has delivered on the objective of positive returns in all conditions fairly consistently, making money during 2008 by shorting the market ahead of its collapse,” adds FundCalibre.

The downside to this fund is that on top of its ongoing charge of 1.06 per cent it has a performance fee which in the fund’s last financial year was 0.98 per cent of the value of this share class. But in view of its outstanding performance it seems worth paying for.

NEW ENTRANT: Invesco Perpetual Global Targeted Returns (GB00BJ04HL49)

Invesco Perpetual Global Targeted Returns is relatively new, but its management team isn’t: the fund is run by Invesco Perpetual’s multi-asset team of which senior members David Millar, Dave Jubb and Richard Batty were part of the team that used to run Standard Life Global Absolute Return Strategies, when that fund was doing well.

Invesco Perpetual Global Targeted Returns targets a 5 per cent gross return per year above UK three-month Libor over a rolling, three-year period. It looks to achieve these returns with a volatility less than half that of global equities over the same rolling, three-year period, and has succeeded in doing this. In the first three years since its inception in September 2013 the fund returned 22.65 per cent, which equates to 7.04 per cent on an annualised basis and is equivalent to three-month Libor plus 6.48 per cent. The fund’s realised volatility at the end of the first three-year period was 3.84 per cent in contrast to MSCI World index’s realised volatility of 12.14 over the same period. The fund made positive returns in 2014, 2015 and 2016.

Four of our panellists suggested adding it to the IC Top 100 Funds. “This fund follows a tightly risk controlled global macro hedge fund approach with 20 to 30 strategies carefully combined to perform in different scenarios,” says Ben Willis, head of research at Whitechurch Securities. “The team are a spin-off from Standard Life GARS, and there are distinct similarities between the two in that they are targeting an annualised return but with less than half the volatility of equities. Since its launch in 2013, the Invesco team has managed to navigate the markets relatively well compared to its peers, producing consistent and steady risk-adjusted returns.”

Invesco Perpetual Global Targeted Returns has a reasonable ongoing charge of 0.82 per cent, and unlike some wealth preservation funds, has no performance fee.

 

GLOBAL EQUITY INCOME (4 FUNDS)

UK investors have tended to have a bias to the home market so adding overseas exposure is important, especially as over the past few years the UK market has become more reliant on just a few dividend payers. With the added uncertainty of Brexit, diversity has never been more important, and the many attractive opportunities outside the UK could improve your income. The number of companies outside the UK offering attractive yields has been increasing rapidly and some overseas equity income companies are in sectors not well represented on UK markets.  

Changes to the selection: We have dropped F&C Managed Portfolio Income (FMPI) because it has underperformed broad indices such as FTSE World over the last four years, and not performed as well as broad global indices or other some other global equity income funds over longer cumulative periods. It also has a relatively high ongoing charge of 1.07 per cent and because it is a fund of funds you are also incurring two layers of charges. Two of our panellists thought it worth removing. “The trust has beaten the UK market but underperformed world equities indices over the medium term,” says Ben Willis at Whitechurch Securities. “Because of the structure, investors have to pay up for the mediocre performance with the ongoing charge coming in at over 1 per cent. In addition, nearly 40 per cent of the trust is invested in the UK so it is not a truly global equity income portfolio.”

Murray International Trust (MYI)

Murray International Trust had historically delivered strong returns but didn’t do well in 2013, 2014 and 2015. However, last year it had a strong return to form and over the first half of this year has held up well. Its longer-term cumulative numbers don’t look strong relative to benchmarks and peers, but if it continues to perform well this will show through in the coming years.

“Bruce Stout, manager of Murray International, has an excellent long term record and the fund offers far greater diversification of income than traditional UK growth and income funds,” comment analysts at Numis. “Performance was disappointing from 2013 to 2015 due to its low US exposure, and high weighting in Asia, Latin America and emerging markets. However, there was a marked turnaround in performance in 2016, which has continued into 2017.”

The trust mainly invests in global equities but also has some bonds which at the half-year point accounted for just under a fifth of assets.

It offers a yield of about 3.8 per cent and has a reasonable ongoing charge of 0.68 per cent

Fidelity Global Dividend (GB00B7778087)

Fidelity Global Dividend is among the top five Global Equity Income funds over three and five years in terms of performance, and beats its benchmark MSCI AC World index over five years. Its manager Daniel Roberts selects shares according to their individual merits, favouring ones with a healthy yield underpinned by a growing level of income, as well as the potential for capital growth.

He places a large emphasis on the sustainability of the dividend and whether the current share price provides an adequate margin of safety, in line with the fund’s aim of income and long-term capital growth. Mr Roberts also manages risk by focusing on companies with predictable, consistent cash flows and simple, understandable business models with little or no debt on their balance sheets. The fund has a yield of about 2.9 per cent.

“Even though the fund invests in mostly larger companies, it is very different to its benchmark,” comment analysts at FundCalibre. “It is quite well diversified, both on a global and sector level. It is typically less volatile than the benchmark and tends to outperform in falling markets. Companies within the portfolio have very low borrowing levels, which means their earnings are less likely to be affected by debt repayments, which adds to their dividend payout stability.”

Artemis Global Income (GB00B5N99561)

Artemis Global Income has an outstanding long-term track record and is among the top-performing Global Equity Income sector funds over one and five years. It is also well ahead of broad indices such as FTSE World and MSCI AC World over five years. The fund has a yield of around 3.5 per cent, which is not the highest in its sector because it aims for capital gain as well as a good, steady and rising income.

The fund is a good diversifier to UK equity income funds because it does not allocate many of its assets to the domestic market. And it takes a different approach to Fidelity Global Income’s more defensive, large-cap focused approach, so it is a good complement to this fund if held with it in a portfolio.

Artemis Global Income’s manager Jacob de Tusch-Lec looks for income in underappreciated and undervalued areas. The fund holds around 90 stocks that can keep growing their dividends over time with a preference for free cash-flow generating companies. Mr De Tusch-Lec adapts to changing economic conditions by shifting investments between high-yielding quality, cyclical and value stocks. He favours large- and medium-sized companies rather than mega caps, giving the fund greater potential for yield and capital growth.

“Jacob de Tusch-Lec has an excellent understanding of the wider economic environment which helps when investing globally,” says Adrian Lowcock at Architas. “He tries to diversify the chance of returns from stocks correlating in times of shock, so the size of a holding is determined more by its riskiness than the level of conviction. The fund has a value bias.”

Newton Global Income (GB00B8BQG486)

Newton Global Income is one of the best-performing Global Equity Income sector funds over three and five years, but performance is not as strong relative to its peers over one year. Much of the long-term performance, however, is due to former manager James Harries who left at the end of 2015.

One year of less impressive performance is too short a period over which to judge a fund and manager, and Newton runs its funds via a team approach so the departure of one manager doesn’t mean a wholesale change to their investment strategies. The fund’s current manager Nick Clay has 25 years’ investment experience and before becoming lead manager on this fund managed a similar offshore global income fund.

Newton Global Income aims to achieve increasing annual distributions together with long-term capital growth by investing in global equities. It has a yield of over 3 per cent and doesn’t buy companies unless they have a yield 25 per cent above that of FTSE World index. If a holding’s yield falls below that of the index it is sold.

An important part of Newton Global Income’s investment process is to identify key themes that drive change in the global economy, and then find investment ideas to express those.

“Ideas are primarily derived from the research recommended list, a portfolio selected by Newton’s London-based analysts,” comment analysts at Tilney Group. “Each analyst specialises in a specific industry, and compares companies worldwide operating in that industry. However, because only a fraction of these recommendations meet the fund’s yield requirement, the three-strong global income team supplement them with ideas sourced themselves or from Newton’s regional income teams.”

The fund can be picked up from platforms for a reasonable ongoing charge of 0.69 or 0.79 per cent, depending which share class you buy.

 

OVERSEAS EQUITY INCOME (5 FUNDS)

Regional funds are in theory, higher-risk because what they generate rests on the fortunes of one region. In particular Asian equity income funds may have exposure to emerging markets that are potentially more volatile and high-risk. However, if you have a large portfolio you could hold some regional equity income funds which could provide stronger returns than broader funds.

Changes to the selection: We have dropped Aberdeen Asian Income Fund (AAIF) because it has lagged its peers and MSCI AC Asia Pacific ex Japan index over one, three and five years. The trust didn’t beat the index in 2013, 2014, and 2015 although it was slightly ahead in 2016. Year to date 2017 it is behind it again and it has an ongoing charge of 1.19 per cent, which seems a lot to pay for underperformance.

Three of our panellists suggested dropping it.

“Performance over the medium term has been shocking and that alone is reason enough to remove it,” says Ben Willis at Whitechurch Securities. “The ongoing charge of 1.19 per cent makes the underperformance even more unpalatable. There are better opportunities to gain income exposure to these markets.”

Schroder Oriental Income (SOI)

Schroder Oriental Income beats MSCI AC Asia Pacific ex Japan index and its sector peers over three and five years, and has a yield of about 3.4 per cent in line with its objective of an attractive income and income growth potential. Its yield is lower than those of its peers, but its total returns are well ahead of them and it has grown its dividend every year since launch in 2005.

The fund is run by Matthew Dobbs, who has been investing in Asia for 29 years, with the support of Schroders’ extensive network of analysts in the region.

“We like the relative stability that the income focus this trust gives versus many others in the region, especially when paired with the manager’s total return mindset,” comment analysts at FundCalibre. “Matthew’s experience, combined with the strength and depth of Schroders’ analyst team, also make the trust stand out from its peers. We believe it is an excellent option for investors seeking exposure to the Asia Pacific region with both an income and a growth objective.”

Because of its good performance and growing income stream the trust often trades at a premium to NAV, so on the occasions it does fall to a discount this could be a good moment to add to it.

The trust doesn’t come cheap – it has a performance fee which when added to its ongoing charge in its last financial year takes this up to 2.07 per cent. However, because of its strong performance, attractive yield and highly experienced manager it looks worth paying for.

Jupiter Asian Income (GB00BZ2YMT70)

Jupiter Asian Income is a relatively new fund but its manager Jason Pidcock isn’t – he ran Newton Asian Income Fund between 2005 and 2015 during which time he made decent returns and generated a good income. He has been investing in Asia Pacific ex Japan since 1993. If Mr Pidcock emulates what he has done in the past, this fund should continued to perform well.

Mr Pidcock puts together a portfolio of his best investment ideas, and the fund typically holds up to 50 shares listed in developed and developing markets in Asia. These can include companies with a below-average yield if he thinks they could enhance the capital growth of the fund. The companies he invests in have to be well managed and well positioned in their industries, and have scalable business models. And their managements must be committed to sharing profits with shareholders through dividends. Because the fund’s returns come from both income and capital growth, Mr Pidcock also wants the price of the shares to represent good value for money as an investment.

His company analysis takes place within the context of his wider views on the economic and political trends affecting each country in the Asia Pacific region, so he takes into account each country’s individual strengths and weaknesses. This may result in the fund holding very little or no shares in some of the region’s largest companies, sectors or countries, if Mr Pidcock feels the risks of investing in them outweigh the potential rewards.

“Jupiter Asian Income is a solid fund, headed by a highly regarded manager,” says Ben Seager-Scott at Tilney Group. “The fund is delivering exactly what is expected of it, and although there has been some short-term underperformance of a strongly rising index, this is entirely understandable given the manager’s style and income objective. I fully expect the manager to add significant value to clients over the long term.”

BlackRock Continental European Income (GB00B3Y7MQ71)

BlackRock Continental European Income outperforms broad European indices such as MSCI Europe ex UK over three and five years, as well as the sector average for the IA Europe ex UK sector. It has an attractive 12-month yield of about 3.9 per cent, in line with its aim of above average income from its equity investments, compared with the income yield of European equity markets excluding the UK, without sacrificing long-term capital growth.

Its managers, Alice Gaskell and Andreas Zoellinger, look for undervalued stocks that offer reliable, sustainable dividends, and potential dividend growth and protection against inflation with lower than average risk. They are flexible with regard to company size and country, and will move away from the benchmark when necessary to protect total returns and ensure a superior yield.

“BlackRock’s strong European team and the fund managers’ extensive experience combine to produce an impressive European fund, which pays an above-average yield with below average volatility,” comment analysts at FundCalibre. “As part of the portfolio construction, the managers follow a rigorous risk control process to reduce volatility while maximising rewards, resulting in a fund that is less volatile than the index.”

It has very few of its assets in the UK, making it a good diversifier for portfolios with UK equity income funds.

“The portfolio is usually composed of around 40 stocks and managed in a fairly disciplined approach,” says Adrian Lowcock. “Dividend sustainability is key with an objective of providing 110 per cent of the benchmark income generation. Although an income strategy, the portfolio is not necessarily composed of the highest-yielding stocks. Despite selling themselves as bottom-up stock-pickers its managers are very much macro driven compared with peers and most of their themes are played according to the macro scenario.”

European Assets Trust (EAT)

European Assets Trust has beaten its benchmark, Euromoney Smaller European Companies (ex UK) Index, over three and five years, and has a very attractive yield of around 6 per cent. The trust aims to pay 6 per cent of its year-end NAV as dividends and is able to make such a substantial payout because it partly pays dividends from capital as well as income from underlying investments. For UK shareholders the exact amount payable will depend on the sterling/euro exchange rate at the time.

The trust also aims for long-term capital growth by investing in quoted small and medium-sized companies in Europe, excluding the UK, meaning it is a good diversifier to UK equity income funds.

Its management team focuses on finding businesses it thinks can deliver good levels of return on capital, run by managers it trusts and that are trading at attractive valuations. The trust’s managers select a relatively concentrated portfolio of around 40 companies with strong balance sheets and healthy cash flows. They believe that the most important factors that influence stock returns are the value creation of the business and the initial price paid to own the equity, so place a significant emphasis on valuations.

Because of its attractive income profile the trust sometimes trades at a slight premium to NAV, so when it is on a discount it could be a good time to buy or add.

JPMorgan Global Emerging Markets Income Trust (JEMI)

JPMorgan Global Emerging Markets Income Trust has outperformed its benchmark, MSCI Emerging Markets index, in NAV terms every calendar year since its launch except 2015. It bounced back well last year with a NAV total return of 40 per cent against 33 per cent for the index. Its cumulative numbers do not look so strong, in part because the trust is underweight technology shares, including names such as Alibaba (US:BABA) and Tencent (HKG700), relative to MSCI Emerging Markets index. It has a yield of 3.8 per cent and has maintained its annual dividend of 4.9p for each of its last four financial years.

“JPMorgan Global Emerging Markets Income provides exposure to high-quality emerging markets equities and offers access to an attractive level of income from the asset class,” comment analysts at Winterflood. “The trust has performed strongly since launch, and while its significant sector and country active positions may lead to periods of underperformance relative to the benchmark, its emphasis on good-quality companies paying attractive dividends should allow it to outperform over the long run.

“It makes good use of the investment trust structure, using gearing to enhance income and revenue reserves to maintain the latest annual dividend. Revenue reserves at 31 July 2016 were equivalent to 68 per cent of last year’s dividend, which should continue to provide support to the dividend if the earnings environment remains challenging. However, we would note that recent currency movements are likely to have benefited the fund’s income account following sterling’s depreciation post-Brexit.”

 

UK EQUITY INCOME (9 FUNDS)

The UK has traditionally been the go-to area for equity income, with the home index offering one of the highest yields. However, this area has faced problems over the past few years, with banks cancelling dividends during the financial crisis and last year a number of major companies announcing dividend cuts.

But there are still good opportunities for funds and managers to home in on. Investment trusts also have the benefit of being able to hold back dividend income in good years, meaning they have reserves that enable them to maintain or even increase dividends in leaner years.

CF Woodford Equity Income (GB00BLRZQB71)

CF Woodford Equity Income is run by Neil Woodford, one of the most high profile UK equities managers who over his long career has performed very strongly, most notably while he ran the Invesco Perpetual Income (GB00BJ04HX60) and High Income (GB00BJ04HQ93) funds.

CF Woodford Equity Income is only three years old and has done well over that period, beating the FTSE All-Share and the IA UK Equity Income sector average.

But the fund has lagged both these benchmarks over one year. This is partly because it lagged the index in 2016 due to being underweight mining and momentum shares, and more recently because its largest holding AstraZeneca’s (AZN) share price dropped sharply after one of its drugs didn’t meet expectations.

Mr Woodford’s defensive style has meant his funds have been less impacted in down markets such as the 2008 financial crisis, but can lag rapidly rising markets. Mr Woodford also takes significant stock or sector bets – such as his current avoidance of mining shares – so his funds can perform quite differently to major indices.

“Neil Woodford’s renowned ultra long-term approach has been tried and tested across a wide range of market conditions and has held up particularly well in tough markets,” comment analysts at FundCalibre. “His astute understanding of the macroeconomic environment, and his preference for companies with transparent earnings, balance sheet strength and attractive valuations have seen him avoid many of the pitfalls that have beset other UK equity managers. He is well known for avoiding technology stocks during the dot-com crash and also being out of banks long before the financial crash in 2008.”

David Liddell at IpsoFacto Investor adds: “We would keep the fund for three reasons: the contrarian in us suggests that some of the underperforming stocks can bounce back, its mixture of higher-yielding stocks and smaller healthcare, technology and unquoted stocks offers something different to the average UK fund, and Mr Woodford has an excellent long-term record.”

If Mr Woodford’s performance is anything like in the past the fund should ride out this period of under-performance and deliver strong long-term returns, and is a reason why you should hold it for at least five years. In the meantime it is paying dividends and has a yield of about 3.5 per cent.

TB Evenlode Income (GB00BD0B7D55)

Evenlode Income has beaten the FTSE All-Share index and IA UK All Companies sector average over three years and, by quite some margin, over five. Although it is not included in the IA UK Equity Income sector it has a yield of over 3 per cent and has steadily increased its dividend over the last five years.

Its managers place an emphasis on sustainable dividend growth by investing in companies with high returns on capital and strong free cash flow. They hold investments for the long-term, meaning trading costs eat less into returns and it has a fairly concentrated portfolio of under 40 holdings. It can invest in companies of all sizes and has about 30 per cent of its assets in mid caps.

Shorter-term performance has been held back by lack of exposure to mining and oil companies. “The fund’s managers invest only in high-quality, cash-generative businesses that can generate consistently attractive returns on capital,” comment analysts at FundCalibre. “Companies will typically have few physical assets and they avoid businesses with high capital expenditure such as miners, or oil and gas producers. They construct a universe of these types of stocks, before using valuation analysis to see which companies are cheapest.

“The fund aims to produce excess returns with reduced risk. It reduces volatility by investing in high-quality, defensive businesses. We expect the fund to outperform in down markets and underperform in a strongly rising market.”

MI Chelverton UK Equity Income (GB00B1FD6467)

MI Chelverton UK Equity Income has a strong performance record beating the FTSE All-Share and Numis Smaller Companies ex Investment Companies indices, and is among the top-performing UK Equity Income funds over one, three and five years.

It has an attractive yield of about 4 per cent, in line with its aim of a high and growing quarterly dividend, and the prospect of good long-term capital growth.

It mainly invests in mid-cap companies that generate cash on a sensible and sustainable basis, which is then used to grow the business and to reward shareholders. Its managers, David Horner and David Taylor, like companies to strike an appropriate balance between current and future income.

They only invest in a company for the first time if it yields at least 4 per cent on a 12-month view. But they are careful to avoid value traps by analysing balance sheets to ensure there is not too much debt and that the working capital requirements are not too onerous. They also examine sales growth and margins. They aim to build a portfolio that will grow its underlying dividend from one year to the next.

They add to companies until their yields fall to 3 per cent, following share price appreciation. If an investment’s yield reduces to 2 per cent it is sold, although it has usually been divested before that point in favour of a high yielder. 

“A star performer over the past five years, this is an income fund that invests in small- and medium-sized companies,” says Adrian Lowcock. “The managers place a strong emphasis on business and balance sheet analysis. 2016 was less impressive but the fund is performing well compared with its peers.”

Rathbone Income (GB00BHCQNL68)

Rathbone Income beats the FTSE All-Share index and the IA UK Equity Income sector average over three and five years, and has a yield of 3.5 per cent. Its S share class has one of the lowest ongoing charges among UK Equity Income funds, at 0.53 per cent.

The fund aims for above-average and maintainable income, without neglecting capital security and growth. Lead manager Carl Stick, who has been running it since 2000, looks to invest in shares with an above-average yield trading at a discount to fair value. Portfolio turnover is low, eating less into trading costs, with the fund typically holding between 30 and 50 shares. 

The fund invests in small and mid caps so it is less defensive than some equity income funds, although exposure to cyclically orientated shares is limited because of its managers’ focus on quality and pricing power. But this means the fund can lag when the market is driven by economically sensitive sectors.

“This is a solid core income fund run by an extremely experienced and long-standing manager,” comment analysts at FundCalibre. “It has one of the best track records in the sector for raising dividends annually over a period of more than 20 years. Carl’s process is well defined without being overly constrictive, and the heavy emphasis on risk management is particularly pleasing.”

Finsbury Growth & Income Trust (FGT)

Finsbury Growth & Income Trust outperforms the FTSE All-Share index over one, three and five years – and by quite some margins over longer periods. It is also one of the top-performing UK equity income investment trusts over three and five years.

Its yield of around 1.8 per cent is lower than that of its UK Equity Income sector peers but its mandate is growth as well as income, and investors could sell its shares and create their own dividends. The trust also pays a steadily rising dividend.

“Although the trust has the lowest dividend yield in the UK Equity Income sector, dividend growth has been strong over a prolonged period and we would expect this to continue,” comment analysts at Winterflood.

Finsbury Growth & Income is also a good option for growth investors as it beats many UK growth-focused investment trusts over longer periods.

The trust is run by top manager Nick Train who runs a concentrated portfolio of between 25 and 30 shares. He invests in companies he considers to be good quality, although tries to buy them at a price below his estimate of their true worth. He favours companies with strong brands and/or powerful market franchises. Many of the holdings are branded consumer goods and services, and financial services companies.

Mr Train doesn’t often buy or sell holdings, which also means trading costs cut less into returns. The trust’s ongoing charge of 0.74 per cent is very reasonable considering its outstanding performance.

Diverse Income Trust (DIVI)

Diverse Income Trust has beaten the FTSE All-Share in NAV performance terms over one, three and five years, and is one of the top-performing UK equity income trusts over those periods. Its yield of about 2.9 per cent is not as high as most of its peers but this is more than compensated for by its strong total returns.

The trust invests in companies that are generating good and growing dividends, in line with its primary objective of paying shareholders a good and growing dividend income. It can invest in companies of all sizes and this includes a substantial allocation to Alternative Investment Market (Aim) shares which accounted for 37.7 per cent of its assets at the half-year point. This differentiates it from many UK equity income funds.

It is run by highly experienced UK smaller companies manager Gervais Williams, alongside Martin Turner.

Diverse Income Trust’s ongoing charge of 1.17 per cent is not the cheapest but in view of its strong performance, growing dividend and differentiation from other UK equity income trusts, this seems worth paying.

City of London Investment Trust (CTY)

City of London Investment Trust beats the FTSE All-Share index over three and five years. It has not been beating its sector average returns though this is in part because the trust typically has at least 60 per cent of its portfolio by value in FTSE 100 companies, in contrast to some sector peers that have a smaller companies focus. It has an attractive yield of about 3.9 per cent and has raised its dividend for 50 consecutive years.

It has been run by Job Curtis since 1991, who manages the trust conservatively, mainly investing in cash-generative businesses that can grow their dividends with attractive yields. The trust often trades at a premium to NAV because of its income profile but does regular share issues to try to keep this in check. It has a very low ongoing charge of 0.43 per cent.

 

City of London Investment Trust has raised its dividend for 50 consecutive years

 

Lowland Investment Company (LWI)

Lowland Investment Company makes strong long-term returns but over shorter periods can be very volatile, a typical characteristic of co-manager James Henderson’s approach. The trust’s share price performance over longer periods has not kept up with its NAV returns so it has been trading on a discount to NAV over the past year, which is not always the case.

Lowland Investment Company beats the FTSE All-Share index over one, three and five years in NAV terms.

It has a yield of just over 3 per cent and has increased its dividend every year since 1975, except in 2009 when it was held at 26.5p. Its board hopes to continue to increasing the dividend over the next three years.

The trust aims to provide a higher-than-average return with growth of capital and income over the medium to long term, and can invest in companies of all sizes which widens the opportunities available to it.

It has recently introduced a tiered management fee and amended the cap on its performance fee so the maximum fees payable are 0.75 per cent a year on the first £375m of net chargeable assets and 0.65 per cent a year on those in excess of that. This means that even in periods of strong performance investors shouldn’t have to pay much more than the current 0.64 per cent ongoing charge

Edinburgh Investment Trust (EDIN)

Edinburgh Investment Trust, with an ongoing charge of 0.6 per cent, is the cheapest of the various funds managed by Mark Barnett, who has run it since January 2014 when he took over from Neil Woodford. It has outperformed the other trust Mr Barnett runs, Perpetual Income & Growth (PLI), over one, three and five years.

Edinburgh has not done well over the short term because it doesn’t hold mining shares, HSBC (HSBA) or Royal Dutch Shell (RDSB), whose share prices have risen strongly. However, Mr Barnett has performed very strongly over the long term, for example, beating the FTSE All-Share index in most years with Perpetual Income & Growth, so poor performance in the short term is not a reason to cut exposure. 

“We would keep Edinburgh Investment Trust despite some recent underperformance as it offers a more defensive portfolio than most,” says David Liddell at IpsoFacto Investor.

Edinburgh’s aim is to increase its NAV per share in excess of the growth in the FTSE All-Share Index and grow its dividends per share in excess of the rate of UK inflation over the long term. It has also increased its dividend every year for the last 12 years and has a revenue reserve equivalent to around 90 per cent of the dividend due for its last financial year, according to Numis Securities, so it could cover shortfalls. This is one of the highest levels of revenue reserves among UK equity income investment trusts.

 

GLOBAL GROWTH (8 FUNDS)

A global equity fund should be at the heart of pretty much every investor’s portfolio, whether the core of a larger portfolio that also includes specialist funds, or the entire equity allocation of small and start-up portfolios. We have a varied selection of eight funds, at least one of which should cover the different risk appetites and needs of a variety of investors.

Changes to the selection: We have moved Law Debenture Corporation to the UK Equity Growth section because although it is ranked in the AIC Global sector about 70 per cent of its assets are invested in the UK.

F&C Global Smaller Companies Investment Trust (FCS)

F&C Global Smaller Companies Investment Trust has beaten broad benchmarks such as MSCI World Small Companies, FTSE World and FTSE World ex UK index over five years. It also has very a reasonable ongoing charge of 0.61 per cent. It has been managed by Peter Ewins since 2005. He invests in smaller quoted stocks which display the potential for superior growth, in particular in the US, UK and Europe. He and his team look to meet individual companies and understand the quality of their managements, position in their targeted market and strategy for growth. They also assess companies’ financial strength and cash flow dynamics, with the aim of investing in high quality companies at attractive prices with the potential to deliver strong returns.

They use funds to gain exposure to areas where they have less experience such as Japan, Asia, Latin America and Africa, though these account for less of the portfolio. Exposure to the different geographic markets is adjusted within specific ranges in light of the attraction of local valuations and the outlook for currencies, but stock selection is the main driver of asset allocation.

Although not a high-yielder the trust’s dividend has risen for 47 consecutive years as it has been benefiting from a growing income stream from its holdings.

Scottish Mortgage Investment Trust (SMT)

Scottish Mortgage Investment Trust is one of the top performing global funds beating most of its peers and making returns well ahead of broad global equity indices such as FTSE World and MSCI AC World, especially over longer time periods. It aims for a greater return than the FTSE All-World Index in sterling terms over a five-year rolling period or longer.

It also has one of the lowest ongoing charges of all active funds at 0.44 per cent making it an excellent core holding for many portfolios – as long as you have a long-term investment horizon and higher risk appetite. Although long-term returns are outstanding it can be volatile over shorter time periods.

Its risk profile has increased in recent years because it has been building an allocation to unquoted companies which account for around 12 per cent of its portfolio. These have the potential to boost returns but could also incur substantial losses. The trust is also fairly concentrated, with the top 10 holdings accounting for over 50 per cent of its assets.

It has a highly experienced manager in James Anderson who has run it since 2000 and worked at Baillie Gifford (Scottish Mortgage’s manager) since 1983. Co-manager Tom Slater has worked on the trust since 2009. They invest via an unconstrained approach and there are no fixed limits on geographical, industry and sector exposure. Current investment themes include the speed of technological advances and how they can disrupt established business practices, and the re-emergence of China as an economic superpower. 

Monks Investment Trust (MNKS)

A slightly less racy option is Monks Investment Trust which is also run by Baillie Gifford, but by a different team with a different approach. Two years ago it appointed new managers who introduced an investment process that has delivered very strong returns for another fund they run, Baillie Gifford Global Alpha Growth (GB00B61DJ021). So far it has resulted in a marked improvement in this trust’s performance: it has beaten broad indices such as FTSE World and MSCI AC World, and the AIC Global sector average over one and three years. As a result of the improvement in performance it now tends to trade near to its NAV, in contrast to around 14 per cent when its new managers were appointed in March 2015.

The trust invests in quoted equities which its managers select according to each company’s individual merits, and there are no limits to geographical or sector exposures, though it is well diversified globally. Its managers invest with a long-term investment horizon.

Monks is less concentrated than Scottish Mortgage with its top 10 holdings only accounting for about a quarter of its assets, and it has virtually no exposure to unquoted companies. Only 17 of its 100 plus investments are held by Scottish Mortgage, representing an overlap of around 20 per cent by value, according to analysts at Numis Securities. The trust also has a very reasonable ongoing charge of 0.59 per cent.

Rathbone Global Opportunities (GB00B7FQLN12)

Rathbone Global Opportunities has beaten broad global indices such as FTSE World, FTSE World Ex UK and MSCI AC World over one, three and five years. It is also in the first quartile of the IA Global sector over three and five years. The fund’s investment team favours under the radar and out of favour growth companies, but also holds a defensive bucket of holdings that are less economically sensitive, with slower and steadier growth prospects, for risk management purposes.

The fund’s positioning is determined largely by where lead manager James Thomson believes the best stock-specific opportunities lie, although he avoids direct holdings in emerging markets.

Less than 10 per cent of the fund’s assets are listed in the UK, meaning it is a good diversifier for UK investors, who often have a bias to the home market.

Lindsell Train Global Equity (IE00BJSPMJ28)

Lindsell Train Global Equity is among the top five best performers in the IA Global sector over three and five years, and in the top quartile over one. It also beats broad global indices such as FTSE World, FTSE World Ex UK and MSCI AC World over one, three and five years, and by a good margin over longer periods.

Its management team includes highly regarded manager Nick Train who has made very strong returns with his funds over the years. They run a very concentrated portfolio, typically of less than 30 shares, with a heavy emphasis on consumer companies. They invest in what they view as durable, cash-generative business franchises and hold them for the long term. They favour companies with a sustainable high return on equity and low capital intensity.

“Nick Train takes a multi-decade view of investing looking for companies with strong brands and repeatable earnings potential,” says Adrian Lowcock. “Performance in these types of companies has been impressive, but whilst they may no longer be cheap it is better to buy a good company at a full price rather than a fair company at a fair price.”

Lindsell Train Global Equity has a reasonable ongoing charge of 0.55 to 0.75 per cent, depending on which share class you buy. The fund rarely buys or sells shares, so trading costs don’t eat up a lot of its returns.

Fundsmith Equity (GB00B41YBW71)

Fundsmith Equity is among the top performing funds in the IA Global sector over three and five years, out of more than 200 funds. It also beats broad global indices such as FTSE World, FTSE World Ex UK and MSCI AC World over one, three and five years, and by a good margin over longer periods.

Manager Terry Smith targets companies that are resilient to change, with attributes such as: the ability to sustain a high return on operating capital, advantages which are difficult to replicate, no need for significant leverage and a certainty of growth from reinvestment of cash flows at high rates of return. He also likes to invest in companies which he considers to have attractive valuations.

The fund has a very concentrated portfolio of less than 30 shares which it looks to hold for the long-term. Consumer staples, healthcare and technology shares account for the majority of its assets, and about 60 per cent of its assets are listed in the US though include global multi-national companies. “This fund takes a simple approach to investing, buying great businesses at a reasonable price and then doing nothing,” says Adrian Lowcock. “Terry Smith didn’t invent this approach but he has been excellent at executing it.”

Witan Investment Trust (WTAN)

Witan Investment trust has a multi-manager structure whereby it does not directly invest in equities. Instead its in-house investment team sets an asset allocation and then outsources that to nine external managers to implement. This means the trust is very well diversified across developed market equities and sectors, as well as manager investment styles and individual shares.

Witan could be a good core holding, in particular for small portfolios that are not large enough to invest in a wide range of funds. And for investors who do not have the time or inclination to asset allocate or research funds, it could account for their equity allocation.

It also provides some exposure to emerging markets, and alternative assets such as private equity via some holdings the in-house team selects.

The trust has outperformed broad indices such as FTSE World and beaten the AIC Global sector average over one, three and five years.

It has an ongoing charge of 0.65 per cent, though this can vary because of underlying managers’ performance fees. The trust has increased its dividend for 42 consecutive years and expects to increase it again this year, in line with its policy of increasing the total annual dividend ahead of inflation. It aims for long term growth of income and capital.

“Witan is an attractive core holding for investors seeking global equity exposure,” comment analysts at Numis. “The trust provides access to a number of leading managers, and has a low ongoing charge given its multi-manager approach. Witan has a good track record with NAV total returns of 158 per cent (13.4 per cent a year) since Andrew Bell took charge in early 2010, ahead of MSCI AC World index’s total return in Sterling of 138 per cent (12.2 per cent a year).”

Unicorn Mastertrust (GB0031218018)

Unicorn Mastertrust is a fund of investment trusts which offers exposure to global equities and alternative assets such as private equity. It beats broad global indices such as FTSE World and MSCI AC World over one and five years, and the IA Global sector average over one, three and five years. It is among the top few funds in terms of performance in its sector – IA Flexible Investment – over one, three and five years. Its ongoing charge of 0.88 per cent is reasonable for a fund of funds.

Unicorn Mastertrust would again make a good core holding for small portfolios that are not large enough to invest in a wide range of funds. It could account for the equity allocation of investors who do not have the time or inclination to asset allocate or research funds.

 

UK EQUITY GROWTH (7 FUNDS)

With its impending departure from the European Union the UK faces an uncertain future. However, stocks do not necessarily follow the fate of the country they are listed in and, regardless of what happens next, there are still many good companies listed in London. Investing in the home market also eliminates some of the currency risk for the end investor.

But with likely volatility ahead it is important to pick the right shares, so investing in a UK fund with a good manager is more important than ever.

Liontrust Special Situations (GB00B57H4F11)

Liontrust Special Situations has beaten the FTSE All-Share index over one, three and five years, and the IA UK All Companies sector average over three and five. Its cumulative numbers currently don’t look so strong because it slightly lagged the index’s return of 16.8 per cent in 2016, albeit with a positive return of 15.8 per cent. But over the long-term it is among the best performing UK equity funds and it has outperformed the FTSE All-Share by a great margin since its launch in 2010.

Liontrust Special Situations’ managers, Anthony Cross and Julian Fosh, like to invest in companies with a durable competitive advantage that allows them to defy industry competition and sustain a higher than average level of profitability for longer than expected.

“This fund is a ‘best ideas’ portfolio that may encompass any UK stocks regardless of size or sector, but typically will have a small and mid-cap bias,” comment analysts at FundCalibre. “The managers look for firms with intellectual capital, which includes strong distribution networks, recurring revenue streams and products with no obvious substitutes. The resulting portfolio consists of businesses that can grow their earnings independently of the wider economy. The fund is typically very different to the UK stock market, with a significant underweight to large companies. It may also have large sector underweight or overweight positions. Despite these factors, the fund has actually exhibited lower volatility than the UK stock market. For investors wanting high-conviction, multi-cap exposure to the UK stock market, this fund ranks among the best.”

Liontrust Special Situations has an ongoing charge of 0.88 per cent.

Castlefield CFP SDL UK Buffettology (GB00BKJ9C676)

Castlefield CFP SDL UK Buffettology beats the FTSE All-Share index and the IA UK All Companies sector average over one, three and five years, and by quite some margins over longer periods. It is among the top few funds in its sector in terms of performance over one, three and five years.

Its manager, Keith Ashworth Lord, aims to replicate the investment philosophy of highly regarded US investor Warren Buffett, with a focus on what he considers to be excellent businesses for an excellent price. He favours companies with enduring operating franchises, high returns on equity, strong free cash flow and experienced management teams. His investment decisions are based on analysis of companies, free from adherence to industry sectors or stock limits.

He looks to keep turnover of holdings down which means trading costs eat less into returns, and has a concentrated portfolio, typically of 25 to 35 shares.

The fund has a relatively high ongoing charge of 1.28 per cent but its strong outperformance has compensated investors well for this.

Law Debenture Corporation (LWDB)

Law Debenture Corporation is ranked in the AIC Global sector but at time of writing had around 70 per cent of its assets invested in the UK. Its investment policy also states that it has to have at least 55 per cent of its assets in securities listed on this market.

The trust also seems to be a successful way to get UK exposure: it has beaten the FTSE All-Share index and the AIC UK All Companies sector average over one, three and five years in NAV terms, and beats most UK All Companies investment trusts over three and five years in NAV terms. It is run by James Henderson, who has made impressive returns with a number of his funds over the years.

Law Debenture’s share price has not been keeping up with its NAV so that it has been trading at a discount to NAV, which has not always been the case – at times this trust has traded at a premium or close to NAV. But if investors recognise the good underlying performance it could tighten. It has an ongoing charge of 0.43 per cent making it one of the cheapest active funds available to UK private investors.

Law Debenture is differentiated from other UK trusts in that it is a provider of independent third-party fiduciary services, including corporate trusts, pension trusts and governance services, the revenues from which boost the trust’s returns.

“The trust stands out given its unusual structure,” says Monica Tepes, head of investment companies research at Cantor Fitzgerald. “Alongside the equity portfolio, it owns a highly cash generative fiduciary services subsidiary. The relationship is symbiotic as the combined entity benefits from more stable revenues and tax savings than either would enjoy on their own. This enables James Henderson to run the portfolio for growth while the shareholders also receive an attractive income.”

Analysts at Killik add: “The trust continues to have a number of attractive attributes including a well-covered dividend yield – and a long history of dividend progression.” But Law Debenture’s returns are fairly volatile and it can have sharp falls over shorter time periods, so it is definitely an option for investors with longer time scales and higher risk appetites.

Old Mutual UK Mid Cap (GB00B1XG9482)

Old Mutual UK Mid Cap has outperformed the FTSE 250 index and the IA UK All Companies sector average over one, three and five years, and by quite a margin over longer periods. It is among the five best performing funds in its sector over one, three, five and 10 years.

Its manager Richard Watts takes a flexible approach, prioritising attractive returns across the entire business cycle by investing in about 40 to 60 stocks. He looks for companies that seem to have the strongest growth potential and the greatest hidden value.

The fund’s investment team believes that a flexible style encompassing, for example, a willingness to hold value and or growth stocks depending on the conditions and outlook, provides the greatest scope for sustained outperformance. When choosing holdings they consider companies’ individual merits, and also economic and sector factors.

“The focus for Richard Watts is very much future growth potential with stock selection being critical,” says Adrian Lowcock at Architas. “He looks to identify companies which have dominant market positions and are able to grow their business. And he hunts for opportunities which the wider market has not fully taken into account and so undervalues.”

Henderson Smaller Companies Investment Trust (HSL)

Henderson Smaller Companies Investment Trust has beaten Numis Smaller Companies Index ex Investment Companies and FTSE 250 index over one, three and five years, as well as the AIC UK Smaller Companies sector average over those periods.

The trust has around 65 per cent of its assets in FTSE 250 mid-cap companies because its manager Neil Hermon likes that they can be easier to buy and sell than smaller companies, and thinks they are typically higher quality than smaller companies. The remainder of the trust’s assets are split between FTSE Small Cap and Aim shares. The trust has a performance fee which took its basic ongoing charge of 0.43 per cent up to 1.01 per cent in its last financial year. However, in view of its strong performance this seems like a fund worth paying for.

Although it is not a high-yielder it has increased its dividend for 14 consecutive years, and in its last financial year its total dividend of 18p was a 20 per cent increase on the year before.

“Henderson Smaller Companies is one of the largest, most liquid UK smaller company trusts, and we believe it is an attractive core holding for investors seeking exposure to this asset class,” comment analysts at Numis. “Neil Hermon, its manager since 2002, has a strong long-term track record from building a diversified portfolio with a focus on growth at a reasonable price, delivering NAV total returns over the last 10 years of 199 per cent (11.6 per cent a year) versus 138 per cent (9 per cent a year) for the Numis Smaller Companies ex Investment Companies Index. The NAV has outperformed the benchmark in 13 of the past 14 financial years.”

Marlborough UK Micro Cap Growth (GB00B8F8YX59)

Marlborough UK Micro Cap Growth beats the FTSE Small Cap Ex Investment Trust index and the IA UK Smaller Companies sector average over one, three and five years. It is in the first quartile of its sector in terms of performance over one and five years, and has made positive returns in each of the last seven calendar years.

Its managers, Guy Feld and highly experienced smaller companies investor Giles Hargreave, invest primarily in companies with a market capitalisation of £250m or less at the time of purchase, and a considerable proportion of the fund will be in companies with one below £150m. These are listed on indices such as Aim, FTSE Small Cap, FTSE Fledgling and FTSE techMark.

The fund’s managers seek to invest in businesses with growth potential not yet reflected in the share price. Unlike some smaller companies funds, Marlborough UK Micro Cap Growth has virtually no mid sized companies. The managers use their own primary research and meet company management teams face to face, and are supported by an investment team of around 12. The size of the team means they have the resources to manage around 250 stocks, with even the largest positions rarely representing 2 per cent of the fund. As at the end of July it had 273 holdings.

To begin with, positions will usually be less than 1 per cent of the fund’s assets and the managers will then average up as they see evidence of a company successfully implementing its strategy. They believe this diversification helps to manage stock-specific risk and the fund’s volatility is below the average of the IA UK Smaller Companies sector. Marlborough UK Micro Cap Growth has an ongoing charge of 0.8 per cent.

BlackRock Smaller Companies Trust (BRSC)

BlackRock Smaller Companies Trust has outperformed the FTSE Small Cap ex Investment Companies and Numis Smaller Companies ex investment companies indices over one, three and five years, and is one of the top performing UK smaller companies investment trusts over those periods. The trust has also beaten its benchmark, Numis Smaller Companies Index ex Investment Companies plus Aim, in each of its last 14 financial years. It is well diversified with around 170 holdings, and its top 10 holdings account for less than a fifth of its assets helping to diversify the risk associated with investing in smaller companies.

BlackRock Smaller Companies is different to a number of other smaller companies funds in that it can invest up to 50 per cent of its assets in Aim shares, an area in which it had about 39 per cent of its assets at the end of July. Although not a high-yielding fund it has increased its dividend for 14 consecutive years.

The trust has a performance fee but even with this taken into account its ongoing charge is still less than1 per cent, making it one of the cheaper smaller companies investment trusts. Despite its good performance, the trust has been trading at a discount to NAV over the past year mostly at double-digit levels, as sentiment towards the UK has deteriorated. However this could tighten if the market recognises its strong performance.

 

EUROPE (5 FUNDS)

UK investors have been underinvested in Europe over the years. But some of the world’s leading companies are listed on markets in this region, while some of the best fund managers run European funds.

Jupiter European (GB00B5STJW84)

Jupiter European beats FTSE World Europe ex UK index and the IA Europe ex UK sector average over three and five years. Historically it has been one of the best performing Europe funds though can lag the index and its peers over shorter periods. The fund invests in high quality European companies meaning it typically has a defensive performance profile which often gives a degree of protection in falling markets. However, this also means it lags in rising markets.

The fund has been run by Alexander Darwall since 2001 who has an outstanding record running European equities. The fund has a concentrated portfolio, typically of 30 to 45 companies, which Mr Darwall holds for the long term meaning trading costs eat less into returns.

He looks for companies he considers to be world class, and thinks can sustain profit growth and margins over the long term. He favours companies whose prospects depend on their own entrepreneurial endeavour rather than factors beyond their control, and which have unique products or services and a proven record of profitability. This is because he wants to invest in exceptional European expertise rather than taking a view on the geopolitical European region. Because many of the businesses the fund invests in are successful on the global stage they are less likely to be affected by regional dynamics.

Less than 5 per cent of the fund’s assets are invested in the UK making it a good diversifier to UK equities.

Henderson European Focus (GB00B54J0L85)

Henderson European Focus’ manager John Bennet selects shares via a combination of sector analysis and stock selection, which produces a best ideas portfolio with the flexibility to invest across all industries in the European equity market. “John’s pragmatic approach means he considers the overall macroeconomic environment and sector trends as well as the criteria of individual companies,” comment analysts at FundCalibre. He weights the fund’s holdings according to his conviction in them. “This fund benefits from a highly experienced manager in John Bennett – he has spent almost 30 years working in European equities,” add analysts at Tilney Group. “He is doing something different to many other European fund managers. Historically his funds have offered a defensive performance profile, typically providing some protection from falling markets but lagging rising markets.”

For example, Henderson European Focus has beaten FTSE World Europe Ex UK index over three and five years, and the IA Europe ex UK sector average over five, but is behind over one year.

FP CRUX European Special Situations (GB00BTJRQ064)

FP CRUX European Special Situations is run by highly experienced manager Richard Pease who has more than three decades of investment experience, alongside James Milne. “Manager Richard Pease has a simple philosophy: invest in high quality businesses that are fundamentally undervalued and hold them for the long term,” explains Adrian Lowcock at Architas. “In doing this he looks for companies with little debt and good balance sheets, attractive valuations, managements with a proven track record, and businesses with pricing power and barriers to entry.”

The managers keep trading activity to a minimum so the costs of this eat less into the fund’s returns.

The fund can invest in companies of all sizes though typically has a bias to mid-caps. It beats FTSE World Europe ex UK index and the IA Europe ex UK sector average over three and five years, over which periods it is among the top performing funds in its sector. Over shorter periods returns can be volatile.

NEW ENTRANT: Schroder European Alpha Income (GB00B6S00Y77)

As well as paying an income, Schroder European Alpha Income makes very good total returns so is also a good option for growth investors, especially if they reinvest the dividends by holding the accumulation share class. Two of our panel felt it would be a worthy addition to the list.

“Manager James Sym runs this fund on a business cycle approach taking into account the macroeconomic climate and market sentiment when picking individual stocks,” says Adrian Lowcock. “There is a tendency towards value stocks but this will vary with where Mr Sym believes we are in the economic cycle. The cyclical stock picking strategy should benefit investors most in rising markets and is designed to take advantage of the European recovery.”

Ben Willis at Whitechurch Securities adds: “Within the business cycle approach, the fund will be managed on an unconstrained basis and Mr Sym will look to identify those stocks that he believes are fundamentally undervalued. Despite value investing being out of favour over recent years, he has still managed to produce strong returns over the medium term.”

Mr Sym shifts the portfolio between cyclical and defensive companies, and between value, quality and growth stocks, depending on what he considers the prevailing market conditions to be. He runs a concentrated portfolio of typically between 30 and 50 large or mid-sized companies that he hopes will offer 50 to 100 per cent upside over the next three years. A crucial part of his investment process is visits to companies.

Baring Europe Select (GB00B7NB1W76)

Baring Europe Select has delivered strong returns, particularly over longer periods where it is one of the best performing of all Europe funds. It beats Euromoney Smaller Europe Ex UK index over three and five years, and broader benchmarks such as FTSE World Europe Ex UK index over one, three and five years.

“Manager Nicholas Williams has worked in the investment industry for more than 25 years, including a long and successful stint running European small cap funds,” comment analysts at Tilney Group. “As well as beating the index fairly consistently his defensive performance profile, which includes typically lower volatility than the benchmark and a degree of protection from falling markets, shows that his risk-averse approach is paying off.”

But Mr Williams’ preference for higher-quality businesses means that while the fund has tended to outperform its peers in tough market conditions it may lag a rapidly rising market. And its focus on smaller companies means it can be volatile over shorter periods.

Mr Williams and his team pick holdings according to their individual merits rather than positioning the fund to reflect macroeconomic news. They focus on companies whose strategic positioning and competitive strengths can drive sustained and long-term improvements in their profitability and returns. They invest via a growth at a reasonable price approach seeking companies demonstrating consistent earnings growth, which are trading on reasonable valuations.

They like companies to have strong balance sheets, low levels of debt and high returns on equity.

 

JAPAN (6 FUNDS)

UK investors have been wary about investing in Japan after experiencing years of poor returns in the last century. But the world has changed, and good Japanese companies and funds have been making strong returns for years. And sentiment towards Japan has improved significantly as the government has taken steps to boost economic growth, increase inflation and weaken the yen. So a good Japan fund should be a useful addition in balancing many investors’ portfolios.

Baillie Gifford Japan Trust (BGFD)

Baillie Gifford Japan Trust delivers returns well ahead of the Topix index over one, three and five years, especially over longer periods, and is also one of the best performing Japan funds available to UK private investors. This outstanding performer is by highly experienced manager Sarah Whitley who has worked in the Baillie Gifford Japanese equities team since 1982, and which she has headed since 2001.

The trust has a focus on medium and smaller companies, of which the growth may come from innovative business models, disrupting traditional Japanese practices or market opportunities such as growth from overseas. Ms Whitley and her team aim to take a three to five year view. “We rate Sarah Whitley and her team very highly,” comment analysts at Winterflood. “The manager has developed an enviable performance record relative to the trust’s benchmark and its peer group through an unconstrained investment approach. The closed ended structure has also allowed her to deploy gearing and increase the trust’s weighting to small cap companies. Both of these have proven to be positive factors over recent years, although the fund has historically underperformed during more difficult market conditions. The trust is one of the largest in the wider Japanese peer group. Its size means that its shares offer better liquidity in the secondary market.”

Its ongoing charge of 0.88 per cent is very reasonable in view of its outstanding performance. The trust often trades at a premium to NAV but it is probably worth paying for the very strong long-term growth this trust delivers.

Man GLG Japan CoreAlpha (GB00B0119B50)

Man GLG Japan CoreAlpha beats the Topix index and the IA Japan sector average over one, three and five years, with particularly good returns over longer periods.

The fund’s investment team, which is led by Stephen Harker, focuses on larger companies. They take a contrarian approach to investing because they believe cyclicality strongly influences every sector of the Japanese market and that outperformance can be generated by exploiting extremes of valuation. They buy stocks that are completely unloved and sell them when they become popular after significant price appreciation.

When selecting shares they judge the quality of businesses, assessing what has been achieved historically and what can potentially be determined about the future from the prevailing environment.

“The portfolio can take aggressive sector and stock positions relative to the index and as a result the fund tends to be one of the more volatile in the sector,” comment analysts at Tilney Group. “However Mr Harker’s long term track record justifies his approach. He is one of the most experienced managers of Japanese equities and he has a distinctive approach to investment. His style can lead to aggressive contrarian calls which can result in periods of underperformance, and he tends to beat the index in a rising market. The fund’s managers focus on what they consider to be valuation anomalies rather than companies with high growth rates. Their preferred valuation methodology is price to book which compares a company’s market capitalisation to its assets, which has traditionally been a potent metric in Japan.”

Schroder Tokyo (GB00BGP6BR86)

Schroder Tokyo has not performed well recently though historically it has done very well. Its conservative management style means it can lag, in particular in rising markets. The fund has no bias to any particular industry or size of company. Its management team, led by Andrew Rose, chooses investments based on Japan’s economic strengths, such as its manufacturing industry – in particular those parts that are demonstrating an ability to exploit newly emerging technology – and from sectors benefiting from structural change in the economy.

The fund uses Tokyo-based in-house research to identify attractively valued companies whose share prices appear low relative to long-term profit potential. These opportunities are likely to be found across a broad range of industries. “Mr Rose has over 30 years of Japanese investment experience and is supported by a team of analysts and fund managers based in Japan,” comment analysts at Tilney Group. “He has provided a consistent approach to investing in the Japanese market with a fundamental, risk cautious style of selecting stocks. His focus on quality companies means the fund will tend to avoid expensive growth stocks which would typically offer resistance in falling markets.”

 

UK investors have been wary about investing in Japan after experiencing years of poor returns in the last century. But the world has changed

 

NEW ENTRANT: CF Morant Wright Nippon Yield (GB00B42MKS95)

In common with other income focused Japan funds, CF Morant Wright Nippon Yield doesn’t have such a high-yield as income funds focused on other jurisdictions. But it does consistently make very good total returns meaning it is in the top quartile of the IA Japan sector over one, three and five years – ahead of many funds with a growth objective. It also beats the Topix index in most years meaning it could be a good option for investors who want to benefit from Japanese equity growth if they hold the accumulation share class. The fund aims to generate absolute returns, and has achieved this with positive returns in each of the last six calendar years. It invests in undervalued Japanese companies that have strong balance sheets, sound business franchises and attractive dividend yields.

“CF Morant Wright Nippon Yield offers a reasonable income in this low-yield market, as well as capital appreciation from excellent stock selection,” says Ben Seager-Scott at Tilney Group. “Morant Wright is a dedicated Japanese fund management house with a strong small cap value style which focuses on price to book. They invest in companies that are trading at a significant discount to their assets and, as a result, the fund is generally quite defensively positioned.”

However, because the types of companies the fund invests in tend to be more secure and are already cheap, it tends to perform well in difficult stock market conditions and may lag in strongly rising markets.

Legg Mason IF Japan Equity (GB00B8JYLC77)

Legg Mason IF Japan Equity has beaten the Topix index and IA Japan sector average over three and five years – by almost three times over the latter period when it is the top performing Japan fund. The fund can deliver excellent returns but also be highly volatile, so is only an option if you have a long-term investment horizon and high risk appetite, and include it as part of a diversified portfolio. 

“Hideo Shiozumi is an experienced manager of Japanese equities,” comment analysts at Tilney Group. During his career he has had periods of considerable outperformance. This is due to his investment style which seeks primarily small cap companies that generate most of their revenues domestically. These stocks tend to exhibit significant volatility, and therefore this strategy should be regarded as relatively high-risk. The portfolio is concentrated and has little resemblance to any benchmark so relative performance can differ substantially.”

Baillie Gifford Japanese Smaller Companies (GB0006014921)

Baillie Gifford Japanese Smaller Companies underperforms MSCI Japan Small Cap index over one year, but beats this and its sector average over three and five. The longer record, however, is largely due to a past manager – Praveen Kumar only started running the fund in December 2015 though has worked in the Baillie Gifford Japanese equities team since 2011. And Felicia Hjertman came on board at the start of this year.

However Baillie Gifford emphasises that its funds are run via a team approach and its Japan team has delivered some excellent returns over the years. And typically volatile smaller companies can undergo periods of under performance, so it is too early to say if the new management is failing to deliver. Also, over the first eight months of 2017 the fund was ahead of MSCI Japan Small Cap index.

Its management team looks to invest in attractively valued smaller companies that offer good growth from innovative business models disrupting traditional Japanese business practises, or growth outside Japan.

The fund has a low ongoing charge of 0.63 per cent.

 

ASIA EX JAPAN (6 FUNDS)

Asia has some of the most dynamic economies and arguably the most growth potential of all geographic regions. It includes China and India, the countries with the world’s largest populations, and where growing affluence is driving many areas such as consumer and financial services. While economic growth is not always reflected in markets, the stock markets in this part of the world are growing and becoming more accessible to foreign investors. They include some high-growth and high-quality companies, which good investment teams should be able to seek out.

Asian equities are a higher risk area that includes a number of emerging markets and can be highly volatile, so you should have a long-term time horizon and higher risk appetite if you invest in this area – especially single-country emerging markets funds.

Changes to the selection: We have dropped Aberdeen Asian Smaller Companies Investment Trust (AAS) because it has underperformed regional indices and peers with a focus on smaller companies. This is alongside a high ongoing charge of 1.69 per cent. 

We have dropped Pacific Assets Trust (PAC) because it is run by the same managers – David Gait and Sashi Reddy – as Stewart Investors Asia Pacific Leaders fund but has a higher ongoing charge of 1.3 per cent against 0.89 per cent.

We have dropped Schroder Asian Total Return (ATR) because although it has been beating its benchmark and many of its peers it has very high charges. Its performance fee in its last financial year took this trust’s basic ongoing charge of 1.02 per cent up to 2.5 per cent.

Stewart Investors Asia Pacific Leaders (GB0033874768)

Stewart Investors Asia Pacific Leaders has not recently performed well against regional indices or the IA Asia Pacific ex Japan sector average. However, its manager David Gait, who took over the running of the fund in 2015, has a strong long-term performance record on other funds such as Pacific Assets Trust and Stewart Investors Asia Pacific Sustainability (GB00B0TY6V50).

Short-term underperformance is not a reason to drop a manager, and in any case Asian equities should be held for the long-term. And Mr Gait invests in quality sustainable companies over a long period with a strong valuation discipline. He typically outperforms in a falling market and can lag rising markets.

“David Gait takes a long term view of investing,” says Adrian Lowcock at Architas. “He adopts a conservative approach looking for well-managed companies with strong cash flows and robust balance sheets which offer some protection in difficult markets. He will not look to time the markets, and unlike many of his peers he focuses on capital preservation and looks to engage with the company managements.”

Invesco Asia Trust (IAT)

Invesco Asia beats regional indices such as MSCI AC Asia ex Japan and MSCI AC Asia Pacific ex Japan over one, three and five years.

When choosing holdings the trust’s management team, which is led by Ian Hargreaves, considers companies’ individual merits and takes a top-down macroeconomic view, looking to be flexible and take advantage of different market cycles and environments. They consider a top-down view to be more important at turning points in the markets and necessary, as countries in the region vary by phase of development, valuation, and economic and credit cycles. Taking macroeconomic considerations into account differentiates the trust from its sector peers.

Its managers target companies that look like they can achieve strong levels of capital gains and or growing dividends, and demonstrate quality characteristics such as robust balance sheets, strong cash flows and good management teams. They also favour companies whose share prices are substantially below their estimate of fair value. 

The trust has a high weighting in Chinese internet companies because its managers feel the market is being too sceptical of their ability to maintain strong growth. And over a fifth of its assets are invested in South Korea because they think corporate governance improvements and dividend payouts are being ignored, with valuations suggesting there is little priced in for future growth.

Invesco Asia can invest in companies of all sizes and typically has 50 to 60 holdings.

Schroder Asia Pacific (SDP)

Schroder Asia Pacific has beaten regional indices such as MSCI AC Asia ex Japan and MSCI AC Asia Pacific ex Japan over one, three and five years, and in NAV terms many of its peers.

“Schroder Asia Pacific aims to take advantage of the domestic growth story in Asia through a bottom-up, stock picking approach focused on quality companies,” comment analysts at Numis. “The fund has consistently achieved top quartile performance versus both open and closed ended funds, and is our core recommendation in the Asia Pacific ex Japan sector. It benefits from an experienced manager, Matthew Dobbs, and has an impressive long term track record, with NAV returns of 187 per cent (11.1 per cent a year) over the past decade compared with 134 per cent (8.9 per cent a year) from MSCI AC Asia ex Japan index.”

It is also one of the largest and most liquid of the Asia investment trusts with a market cap of over £700m.

The trust had an ongoing charge of 1.1 per cent at the end of its last financial year in September 2016, but as of 1 April this year made some changes to its fee which could result in a fall.

Fidelity China Special Situations (FCSS)

Fidelity China Special Situations has beaten its benchmark, MSCI China index, over three and five years by quite some difference, as well as many other China funds. The trust has been run by Dale Nicholls since April 2014, and over the first three years of his tenure he made a NAV return of 101.8 per cent against 60.6 per cent for the trust’s benchmark.

The trust can invest in domestic A shares, in which it has around 9 per cent of its assets, and up to 10 per cent of its assets in unlisted companies, where it currently has around 4 per cent of its assets.

Mr Nicholls invests in undervalued companies with good long-term growth prospects which have been underestimated by the wider market. He has a bias to small and medium-sized companies, where lower levels of research by competitors leads to greater opportunities for mispricing. But he can also invest in large or mega-cap companies such as state-owned-enterprises where mispricing appears. He believes the growth of the middle class and a refocusing of China’s economy towards domestic consumption, will be key drivers of its economy and stock market in the coming years, so invests in companies offering products and services that cater for this growth.

“We regard Dale Nicholls highly and believe that Fidelity China Special Situations is an attractive vehicle for investors who are comfortable with the risk profile of a leveraged fund with a focus on mid and small caps in a single emerging market,” comment analysts at Numis.

The trust has an ongoing charge of 1.16 per cent but this can be higher in years when it triggers its performance fee of 15 per cent of any change in the NAV per share attributable to performance which is more than 2 per cent above the return of MSCI China index.

NEW ENTRANT: Jupiter India (GB00BD08NQ14)

Jupiter India is one of the best performing India funds available to UK private investors and beats its benchmark, MSCI India, over three and five years. Since its launch in 2008 it has made a return of 208.2 per cent against 77.3 per cent for its benchmark.

The fund’s manager, Avinash Vazirani, has extensive experience investing in India. He invests with a growth at a reasonable price philosophy seeking to identify and then invest on a long-term basis in companies he believes have the potential to grow and may benefit from country-wide structural trends.

The fund invests across companies of various sizes, and its inclusion of small and mid-caps differentiates it from some of its peers which are focused on larger companies. The X share class has a very reasonable ongoing charge of 0.69 per cent.

 

Jupiter India is one of the best performing India funds available to UK private investors

 

Aberdeen New India (NII)

Aberdeen New India has beaten MSCI India index over three and five years, as well as being ahead of this index in seven out of the last 10 calendar years in NAV terms.

The trust’s managers invest in companies they think offer good value, and estimate a company’s worth by assessing quality and price. They define a company’s quality with reference to its management, business focus, balance sheet and corporate governance record. And they seek and hold companies that are run efficiently and can tap into India’s vast long-term potential for growth.

Consumer stocks account for over 20 per cent of assets. The trust also has substantial exposure to financials but its managers prefer private sector banks because they expect private lenders to gain more ground as they have capital for growth, cleaner balance sheets and more nimble management.

“The Aberdeen strategy remains our favoured pure play on the Indian equity market due to its focus on well run companies with sound fundamentals,” comment analysts at Killik.

It has an ongoing charge of 1.31 per cent but this could fall because it is going to reduce its management fee from next April.

 

EMERGING AND FRONTIER MARKETS (6 FUNDS)

Perhaps the most important area for long-term growth investors is emerging markets, because populations and wealth in these parts of the world are growing as the countries, economies and markets develop. These markets are also less researched than developed markets so should give active managers more opportunities to find good companies. But along with growth potential comes a lot of risk, as these areas are less politically stable and have lower levels of corporate governance than developed economies. So funds focused on these areas are better suited to investors with long-term time horizons and high risk appetites.

Changes to the selection: We have dropped Utilico Emerging Markets (UEM) because its ongoing charge of 1.1 per cent, when added to its performance fee at the end of its last financial year in March, hit 2.9 per cent, which is an excessive amount. This is despite the fact that over its last financial year it made a NAV return of 26.2 per cent, behind MSCI Emerging Markets index’s 34.9 per cent. At the end of July it still lagged this index over one year, and only kept pace with it over three. There are emerging markets funds which perform better and have far lower fees.

Templeton Emerging Markets Investment Trust (TEM)

Templeton Emerging Markets Investment Trust has had a good run since Carlos Hardenberg became its manager in October 2015. During 2016 the trust made a NAV return of 49.18 against 33.12 per cent for MSCI Emerging Markets index, and over the first eight months of this year had returned 30.2 per cent against 23.3 per cent for this benchmark.

Mr Hardenberg has achieved this improvement in performance by making changes including lowering the risk of the portfolio, reducing concentration in individual shares and sectors, and investing in a wider range of countries. Mr Hardenberg and his team evaluate a company’s potential for earnings and growth over a five-year horizon. They model a company’s potential future earnings, cash flow and asset value relative to its stock price, and their research includes visiting companies.

“There has been a significant turnaround since Carlos Hardenberg took over management of the portfolio, following a number of years of underperformance,” comment analysts at Numis. “The NAV has strongly outperformed since October 2015, up 77 per cent versus 55 per cent for the benchmark. His investment approach remains focused on value through bottom-up stock picking, and the definition of value is now much broader and seeks to factor in companies with long term competitive advantages, as well as strong balance sheets and good corporate governance. This has led to substantial shifts in the portfolio, including increased exposure to a number of key themes such as improved sentiment towards China and structural growth in the internet, with the portfolio’s weighting in technology stocks now 30 versus around 6 per cent in mid-2015. The portfolio is now more diversified, with the number of stocks increased from 56 to over 90, although the manager stresses that it does not mean it is becoming more index aware.”

Templeton Emerging Markets’ share price has not kept up with its NAV so at time of writing the trust was trading on a discount to NAV of more than 12 per cent, but if the good performance continues this could tighten.

The trust had an ongoing charge of 1.21 per cent as at the end of its last financial year in March, but since 1 July it has reduced its fee so this could fall.

Newton Global Emerging Markets (GB00BVRZK937)

Newton Global Emerging Markets has beaten MSCI Emerging Markets index and the IA Global Emerging Markets sector average over three and five years. Returns can be volatile, though, as lead manager Rob Marshall-Lee takes high conviction bets switching between areas he thinks will outperform. And the fund’s focus on consumer shares means it often lags when the oil price rallies, given its low exposure to commodities both directly and indirectly. The fund typically has between 50 and 70 holdings.

Mr Marshall-Lee and his team follow a distinct global thematic investment approach and conduct extensive proprietary research. “This growth-style fund also has a pronounced quality bias which should help in challenging markets,” comment analysts at Tilney Group. “The team-based approach follows the broader macroeconomic themes and is underpinned by extensive proprietary research. While the house themes define the areas of stock selection, sector weights result from active stock picking. Although the fund manager is ultimately responsible for investment decisions, consensus must be reached within the team for a stock to be included in the portfolio. Team debate is encouraged, and many contrarian ideas are generated.”

Fidelity Emerging Markets (GB00B9SMK778)

Fidelity Emerging Markets’ manager Nick Price looks to invest in high quality, attractively priced companies that are capable of delivering sustainable returns. He favours companies with strong market positions and competitive advantages, as these are typically able to deliver attractive earnings throughout the economic cycle. He also favours companies that deliver superior returns on their assets and have well capitalised balance sheets on the grounds that such companies are usually more able to fund internal growth without diluting existing shareholder earnings through issuing new shares.

Mr Price thinks that prioritising quality will help the fund over the long term as emerging markets mature and investor focus shifts from the pace of growth to its sustainability. This has been the case so far with the fund beating MSCI Emerging Markets index and the IA Global Emerging Markets sector average over three and five years. Key sector exposures include consumer shares and financials, and Mr Price and his team of six portfolio managers and 49 analysts favour companies which serve the nascent emerging markets consumer.

“Nick Price is an experienced emerging markets equities manager, who has been running money in the space for over 10 years, and took over this fund in July 2009,” comment analysts at Tilney Group. “He is an accountant by background and scrutinises companies’ balance sheets rigorously. This is helpful in picking better quality companies that potentially better protect the fund’s performance in falling markets.”

NEW ENTRANT: Schroder Small Cap Discovery (GB00B5ZS9V71)

Schroder Small Cap Discovery invests in smaller companies listed in Asia and emerging markets, or ones which derive a significant portion of their business or growth from these regions. Over the long-term these regions look like they will experience strong growth, and smaller companies often capture the dynamics of domestic economies better than large ones.

The fund’s managers, highly experienced Asia investor Matthew Dobbs and Richard Sennitt, say: “We believe smaller companies can provide higher growth prospects than larger companies over the longer term, due to the fact they are typically in the early stages of their development. Smaller companies are less researched than larger ones. We believe that our focus on finding companies that offer sustainable growth patterns and are trading on compelling valuations should reward the fund’s investors.”

However, with this growth potential comes a tremendous amount of risk and the likelihood of considerable volatility. Smaller companies and these regions are also unlikely to see their potential come to fruition for a long time. So this could be a racy option for very long-term investors with a high risk appetite, accounting for only a small portion of diversified portfolios.

BlackRock Frontiers Investment Trust (BRFI)

BlackRock Frontiers Investment Trust is one of the few options available to private investors for getting exposure to frontier markets, which are even less developed than emerging markets. These typically have lower market capitalisations and less liquid stock exchanges, making them higher-risk. But they also have the potential for even higher growth than emerging markets, which have matured significantly over the past decade. But frontier markets are only suitable if you have a very high risk appetite and long-term investment horizon.

BlackRock Frontiers has beaten MSCI Frontier Markets Index over three and five years. It also has an attractive yield of over 3 per cent, although its objective is long-term capital growth. “We rate the BlackRock team highly and the track record on this listed fund is impressive, having significantly outperformed both the MSCI Frontier Index and MSCI Emerging Markets Index since launch in 2010,” comment analysts at Killik. The trust has a high ongoing charge plus performance fee of 2.39 per cent but it is a specialist mandate and has performed well.

Aberdeen Latin American Equity (GB00B4R0SD95)

Aberdeen Latin American Equity has beaten MSCI EM Latin America index over one, three and five years, and by quite a margin over longer periods. It is also one of the best performing Latin American equity funds available to private investors. The fund’s investment team look for quality companies with straightforward businesses, recurring earnings growth and strong balance sheets that can support expansion, and which are shareholder friendly. One of their key disciplines is to avoid overpaying for shares, and they sell them when they consider valuations are stretched.

“The team’s conservative approach means performance characteristics should be similar to those of other Aberdeen emerging markets funds, providing a degree of protection from falling markets but underperforming in strong market rises,” comment analysts at Tilney Group. “However, investors should expect a higher degree of risk compared to a diversified emerging markets fund.”

In keeping with the asset class it invests in, the fund can be volatile and has a relatively concentrated portfolio of 42 shares. Like other single country or regional emerging markets funds this is only an option if you have a very high risk appetite and long-term investment horizon.

 

 

COMMODITIES (2 FUNDS)

Commodities are a high-risk and volatile area, but can also deliver high returns. Active commodity funds tend to invest in the shares of commodity companies such as miners rather than actual commodities, so this section is small as you can also get exposure to this high-risk equity sector via broader, diversified funds. If you want exposure to commodities have a look at the IC Top 50 ETFs which include funds that hold metals such as gold.

Changes to the selection: We have dropped City Natural Resources High Yield (CYN) because it has underperformed Euromoney Global Mining index in three of the past five full calendar years and over the first seven months of this year in NAV terms, as well as cumulatively over one, three and five years. The dividend it paid in its last financial year was not fully covered by earnings, the trust doesn’t have a discount control mechanism and trades at a discount of around 20 per cent, and has a market capitalisation of only about £80m.

This is all for a high ongoing charge of 1.86 per cent. If investors want a high income we have better performing, cheaper and less volatile options in other sections of the IC Top 100 Funds.

We have dropped BlackRock Commodities Income Investment Trust (BRCI) in favour of BlackRock World Mining Trust because it has a higher ongoing charge but has not performed as well over one and three years. It also has assets of only around £100m, against BlackRock World Mining’s £800m-plus. BlackRock Commodities Income has a high yield but cut its dividend in its last financial year.

“While BlackRock Commodities Income Investment Trust pays an attractive yield of 5.6 per cent, much of its income is generated from option writing rather than underlying dividends,” comment analysts at Numis. “BlackRock World Mining is a better alternative for investors seeking exposure to a recovery in mining shares.”

Smith & Williamson Global Gold & Resources (GB00B3RJHY30)

Smith & Williamson Global Gold & Resources mainly invests in gold mining, precious metal and resources companies’ shares, although it can also invest in other securities such as gold bullion shares, money market instruments and deposits. Ani Markova has been lead manager since 2011 and has worked at AGF, the company which manages it, since 2003.

Around three-quarters of the fund’s assets are listed in Canada, and it includes exposure to mid and smaller companies, which each accounts for around a third of the portfolio, and micro-caps which account for around 20 per cent. “The bias towards mid sized and smaller companies helps deliver outperformance when the gold price rises, but offers little protection in weaker markets,” says Architas’s Adrian Lowcock.

Analysts at Tilney Group add: “Managed by a very experienced team based in Canada, this fund invests predominantly in gold and resource equities with the former being greater than half of the fund’s exposure. The team looks to invest across the market capitalisation spectrum and is able to move relatively quickly due to the fund’s small size. Nevertheless, investors should be aware that performance is likely to have a strong positive correlation to the gold price. This relatively small fund has a distinct house style. Given its biases, the risk profile is likely to be higher than some of its larger rivals, which have produced similar long-term returns.”

Smith & Williamson Global Gold & Resources has a very reasonable ongoing charge of 0.72 per cent, making it one of the cheaper gold equities funds available to private investors.

NEW ENTRANT: BlackRock World Mining Trust (BRWM)

Two of our panelists suggested adding BlackRock World Mining Trust, not least because it is larger and more liquid than stable mate BlackRock Commodities Income. BRWM has beaten Euromoney Global Mining Index over one year, and offers a yield of just under 4 per cent. Its policy is to distribute a substantial amount of the income it has available. The trust experienced some difficulties in 2014 when it had to write off the Marampa Royalty Contract and a convertible bond issued by iron ore producer London Mining (LOND), which accounted for over 6 per cent of its assets. And last year it cut its dividend.

But more recently things have been going better and listed equities account for about 90 per cent of assets, although the trust can hold up to 20 per cent of its assets in unquoted investments. It has one royalty contract with Avanco which has been performing well and accounts for about 2.5 per cent of its assets. The trust invests in mining companies involved with a range of metals, including copper, gold and silver. But it has also been moving away from pure commodity themes and invests in areas such as resource replenishment, deleveraging, growth and early-stage opportunities which could limit the potential for revenue growth but offer the potential for high capital returns.

“While the trust endured a difficult period before last year, the BlackRock Natural Resources team remains well-resourced and experienced,” comment analysts at Winterflood. “The team has a flexible approach to investing across base and precious metals and is prepared to take advantage of special situations. There is greater clarity on the dividend policy and scope for the trust’s discount to tighten.”

BlackRock World Mining is a high risk and potentially volatile trust, however, so it should only be held if you have a very long-term time horizon and high risk appetite, and only account for a small part of your portfolio.

 

 

ALTERNATIVE ASSETS (8 FUNDS)

It is important to diversify your portfolio so that if one area goes down, hopefully other parts of your portfolio won’t. Funds focused on alternative assets can also boost your returns. Private equity investments, for example, offer the prospect of high growth and diversification away from equities because they are unlisted. Private investors generally can’t access this asset class directly, but there are a number of investment trusts focused on this area. However, they are high-risk so should only account for a small portion of larger portfolios. Infrastructure, by contrast, is a lower risk and high yielding way to get exposure to alternative investments.

Changes to the selection: We have dropped Foresight Solar Fund (FSFL) as earlier this year it experienced operational problems at a number of its sites. Its dividend is 1.06 times covered with the financial compensation for lost revenue following its operational problems, but without this it falls to 1.01 times. “We are concerned by the speed and magnitude (+15 per cent) of the revaluation of the fund’s largest asset, Shotwick, despite operational issues and energy production being 24 per cent below expectation,” add analysts at Winterflood. “Taking all of this into account we do not currently view the fund as a particularly attractive option within the peer group.”

SVG Capital is no longer in the list because it was wound up earlier this year after selling its portfolio to private equity firm HarbourVest.

First State Global Listed Infrastructure (GB00B24HK556)

This fund invests in the securities of infrastructure companies, and because it is open-ended it does not trade on an excessive premium to NAV like infrastructure investment trusts. The fund has beaten its benchmark, FTSE Global Core Infrastructure 50/50 Index, over one, three and five years, and since launch in 2007. It is ranked in the IA Global sector, and over three and five years is in the first quartile in terms of performance, beating many funds with a much broader mandate.

First State Global Listed Infrastructure holds the shares of companies in areas including electric utilities, highways and rail tracks, and oil and gas storage and transportation. About 45 per cent of its assets are listed in the US, with most of the remainder in developed economies. Its managers favour quality companies, and look for real infrastructure assets with barriers to entry and pricing power. The fund has a reasonably concentrated portfolio of about 40 investments. It also has a lower ongoing charge than infrastructure investment trusts of 0.82 per cent. It only has a yield of around 2.5 per cent, though, and is likely to move more in line with equity markets because its underlying holdings are listed.

HICL Infrastructure (HICL)

HICL’s principal objective is predictable and sustainable dividends derived from stable, inflation-correlated cash flows from infrastructure projects. And the trust has done this, having increased its dividend in each of its last six financial years so that it has an attractive yield of about 4.7 per cent. It is targeting a dividend of 7.85p for its financial year to 31 March 2018 and 8.05p for the financial year to 31 March 2019.

It has also succeeded in delivering good and stable total returns, with positive share price returns every calendar year since 2007, and positive NAV returns in every one except 2009. Cumulatively, it outperforms the FTSE All-Share index over three and five years.

HICL’s returns also have a 0.8 correlation to inflation, which could prove useful if this goes up in the UK. The trust has more than 100 investments valued in excess of £2bn, many of which are UK Private Finance Initiative (PFI) and Public Private Partnership (PPP) schemes. In recent years it has been expanding into slightly higher-risk investments such as demand-based toll roads, and this year made its first investment in a regulated asset when it acquired 37 per cent of Affinity Water.

Its investments span a range of sectors including education, health and transport, mostly in the UK.

Because of its attractive attributes the trust has often traded at a double-digit premium to NAV. So it is one to add to on the occasions it is available at a lower rating, for example, a C share issue or if it falls to a single-digit premium, as was the case at time of writing because it had recently completed a share issue.

Renewables Infrastructure Group (TRIG)

Most renewable energy infrastructure investment trusts offer even more attractive yields than broad infrastructure funds, and trade at single-digit rather than double-digit premiums to NAV. These tend to invest in wind farms and/or solar parks, and make their returns through a mixture of government subsidies and power generation.

The oldest established trust in this relatively new area, Renewables Infrastructure Group, is run by the same management group as HICL – InfraRed Capital Partners – which has been managing infrastructure investments for 20 years. At time of writing it traded on a premium to NAV of about 9 per cent.

The trust has delivered positive returns in every calendar year since its launch in 2013 and has been steadily increasing its dividend since launch, in line with its aim of long-term stable dividends while preserving the capital value of its investment portfolio. It has a yield of around 5.8 per cent and for its current financial year is targeting a dividend of 6.4p a share, a slight increase on the 6.25p it paid last year.

The trust has 56 investments, mainly in renewable energy infrastructure operating projects in the UK and France. About three quarters of these by value are wind related with most of the remainder in solar, and recently it has invested in a battery energy storage project which is under construction. Some of its revenues are linked to inflation. It is the largest of the renewable energy infrastructure investment trusts with a market cap of over £1bn, and has the lowest ongoing charge of these at 1.09 per cent.

NEW ENTRANT: John Laing Environmental Assets Group (JLEN)

John Laing Environmental Assets has a diversified portfolio of 22 operational environmental infrastructure projects, mostly in the UK. It looks to invest in projects that have long-term, predictable, wholly or partially inflation-linked cash flows supported by long-term contracts or stable regulatory frameworks. Around 70 per cent of its revenues are inflation linked.

The fund targets a net internal rate of return of 7.5 to 8.5 per cent over the long term, and a long-term sustainable dividend that increases in line with inflation. It looks to preserve the capital value of its portfolio by reinvesting cash flows not reserved for dividends. It paid a dividend of 6.14p in its last financial year, up from 6.054p the year before, and is targeting a full-year dividend for the year ending 31 March 2018 of 6.31p. It has an attractive yield of about 5.8 per cent.

At time of writing the trust traded on a premium to NAV of just over 8 per cent, which was lower than most of the broad infrastructure funds.

Nearly half of its assets are invested in wind, around a third in solar, and the rest in waste and waste water projects. It has a first offer agreement over a pipeline of environmental infrastructure projects worth an estimated £345m owned by its asset manager, international infrastructure company John Laing (JLG).

“Since launch the fund has benefited from its diversification across a number of asset types, with its waste and wastewater assets softening the impact of falling power prices,” comment analysts at Winterflood.

Standard Life Private Equity (SLPE)

Standard Life Private Equity Trust takes a fund of funds approach, buying private equity buyout funds rather than direct investments. This means it has exposure to around 340 private companies via 49 funds, rather than tens of investments. But a fund of funds won’t benefit as much from the uplift of a single realisation as a directly investing private equity fund, although Standard Life Private Equity is more concentrated than some of its fund of funds peers.

The trust mainly invests in Europe although it amended its policy last year to remove geographic restrictions. Its portfolio is diversified by industry, manager, geography and vintage year. The trust introduced an enhanced dividend policy last year and plans to pay a dividend of 12p for its current financial year, up from 5.4p last year. It has a yield of about 3.6 per cent and its board is committed to maintaining the real value of the dividend. This also differentiates it from many of its private equity investment trust peers.

The trust has a strong long-term performance record, having made a NAV total return of 349 per cent between its launch in May 2001 and June this year, in contrast to a 166 per cent rise for MSCI Europe. Its share price has not done as well, and like a lot of private equity investment trusts it typically trades at a discount to NAV. 

The trust scrapped its performance fee last year so its high ongoing charge plus performance fee of 2.33 per cent in its last financial year is likely to fall.

“Standard Life Private Equity is one of the leading UK-listed private equity funds, offering shareholders concentrated exposure to a fund of funds strategy at a competitive cost,” comment analysts at Winterflood. “We believe that its discount could continue to narrow, particularly if its strong performance record continues and the shareholder base continues to broaden towards wealth managers and retail investors.”

Pantheon International (PIN)

Fund of funds Pantheon International’s assets are spread across different investment styles and stages including buyout, venture, growth and special situations, with the aim of reducing volatility of returns and cash flows. Its diversified maturity profile means it is not overly exposed to any one vintage.

Around 56 per cent of its assets are in the US and a quarter in Europe. The trust has a good long-term performance record, with its share price returns beating broad indices such as the FTSE All-Share and FTSE Small Cap over one, three and five years.

“The group is well resourced with a team of 70 investment professionals that manages assets of $36.6bn, and the listed fund has priority access to secondary investments,” comment analysts at Numis Securities. “The outlook for realisations remains positive from Pantheon’s mature portfolio.”

HarbourVest Global Private Equity (HVPE)

HarbourVest Global Private Equity has one of the best performance records of private equity fund of funds, and its share price beats broad indices such as FTSE World and FTSE World ex UK over one, three and five years.

The trust has a varied portfolio of private equity funds with over 60 per cent in buyouts, and about 30 per cent in venture and growth equity. About 60 per cent of its assets are in the US, and about 20 per cent in Europe. Its managers aim to manage risk through diversification and it offers exposure to over 7,000 companies.

Syncona (SYNC)

Syncona changed its name from The BACIT last year after a major change to its investment strategy. It was essentially a wealth preservation fund focused on hedge funds which also donated 1 per cent of its NAV each year to charity. But in December shareholders agreed for it to gradually become a life sciences investment company.

The fund now has seven life science companies which account for around a third of its assets, although this proportion should rise. The fund is looking to invest £75m to £150m over its current financial year into life sciences companies and has a longer-term aim of investing in up to 20 life sciences companies. Funds account for about 60 per cent of its assets and about a third of these are hedge funds, as the aim of the fund allocation is to limit volatility.

Syncona is becoming a very high risk venture capital fund, focused on one sector, albeit with the potential for high returns – it is aiming for a net internal rate of return of 15 per cent through the cycle. It also donates 0.3 per cent of its NAV to mainly medical charities each year. Syncona could account for a small portion of investors’ portfolios if they have a very high risk appetite and long-term time horizon, and want exposure to unlisted biotech companies they probably couldn’t access directly. They should also wait until it is at a more reasonable rating or does a C share issue: at time of writing the trust was on an excessive premium to NAV of over 20 per cent.

 

ETHICAL/ENVIRONMENTAL (5 FUNDS)

A number of investors are not just interested in making money but also making a difference with their investments. Although there is a smaller choice of ethical or environmental investments, if you look in the right places you can find funds that are not just good because of their returns.

If you are interested in this area, also see Royal London Ethical Bond in the bond section, and Renewables Infrastructure Group and John Laing Environmental Assets Group under alternative assets.

Changes to the selection: We have replaced F&C Responsible UK Equity Growth (GB0033396481) with Standard Life Investments UK Ethical because the latter fund has delivered much better performance.

We have moved Syncona, which changed its name from The BACIT, into the alternative assets category because it has reduced the percentage of its NAV that it donates to charity. The trust is also substantially changing its investment strategy to become a very high risk private equity fund focused on life sciences, which may not suit the preferences of some ethical investors.

Impax Environmental Markets (IEM)

Impax Environmental Markets aims to benefit from growth in markets for cleaner or more efficient delivery of the basic services of energy, water and waste. It mainly invests in quoted companies which provide or use technology-based products or services in environmental markets, in particular alternative energy and energy efficiency, water treatment and pollution control, and waste technology and resource management.

The trust beats its benchmark, FTSE ET Index, over three and five years. It also beats broad global indices such as FTSE World and FTSE World ex UK over three and five years, and beats or matches them over one.

About 43 per cent of the trust’s assets are listed in the US, and nearly a third in Europe. Companies involved with energy efficiency account for just over a third of its assets, and those involved with water infrastructure and technologies a fifth.

“Impax Environmental Markets offers specialist exposure to a growth oriented sector and the Impax team has considerable experience of investing in this area,” comment analysts at Winterflood. “We view the trust as a higher risk, potentially higher return vehicle. However, while it is susceptible to political and regulatory changes, that risk is mitigated to an extent by its diversification across sub-sectors. Downside discount risk is limited by its board’s commitment to buy back shares at a discount of wider than 10 per cent.”

This has meant that over the past few years the discount to NAV has not gone far beyond 10 per cent, although it also hasn’t been much tighter.

NEW ENTRANT: Standard Life Investments UK Ethical (GB00B6Y80X40)

Standard Life Investments UK Ethical beats the FTSE All-Share index and the IA UK All Companies sector average over one, three and five years, putting it into the first quartile of this sector in terms of performance over these periods – ahead of many funds that don’t have an ethical remit.

The fund aims for long-term growth by investing in UK equities that meet a number of ethical criteria. It screens companies and industries in or out of the stock selection process depending on their impact on the environment or society. For example, it avoids companies involved with gambling, tobacco and alcohol production. Standard Life Investments also annually surveys the fund’s investors to get their views on what ethical policies they want.

Key sector exposures currently include industrials, consumer services and financials.

“Fund manager Lesley Duncan has an established track record in the UK All Companies sector, taking over the reins of this fund in 2004,” comment analysts at Tilney Group. “She is a member of Standard Life’s large UK equity desk, and benefits from shared expertise and research when constructing the portfolio. The fund’s fairly strict ethical approach tends to exclude many of the larger companies in the index and leads to a bias to mid-cap stocks and also to certain sectors. As a result performance often differs from the benchmark and peer group, and can be volatile.”

NEW ENTRANT: Unicorn UK Ethical Income (GB00BYP2Y515)

Despite having a smaller universe to pick from than its peers, over one year Unicorn UK Ethical Income is among the top five best performing IA UK Equity Income funds out of over 80, and has a yield of about 3.9 per cent. Although the fund was only launched just over a year ago it is run by Fraser Mackersie and Simon Moon, who also run the highly successful Unicorn UK Income (GB00B00Z1R87).

Unicorn UK Ethical Income aims for a historic yield in excess of 110 per cent of the FTSE All-Share yield over a three-year period. Its managers invest in companies that pay a dividend with the potential to grow, but screen out companies and organisations that don’t meet their ethical criteria. They consider ethical issues including alcohol, armaments, gambling, pornography, tobacco, human rights, animal testing and the environment. The fund has 43 holdings as its managers aim not to have more than 50.

Unicorn UK Ethical Income has a small- to mid-cap bias which means it could be more volatile than a conventional income fund focused on larger companies, so if you invest in this you should have a long-term investment horizon.

NEW ENTRANT: Stewart Investors Worldwide Sustainability (GB00B7W30613)

Stewart Investors Worldwide Sustainability invests in companies that should benefit from and contribute to the sustainable development of the countries in which they operate.

The fund's managers are Nick Edgerton and highly regarded Asia investor David Gait who has a strong long-term performance record on other funds such as Pacific Assets Trust (PAC) and Stewart Investors Asia Pacific Sustainability (GB00B0TY6V50).

Stewart Investors Worldwide Sustainability is in the top quartile of the IA Global sector and beats MSCI AC World Index over three years, and is ahead of the index over the first eight months of this year. It lags its sector average and benchmark over one year, albeit with a double-digit return. Mr Gait tends to invest in quality sustainable companies over a long period with a strong valuation discipline, so typically outperforms in a falling market and can lag rising markets.

The fund’s main sector exposures are consumer staples and healthcare, which account for about 32 and 25 per cent of assets respectively. Europe ex UK and Middle East accounts for 30 per cent of assets, and North America 20 per cent.

NEW ENTRANT: Rathbone Ethical Bond (GB00B7FQJT36)

Rathbone Ethical Bond is among the top 10 performing IA Sterling Corporate Bond funds over one, three and five years out of more than 60, beating several peers which don’t have ethical constraints. The fund aims for a regular, above-average income, aiming for a 5 per cent to 7 per cent gross interest yield, and mainly invests in investment grade bonds that meet strict ethical and financial criteria.

It has an attractive 12-month yield of about 4.4 per cent and is one of the higher yielders in its sector.

“This fund typifies stable management, with Bryn Jones having been at the helm for over 10 years,” comment analysts at FundCalibre. “It has managed to outperform regardless of its ethical constraints, illustrating that income and ethics can be combined without sacrifice. It is a solid core investment grade fund.”

Mr Jones takes a strongly defined view that accounts for economic and political trends, company analysis, and thematic ideas. Once investment themes have been developed, he and his team carry out credit analysis to find the assets that work best within the thematic framework. Cash flow and strong balance sheets are key in determining bond selection. After that, an ethical overlay is applied.

The fund excludes bonds issued by organisations involved in areas including alcohol, animal testing, armaments, environmental or high-carbon impact, human rights abuses, nuclear power, pornography, predatory lending and tobacco. It favours issuers with progressive or well developed practices in areas such as corporate community investment, employment, human rights and management of environmental impacts. It also invests in green, climate, sustainability and social bonds.

Bonds issued by banks and insurance companies account for around two-thirds of its assets.