Fund & Investment Trust options for 2021

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2020 has been a rollercoaster year for DIY investors and the market crash in March, combined with the nationwide lockdown that followed saw new investors flock to investment platforms in record numbers. Ryan Hughes, Head of Active Portfolios at AJ Bell, takes a look at the funds and investment trusts investors might consider as they position their portfolios for the year ahead.

Cautious

The defensive nature of the approach sits well as we go into the new year for those investors who are cautious that markets remain at or close to all-time highs and also fear the return of inflation. Manager Sebastian Lyon takes a naturally cautious approach and has looked to build in some inflation proofing with 10% exposure to gold and a further 28% in index linked bonds. Add in 40% in high quality equities such as Microsoft, Diageo and Unilever that have the ability to compound returns and you end up with a well-rounded portfolio, not just for cautious investors but all of those who want to add some diversification to their portfolio. The approach of ‘winning by not losing’ is one that is often forgotten by many investors

With yields on cash being almost non-existent, some cautious investors may be looking to eek out a little extra return. While yields on corporate bonds are low, they do offer a step up over cash and therefore still have a role to play for investors. With some companies likely to struggle through 2021 and potentially go bust, taking an active approach to the asset class with a manager prepared to invest away from the benchmark could be beneficial. Artemis Corporate Bond brings just that with a pragmatic manager in Stephen Snowden who is comfortable standing out from the crowd and being genuinely active. The fund is only just over a year old but has grown to nearly £500m, helped by a low fee of 0.40%.

Balanced

The UK market is at an interesting inflection point as we run into 2021. It has lagged global markets for a number of years as the structure of the market with a large allocation to ‘old economies’ such as oil and a large financials weighting has hampered returns. With the conclusion of Brexit finally here, there is a chance that investors once again begin to look at UK equities and for that discount to close. Fidelity Special Values, managed by Alex Wright could be very well placed to capitalise on this with his focus on solid but out of favour companies. The burst of performance seen late this year when news of the vaccine was announced shows how much performance potential is in these stocks and this is helped by the 18% gearing Wright has currently employed to take advantage of price weakness. Another plus is the imminent cut of fees on the trust which should take c.0.20% off the OCF come the New Year.

Many investors have been underweight core UK equities for a while but with a potentially improving picture, boosting domestic exposure to take advantage of the discount to global equities may be attractive. The Threadneedle UK Equity Income fund managed by Richard Colwell is proof that value can be added despite being significantly exposed to larger companies. While this is an income focused fund, it is very much managed on a total return basis and makes for a solid core UK equity holding. The approach is best described as gently contrarian and Colwell is currently happy being underweight in financials, miners and oil stocks, despite their potentially higher yields.

Adventurous

With a potential rebound in UK equities on the cards, gaining exposure to some of the fastest growing companies in the UK could be a potential winner in 2021. The smaller companies team at Aberdeen Standard led by the highly experienced Harry Nimmo is very strong and the trust has also recently appointed Abby Glennie as co-manager. The closed ended structure is a good way to gain exposure to smaller companies and with assets of around £600m the trust is a nice size to be able to look across the market cap spectrum. The approach has a strong preference for growth companies and is very comfortable looking away from the index, which is entirely appropriate in the smaller companies space. With high active share, sensible costs and an outstanding track record, this trust is great example of the benefit of genuinely active management.

The growth in interest in ESG investing has been one of the big stories of 2020 and it is clear that it has become firmly embedded and is here to stay. The team at Liontrust have been investing with sustainable approach for many years and have a great understanding of the way that companies are adapting to the importance of ESG along with the way that the behaviour of people is also changing. The fund has a strong growth bias with large allocations to technology and healthcare and therefore naturally has a strong allocation to the US. With valuations potentially looking a bit rich in some cases, this is in the adventurous camp but for investors that want exposure to sustainable themes, the Liontrust team is up there among the best.

Income seekers

Investing for income was a nightmare strategy in 2020 with so many companies cutting dividends due to the pandemic. With a vaccine hopefully being rolled out soon there is hope that some form of normality can resume and companies are certainly looking to start paying dividends again. City of London has for many years been one of the standout UK equity income trusts with manager Job Curtis in place since 1991. The trust has a track record of increasing its dividends every year for over 50 years and the Board has committed that it intends for this to continue, making use of its income reserve. Even after the recent rally, the trust is yielding over 5% with holdings in high quality UK equities such as Unilever, Glaxo and Reckitt Benckiser. With fees at just 0.36% per annum, this is a good option for investors either wanting to take an income or simply want exposure to UK equities and reinvest the income to generate future growth.

Japan and income are not always two investment themes that go together but in recent years Japanese companies have evolved to become highly profitable and consequently have significant amounts of cash on their balance sheets. This is translating into dividends with company management showing more understanding of the importance of dividends to overseas investors. Jupiter Japan Income actively seeks out those high quality companies that are generating profits and have a willingness to return that to shareholders as dividends. While the yield may seem low compared to the UK at around 2.4%, the growth of this dividend is key and with low levels of debts in Japanese companies, the potential for this to grow in the coming years is very strong.

These articles are for information purposes only and are not a personal recommendation or advice. Past performance isn't a guide to future performance, and some investments need to be held for the long term. Remember that the value of investments can change, and you could lose money as well as make it.


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Written by:
Ryan Hughes

Ryan Hughes is Head of Active Portfolios at AJ Bell. He has 20 years of experience in finance and investments and started his career working as a financial adviser before becoming an investment analyst and discretionary fund manager as well as twice being named one of the most influential financial advisers in the UK. In 2006, Ryan joined Skandia Investment Management as a fund manager, sitting on both the investment committee and global asset allocation committee before then joining Apollo Multi Asset in 2013. In October 2016, Ryan joined AJ Bell to help establish the investment research capability.