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Top quality unit trusts and Oeics for your ISA or SIPP
Thursday 13 Oct 2016 Author: Daniel Coatsworth

Picking funds can be a difficult task given the sheer volume of products available to UK investors. We’re big fans of analysing long term performance data to help narrow down the field and help spot the funds that shine year in, year out.

Last week we revealed the investment trusts which managed to achieve at least 7% annual total return the most times over a decade. This week we look at unit trusts and open-ended investment companies (Oeics) which match the same criteria.

Consistency of performance is very important when it comes to picking funds. You should be wary of any product that has one or two great years but in general doesn’t perform to the same level. This could imply it had a one-off benefit like some holdings being taken over at a premium price.

Ideally you should park your money with a fund manager who can invest it in assets that grow every year and runs a portfolio not dependent on M&A driving the value.

Rathbone Global Opportunities (GB0030349095) managed to produce annual total return in excess of 7% for eight of the 10 years to the end of 2015, according to Morningstar data. In four of those years it achieved more than 25% gains.

The fund focuses on ‘under the radar, out of favour growth companies,’ according to its manager James Thomson who has run the product since 2003. It has a concentrated portfolio of circa 40 names with freedom to invest anywhere, albeit it shuns emerging markets.

The top performing investment during Thomson’s tenure is property listings website Rightmove (RMV) on which he enjoyed a 1,300% return. US payment processing business Visa (V:NYSE) is another success story from the portfolio. Thomson says the company has ‘future-proofed’ its business to benefit from the shift to contactless payments and the introduction of new technologies such as Apple Pay.

‘Sell discipline is important,’ says Thomson. ‘We have to be quite cut throat. If a company is underperforming or executing poorly it will be sold.’ He has a ‘run the winners, cut the losers’ mantra.

He admits the fund was ‘too adrenaline fuelled’ heading into the financial crisis and this was a ‘eureka moment’ for him to evolve and make greater use of risk management.

One of the top performing funds in our screening exercise is Pictet-Digital Communications P USD (LU0101692670). It has one of the highest annualised total return scores of all the funds at 12.24% between 2006 and 2015 and beat our 7% total return hurdle in eight of the 10 years.

‘The fund’s objective is to invest in innovative, fast growing and disruptive companies that benefit from the “digital transition”,’ says asset manager Pictet. ‘We only select companies with a minimum of 20% of their revenue conducted online.

‘The objective is to construct a well-diversified portfolio, investing only on interactive business models / software that are conducted online and filtering for qualitative companies through a very strict investment process,’ adds Pictet.

The fund used to have a telecoms focus until its repositioning in 2008 towards digital communication. It attributes the stellar performance to constant re-evaluation of the portfolio’s risks, a strict investment process, deep knowledge of companies and web-based business models, and a highly experienced team.

Current holdings include discount travel ticket website Priceline (PCLN:NDQ), media conglomerate Comcast (CMCSA:NDQ) and social media giant Facebook (FB:NDQ).

It suggests the fund is suitable for investors who want exposure to an innovative and growing theme: the digital revolution. ‘They will get a secular growth exposure towards the digital transformation of the economy,’ it says, with the caveat it is not buying growth at any price.

Pictet believes the next decade will continue to see significant innovation. It believes there could be ‘unprecedented opportunities’ for investors to access to innovative and disruptive business models in areas such as Internet of Things, e-health, fintech and the future look of devices such as thin and flexible products.

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what do the figures mean funds

We believe Newton Global Income GBP Inc (GB00B0MY6T00) is an ideal fund for your ISA or Sipp. It has achieved 8.78% annualised total return over the past decade. Five of those years saw annual total return in excess of 13%.

Its strategy is aligned with many of the traits we desire when looking for investment opportunities. It likes companies with consistent cash flows, robust balance sheets, pricing power and flexible cost bases.

‘The fund’s strategy is to generate a good total return over the medium term by focusing upon good quality companies that are able to generate a sustainable income,’ says fund manager Nick Clay. ‘We employ a disciplined “buy” process, in which any new investment must yield more than 125% of the world market, and a sell discipline which requires us to sell any holding yielding less than the market.’

Top holdings include Gillette razors-to-Head & Shoulders brand owner Procter & Gamble (PG:NYSE), electricity and gas provider Eversource Energy (ES:NYSE) and software group CA (CA:NDQ).

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The fund has a circa 3.3% yield and pays dividends quarterly. Newton’s strict selection criteria helps to spot stocks that should have reliable dividends. ‘In order for a company to generate a sustainable income it must generate sustainable cash flows; which in turn requires sustainable returns on its capital. To achieve this, the company’s management must exhibit a discipline on how it allocates it capital,’ says Clay.

Invesco Perpetual has two funds in the best performers’ list, both achieving more than 7% annual total return in eight out of the past 10 years.

Invesco Perpetual High Income Inc (GB0033054015) has an 8.96% annualised total return over the decade. Invesco Perpetual Income Inc (GB0033053827) is close behind with 8.74% annualised total return over the same 10-year period.

The funds are run by Mark Barnett who took over both products from fund manager Neil Woodford in 2014. ‘(Both funds) aim to invest primarily in UK companies, with the balance invested internationally,’ says Invesco.

man hand holding his nutritional supplemets, healthy lifestyle background.


One of the star performers on our list is Findlay Park American (IE0002458671) with 12.3% annualised total return over the 10 years to end of 2015.  Sadly the fund is closed to new investors.

Both funds presently yield 3.1%-3.2%, according to Trustnet data. Their top holdings include numerous tobacco and drug stocks. Interestingly, just over 2.5% of each fund is held
in outsourcing group Capita (CPI) which recently issued a profit warning and whom analysts believe may have to undertake a rights issue. Such an event could trigger the cancellation of the dividend.

That would clearly be negative for the products, although one of the reasons for investing in funds is to benefit from diversification. Any setbacks to a single holding shouldn’t, in theory, have too dramatic an impact on the overall performance.

Investors seeking a seemingly-reliable fund that delivers year in, year out should definitely take a look at Morgan Stanley UK Global Brands A GBP (GB0032482506). The annualised return on a 10-year basis was 9.75%.

It achieved at least 7% total return in eight out of the past 10 years. Of the remaining two years, one scored very close to our hurdle with 6.5% positive return in 2006. The other year (2008) saw a mere 4.8% decline – arguably a very good result given global stock markets collapsed that year.

‘Our goal is to compound shareholder wealth at a superior rate over the long-term by investing in high quality companies run by high quality management teams at the right price; capital preservation is key to the ability to compound money over time,’ says Bruno Paulson, portfolio manager at Morgan Stanley.

The asset manager believes its fund has performed well because it follows a consistent investment philosophy and process. ‘We believe that a portfolio of exceptionally high quality companies, whose competitive advantage is driven by hard-to-replicate intangible assets and pricing power, has the potential to generate consistent returns in up markets and help to preserve capital in down markets,’ adds Paulson.

chocolate bars with hazelnuts

Key holdings include Kit Kat-to-Shredded Wheat seller Nestle (NESN:VTX), cosmetics giant L’Oreal (OR:EPA), and Altria (MO:NYSE) which owns cigarette maker Philip Morris and US drinks group Ste. Michelle Wine Estates.

Although SLI China Equities A Acc (LU0213068272) ‘only’ passes our 7%+ total return hurdle for seven out of the
10 years, it is worth a look as an example of a fund that has produced exceptional gains in the ‘good’ years.

Total returns in the early part of our 10-year analysis period were: 88.6% in 2006, 70.9% in 2007 and 58.5% in 2009. In contrast, the ‘bad’ years were represented as: -34.2% in 2008, -20.5% in 2011 and -4.4% in 2015. Overall it has a 15.95% annualised total return on a 10-year basis, according to Morningstar data.

Ross McSkimming, investment director (equities) at fund manager Standard Life says the investment focus is on ‘companies with improving global competitiveness; companies which drive structural change; stock specific self-improvement; and innovation in underdeveloped sectors’.

He says: ‘We aim to identify positive drivers of change within a company that the rest of the market has yet to price in and exploit this ahead of the market view coming into alignment with us.’

The fund invests in companies domiciled in China or companies that derive the majority of their revenue/profit from Chinese operations or have a significant proportion of their assets located in the country.

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Key holdings include online marketplace Alibaba (BABA:NYSE), China Construction Bank (601939:SHA) and travel services group (CTRP:NDQ). Nearly half the fund’s holdings are concentrated in the information technology and financial sectors.

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