Last year (2017) saw a record-breaking £46bn of cash invested
into UK funds, almost 600% more than in 2016 when initial fears
about the UK’s decision to leave the EU caused investors to pull money out of funds in droves. 

It’s easy to see why funds are popular as you get exposure to lots of different assets through a single product. 

Unfortunately, knowing which fund to pick can be tricky unless you are an expert or know where to get help. There are thousands of fund options which can lead to what psychologists call the ‘paradox of choice,’ when too much information paralyses people into making no decision at all.

Some funds have a wide-ranging investment remit such as targeting returns that roughly match global growth or the ambition might be to perform a bit better than the MSCI AC World Index, for example, over a period of time. They might target capital growth, income or a mixture of the two.

Other funds are far more specific. They might target a particular geographic market such as, the UK, US, Europe or emerging markets such as Asia, for example. Or they might focus on particular industries such as technology, infrastructure or renewable energy. You can even get funds which focus on specific asset classes such as bonds or property as well as, or instead of, equities.

DE-CLUTTER YOUR THINKING

Simplifying the selection process can help, as we discussed in detail in a feature on 14 September 2017. In that article we talked through an elementary six-step process.

The sixth step is to consider using a short-list provided by a trusted source of analysis.

Most execution-only investment platforms offer a preferred funds list, and experts at AJ Bell have recently re-jigged their own conviction line-up. This exercise effectively strips down the thousands of funds on the market to just 76, a far more manageable number for investors to assess for themselves.

‘Identifying the best funds from the thousands that exist in the market is one of the biggest challenges investors face and is something our customers consistently ask for help on,’ says Ryan Hughes, head of active portfolios at AJ Bell.

The majority of the conviction list features actively-managed funds, 55 in all, although they are complemented by 21 passive exchange- traded funds, so there’s something for investors of every stripe.

Popular names on this conviction list include BlackRock Gold and General (B5ZNJ89), Polar Capital Global Technology (B42W4J8) and TB Evenlode Income (BD0B7D5), the latter having beaten its FTSE All Share benchmark every year since 2011.

HANDS-ON OR HANDS-OFF

Active funds are run by a professional fund manager who selects what goes in the portfolio. The aim is to typically beat a benchmark index and outperform the market, meaning investors in the fund could get better returns, although you have to pay a fee for the services of the fund manager.

The alternative is to use passive funds, often called tracker or index funds.

These aim to mirror the performance of a key benchmark or index, such as the FTSE 100 or FTSE All-Share. They do this by investing their cash to match the make-up of the benchmark they are tracking. These types of funds are relatively low-cost, although potential returns are unlikely to exceed the index they are tracking.

As you might image, distilling thousands of fund possibilities into a relative handful is huge and complex task.

‘The funds have been picked using a variety of criteria, including assessing the fund manager’s ability through multiple market cycles, the investment process utilised and cost,’ explains Simon Molica, a fund manager at AJ Bell.

New entrants to the AJ Bell conviction list include Man GLG UK Income (B0117D3), Troy Trojan Income (BZ6CQ17) and the JOHCM UK Dynamic (BDZRJ10), which we write about in more detail later in this feature.

Funds that have fallen off the list are NOT sell recommendations, AJ Bell stresses, but the refreshed selection represents ‘our highest conviction picks today,’ says Molica.

It is also important to stress that AJ Bell is not giving financial advice by providing its list of favourite funds. It is simply to provide some guidance to investors who want help with narrowing down the funds universe and anyone interested in these funds should always go off
and do further research before making an investment decision. We will profile eight of these funds in this article. The full list can be found at youinvest.co.uk/investment-ideas/favourite

How AJ Bell’s experts pick funds

AJ Bell’s in-house fund research team apply their significant knowledge and expertise in the funds space to help navigate the large fund universe to focus on an elite group of products.

‘We ask a whole variety of questions at our regular one-to-one fund reviews, such as whether the funds’ management teams are sufficiently resourced down to individual stock picks in order to ascertain whether they are truly sticking to their defined investment process,’ says Simon Molica.

‘Ultimately, we are looking to assess whether we believe the stated objective is achievable time and time again through a well-defined repeatable investment process.’

---

FOUR NEW NAMES ON THE FAVOURITE FUNDS LIST

FRANKLIN UK SMALLER COMPANIES (B7FFF70)

This smaller company specialist fund has been overhauled since Richard Bullas and Paul Spencer were named as co-managers in June 2012. The fund runs on a combined quality and value mixture, hoping to identify a basket of 40 to 50 stocks that offer either high-quality growth, are undervalued and overlooked, or are out-of-favour cyclical companies capable of recovery down the line.

Potential investments are then subject to a valuation test. This involves a series of in-house models that assess appropriate multiples for common valuation metrics, and what they might be in five years’ time.

These typically include aspects like enterprise value to earnings before interest, tax, depreciation and amortisation, or EV/EBITDA for short. It also uses the EV/EBITA measure which strips out depreciation of assets from the previous metric, as well as price-to-book which is a traditional balance sheet valuation benchmark.

The portfolio currently includes document management specialist Restore (RST:AIM), broadcast cameras designer Vitec (VTC) and parts and components supplier to the engineering industry, DiscoverIE (DSCV). There are several other engineering and electronics industry suppliers in its portfolio.

Savvy stock spotting has helped Franklin UK Smaller Companies beat its benchmark FTSE Small Cap index in four out of the past five years and AJ Bell experts like the fund’s disciplined approach and collaborative team style. (SF)

5 years annualised return: 12.73%

Benchmark: 8.66%

---

JO HAMBRO UK DYNAMIC (BDZRJ10)

Celebrating its 10 year anniversary over the summer, JO Hambro UK Dynamic (BDZRJ10) is a new addition to the AJ Bell favourite funds list.

This UK equity fund seeks to outperform the FTSE All Share via a valuation-biased process developed by fund manager Alex Savvides, one driven by stock selection to create a fairly concentrated portfolio of between 35 and 50 holdings.

The collective seeks to profit by backing positive corporate change and offers investors a compelling combination of recovery situations, and restructuring and ‘hidden growth’ stories.

Savvides believes the market’s misunderstanding of corporate change – typically new management teams with new strategies – regularly throws up opportunities for patient, disciplined and unemotional investors.

His process aims to profit from understanding change and investing where there is the highest probability of success but with the highest
cash-based valuation support. This approach typically leads him to put money to work with high quality, unloved and under-researched
UK companies.

As at 31 July, leading portfolio positions range from oil major BP (BP.) and private equity giant 3i (III) to grocer WM Morrison Supermarkets (MRW) and electrical goods distributor Electrocomponents (ECM). (JC)

5 years annualised return: n/a

(3 years: 12.24% / Benchmark: 10.10%)

---

MONTANARO UK INCOME (BYSRYZ3)

Notably this fund has a very high active share of near-on 100%. Or, in plain English, nearly all its holdings differ from those in its benchmark. It has a small and mid-cap focus and a concentrated portfolio of 50 companies – with a ‘one in, one out’ policy which means it always stays at this number.

It earns a place on AJ Bell’s favourite funds list thanks to its expertise in small cap investing backed both by the experience of manager Charles Montanaro and a well-resourced team.

The fund’s approach offers a reminder that small and mid-sized companies aren’t just about growth as many also offer a decent income stream too.

Top holdings include chemicals firm Victrex (VCT), cinema chain Cineworld (CINE) and meat packer Hilton Food (HFG).

More than 90% of the fund is invested in stocks that trade on the London Stock Exchange, with a smattering of European equities also included. Industrials represents the biggest sector at nearly 20%. (TS)

5 years annualised return: n/a

(3 years: n/a / Benchmark: n/a)

---

SCHRODER  EUROPEAN (0764812)

This fund will provide you with exposure to large cap stocks across Continental Europe. The investment style is to find companies trading below what fund manager Martin Skanberg believes to be their proper value, with the expectation that they will eventually revert back to the higher level.

Earlier this year, Skanberg predicted a rise in capital expenditure among European companies, a sign they are confident the European economic recovery will be long-lasting.

While higher spending could result in slower dividend growth for some companies, the fund manager also has also the opportunity to invest in businesses which benefit from higher corporate spending such as those who build new plants, retool factories or produce equipment.

This might explain why the fund’s portfolio currently includes software group SAP and industrials giant Siemens, in addition to other well-known names such as chemicals group Akzo Nobel and oil and gas producer Total.

Skanberg, who has run the fund since 2006, likes to find 20 new investment ideas each year so existing holdings need to remain attractive in order to stay in the portfolio.

You’re likely to make most of your returns via capital gains rather than income as the dividend yield is only 1.5%. An annualised total return of 10.1% over the past decade is a very decent performance. (DC)

5 years annualised return: 10.60%

Benchmark: 8.79%

---

FOUR EXISTING NAMES ON THE FAVOURITE FUNDS LIST

ARTEMIS US SELECT (BMMV510)

Managed by Cormac Weldon since its September 2014 launch, Artemis US Select (BMMV510) has an objective of generating
long-term capital growth from a book of equities traded across the pond. It has outperformed the IA North America sector on a cumulative one and three year basis.

With lead manager Weldon assisted by Stephen Moore and William Warren, the fund seeks to outperform the S&P 500 Index through investments in large caps with an emphasis on growth. Top down assessments are combined with bottom up analysis (numerous company meetings plus fundamental analysis) to arrive at a concentrated portfolio of 40 to 60 best ideas.

As of 31 August, the top 10 holdings include high-quality tech titans Microsoft, Alphabet (Google’s parent company) and Apple; as well as branded apparel retailer Burlington Stores.

In the opinion of AJ Bell, Artemis US Select benefits from an extremely experienced team head, having been involved in analysing US equities for over two decades.

It adds: ‘The strong application of this conviction-driven investment approach is another positive feature. Additionally, the resource behind the strategy is highly regarded owing to the core of this team successfully running similar mandates at another investment house before joining Artemis.’ (JC)

5 years annualised return: n/a

(3 years: 23.21% / Benchmark: 25.75)

---

BAILLIE GIFFORD GLOBAL ALPHA GROWTH (B61DJ02)

All investors should have a good global fund in their portfolio. This fund aims to outperform the MSCI AC World Index by at least 2% per year over rolling five-year periods (before management fees).

The fund was launched in 2010 and is a growth-orientated product. We would suggest it is aimed at investors seeking a fund to buy and tuck away as a core long-term holding in their portfolio.

Its investment process seeks companies with the potential to grow at a faster rate and on a more sustainable basis than their peers, believing these characteristics could result in higher long-term returns.

The portfolio is allocated into four growth buckets with varying degrees of growth, says Morningstar analyst Fatima Khizou. These are: rapid growth, latent growth, cyclical growth and growth stalwarts. Khizou says the team’s growth approach has typically seen the fund leading the pack when the markets rally, but investors should appreciate it can go through very volatile periods.

Buying the fund today would give you exposure to some of the biggest corporate names in major regions of the world. In addition to Amazon and Alibaba (China’s massive e-commerce business), you’re also getting Asian life insurer AIA, US health insurer Anthem, energy firm Apache and South African media group Naspers, among
many others. (DC)

5 years annualised return: 15.52%

Benchmark: 15.76%

---

KAMES ETHICAL CAUTIOUS MANAGED (B7V2CD0)

The ethical and socially responsible end of the investment universe
has ballooned in recent years as investors embrace the wider ethos and, crucially, have begun to recognise this does not
mean poorer performance.

Investment targets come from a diverse spectrum of the UK stock market and further afield (about 10% to 12% of fund is invested in North America and Europe), such as engineering, technology and insurance, where it has a little more than 2% of its funds in Prudential (PRU).

Strict rules determine that no more than 60% of its money is tied up in equities but this arguably plays to its real strengths, which according to Morningstar analysis, is in fixed income assets, or bonds.

This hints at the investment strategy’s ‘cautious’ approach, which will no doubt appeal to many investors either approaching, or in, retirement and are looking for a solid income.

AJ Bell experts give Kames Ethical Cautious credit for the breadth and depth of its management team, although the overall performance versus its combined FTSE All Share and iBoxx Sterling
Non-Gilts Index is mixed.

Fairly low-cost (including a 0.75% annual management fee and 0.79% ongoing charges) and with a 2% income yield, Kames appears to be a solid if unspectacular ethical income option. (SF)

5 years annualised return: 5.79%

Benchmark: 7.79%

---

NEWTON GLOBAL INCOME (B0MY6X4)

More than a decade on from its inception, this collective is one of the longest standing in the Investment Association’s Global Equity Income sector.

The fund has a sensible approach to risk which might see it miss out on big returns during stock market rallies but also helps mitigate any downturns.

The focus is on companies with higher yields than the worldwide market average, and where manager Nick Clay reckons the dividend is sustainable and can be grown over time.

The departure of co-lead manager Ian Clark earlier this year was a blow – but not disastrous enough to deter AJ Bell from keeping it on its list of favourite funds thanks to the strength of the analysts and strategists working behind the scenes at Newton Investment Management.

Some of the fund’s larger investments include US IT firm Cisco Systems, Ralph Lauren and UK spirits manufacturer Diageo (DGE). The fund pays dividends quarterly, yields 3.1% and has an ongoing charge of 0.79%. (TS)

5 years annualised return: 12.46%

Benchmark: 10.92%

---

DISCLAIMER: Editor Daniel Coatsworth has a personal investment in Evenlode Income referenced in this article 

‹ Previous2018-09-20Next ›