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These investments have the right characteristics to create significant value in the coming years
Thursday 04 Jun 2020 Author: Ian Conway

The equity markets have just endured a difficult period but over the long term they remain an excellent vehicle for growing your cash and, in turn, helping to fund a comfortable retirement.

In this article, and with the help of the head of active portfolios at AJ Bell Ryan Hughes, we have identified four compelling fund picks for a retirement portfolio. These products look to capture a range of different investment themes and styles including growth, value and sustainability.

For those just entering the workplace, the thought of putting money into a pension is often at the very bottom of their ‘to do’ list. We might save for a holiday, for the deposit on a flat or house, or for a baby, but retirement is so far off we tell ourselves we’ll ‘get round to it another time’.

In any case, most employers now have to offer a workplace pension. Every payday your employer puts a small percentage of your pay into a pension scheme together with their own small contribution, so that should be enough, right?

While it’s a start, a quick look at your annual statement and the estimate of how much you’ll get when you retire will show you that a workplace pension isn’t likely to provide you with enough of a pot to retire comfortably.

A better solution could be to open a self-invested pension plan (SIPP) alongside your workplace pension, and add a small amount of money every month to start building up a pot.

The difference between starting early and starting later in life is staggering. Due to the power of compounding, you’re better off investing a small amount over a long time than a large amount in a short time.

If you open your SIPP with £500, and put away £50 a month for 40 years, at a 5% rate of compound interest your nest egg will be £76,000 at the end of the period. To get the same amount over 10 years, you would need to invest £500 a month.

The chart from asset manager Vanguard illustrates the point starkly: the longer you leave it, the more you’ll have to pay in each month. Its scenario is based on 6% annual return and does not factor in costs


Once you have set up regular monthly payments to your SIPP, you need to sit back and think about the long term. Investing isn’t about ‘playing the market’ and trying to make short-term gains. You are building a solid retirement ‘pot’, the last thing you want to do is risk losing your capital, which you need to generate income and capital gains.

Warren Buffett, one of the world’s greatest long-term investors, has two simple rules. Rule one is never lose money. Rule two is never forget rule one.

The other thing you need to consider as a long term investor is that markets can be volatile. Shares, or equities as they are also known, are more volatile than bonds because they generate higher returns over the long term.

Volatility isn’t necessarily a bad thing. When the market goes down, which it does from time to time, by keeping your regular investment amount the same you are actually buying more shares at cheaper prices. This is known as ‘pound cost averaging’ and is an important part of the discipline of long-term investing.

Dividends form a large part of total returns, and although many companies have cut or reduced their payments due to the crisis, this is likely to be just a temporary phenomenon.

As you are building a long term ‘pot’, you should make sure you reinvest your dividends – in other words you use the cash payout to buy more shares. This not only increases your capital, it accelerates the process of compounding as your money generates more money.

Lastly, you need to resist the temptation to check on your investments too often. You are investing for the very long term, if you check your investments every five minutes you will be tempted to chop and change, which will just result in higher costs and lower returns. To help you build this portfolio for the long term, overleaf are our four prime fund selections.

ASI Global Smaller Companies (B7KVX24) 147.5p

AJ Bell head of active portfolios Ryan Hughes says: The smaller companies team, until recently led by Harry Nimmo, are one of the best in the business with huge experience and a long track record of unearthing great small companies that generate long term returns for investors. The manager, Alan Roswell looks for growth companies that have the ability to turn into large companies and is prepared to invest very differently to the index.

A collective those building a retirement pot for the future should consider is ASI Global Smaller Companies (B7KVX24), which seeks to generate growth over the long-term (five years or more) by investing in global small caps.

Launched in January 2012, this a higher risk but potentially higher reward portfolio that gives the patient investor exposure to carefully selected growth stocks sourced from around the world. Shares welcomes the diversification of the fund at country, sector and stock level, with the actively managed OEIC invested across 48 holdings at the end of April.

The £920.1m fund has generated a strong five-year annualised return of 13.2%, thanks to a strategy that benefits from the longevity of a disciplined investment process, which has been in place for around two decades, initially with a focus on UK small caps.

The breadth of resource, wealth of knowledge and expertise in the small cap team is another redeeming feature, with lead fund manager Alan Rowsell boasting over two decades of investment experience and using the management team’s quality, growth and momentum approach. This aims to identify companies exhibiting a range of high-quality characteristics that operate in growing markets and display positive business momentum to boot.

Top ten holdings as at 30 April included the likes of US-listed Insulet, the insulin delivery system maker, online textbook rental and tutorial company Chegg and police body camera maker Axon Enterprise. Other top ten holdings include Japan-based M&A brokerage Nihon M&A Center, Israel-based digital printing tech play Kornit Digital and the swimming pool equipment distributor Pool.

Five year annualised performance: 13.2%

Baillie Gifford Global Alpha Growth Fund (B61DJ02) 126.7p

AJ Bell head of active portfolios Ryan Hughes says: The team at Baillie Gifford have had huge success focusing on genuine growth business that have the ability to transform the industries that they operate in. The Global Alpha fund benefits from a strong team of managers who have worked together for many years looking to identify companies that can grow at a far faster rate than the market.

Cut from the same long-term growth pattern that clothes all Baillie Gifford funds, the Baillie Gifford Global Alpha Growth Fund (B61DJ02) is a great choice for patient investors looking for low cost, premium returns.

Run by the same manager triumvirate of Charles Plowden, Malcolm MacColl and Spencer Adair since its March 2010 launch, the fund targets companies that offer sustainable, above average earnings and cash flow growth which can compound over time and generate its own future growth investment firepower.

Unlike most fund managers, Baillie Gifford funds resist the temptation to endlessly pore over company financials, preferring to spend more energy on understanding a potential investment’s competitive advantage, and if this edge is sustainable, and Global Growth Alpha is no different to its stable mates.

Underlying industry growth trends, barriers to entry, pricing power and value to users all fall under this analysis microscope, where the rapid growth of internet shopping and cloud computing are standout themes. Amazon, Google-parent Alphabet, Chinese shopping platform Alibaba and Microsoft are all among its top 10 stakes.

Interestingly for potential investors, Baillie Gifford Global Alpha Growth has a wider remit than other Baillie Gifford funds. This means it can seek growth opportunities even in more mature and cyclical parts of the market. So while it avoids growth stifled traditional banks, other financial services are included. Insurance and electronic payments are represented by the likes of AIA, Prudential (PRU) and Mastercard. It also owns a stake in ratings agency Moody’s.

The strategy has worked impressively for investors, with total returns close to double or better than its Investment Association Global benchmark over one, three and five years. It has also delivered strong absolute returns relative to the MSCI ACWI Growth Index, a relevant yardstick given the growth profile.

Five year annualised performance: 18.8%

Man GLG Undervalued Assets (BFH3NC9) 126.7p

AJ Bell head of active portfolios Ryan Hughes says: This fund uses a ‘value’ approach which looks to identify companies that others are overlooking for a variety of reasons. This style has not been in favour recently so performance may look disappointing  but it’s important to think about how this approach blends with the others already outlined which brings diversification to the portfolio. Henry Dixon looks right across the spectrum of UK companies and will adjust the portfolio for the opportunities he sees and is not frightened of investing very differently to the index.

Value investing, the art of buying stocks which trade at significant discounts to their intrinsic value, has a habit of rewarding patient investors having consistently outperformed over the long term.

You have to be patient when it comes to value investing, meaning such funds and stocks may not be right if you’re need to access your cash in say five years’ time. But as saying the goes good things come to those who wait, making it a perfect approach as part of a retirement portfolio.

A top fund to play this style of investing is Man GLG Undervalued Assets (BFH3NC9), a UK equity fund which looks to outperform the FTSE All-Share and invests in a range of large, mid and small cap stocks.

Historic performance hasn’t been the best so far, with annualised five year returns of just 0.37% (a 10-year figure isn’t yet available as the fund was set up in 2013), but this reflects the fact that value investing has been out of favour over the period.

When held for decades, such funds have consistently outperformed other styles of investing.

The fund is run by experienced manager Henry Dixon, who has been in charge of the fund since it was set up, and co-manager Jack Barrat, with dedicated support from analysts.

We like this strategy as its investment process is mainly driven by bottom up stock selection, and seeks out unloved and undervalued companies by identifying two types of stocks – those trading below their replacement cost, and those where the market appears to be undervaluing their profit stream.

The managers also seek to avoid value traps by focusing on cash, cash flow and assets. It’s important to note this also means the fund will have a high turnover, so transaction costs from this fund can be higher than usual.

Some of its top holdings include housebuilder Redrow (RDW) and defence and security group QinetiQ (QQ.), which we believe is more dynamic than the market thinks and has transformed its commercial capabilities under chief executive Steve Wadey.

Five year annualised performance: 0.4%

Stewart Investors Worldwide Sustainability (B7W3061) 245.1p

AJ Bell head of active portfolios Ryan Hughes says: Sustainable investing is growing rapidly in popularity and Stewart Investors have a long track record of investing in this way. The fund invests globally with a clear philosophy focusing on avoiding capital losses through investing in high quality companies and takes a long term view.

Sustainability is becoming increasingly central to investing and this process is likely to continue in the coming years, with some factors potentially accelerated by the coronavirus crisis.

So as well as any ethical considerations, a fund which taps into this theme makes for a natural long-term holding as part of a retirement portfolio.

Managed by David Gait and Nick Edgerton Stewart Investors Worldwide Sustainability (B7W3061) applies a stock picking strategy based on identifying quality companies from across the globe with a sustainable approach at the heart of their business models.

This includes firms in both the developed and developing world and the fund actively engages with its investments on issues of sustainability.

At any one time the portfolio is likely to contain between 40 and 60 shares. Other key things the managers are looking for include proven management teams, robust balance sheets and the potential for earnings growth.

Gait and Edgerton are supported in the stock selection process by a strong team providing independent research.

There is an emphasis on capital preservation which means the fund should hold up better during periods of volatility even if it might lag a little in a bull market.

Over the medium-term it has performed well with a five-year annualised return of 8.2% against 6.6% for its benchmark.

One of its top holdings will be familiar to investors – FTSE 100 firm Unilever (ULVR). The consumer goods giant’s commitment to sustainability encompasses so-called ‘purpose-led marketing’. This involves linking its brands to social and environmental causes.

It is also committed to sourcing raw materials sustainably and reducing its products’ environmental impact.

Other names in the portfolio are less well known, including Italian biotechnology firm DiaSorin and Japanese pharmacy franchise Ain Holdings.

The company recently took advantage of the market correction to take positions in health and safety technology kit supplier Halma (HLMA) and two other businesses.

Five year annualised performance: 8.2%

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