Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
How sectors can help with fund and trust selection
For novice investors, selecting the right fund or investment trust from the thousands available to suit your target returns and risk tolerance is not easy.
To help you decide industry trade bodies the Investment Association (IA) and the Association of Investment Companies (AIC) provide a menu to choose from by separating collectives into different sectors.
This enables you to narrow down choices and make like-for-like comparisons between funds in one or more sectors in terms of performance and fund charges.
Sector definitions based on what assets the fund is invested in, largely equities (shares) or fixed income (bonds), as well as their geographic focus.
The recent addition of over 530 exchange-traded funds (ETFs) increased the number of funds classified by the IA across 52 sectors to 4,100-plus.
Broadly, the IA system splits funds between ‘income’ and ‘capital growth’, then classifies them by asset type, region or industry sector. The AIC’s sector classification system provides more than 50 categories.
GO FOR GROWTH
The IA UK All Companies sector’s funds must invest at least 80% of their assets in UK companies and these collectives have capital growth as their main objective. This sector could be a good first port of call for a novice, since it offers exposure to domestic companies and household name brands with which the first-time investor will be familiar.
Elsewhere, IA UK Equity Income encompasses funds that invest the bulk of their assets in UK shares and aim to deliver a higher yield than the FTSE All-Share.
And for those wishing to venture overseas, the IA Global sector houses funds that invest in a diversified mix of global shares.
Asia Pacific ex Japan is a longstanding IA sector that includes funds which invest at least 80% of their assets in Asia Pacific equities and exclude Japanese shares, although up to 5% of the total assets of its fund can be invested in Japanese equities (to allow flexibility for corporate actions, for example).
Why, one might ask, is Japan excluded from this sector when major regional country rivals aren’t? An IA spokesperson has the answer: ‘Japan is the largest developed market in Asia with a highly developed economy. China and India are considered developing countries and may be more difficult for investors to access.
‘We keep all our sectors under review to reflect the evolution of the retail investment market.’
Investors looking for exposure to the US, the world’s largest, most liquid stock market, are well served by the IA and AIC North America sectors through funds such as Baillie Gifford American (0606196) or the JPMorgan American (JAM) and North American Income (NAIT) investment trusts.
BONDS & PROPERTY
Investors seeking reliable income rather than rapid growth should familiarise themselves with the IA’s Fixed Income sectors - these include the UK Gilts, Sterling Strategic Bond and the Global Government Bond and Global Corporate Bond sectors.
Put simply, corporate bonds are loans to companies that pay a fixed rate of interest to investors and help diversify your portfolio away from equities to reduce risk and volatility. Strategic bond funds invest in a greater variety of fixed-interest investments, giving their fund managers more options.
The IA’s global bonds sectors might suit investors who want exposure to overseas fixed-income markets as a global approach to bond investing can help diversify a balanced portfolio and provide opportunities that are not available in the UK; the Global Government Bond sector includes funds which invest at least 80% of their assets in government backed securities from around the world in a variety of currencies.
For those interested in real estate, the IA’s property sectors can provide you with exposure to property assets ranging from commercial and residential assets to care homes and doctor’s surgeries.
However, risk-averse investors should be aware that in recent years, dealings in numerous open-ended property funds has been suspended, tying up investors’ cash as the funds were unable to sell property quickly when investors wanted their money back.
The structure of investment trusts, which trade on the stock market, means they do not face the same problem. Although they may trade at a discount (or premium) to the value of the underlying assets.
FIND OUT MORE
These are just some of the principal sectors, but as the first-time investor gains experience, he or she might elect to purchase funds and trusts offering broad-based exposure to regions such as Europe and Latin America – investment trust examples include BlackRock Latin American (BRLA) and Fidelity European (FEV) – or country specific funds focused on the US, China, India and Vietnam.
There are also sectors focused on opportunities in the infrastructure, private equity and leasing industries, as well as on niche areas such as music royalties. The AIC now has a Royalties sector, which contains Hipgnosis Songs Fund (SONG) and Round Hill Music Royalty (RHM).