Nine bargain UK funds
We all like getting good value for money. But this entails taking into account quality as well as cost.
It's the same when we choose an actively managed investment. It's not just a matter of picking the cheapest products. Performance also has to be taken into account. So when our sister publication Money Observer selected the 21 actively managed funds and investment trusts we believe offer investors good value, we did not necessarily choose the cheapest products. We have selected those we believe will also deliver good returns.
Below are our nine UK-focused picks. For our worldwide selections, read: 12 bargain global funds.
That said, we started by looking at funds and trusts with the lowest annual management charges and ongoing charges, according to fund performance specialist Lipper.
With investment funds, we looked at traditional annual management charges. In the case of equity funds, these charges currently average around 1.5% a year, which is typically split three ways: 0.75% goes to the fund manager, 0.25% to the fund platform and 0.5% to the adviser who originally sold the fund, in the form of commission.
It is now possible to buy funds through platforms that rebate part of the annual management charge. It is also possible to choose "clean" share classes in some funds where only the fund managers' fees are deducted. However, the market will remain in a state of flux until the final regulations on platforms come into force at the end of this year as part of the Financial Services Authority's Retail Distribution Review.
For this reason we decided to take particular note of the traditional annual management charge, especially as we expect those funds with lower charges to retain them in future. However, a more important yardstick, in many cases, is the ongoing charge. This figure includes various back-office administration fees deducted by funds and trusts.
Some investment groups appear to work harder than others to keep these costs down, and they can vary widely. Sometimes they add less than 0.1% to annual management charges; in other cases, they push total costs up by 0.5%. Ongoing charges are often concealed in the key investor information documents.
Performance fees need to be considered too, and these can be particularly hard to calculate. Around half of investment trusts have performance fees, but in some sectors virtually all trusts have them. We have only included two trusts charging these fees.
We also looked at performance records. Clearly, a fund or trust with low charges may well underperform. Poorly-performing funds and trusts have been excluded.
The importance of past performance can be overstated. Ed Moisson, head of UK and cross-border research at Lipper and the UK's leading expert on fund charges, puts performance into perspective when he says: "While a fund manager will have some good years and some that are less so, you can be sure charges will have an impact on your returns every year."
Nevertheless, our experience of researching funds and trusts over the years confirms the intuitive belief that investment managers who have produced consistently decent returns in the past are more likely to perform well in future than managers who have done poorly. For this reason, most of our 21 selected funds and trusts are listed among our 2013 Rated Funds.
The list incorporates a spread of funds and trusts in different sectors, and asset classes we believe offer investors value for money.
More than half of our selections (12) are investment trusts, which have traditionally had lower charges than funds because they do not build in commission payments to intermediaries. This advantage will disappear to some extent when "clean" share classes in investment funds become the norm. However, some global investments trusts, such as Scottish Mortgage and Temple Bar, are likely to retain their cost advantage. Trusts that can be purchased directly from managers may continue to be cheaper than funds that incur annual platform costs and dealing charges.
Fidelity Moneybuilder Balanced
This fund has a 1% annual management fee and an ongoing charge of 1.21%. This is lower than many mixed funds. The fund appears in the mixed investment 40-85% shares sector. It consists of a portfolio of shares representing about 65% of the fund and a portfolio of fixed-income securities representing about 35%.
The share portfolio is managed by Michael Clark, and Ian Spreadbury is responsible for the bond portfolio. They are regarded as cautious and the fund's volatility is relatively low.
Personal Assets has a tiered annual management fee ranging from 0.5% on the first £100 million to 0.625% on amounts of more than £500 million. The trust is currently valued at about £580 million. Its primary aim is capital protection. It is a self-managed investment trust and the investment adviser is the highly regarded Sebastian Lyon, at Troy Asset Management.
Just 44% of the portfolio is invested in equities. The rest is in gold (13%), government securities (41%) and cash (2%).
Fidelity Moneybuilder Growth
This fund has a 1% annual management charge and a 1.2% ongoing charge. It is managed by James Griffin and mainly invests in larger UK companies, typically in the FTSE 100 and top half of the FTSE 250.
Griffin invests in "mis-priced industry winners" - companies with sustainable competitive advantages and strong long-term growth prospects. He believes the stockmarket often undervalues these companies and thinks companies with the ability to remain winners and "beat the fade" will outperform.
The Mercantile Investment Trust
This trust is one of the cheapest in the UK growth sector and has a 0.5% annual management charge and an ongoing charge of just 0.51%. It is part of the JPMorgan range and is managed by a three-strong team - Guy Anderson, Martin Hudson and Anthony Lynch.
It invests in medium-sized and smaller UK companies and its managers argue that this segment of the market is where deep value can be found, M&A activity remains robust and earnings growth strong.
UK smaller companies
Aberforth UK Small Companies Fund
This fund has a 0.8% annual management charge and an ongoing charge of 0.85%. Aberforth is a boutique investment company specialising in small quoted UK companies. Six partners make up the investment team. They also run an investment trust with essentially the same charges.
The fund and trust portfolios only differ in their weightings - because of inflows and outflows in the case of the fund - and the level of gearing. They hold diversified portfolios of at least 80 investments. Aberforth focuses on "value investing". Fund turnover is relatively low.
Henderson Smaller Companies Investment Trust
Henderson Smaller Companies has a low annual management charge of 0.35% but charges a performance fee, like most trusts in this sector. It has been managed by Neil Hermon for the past 10 years. He favours companies with good growth prospects, sound financial characteristics, strong management and share prices that don't reflect these strengths.
He takes a long-term approach. The trust has around 100 holdings. It is a smaller companies trust, but it has had a quite high exposure to medium-sized companies recently.
Focus on income
Fidelity Moneybuilder Income
Bond funds have traditionally had lower annual management charges than equity funds, typically of around 1%. However, Fidelity Moneybuilder Income is lower still at just 0.8%. With additional expenses, its ongoing charge is 1%. As returns from bonds are likely to be lower in future, it is important to be in a fund that keeps costs down.
Despite the less rewarding outlook for bond funds, they still have a role in a balanced portfolio. This fund focuses on high-quality, investment-grade UK corporate bonds. It is managed by the highly experienced Ian Spreadbury.
UK equity income
Fidelity Moneybuilder Dividend
The fund is managed by Michael Clark, who looks for undervalued investment opportunities with above-average yield and dividend growth potential. These are mainly blue-chip companies with well-known names. The key tenet of his investment process is "safety of income at a reasonable price". To establish this element of safety, Clark evaluates several factors, such as the sustainability of company returns through the economic cycle, balance sheet strength and how well the dividend is covered by cash flow.
Temple Bar Investment Trust
This trust has an annual management charge of just 0.35% and an ongoing charge of 0.51%. It sits within the Investec Asset Management stable. Its shares currently trade at a small premium. It has increased its annual dividend for the past 28 years. The trust can invest in UK companies of any size, but typically most of the portfolio is in FTSE 100 companies.
Manager Alastair Mundy has a contrarian investment approach that he defines as successfully opposing the herd and buying companies when sentiment about them is at or near its worst. Typically, he only invests in a share that has fallen at least 50% from a high. If it continues to fall, he will buy more. He will then wait patiently for it to recover. Mundy's average holding period is five years.
This feature was written for our sister publication Money Observer
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
Usually charged as a percentage of returns for performance above a specified benchmark, such as an index. The fee can range from 10% to 20% of total investment returns on a low starting benchmark such as Libor and investors could find themselves paying extra fees for merely average performance. Note that these funds do not compensate investors when the manager underperforms the benchmark.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.