Top fund recommendations for your ISA
The stockmarket doom and gloom of 2008 has been reversed to a certain extent. But the spectre of a double-dip recession still looms large and the outlook for 2011 remains unclear, at best.
So it's especially important for investors to select funds they can rely on to perform consistently well through both good and bad times – and that's exactly what the annual Moneywise Fund Awards strives to highlight.
Read on to see which funds took this year's winning spots.
UK ALL COMPANIES
WINNER: Rensburg UK Mid Cap Growth
HIGHLY COMMENDED: Threadneedle UK Mid 250
COMMENDED: SVM UK Growth Retail, Standard Life UK Equity Unconstrained, L&G UK Alpha
Home is where the heart is: it may not be where the dramatic returns are, but British investors still prefer to weight the majority of their portfolio towards the UK.
All of the winning funds reflect reassuring consistency, having featured in the 2009 Fund Awards shortlist and, in some cases, the year before as well.
Rensburg UK Mid Cap Growth, for example, has extended its run at the top of the UK All Companies category for three consecutive years. During this time, it grew by 26.08% against the sector average of -4.34% – a handsome performance by any standards.
According to Gavin Haynes, managing director at Whitechurch Securities, this is attributable to the fund's "defensive positioning" during the market woes of 2008.
The largest sector weighting within the portfolio is in consumer services and financials at 23% apiece, closely followed by industrials at 22%.
Nick McBreen, independent financial adviser for Worldwide Financial Planning, says this reflects manager Paul Spencer's unswerving faith in a British recovery: "The management team believes in the UK and the potential contribution that its consumers can make to a sustained recovery."
In much the same way, highly commended Threadneedle UK Mid 250 is heavily invested in industrials (a 38% weighting) and, given the coalition government's call to "rebuild the UK economy with infrastructure projects", McBreen thinks the fund is "well placed to deliver good returns going forward".
Unsurprisingly, both winner and runner-up are mid cap funds – Darius McDermot, managing director of Chelsea Financial Services, says this sub-sector within All Companies has been out-performing the FTSE All-Share off and on over the last seven years.
UK SMALLER COMPANIES
WINNER: Standard Life UK Smaller Companies
HIGHLY COMMENDED: Investec UK Smaller Companies
COMMENDED: Old Mutual UK Select Small Companies, Marlborough Special Situations, Cazenove UK Smaller Companies
The UK Smaller Companies sector is more volatile, owing to the stipulation that companies must be in the bottom 10% of the market in terms of size. But this also makes it an exciting sector with lots of potential.
A case in point is the portfolio of this year's winning fund, Standard Life UK Smaller Companies.
Its top 10 holdings include ASOS, Domino's Pizza and Hargreaves Lansdown – companies that are enjoying current success. "Fund manager Harry Nimmo only invests in companies that make money," explains Haynes.
McBreen also praises Nimmo and his team's "outstanding use of research and analysis to identify smaller-sized companies entering some kind of restructure or change which will lead to business improvement and increased returns".
Highly commended Investec UK Smaller Companies is also well regarded by industry insiders. Lee Robertson, chief executive of Investment Quorum, notes Philip Rodrigs's experience: "He has managed this fund for about four-and-a-half years, and before this was a UK equity analyst specialising in small cap stocks."
WINNER: M&G Strategic Corporate Bond
HIGHLY COMMENDED: M&G Corporate Bond
COMMENDED: CF Canlife Bond, Gartmore Corporate Bond, IP Corporate Bond
The Corporate Bond sector is the biggest-selling sector, according to the latest IMA net retail sales.
It's little surprise, then, that the M&G Strategic Corporate Bond, which incorporates strategic, high yield and investment grade bonds, is the winner of the Corporate Bond category. It also took first prize in 2009.
M&G's Corporate Bond once again takes the highly commended spot.
Richard Woolnough, who has been with M&G since 2004, manages both funds.
"Woolnough's management style places a strong emphasis on assessment of the economic cycle," says Haynes. "His defensive positioning during the credit crunch was impeccable, and he has done well to capture strong returns in the corporate bond rally that commenced in 2009."
WINNER: Schroder Income
HIGHLY COMMENDED: St James Place Equity
COMMENDED: BlackRock UK Income, St James Place UK High Income, Unicorn UK
The Equity Income sector came under IMA scrutiny at the start of 2009, due to its division into Equity Income (for funds able to produce 110% of the FTSE All-Share yield) and the Equity Income and Growth sector (which only requires funds to produce 90%).
In July 2010, the sectors were recombined, and funds with "the intention" of reaching 110% are now allowed into Equity Income.
Despite this shuffling back and forth, the Schroder Income fund wins for the second consecutive year, providing some consistency amid the sector confusion. Robertson says: "Returning over 121% over the last decade, the fund has holdings across pharmaceuticals, banking and technology.
"It's seen strong growth over the years, particularly in recent months, with top-end performance."
Former managers Nick Purves and Ian Lance have been replaced by Kevin Murphy and Nick Kirrage. The pair previously managed Schroder's UK Recovery fund, where they built up their track record. "They're making their mark as future equity income stars," says McDermott.
Purves and Lance still manage highly commended St James Place Equity, which is outsourced to Schroders. With one third of its portfolio in financials, Robertson believes it's benefiting from the return of risk appetite among investors.
WINNER: CF Ruffer European
HIGHLY COMMENDED: CF Miton Special Situations
COMMENDED: Newton Balanced, Baillie Gifford Managed, Jupiter Merlin Balanced Portfolio
Funds in this sector can invest in a range of assets, which makes comparison tricky, although there is an 85% cap on equity investment. Limits on equities and the spread of assets make balanced managed funds a popular choice for pension savers.
It's particularly good news for savers who opted for CF Ruffer European last year, as it's the Moneywise Award winner in this category once again.
"There's no question that CF Ruffer is a worthy winner," says McBreen. "It's a boutique house that's small, flexible and nimble enough to move in on interesting opportunities and garner the returns."
Both CF Ruffer European and runner-up CF Miton Special Situations top the sector, according to McDermott, because they give investors truly diversified portfolios that lower risk.
"What investors need in this sector is true asset allocation, not inconsequential tinkering with minor asset class shifts from bonds to equities and vice versa," he says.
McDermott adds that both funds did particularly well during 2008 – the market's annus horribilis – because they made use of their flexible asset allocation mandates and harboured capital in safe-haven asset classes.
EUROPE (EXCLUDING UK)
WINNER: BlackRock European Dynamic
HIGHLY COMMENDED: Jupiter European
COMMENDED: Neptune European Opportunities, BlackRock Continental European, Jupiter European Special Situations
The Greek banking crisis, plus record debt in Ireland, Spain and Portugal, mean that from the outside the European Equities sector looks unappealing. Yet advisers are increasingly recommending their clients use this sector for indirect exposure to emerging markets.
Referring to winner BlackRock European Dynamic fund's manager Alister Hibbert, Robertson says: "While seeking out opportunities within continental Europe, he has also been able to find European businesses that are benefiting from the growth story of Asia and the emerging markets."
Highly commended Jupiter European fund is managed by Alexander Darwell. "He invests into world-class companies that are able to sustain growth and profit margins over the longer term," says Robertson.
"While geographical and sector weightings are important, they play less of a part in his investment strategy; he looks for companies whose products or services are in universal demand and are less price-sensitive."
WINNER: Neptune US Opportunities
HIGHLY COMMENDED: Schroder US Mid Cap/Jupiter North America
COMMENDED: Gartmore US Growth, Baillie Gifford American, Threadneedle American Select Retail
Not only does the US carry one of the biggest deficits in the world, the fact that it's not reducing also makes the North American sector a concern for investors. According to the IMA, it's currently the least popular sector.
That said, there are still plenty of opportunities – and brand giants like Apple and Google have considerably bolstered its technology sector.
The winning fund in this category, Neptune US Opportunities, has strong exposure to IT, as well as healthcare and consumer goods. It's recommended by some experts as suitable for those seeking out an active exposure to US equity markets.
"Beating the benchmark is notoriously difficult in the US market," says McDermott.
"The region is overrun with analysts and often proves to be a graveyard for active managers. But this fund has managed to outperform the sector well, albeit with a choppy last year."
Highly commended Schroder US Mid Cap is managed by US-based Jenny Jones. "She employs a bottom-up, research-based approach, seeking attractively valued, small and mid-sized US companies," says Haynes.
ASIA PACIFIC (EXCLUDING JAPAN)
WINNER: First State Greater China Growth
HIGHLY COMMENDED: First State Asia Pacific
COMMENDED: CF Canlife Far East, Aberdeen Asia Pacific, Fidelity South East Asia
As the region that incorporates emerging markets juggernaut China, it's no surprise that Asia Pacific is still much talked about by private investors and advisers alike. It also explains why last year's winning fund, First State Greater China Growth, once again comes out on top.
"China is the investment story that just runs and runs," says McBreen. "When it will run out of steam is anyone's guess."
In the meantime, Martin Lau's fund also has strong exposure to Taiwan and Hong Kong. "Lau believes there are returns to be found in financials, IT and consumer basics, due to the rising number of consumers in the region with increasing disposable income, who are helping fuel ongoing growth," McBreen adds.
First State also picks up the highly commended prize with its general Asia Pacific fund.
"This fund is an excellent choice to get core exposure to the exciting growth prospects in Asia," says Haynes. "Its investment style is based on a pure stockpicking approach, rather than on sector/country benchmarks."
WINNER: Aberdeen Emerging Markets
HIGHLY COMMENDED: First State Global Emerging Markets and Baillie Gifford Emerging Markets
COMMENDED: JPMorgan Emerging Markets, AXA Framlington Emerging Markets
Growing consumer wealth in the BRIC economies (Brazil, Russia, India and China) guarantees that Emerging Markets remains the sector for long-term gain, provided investors can cope with the additional volatility.
Although top-performing funds have grown by 50% or more over three years, others fail to hit double figures, but the sector average is still a solid 19.24% growth.
This year's top fund in the sector, Aberdeen Emerging Markets, has grown by an impressive 56.99% over the same period. McDermott sees no reason why it shouldn't continue to outperform the sector, as it champions local expert knowledge. The fund's management team is based in Kuala Lumpur, Bangkok, Singapore and Hong Kong.
In the 2010 awards, two funds share the highly commended plaudits: last year's winning fund Baillie Gifford's Emerging Markets fund and First State Global Emerging Markets.
The former is praised by Haynes for "doing its own thing". He says: "The team takes a non-indexed approach and is unafraid to take large stock, sector or country bets against the benchmark index."
WINNER: Amity International
HIGHLY COMMENDED: M&G Global Basics
COMMENDED: M&G Global Growth, CF Adam Worldwide, IP Global Smaller Companies
Want the emerging markets glory but with a touch more diversification? Then go for a Global Growth fund. Holding on to top spot from 2009, Ecclesiastical's Amity International fund is a socially responsible investment (SRI) that stands out because its performance matches up to its ethics.
"It holds its own against all the other heavy-weights in the international equity sector. This speaks volumes for the manager's skill," says McBreen.
Much of the fund's success is attributed to manager Robin Hepworth; Graham French, manager of highly commended M&G Global Basics, is also recognised by the judges as a manager of tremendous experience. "His philosophy is based on a view that exposure to physical assets provides superior returns," explains Haynes.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
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.
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.
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).
An acronym, which stands for Brazil, Russia, India and China; countries all deemed to be at a similar stage of advanced economic development. The term was coined in 2001 in a report written by Goldman Sachs director Jim O’Neill who speculated that, by 2050, these four economies would be wealthier than most of the current major G7 economic powers.
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.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.