Why select investment funds over shares?
Diversification – By diversifying your investments, you are reducing your risk. An investor spreads risk across asset classes (property, shares, cash and bonds), sectors and countries.
Lower cost – Buy a diversified portfolio without incurring numerous commission charges.
Professional management – fund managers possess specialized expertise, each stock can be carefully researched.
Convenience – Researching individual shares and constantly eying the stock market is time consuming.
This is why I believe investment funds should form the majority equity portion of a portfolio.
Investment Funds worth considering
City of London Investment Trust
Objective: provide long-term growth in income and capital.
Conservatively managed, it invests principally in large blue-chip and medium companies listed on London Stock Exchange. Its biased towards large-caps.
Record: Longest record of raising dividends among investment trusts, increased for 47 consecutive years since 1966. Achieved unbroken dividend growth by retaining income from good years in revenue reserve to bolster dividends during difficult years.
Appreciated over 140% since 2009 and yields just under 4%.
Fee: 0.44%, no performance fee
Market Cap: £1.2 Billion, 76% invested in UK blue chip companies.
Net Gearing: 8%
Portfolio Manager: Job Curtis managed the trust since 1991.
Incorporated in 1891, the company is a constituent of the FTSE 250 Index. Managed by Henderson Global Investors.
This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts’ buy list.
The City of London Investment Trust (CTY:LSE) website.
Bankers investment Trust
Objective: generate maximum returns through a global, well-diversified portfolio.
Aims to also deliver divided growth in excess of Retail Price Index.
Record: Increased dividends for 47 consecutive years. It possesses ample revenue reserves to support dividend growth when required during difficult years.
Dividend yield presently 2.5%. Revenues Reserves: 32m as of October 2013. Dividends paid were 15.1m, therefore 2x dividend cover.
Capital appreciation of 120% over five years.
Manager: Alex Crooke, managed Bankers Investment Trust since 2003. Worked at Henderson since 1994. He’s a value based investor.
Has degree in astrophysics from Manchester University.
He uses shares in London to play international themes, as most of their revenue derives from abroad. Nearly 45% of portfolio is focused on UK shares.
Fee: 0.45% year, again one of the lowest in the industry
Market Cap: £680 million.
Incorporated in 1888, its constituent of FTSE 250 index.
The Bankers Investment Trust website.
Lowland Investment Trust
Objective: Achieve higher-than-average return through both capital growth and income over long-term. They have up to 50% invested in FTSE 100 companies for stability and income, with a greater bias towards small and medium UK companies for their greater growth potential.
Gearing: Presently 13%. This fund is slightly more aggressively geared than its counterparts. Gearing is capped at 30% of fund.
Revenue reserves were £8.5 million as of 30 September 2013.
Fund launched in 1963, managed by James Henderson since 1990.
Fee: 0.59%. There is a performance fee, capped at 0.75%.
Market Cap: £391 Million
Record: 2.5% dividend yield and revenue reserves are £8.5 million.
Dividends: Grown its dividend for 19 of 20 years.
Grew by 300% over five years. Because capital growth has outstripped income growth in other portfolio, the dividend yield has fallen to 2.5%. They believe investing in high quality blue-chip stocks is an crowded trade, preferring instead to funds focus on smaller companies to yield better value.
Manager – James Henderson from Henderson Global Investors.. His is very much a pragmatic bottom-up style investor, focusing on individual companies rather than sectors, countries or the macroeconomic outlook. He’s run the fund for over 20 years and managed investment trusts for over 25 years.
Portfolio turnover – A turnover of 20% per year, and on average he holds stocks for five years.
This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts’ buy list.
Lowland is also highly commended in the Moneywise magazine UK growth and income category. And Moneywise also awarded ‘Henderson Global Investors‘, which manages the above three trusts as the ‘Investment Trust Group of the Year in the 2014’.
Finsbury growth and income trust
Objective: Invest in predominantly UK quoted shares to achieve income and capital growth. Up to 20% of portfolio can be invested in overseas stocks.
He runs a very concentrated portfolio, comprising of around 30 stocks.
Manager: Portfolio run by Nick Train of Lindsell train investment management since 2000. Nick Train and his business partner Michael Lindsell established ‘lindsell Train’ to offer pooled investments for UK, Global and Japanese equity. The company is majority owned (73%) by the two founders. This allows them to maintain the integrity of the business principles on which the firm was founded –
- To run client capital as we would run our own
- To align our interests with those of our clients
- To take the long view on investment performance and business development
Skin in the Game – According to their annual report for the year ending 30 September 2015, Nick Train holds a total of 522,616 shares in the Company. At today’s prices, this is more than £3m. Finding fund managers with a significant stake in their fund ensures the interests of the people managing your money are aligned with your own.
His approach is based on that of Warren Buffett’s and involves building a concentrated portfolio of “quality” companies that have strong brands and/or powerful market franchises.
Their ‘portfolio has a heavy emphasis on branded consumer goods and services (Diageo, Unilever, Kraft, AG Barr), media (Pearson, Sage) and financial services (Fidessa, Schroders, Rathbones, Hargreaves Lansdown’.
Record: Dividend yield 2%. Capital growth of above 200% over 10 years and 160% dividend growth over the same period.
Fee: 0.85%, total expense ratio capped at 1.25%.
Market Cap: £605 million
This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts‘ buy list.
MFM Slater income fund
Objective: From their website: ‘To produce an attractive and increasing level of income in addition to seeking long term capital growth. The Fund will invest in shares of high yielding companies with growing profits and strong cash flows across the market capitalization spectrum’
This is an open ended investment company. They run a relatively concentrated portfolio of between 50 and 70 stocks.
He invests across the market capitalization spectrum, holding a balanced mix of small, medium and large companies. His portfolio generally comprises of three types of income yielding companies – growth businesses, cyclicals and stalwarts.
Record: Yields over 3.6%. Outperformed IMA UK Equity Income benchmark last year. The funds up 33.6% while the benchmark appreciated by 23%. Since inception the fund is up by more than 65%.
Manager: Mark Slater co-founded ‘Slater Investments Limited’ with Ralph Baber in 1994 to manage UK equities. He’s previously worked as a journalist at analyst PLC and Investor Chronicles.
Alignment of interest – Mark Slater of Slater Investments told Telegraph Money that he had invested 97pc of his personal pension in his three funds, Slater Growth, Income and Recovery.
And Slaters investment team have invested significant amounts of personal assets in their funds, ensuring their interests are inextricably aligned with the clients.
Fee: 1.0% annual charge
Fund size: £65 million.
Launched in the second half of 2011.
Source: Slater Investments.
Fund Smith Equity Fund
Objective: to achieve long-term capital growth via a portfolio of global shares. Invests in a concentrated portfolio of between 20 and 30 stocks globally.
The fund does not adopt short-term trading strategies and does not invest in derivatives.
Manager: Terry Smith, he launched the fund in November 2010. In his plain speaking style he said he would give “fat and complacent” fund management industry a bloody nose”.
He said up the fund because he believed Investors “continued to suffer from punitive fee structures, over-complexity, over-trading, fund proliferation, closet indexing and over-diversification.”
In his no nonsense style, he says ‘buy companies that can be run like an idiot, because in the end most are’
Furthermore he puts his money where his mouth is, he’s invested more than £50 million of his own money in the fund – he eats his cooking.
Regarding investors who wish to time the market, he says there are two types: ‘those who can’t do it and those who don’t know they can’t do it’
Fee: no performance fees, just annual cost of 1.1%
His secret ingredients: run a concentrated portfolio in well established companies and hold them indefinitely while minimizing trading. His fund has one of the lowest turnovers in the industry.
This fund is included as one of Investor Chronicles top 100 investment funds.
Fund manager Terry Smith presentation.
More information at : Fundsmith.com
Royal London UK Equity Income
Objective: To achieve a combination of income and some capital growth.
It’s a core equity income fund which invests solely in high yielding UK stocks, with a particular emphasis on companies generating significant free cash flow to fund sustainable dividend payments.
The fund manager runs a high conviction stock portfolio and the risk profile reflects this. The fund has a larger than average weighing to mid-cap stocks (more than 40%).
He expects to hold between 40-60 stocks within the fund, although he presently has 72 holdings.
The fund was launched in 1984.
Manager: Martin Cholwill since 2005. Prior to joining RLAM he spent 21 years working for AXA Investment Managers. He has degree in Mathematics from Durham University.
Record: The fund has consistently outperformed its benchmark, growing by more than 120% over 10 years.
Skin in the game – When asked how much he had invested in the fund, he responded “I would rather not state a specific figure but the overwhelming majority of my investments are in the fund.”
Dividend: A 3.36% dividend yield (as of 28 Feb 2014), pays quarterly dividends.
Fund Size: £1.2bn
Charge: At HL, net annual charge is 0.62%
Citywire awards Martin Cholwill a triple AAA rating.
The Royal London UK Equity Income Fund Factsheet.
CF Woodford Equity Income Fund
Objective: Under his new investment boutique ‘Woodford Funds’, his aim is to offer investors capital growth and a growing income stream, paid quarterly. This is considered a core UK equity income fund, although it has the flexibility to invest 20% of the portfolio overseas.
Approach: His focus is on the long term – they don’t know what will happen tomorrow but they do know what drives markets over time. They are prepared to go against market consensus to deliver superior long-term returns, an approach that has served them well in the past.
The fund is defensively positioned with a heavy weighting towards pharmaceutical and tobacco stocks. Woodford is still avoiding banks, believing the process of ‘post-crisis balance sheet repair still has a long way to go’.
In addition he’s also concerned about ‘fine inflation’, where the worlds banks are still facing increasingly onerous fines for past wrongdoings.
Dividend Yield: 4.00%, its objective is to produce an income 10% higher than the FTSE All Share Index.
Size: £4.695 Million
Performance: Since the launch in 02/06/2014 the fund has gained 11%, beating the benchmark (FTSE All Share Index).
Cost: Total Expense Ratio: 0.75%
Manager: Neil Woodford is one of the most prominent and experienced investment managers within the industry with a successful track record at Invesco perpetual.
His success stems from his ability to avoid short-term trends and fabs (i.e dotcom bubble) and invest in predictable industries such as the pharmaceutical and tobacco sectors.
Additional information: Woodford Funds provides incisive analysis and commentary through their blog.
Alignment of interest – Neil Woodford is reported to have his entire pension invested in the fund
Vanguard FTSE UK Equity Income Index Accumulation (GBP)
Objective: To track the performance of the FTSE UK Equity Income Index as closely as possible. This FTSE index is made up of the highest dividend paying shares in the FTSE 350, is reviewed semi-annually and is based on forecasted dividend yields.
Capitalization weighting: 82% of the companies are large caps.
This fund gives investors access to high yielding UK stocks in a low cost passively managed fund.
Charge: Although technically this fund has no initial charge it is subject to Stamp Duty Reserve Tax (SDRT) and is deducted from the initial investment as a 0.4% charge. Ongoing charge at Hargreaves Lansdown is 0.22%.
Inception: Launched by the Vanguard Group in June 2009.
Size: £774 Million
Dividend Yield: 4.2%
Performance: 77% total return over five years.
Manager – European Equity Index Team.
Vanguard FTSE Developed World ex-UK Equity Index Accumulation (GBP) (2016 update addition)
Objective: The Vanguard FTSE Developed World ex-U.K.Equity Index Fund seeks to track the performance of the FTSE Developed ex-U.K. Index.
The Index is comprised of large and mid-cap stocks providing coverage of developed markets around the world, excluding the U.K.
Charge: 0.15% per annum
Dividend Yield: 1.69% as of 30 June 2016.
Size: £2,338 million, the fund was launched in June 2009.
Performance: More than 110% over five years.
Trustee: State Street Trustees Limited
Fund characteristics – Comprises 1,967 stocks, 33.4 Billion median market cap and 19.6 price to earnings ratio.
Top countries exposure (30 June 2016) : US 62.7% , Japan 9.8%, France 3.6%, Switzerland 3.6% and Germany 3.4%.
Vanguard FTSE Developed World ex-UK Equity Index factsheet.
This fund is the top holding of the ‘Vanguard LifeStrategy 40% Equity’ and the ‘Vanguard LifeStrategy 60% Equity’ funds.
Fixed Income Funds
Royal London Corporate Bond Trust
Objective: To maximize investment return (predominantly income with some capital growth) over the medium to long term from a portfolio comprising mainly of corporate fixed interest securities. This is a conservatively-managed fund, predominantly invested in higher-quality, investment grade corporate bonds
The fund was launched in 1991.
Morningstar allocates this fund a gold star analyst rating and Bestinvest a five star rating.
Managed by Royal London Asset Management.
Performance: Appreciated by 30% over three years (total return).
Income yield (underlying): 4.3%, paid quartely.
Its included in HL wealth 150.
New City High Yield Fund (NCYF)
Objective: ‘To provide investors with a high dividend yield and the potential for capital growth by investing mainly in high yielding fixed interest securities’
Managed by Ian Francis since Nov 2007, he’s supported by the New City Investment Management team. NCIM is a trading name of CQS asset management.
Ian Francis holds 99,894 shares, at 64p price is £64,000.
Fund was incorporated in January 2007, Jersey.
Gearing: 107% (100 = no gearing) as of 30 January 2014. As of 2013 annual report, the company had 12m borrowings from HSBC Bank.
Revenue Reserves: as of 30 June 2013 are £12.5m. Revenues reserves are dividend income retained, allowing the company to dip into this pot during less fruitful years.
Size: £169m, trades at plus 4.5% premium.
Yield: Estimated 6.6%, increased on average 2.5% every year since inception (2007)
Total dividend paid: £9.1m as of 30 June 2013
Return: Appreciated by nearly 30% over three years.
Cost: Total Expense Ratio (TER) is 1.25%.
This fund is included as one of Investor Chronicles top 100 investment funds. Also included in John Barons Investment Trust portfolio at investor chronicles magazine.
This Fund won the Money Observer Trust Awards in 2013.
All performance data is based on total return.
Recommended Reads –
Why investors should pick managers with ‘skin in the game’, by Stephen Foley.
How much money managers put into their own funds, by Richard Evans.