10 investment funds to buy and hold for 30 to 40 years

by Jennifer Hill from Money Observer |

Industry experts offer investment ideas that could reward children or grandchildren in the decades to come.

An investment made on behalf of a grandchild stands to last a lot longer than the latest must-have gadget or piece of plastic tat, especially for those who take a very long-term view and are prepared to invest for a 40-year timeframe.

The idea of such a long timescale may not be feasible for those grandparents who wish to help with the high costs associated with getting on the first rung of the property ladder. But those who want to help their young grandson or granddaughter in three or four decades’ time will be able to invest at the top end of the risk scale.

Furthermore, the potential rewards from such a long-term view would provide your grandchild with a meaningful pot at a time when they are likely to face growing financial pressures, from having a family of their own and/or upsizing their property to thinking about saving more for their retirement.

“But it means you need to think longer-term about your investments and themes or trends that might drive demand, company profits and where growth is likely to come from,” says Adrian Lowcock, head of personal investing at Willis Owen.

We asked financial advisers, wealth managers, multi-managers and fund analysts to pick their ideal fund for a 40-year timeframe, with some interesting results. There are no developed regional equity market strategies, with many commentators preferring a global approach. Technology funds are notably absent, owing to valuations looking rich following a strong run in recent years.

Instead, the thematic elements among our 10 recommendations are focused on environmental, social and governance (ESG), and impact investing – areas that are becoming more mainstream.

“If you’re investing for your grandchildren and taking a very long-term view, you will want to select a fund that invests in companies with high and sustainable profits, reinvesting their earnings to earn even more in the future,” says Mark Denham, a fund manager at Carmignac.

‘Buy and hold’ funds: annualised performance over five years
 

Fund/investment trust Five-year annualised
return (%)
Fundsmith Equity 21.2
Impax Environmental Markets (LSE:IEM) 18.3
Baillie Gifford Global Discovery 17.4
Finsbury Growth & Income (LSE:FGT) 15.1
Dimensional World Equity 11.1
Fidelity Emerging Markets 10.3
Capital Gearing (LSE:CGT) 7.1
T. Rowe Price Frontier Markets 6.1
LF Miton UK Smaller Companies 2.7

Note: Hermes Impact Opportunities Equity excluded as fund launched in December 2017. Source: FE Analytics. Data as at 18 October 2019.

10 funds to buy and hold

Baillie Gifford Global Discovery

Darius McDermott, managing director of FundCalibre, suggests investing in smaller companies for grandchildren. They have been shown to outperform over the long term and are less well-researched, so good active managers can “really add value”, he says. He rates Baillie Gifford Global Discovery as “great” for long-term investors.

“This is one of our favourite smaller companies funds. It seeks out innovative and fast-growing companies from all around the globe that are capable of changing the world. It has a firm eye on the future and thematic influences – that fits really nicely with investing for grandchildren, as their world is likely to be very different from ours.”

The fund has a good slug of assets in technology, at 23%, but its largest sector allocation is to healthcare at almost 40%.

Capital Gearing Trust

Such a long-term timeframe requires built-in flexibility to accommodate potentially sweeping changes to the investment landscape. That’s why James Carthew, research director at investment trust research company QuotedData, opts for Capital Gearing Trust (LSE:CGT) from the Association of Investment Companies’ flexible investment sector, which can hold a range of asset types.

“It has been the best performing investment trust of any type over the past 37 years,” he says. “Its focus on avoiding losing money should offer a smoother ride, its zero-discount policy helps avoid wild swings in discounts and premiums, annual costs are just 0.7% and its current bias towards securities that offer some protection against inflation is an additional comfort.”

Dimensional World Equity

For Tim Walsham, a director of Cheshire-based Claritas Wealth Management, it makes no sense to do anything other than invest wholly in equities.

He recommends Dimensional World Equity, a passive fund that consists of almost 11,000 holdings, with a tilt towards smaller, cheaper and more profitable companies – that tend to produce long-term outperformance – and costs just 0.43%.

“Invest, sit back and look out of the window for 40 years,” he says.

Fidelity Emerging Markets

Emerging markets have among the best long-term growth credentials, driven by structural themes. “Many have young and growing populations, their economies are not as indebted as western ones and economic growth is higher,” says Lowcock. However, given the higher risks inherent in these markets, selectivity is key at both country and stock level.

Lowcock likes the experienced hands of Nick Price, who has run Fidelity Emerging Markets for almost a decade. He looks for “quality growth” companies by undertaking deep analyses of company accounts and stock fundamentals. He looks for strong, unleveraged balance sheets, shareholder-friendly management and reasonable valuations.

Finsbury Growth and Income IT

For John Newlands, founder of Newlands Fund Research, there is only one choice – Finsbury Growth & Income (LSE:FGT). “Nick Train is the only fund manager I know who actively seeks out companies that will prevail on a multi-decade view,” he says. “For 20 years now, I have heard him inviting analysts and investors to ‘come back to this room in 50 years’ time and I will guarantee Unilever’s share price will be 50 times higher than it is today’.” Diageo (LSE:DGE) and Heineken (EURONEXT:HEIA) are other long-term holdings whereby Train is seeking to profit from the increasing spending power of the global consumer.

Newlands adds:

“That’s my kind of outlook and, even if Nick is not still at the helm beyond the age of 90, which I wouldn’t rule out, I would expect him to have trained his successors in his winning ways.”

Fundsmith Equity

David Watson, a chartered financial planner at Johnston Carmichael Wealth, would blend a global tracker, such as Vanguard LifeStrategy 100% Equity, which costs 0.22%, with an active fund pick in the form of Fundsmith Equity. “We believe there’s a place for both active and passive investing, and usually recommend clients split their money 50/50 between a low-cost passive global equity fund and an active one,” he says.

Manager Terry Smith has delivered annualised returns of 18.8% since its inception a decade ago. He runs a concentrated portfolio (27 stocks at present) of high-quality, resilient global growth companies. “Some active managers can and do add value – Fundsmith Equity is one such fund,” adds Watson.

Hermes Impact Opportunities Equity

Hermes Impact Opportunities Equity has a bold philosophical foundation: to increase prosperity in society through sustainable impact investing. Melissa Scaramellini, a fund research analyst at Quilter Cheviot, has high regard for manager Tim Crockford and rates Hermes’ “strong and demonstrable” track record in this space. Crockford runs a high-conviction global equity portfolio of 25 to 50 companies (30 at present) with a product or service that addresses an unmet need in society, as defined by at least one of 17 United Nations sustainable development goals.

“The high-growth nature of the investment thesis of this fund’s holdings contributes to the higher volatility of performance, which is why a longer time horizon is appropriate,” she says.

“For many young people, the idea of combining a long-term growth investment with a focus on a positive societal and environmental impact is likely to appeal.”

Impax Environmental Markets IT

Patrick Thomas, head of ESG investing at Canaccord Genuity Wealth Management, would buy Impax Environmental Markets (LSE:IEM) investment trust for his future grandchildren. “For their generation, the future of the planet will be the most important concern,” he says. The premise behind this trust is that the global economy is transitioning from a depletive economic model to a sustainable one.

Thomas believes companies that help to solve these huge, global problems will outperform those that don’t.

“Not only do this trust’s investments make a difference to the world, but it uses ESG as an effective way of mitigating risks in the companies it invests in,” he says.

Miton UK Smaller Companies

With a 40-year timeframe, volatility is not a great proxy for risk, according to Giles McKean, a senior investment manager at Charles Stanley. A 7% annual return compounded over 40 years is close to a 1,500% return, so whether the worst declines are 40% or 60% shouldn’t really be of concern.

In his book The Future is Small, (published in 2014) LF Miton UK Smaller Companies manager Gervais Williams highlights the “astonishing” annual real returns of more than 15% that a UK small company value-oriented strategy would have delivered between 1955 and 2013.

“With growth having outperformed value for the past decade and Brexit uncertainty hanging over the UK stock market, adding to a fund like Miton UK Smaller Companies feels very uncomfortable, which usually means it’s a good idea,” says McKean.

T Rowe Price Frontier Markets Equity

The luxury of a 40-year investment horizon lends itself to asset classes that thrive over longer periods – frontier markets being one, says Seven Investment Management’s Jack Turner.

Frontier markets are operating in the world’s fastest-growing economies, and have low correlation with other equity markets and low analyst coverage.

Turner likes the T Rowe Price Frontier Markets Equity fund. It incorporates ESG factors into its research process – a “key screen” for frontier markets, he comments. “We think that ESG concerns will carry a greater weight in future investment decisions, and want to ensure these factors are covered for the investment horizon we are looking at here,” he says.

The fund has around 70 holdings, with its largest geographical allocations – to Kuwait and Vietnam – collectively accounting for more than half of assets.

Outperformance of smaller vs larger companies

The significant outperformance of smaller companies over large ones is a trend that’s the long-term investors’ friend.

Research in 2019 by the London Business School found the Numis 1000 index, composed of the 1,000 smallest UK-listed companies, would have grown to £15,213 by the end of 2018. In contrast, £1 invested in the FTSE All-Share index over that 60-year period would have grown to just £991.

The cheapest options for regular savings

Platforms are becoming more competitive for regular investors. A string of them, including AJ Bell YouInvest, Fidelity and Hargreaves Lansdown, charge £1.50 for regular trades, while interactive investor, Money Observer’s parent company, charges just 99p.

While some platforms, including Bestinvest, Fidelity and Hargreaves, charge a percentage of assets and will be cheaper for those with less to invest or just one product wrapper (an ISA, for example), a small number have fixed fees (including interactive investor) that stand to save investors a substantial sum as investments grow.

Meanwhile, a host of investment houses have closed their low-cost investment trust saving schemes – Baillie Gifford, JP Morgan and Witan this year followed in the footsteps of BlackRock and Jupiter. That leaves just Aberdeen Standard Investments (ASI) and BMO Global Asset Management, with regular savings schemes from £100 and £50 per month respectively.

BMO’s fees of £40 per year and £8 per trade online (£12 by post) would soon eat into small, regular savings. ASI does not levy initial, annual or purchase fees, and is the cheapest scheme for those who want to access its range of investment trusts.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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