Kyle Caldwell highlights five key trends among the most-bought actively managed funds over the past six months.
Passive funds have plenty of appeal. In most cases they offer investors low-cost, simple and effective exposure to stock markets, asset classes and sectors.
While such funds will not outperform due to the fee that is levied, they will also avoid significant levels of underperformance. The relative certainty of getting exactly what it says on the tin holds plenty of attraction, particularly at the moment given that many investors are adopting a glass half-empty stance.
With the tightening in monetary policy, and the prospect of a recession later this year or in 2024, many investors are sitting tight. As a result, the broad exposure passive funds offer is being favoured, rather than investors targeting more focused active fund exposure.
However, when stripping out passive funds, there are some interesting trends among the most-popular active funds, particularly when compared with the most-bought investment trusts.
But before we examine those trends, the tables below show the most-popular actively managed funds and investment trusts among interactive investor customers over the past six months, from 23 November 2022 to 23 May 2023.
Most-popular active funds over the past six months
Most-popular investment trusts over the past six months
Going for global exposure
The first trend is that investors are spreading risk by preferring global exposure, reflected in five of the top 10 actively managed funds having the freedom to invest across the world in any country or sector: Fundsmith Equity, Fidelity Global Dividend, Baillie Gifford Positive Change, Rathbone Global Opportunities and Lindsell Train Global Equity.
In the investment trust top 10 most-bought table, the same trend is apparent, as half have a global remit: Scottish Mortgage (LSE:SMT), F&C Investment Trust (LSE:FCIT), Alliance Trust (LSE:ATST), JPMorgan Global Growth & Income (LSE:JGGI), and Murray International (LSE:MYI).
As ever it is important to look under the bonnet to ascertain the risk profile of the fund. For example, Scottish Mortgage, owns high-risk companies (with around 30% in private companies), whose best profit-generating years are generally going to come a long way in the future. Therefore, it is an adventurous option and not for the faint-hearted.
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In main, though, most global funds make solid core holdings in an ISA or SIPP, due to the diversification they offer. Therefore, such funds are a great option for hunkering down during an uncertain period.
However, it is also worth bearing in mind that most global funds tend to stick to developed markets – the US, Europe and the UK. Such funds will indirectly have exposure to faster-growing economies in the emerging markets due to the global companies they invest in having underlying exposure.
But, if you want dedicated exposure to funds directly investing in emerging markets, you will need to consider a fund that invests exclusively in that part of the world. An Asia-Pacific or emerging market fund is best as a satellite holding, due to its adventurous approach.
Murray International differs from most global funds and investment trusts as it has more than a third of its assets in Asia Pacific, emerging markets, and Latin America.
Investors who want an even more defensive approach could turn to the flexible investment sector, where quoted equity weightings are typically much lower. But this tends to limit the upside as well as the downside potential. Among the top 10 most-bought investment trusts is RIT Capital Partners (LSE:RCP), which is considered one of a small number of wealth preservation strategies alongside Capital Gearing (LSE:CGT), Ruffer (LSE:RICA) and Personal Assets (LSE:PNL).
Hunt for income, with trusts preferred over funds
Dividend strategies have become more appealing to investors in response to interest rates rising in an attempt to cool high inflation.
While far from guaranteed, the prospect of a company paying a dividend gives investors greater confidence in terms of its valuation versus firms that are reinvesting all their cash back into businesses for future growth. With interest rates on the rise, investors have become more mindful of valuations and more attracted to dividend-paying companies.
However, there’s a clear preference to hunt for income among investment trusts. Over the past six months, seven of the top 10 most-bought trusts have a yield of over 2.4%: BlackRock World Mining Trust (LSE:BRWM), Greencoat UK Wind (LSE:UKW), City of London (LSE:CTY), Merchants Trust (LSE:MRCH), Murray International, JPMorgan Global Growth & Income and Alliance Trust.
Whereas, among the top 10 most-bought funds over the past six months only one equity income strategy features; Fidelity Global Dividend.
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Income-paying investment trusts have a particular attraction for investors who want a regular cash flow, because – unlike open-ended funds – they don’t have to distribute all the income generated by their assets every year.
They can hold back up to 15% each year, which means they can build up a reserve to bolster dividend payouts in leaner years. During the financial crisis and the Covid-19 pandemic, most income-paying investment trusts were able to either maintain or increase their dividends, as they dipped into their reserves. In contrast, most income-paying funds cut their dividends.
It appears that interactive investor customers see the investment trust structure as a superior option for income, due to its greater consistency in increasing payouts.
The low-risk fund investors are also favouring for income
Royal London Short Term Money Mkt fund has also been proving popular with income seekers. The fund has been snapped up by investors looking for a low-risk way of generating a decent level of income.
The fund, which invests in short duration bonds that are set to mature soon, has a yield of 4%. This yield has risen notably over the past 18 months in response to interest rate rises, which have caused bond prices to fall and bond yields to rise.
Some love for unloved UK equities
The UK market has been out of favour with UK investors for several years, which has left various fund managers perplexed due to many UK companies being cheaper than global peers.
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Jupiter UK Special Situations invests in value shares, focusing on those that are cheap and unpopular, while Lindsell Train UK Equity invests in high-quality growth stocks, which carry higher valuations.
The UK is also represented among the most-bought investment trusts in the City of London, Greencoat UK Wind, and Merchants.
Out of form, but investors keeping the faith
The final trend is that investors are sticking by Scottish Mortgage and Baillie Gifford American, which have both posted losses over the past three years. Both invest in growth stocks, which have seen their future earnings devalued by higher interest rates. In response, valuations have re-priced and share prices have fallen.
When a fund is underperforming, the most important thing to assess is whether the fund manager is staying true to the investment process. If this is not the case, then this is a sign the manager has lost confidence.
It is also important to step back and try to understand why the fund is underperforming. If it is because the region it invests in, or the investment style, is out of favour, then a period of subdued short-term performance can perhaps be forgiven.
You may view it as a good time to buy more if you think prospects for the region the fund invests in, or the types of shares it holds, will likely improve over time.
However, if it has been a favourable market backdrop for the fund and it has still notably underperformed peers, then investors need to weigh up whether to hold on in the hope that performance improves, or hit the sell button. Ultimately, it is a judgement call that only you can make.
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.