We ask a range of experts for potential fund substitutes for funds and trusts consistently high in demand, including Scottish Mortgage, Fundsmith Equity, City of London, and Vanguard LifeStrategy.
Investing can be a fickle business as money follows the latest trend but analysis of the most-bought funds and investment trusts of 2022 shows users of our platform to be a reasonably loyal bunch.
Assets flowed into passive and income-producing strategies as most active managers proved no match for volatile stock markets and investors reached for yield amid rocketing inflation.
Growth-focused funds have lost some appeal, but Scottish Mortgage (LSE:SMT) bucked the trend. It was the most popular investment trust in 2022, having occupied the number one spot every month since June 2019. Investors may have sensed a bargain in its shares, which dropped around 40% last year.
Attempting to time the market and jump from one theme du jour to another is never a sensible investment strategy, but it can pay to cast your net wider and hold a mix of strategies – active and passive, growth and value.
“With fund investing there are no guarantees, and even fund managers get it wrong, so spreading your investments over a range of different asset classes, regions, sectors and individual fund managers is the best way to be diversified,” says Dzmitry Lipski, head of funds research at interactive investor.
He adds: “You cannot control the risk the fund manager takes, but you can control risk and limit losses within your portfolio by being diversified.”
Alternatives to Scottish Mortgage
In Winterflood Securities’ 2023 recommendations, it switched from Scottish Mortgage to its Baillie Gifford stablemate Monks (LSE:MNKS) for the well-managed exposure to global growth stocks it offers but with more diversification and less volatility.
“The managers of Monks appreciate that growth may be achieved in a variety of ways and are mindful of valuations,” says Winterflood analyst Shavar Halberstadt.
AVI Global Trust (LSE:AGT) takes this a leap further as it has an explicit objective of investing in undervalued assets. “A stronger yen should help its Japanese investments, there’s a bit more yield from the AVI trust and its managers say the underlying portfolio is valued at a 33% discount to its intrinsic value,” says James Carthew, head of investment companies at QuotedData.
GAM Star Disruptive Growth
Lipski likes an open-ended fund alternative in the form of GAM Star Disruptive Growth. It invests in global companies with competitive business models across all sectors, which are highly innovative and profoundly changing the way we live and work.
“The portfolio includes 40 to 60 stocks, diversified across three to five key themes such as Digital 4.0, metaverse and cybersecurity,” he says.
Alternatives to City of London
The second most-popular investment trust on interactive investor last year, equity income trust City of London (LSE:CTY) tops the table for dividend growth at 56 consecutive years.
Murray Income (LSE:MUT) is not far behind at 49 years. David Liddell, a director of IpsoFacto Investor, points to many similarities. Murray Income has the upper hand in a couple of areas: its dividend is 80% covered by revenue reserves (47% for City of London) and it can be bought at a near 8% discount (compared to an almost 2% premium)
Dunedin Income Growth
Another UK equity income trust that can be bought on a discount (of around 3%) is Dunedin Income Growth (LSE:DIG), among the next generation of the AIC’s ‘dividend heroes’ with 11 years’ dividend growth. Kamal Warraich, head of equity fund research at Canaccord Genuity Wealth Management, likes its investments in smaller companies and slightly higher international weighting.
Lipski regards open-ended fund Artemis Income as a “solid, core UK large-cap equity income option”. Although mainly investing in UK companies, it has the flexibility to invest overseas when attractive opportunities arise.
It yields 4.1% compared to 4.28% for Murray Income, 4.37% for Dunedin Income Growth and 4.74% for City of London – all in the same ballpark.
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Alternatives to BlackRock World Mining
BlackRock Energy and Resources Income Trust
Winterflood Securities made another switch in its 2023 recommendations – from BlackRock World Mining (LSE:BRWM), which was popular with interactive investor customers in 2022, to BlackRock Energy and Resources Income (LSE:BERI).
“[It] provides a level-headed response to the challenges and opportunities posed by the energy transition,” says Halberstadt.
Around half the portfolio is invested in the mining sector, essential for electric vehicle batteries, with the remainder split between traditional and renewable energy companies.
TB Amati Strategic Metals
Fairview Investing added TB Amati Strategic Metals to adventurous clients’ portfolios last May. “What makes this interesting,” says director Ben Yearsley, “is it isn’t just a gold and silver fund or one that invests in industry behemoths. It targets interesting smaller growth companies and will vary drastically the underlying metals exposure depending on the outlook. Battery metals and lithium currently feature heavily.”
WisdomTree Enhanced Commodity ETF
Lipski suggests the WisdomTree Enhanced Commodity ETF (LSE:WCOB) for broad and diversified exposure to major commodity sectors from industrial and precious metals to energy and agriculture. “This ETF combines both passive and active investing… [and] its effective cost management and lower risk profile give the strategy a competitive advantage against other funds in the sector,” he says.
Alternatives to Fundsmith Equity
Rathbone Global Opportunities
A feature of portfolios run by IBOSS, part of the Kingswood Group, since August 2016, Rathbone Global Opportunities could be seen as an alternative to Fundsmith Equity, the most popular open-ended fund on interactive investor last year.
“Selecting a manager with a proven track record of adapting to the prevailing and ever-changing market conditions is vital,” says investment manager Chris Rush.
While the early part of fund manager James Thomson’s career saw value dominate growth, the fund still performed well.
Artemis SmartGARP Global Equity
Another growth fund alternative, Artemis SmartGARP Global Equity uses in-house software to seek ‘growth at a reasonable price’. “The portfolio is well diversified with a bias to value stocks, so investors are exposed to less downside risk than a pure growth strategy,” says Lipski.
For those who hold Fundsmith for its exposure to technology (around 20%), Carthew at QuotedData suggests Herald (LSE:HRI) investment trust, which invests solely in tech stocks. Its bias to smaller companies means it often owns the bid targets for larger tech and private equity players. Recently, it has been using market weakness and forced selling by open-ended funds to exploit lower valuations.
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Fund alternatives to Vanguard LifeStrategy
Tom Munro, a financial planner at McHardy Private Wealth, has recently discovered the BlackRock MyMap funds – a “creditable alternative” to the Vanguard LifeStrategy range, which occupied the second to fourth most-bought open ended funds on interactive investor in 2022.
Both allocate assets through passive funds. A key difference is that the BlackRock range makes short-term tactical changes, which proved advantageous in last year’s rocky market. Its annual fees are exceptionally low, 0.17%, relative to Vanguard’s 0.22%.
CT Sustainable Universal MAPs
Lipski suggests the CT Sustainable Universal MAP range as a “one-stop, hybrid solution” that incorporates actively managed multi-asset and sustainable investing with a focus on low cost. “The range is actively managed, combining strategic and tactical asset allocation with individual security selection and integrates ESG factors within the process,” he says. The funds cost 0.29% a year.
Fund alternatives to L&G Global Technology Index Trust
Instead of L&G Global Technology Index Trust, which was among the top 10 most-bought funds among interactive investor customers in 2022, why not consider Allianz Technology Trust (LSE:ATT) – a “compelling opportunity”, says Trodd.
Recently appointed lead manager Mike Seidenberg has shifted exposure away from ‘hyper-growth’ stocks towards cyclical growth companies, such as semiconductors, and the portfolio no longer has exposure to China following the sale of Tencent (SEHK:700).
“The sell-off in small/mid-sized technology companies creates an opportunity for a re-rating at both a sector and trust level, with the discount representing an attractive entry point,” says Trodd.
Peel Hunt favours a fintech trust – Augmentum Fintech (LSE:AUGM). The acquisition of interactive investor by abrdn for £1.49 billion in 2022 delivered around £43 million of sale proceeds to the trust. “With revenue penetration of the financial services sector yet to reach 10%, fintech has a lot further to go in terms of growth and disruption,” says Peel Hunt analyst Anthony Leatham. The trust can be bought on a very wide discount of more than 30%.
First Trust Dow Jones Internet ETF
Lipski’s final suggestion is First Trust Dow Jones Internet ETF (LSE:FDN), which tracks the performance of the 40 largest US internet companies. Not only does it give investors exposure to well-known giants such as Amazon (NASDAQ:AMZN), Meta Platforms (NASDAQ:META), Alphabet (NASDAQ:GOOGL), Netflix Inc (NASDAQ:NFLX) and PayPal (NASDAQ:PYPL), it also owns “exciting opportunities” in e-commerce and internet services. Its ongoing charge is 0.55%.
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