Interactive Investor

Six ideas for a core holding in your pension fund

17th July 2023 09:41

by Faith Glasgow from interactive investor

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You don’t want to keep monitoring performance or spend time and money switching in and out of funds. So Faith Glasgow has some tips for identifying a steady core fund for your SIPP portfolio.

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If you are investing for retirement via a self-invested personal pension or SIPP, the chances are that you have some interest in actively overseeing your portfolio, either on your own or with input from a financial adviser.

You’ll know that over the very long term - which could be 30 years-plus if you’re in your 30s – the additional ups and downs of stock market investment are rewarded as equities outperform fixed interest or cash holdings.

The 2023 Barclays Equity Gilt study shows that over the past 50 years, equities have produced real returns (ahead of inflation) averaging 4.5% a year, compared with 2.4% for gilts and just 0.7% for cash.

There are bound to be ups and downs on the journey, but the point of long-term investment is ultimately being in the market: you don’t want to have to do a lot of monitoring performance, or spend time and money switching in and out of funds that have disappointed.

It therefore makes sense to identify a broad, steady ’core’ fund for most of your portfolio – something that you can buy and hold or drip-feed into for the duration. You may choose to bolt on some more specialist or racier ‘satellite’ holdings, but the core needs to be a solid, trustworthy choice.

Gavin Haynes, an investment consultant at Fairview Investing, says it should be globally invested. “The UK only constitutes a very small part of global equity markets, and it makes no sense to restrict yourself to the domestic market for a core holding,” he comments.

Additionally, he advises, cost should be a consideration. “Fees can have a significant impact on the value of your fund over the long term; that doesn’t mean you should go for the cheapest option, but make sure you’re getting value for money if you choose an actively managed fund over an index tracker.”

So, what options could you consider as a core SIPP holding?

Passive choices

Many people decide to keep fees to a minimum and simply track the global market. Haynes says it’s a very good long-term approach: “Active strategies can be incorporated as satellites if you want to pursue individual investment themes,” he adds.

Included on interactive investor’s Super 60 investment ideas list is the iShares Core MSCI World ETF USD Acc GBP (LSE:SWDA), which tracks the MSCI World index, with an ongoing charge of just 0.2%.

If you’d prefer a conventional passive fund to an exchange-traded fund (ETF) traded on the stock market, you could consider the Vanguard LifeStrategy 100% Equity fund, which costs 0.22% and invests in a range of in-house funds tracking global markets.

Global growth funds

The best managers can add significant long-term value through canny stock-picking and a rigorous process, although they won’t always be top of the performance tables. The global open-ended fund sector contains some reliable choices with impressive track records.

Rathbone Global Opportunities is a favourite of Haynes. It’s a global equity fund focused on high-quality blue chip growth businesses. It has a global remit, but there’s a clear bias to the US and to world-leading businesses. “The team managing the fund has a strong track record of maintaining a consistent approach throughout cycles,” he observes.

Fundsmith Equity is another extremely successful fund chosen by the interactive investor team for its Super 60 shortlist. It is managed by Terry Smith along the same lines as the legendary investor Warren Buffett, with a focus on a select portfolio of high-quality growth businesses that will continue to grow sustainably over the very long term.

However, its style bias and concentrated nature do mean there’s potential for it to deviate from the benchmark when market conditions turn against it.

Investment trust ideas  

The closed-ended structure of investment trusts means that over the long term they tend to outperform open-ended funds in most sectors.

That’s partly because investors buy shares in a trust on the stock market (rather than directly from the fund manager), and not necessarily at the same price as the value of the underlying assets held by the trust.

If they buy at a discount to net asset value (NAV) and the discount subsequently narrows - perhaps because sentiment towards that sector is improving – their returns receive an added fillip over and above the performance of the assets. Investment trusts can also borrow to invest, potentially boosting returns further.

The IT Global sector is an interesting place to look, with a number of very broad-based and venerable trusts to choose from, including F&C Investment Trust (LSE:FCIT) (included in the Super 60 line-up as a core choice) and Witan (LSE:WTAN), among others.

Haynes particularly likes WTW Alliance Trust (LSE:ATST) as a relatively low-cost option (ongoing charge 0.61%) with well-diversified exposure.

“The trust follows a multi-manager approach; the manager Willis Towers Watson blends a range of best in class’ boutique stock-picking managers who pursue different strategies (value, growth, quality and so on), thereby reducing the trust’s bias to any one style,” he explains.

Unless you have a strong stomach for risk and a very long time frame, it’s probably best to steer clear of more concentrated, high-conviction global peers such as Scottish Mortgage (LSE:SMT) for a core SIPP choice.

Scottish Mortgage is an impressive long-term holding with a strong growth focus, but it may take relatively large positions in companies the manager likes, and it also has a mandate to hold up to 30% of the portfolio in unlisted companies. As a consequence, it can be very volatile over the short to medium term.

Dividend payers

Although the focus of a long-term SIPP strategy is growth, Haynes makes the point that equity income funds can be a good choice, in that a reliable dividend can provide some compensation when growth is thin on the ground. Moreover, he adds: “The power of compounding over the long term through reinvesting dividends cannot be ignored.”

His choice is the open-ended fund Guinness Global Equity Income, which takes a total return approach but invests specifically in dividend-paying businesses.

“Quality of business is the first element the managers focus on, because if the company itself is growing, so should the dividend,” he says. “The fund has produced impressive long-term returns with low volatility and has a strong record of outperforming in difficult markets.”

Multi-asset approach

If you want to reduce the risk of big short-term swings in the value of your investment, or if retirement is not so far off, a mixed-asset fund is an obvious choice.

The addition of fixed interest holdings, which are less volatile anyway but historically have also tended to do well when stock markets are falling, creates a more balanced core holding.

Relatively cautious investors might find the defensive ‘all-weather’ multi-asset fund Troy Trojan Ethical suits them, suggests Haynes. It aims to “grind out low-volatility returns for long-term investors, while screening out several areas deemed undesirable from an environmental, social and governance (ESG) perspective”, he comments.

A more adventurous alternative with impressive long-term returns over the past decade is Baillie Gifford Managed. This fund typically holds around 75% of the fund in global shares, including emerging markets, with the balance in cash and bonds. “However, the focus on high-growth stocks mean it is likely to be higher risk and may see periods of underperformance,” Haynes warns.

interactive investor experts have picked out the Vanguard LifeStrategy range of passive funds as a low-cost option, with fees of just 0.22%. The range provides a choice of different levels of risk (in other words, different proportions allocated to equities, with the balance in fixed interest): 20%, 60% and 80% equity.

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Sustainable alternatives

Given the timescale involved in pension investing, the very real threats to the global climate and environment, and the fact that sustainability is becoming a long-term structural theme well-suited to SIPP portfolios, there’s a good argument for allocating your core savings to a sustainable investment.

There are numerous funds now seeking to invest in the companies prioritising environmental, social and governance considerations in the way they operate, and a smaller number actively producing solutions to environmental issues.

However, this is a difficult area for investors to navigate, with high levels of marketing ‘greenwash’ making it challenging to work out which funds are actually walking the environmental walk as well as talking the talk.

interactive investor’s ACE 40 investment ideas list of preferred sustainable fund choices is a good place to start. For investments focused on sustainably run companies, look at the Considers category; Royal London Sustainable Leaders is a highly regarded example of a core choice.

For those seeking out the companies delivering positive social or environmental change, it’s the Embrace category; but these do tend to be more focused, and therefore adventurous funds are likely to be better suited to a ‘satellite’ investment than a core holding.

Haynes suggests that Janus Henderson Global Sustainable Equity is an attractive choice. “It invests worldwide in companies that offer long-term structural growth opportunities through solutions to environmental and social challenges,” he says.

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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