Ten growth funds the pros have been sticking by despite style rotation

Despite the market rotation towards value investing, professional investors are sticking by a range of growth funds.

The market rotation this year has seen some investors reduce exposure to growth-focused funds, but trying to time the market is notoriously difficult.

“This is the key point,” says Ben Yearsley, investment director of Shore Financial Planning. “I favour balanced portfolios which contain elements of growth, value, cyclical and defensive investments and a broad geographic mix.

“I look for the best active managers in each area and don’t panic if their style underperforms. I’m not looking to market-time otherwise I’d try and switch between growth and value rather than having the best of both.”

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We asked financial advisers, fund analysts and wealth managers to name the growth funds they have been sticking by despite them being out of favour.

Fundsmith Equity

One Four Nine has an unashamed bias towards ‘quality growth’ funds, although it prefers to think of its focus as being on fund managers who can grow client wealth by picking good companies instead of being beholden to an investment style.

Fundsmith Equity is a key holding. Run by veteran stock-picker Terry Smith, it invests in a small number of high-quality, resilient, global growth companies that are attractively valued.

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“I’ve held the fund since November 2011 in various portfolios,” says chief investment officer Bevan Blair. “In those 11 years, it’s not changed its philosophy and has stuck to what it believes provides the best long-term value for investors.”

LF Blue Whale Growth

Shore Financial Planning added global quality growth fund, LF Blue Whale Growth, to portfolios in January 2019.

All its portfolios except responsible ones have an allocation to the fund, ranging from 3-5% for moderately cautious to adventurous investors.

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“I’ve known Stephen Yiu, the lead manager, for about 20 years and he’s always been a driven and talented individual,” says Yearsley.

He adds that recent performance in 2022 “has been disappointing”, but this is against a market backdrop in which “growth has been massively out of favour over the last year”.

Yearsley points out: “Ultimately you want managers who have a clear focus and approach but aren’t blinkered – this fund has that.”

Montanaro Better World

Dzmitry Lipski, head of funds research at interactive investor, likes smaller companies fund Montanaro Better World as a satellite allocation.

Appearing on ii's ACE 40 Sustainable Funds List, it invests in small and mid-caps globally that seek to address major challenges in line with the United Nations Sustainable Development Goals. Highly regarded managers Charles Montanaro and Mark Rogers have run the fund since its launch in April 2018.

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They focus on six impact themes: environmental protection, the green economy, healthcare, innovative technology, nutrition and well-being.

“Following a strict three-stage process, the managers aim to establish if a company is making a good impact in these areas and this is assessed through a variety of screening tools as well as meeting with the company management teams regularly,” says Lipski.

Impax Environmental Markets

Ayres Punchard Investment Management’s Key to the Future model portfolio service has held the Impax Environmental Markets (LSE:IEM) investment trust since the models launched in October 2019.

The trust comprises 2% of its cautious portfolio, 7% of its medium-risk portfolio and 12% of its most aggressive portfolio.

“We believe the falls of the last 12 months have simply created further long-term opportunities for well-managed sustainable growth funds such as this one,” says Chris Welsford, managing director of Ayres Punchard.

“If you think about the highly impactful nature of the fund, the performance has been excellent and set against the COP27 backdrop, I think it’s a very good news story.”

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Slater Growth

Slater Growth is run by Mark Slater, who Canaccord Genuity Wealth Management regards as one of the longest-serving and most successful UK equity managers. The fund has typically commanded 2% of its higher-risk models since June 2018.

“The fund’s overweight to small and mid-caps has aided longer-term returns, and the alpha has been generated through excellent stock-picking and not just style factors,” says Kamal Warraich, Canaccord’s head of equity fund research.

“It has struggled versus the index more recently due to this small and mid-cap bias, but pleasingly it continues to outperform comparable peers.”

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Liontrust Sustainable Future UK Growth

Liontrust Sustainable Future UK Growth hasn’t done as well since it was added to Canaccord’s core models, with a 3% allocation, in June 2021. As of early November, it is down around 25%, while the FTSE All-Share has eked out a small gain.

“Time frames are everything when assessing fund returns, and while these short-term numbers are disappointing longer-term returns remain compelling,” says Warraich.

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He also points to the “enormous” dispersion in returns between large and small-caps this year. The fund’s overweight to smaller companies and lack of allocation to the energy sector have held it back.

“We continue to rate the team, philosophy and fund, which fulfils a particular role within our portfolios,” adds Warraich.

Henderson Smaller Companies

Among UK smaller companies Lipski suggests Henderson Smaller Companies (LSE:HSL) investment trust. The smaller companies team at Janus Henderson benefits from the leadership of the experienced Neil Hermon, manager of the trust since 2002 and an investor in UK smaller companies since 1993.

Hermon invests in a diversified portfolio of around 100 companies with a keen eye on valuation – buying ‘growth at a reasonable price’, sometimes referred to as ‘GARP’ investing.

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He looks for ‘the four Ms’: model (a strong business model); management (company managers with a good track record); money (strong balance sheets and cash flows); and momentum (good earnings momentum).

“He finds his investments mainly by meeting companies and assessing the managers and their strategies,” adds Lipski.

Comgest Growth Europe

IBOSS Asset Management bought the Comgest Growth Europe fund in May of this year to replace its allocation to two other growth funds amid concerns over stock valuations and whether their managers would “make sufficient amendments to their holdings”.

“As central banks of the developed world woke up to the non-transitory spectre of inflation, we felt the new winners would unlikely be the same as in the era of ‘lower [interest rates] for longer’,” says Chris Metcalfe, its chief investment officer.

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The fund is in early November down around 22% in the year-to-date, but Metcalfe says it has performed “in line with our expectations within the complex and challenging environment of 2022”. Clients considered medium risk and above have a 2% allocation to the fund.

Stewart Investors Asia Pacific Sustainability

Tyndall Investment Management re-introduced the Stewart Investors Asia Pacific Sustainability fund to both traditional and sustainable portfolios this April following a period of being underweight quality growth as a factor.

The fund adopts a quality growth mantra and includes ‘quality of company finances’ as part of its process to ensure it does not pursue growth at the expense of balance sheet strength.

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It has gained almost 3% so far this year, while the MSCI Asia Pacific ex Japan index has shed 15%, both in sterling terms. Its overweight to India, a region that had a very strong third quarter, has underpinned performance.

“We have a long association with the fund and use it in existing portfolios and when creating new mandates,” says James Sullivan, Tyndall’s head of partnerships.

Polar Capital Technology

Ravenscroft has held the Polar Capital Technology (LSE:PCT) fund since August 2011, netting a return of over 400%. The fund commands 5% of its balanced and growth portfolios.

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“Accelerating innovation is one of our key investment themes and the rationale for initiating the position is still valid today: we believe technology will remain a key part of our lives,” says fund analyst Shannon Lancaster.

“In a sector like technology, which has become frothy with high valuations at times, we require a disciplined and patient active manager. Polar has a fantastic reputation as a thematic investment house.

“Its managers have run money through various crises and are incredible bottom-up stock-pickers, taking advantage of the volatility faced this year to buy great businesses at attractive prices.”