We share substitutes for three funds and two investment trusts that are among the most popular each month with interactive investor customers.
Funds that have attracted billions of pounds are popular for a reason – their managers have built impressive track records in both rising and falling markets – but it can pay to go off the beaten track.
Managers of newer or smaller propositions are often more motivated to succeed as they seek to grow their funds and build their reputations. Flexibility to invest in smaller companies is another big benefit.
“One of the key advantages that smaller funds have over larger ones is their ability to be more nimble,” says Ruli Viljoen, head of manager selection at Morningstar.
“They can invest lower down the market-cap scale and take larger positions in smaller, less liquid names. The risk/reward trade-off is often higher.”
On the downside, costs can be higher too. Larger funds boast economies of scale, which in some cases are passed on in the form of lower costs to investors. However, there is downward pressure across the industry.
“With the fund industry becoming increasingly competitive, we are seeing new funds being launched with lower fees than larger, established funds,” says Gavin Haynes, co-founder of Fairview Investing, a consultancy.
Teodor Dilov, a fund analyst at interactive investor, points to large investment houses offering seed share classes or lower early bird fees until a fund reaches a pre-determined size.
While small boutiques often cannot afford to offer cheaper share classes, this is not necessarily a deal-breaker. Their best way of attracting assets is to focus on building a strong track record – a high level of investment outperformance will more than offset slightly higher fees.
We have mined the insights of a range of fund experts to unearth hidden gem alternatives to three funds and two investment trusts that are regularly among the most popular each month with interactive investor customers. These lesser-known names have assets of £500 million or less, so are more likely to be under investors’ radars.
- Top 10 most popular investment funds: July 2020
- Top 10 most popular investment trusts: July 2020
- ii Super 60 investments: Quality options for your portfolio, rigorously selected by our impartial experts.
Fundsmith Equity is the biggest fund in the Investment Association (IA) Global sector with assets of £20.5 billion. Manager Terry Smith has attracted a growing following as investors seek sanctuary from economic uncertainty in his bias to large-cap quality growth stocks.
- Terry Smith says no one should invest in equities for income. Is he right?
- Stephen Yiu interview: guarded optimism and outperformance
An alternative that merits consideration, according to Haynes, is LF Blue Whale Growth, a fraction of the size at £460 million. “Similar to Fundsmith, Blue Whale is an investment boutique set up by a fund manager [in this case ex-Artemis Stephen Yiu] wanting to launch a fund with a focused approach to identifying world-leading businesses with strong growth prospects,” he says.
Both portfolios are concentrated (Fundsmith has 29 holdings and Blue Whale 25) but the smaller fund has twice as much in technology, which accounts for 60% of its assets and has supercharged its performance this year.
As another option, Square Mile Investment Consulting & Research likes Artemis Global Select, which has assets of £220 million. The fund invests in long-term structural growth trends, such as online services, automation and scientific equipment.
It has a larger number (63) and more diverse range of holdings than Fundsmith, and its three managers are more valuation-conscious than Smith. “All of this helps to moderate downside risks,” says Square Mile analyst Daniel Pereira.
Lindsell Train Global Equity
Lindsell Train Global Equity has been a stalwart performer for investors seeking exposure to high-quality global businesses. Nick Train’s impressive track record has seen the fund grow to almost £8 billion.
Morningstar suggests Capital Group New Economy as a substitute. The strategy has been running since December 1983 but has only recently been made available to European investors with the launch of a Luxembourg fund in November 2019. It has since attracted $90 million (£68 million).
It also favours large-cap growth stocks but focuses on “new economy” companies that are innovating to attract new customers, develop new markets, create supply chain efficiencies and improve technologies. With six portfolio managers, it lacks the keyman risk of the Lindsell Train fund.
Another good core global equity strategy with the same bias as Lindsell Train to quality companies (consumer staples and healthcare stocks particularly) is Trojan Global Income, according to Fairview Investing.
It differs in its focus on income and capital preservation – biases that can help investors in tougher times. Like other Troy Asset Management funds, manager James Harries adopts a conservative approach. His focus on income growth and total returns has helped him navigate recent dividend cuts.
Vanguard LifeStrategy range
With assets of £22 billion, Vanguard LifeStrategy dominates the low-cost multi-asset space. Other ranges seeking to challenge its position include BlackRock MyMap and BMO Universal Multi-Asset Portfolios.
“When BlackRock launched MyMap last May, it certainly appeared to have Vanguard LifeStrategy in its sights,” says Haynes. Although early days, performance has caught the eye and he expects the five funds, each worth less than £100 million at present, to take market share from Vanguard on account of lower fees (0.17% versus 0.22%). It is also worth noting that an ESG option for sustainable-minded investors was launched by BlackRock in June.
The BMO range has been around for longer – since October 2017 – having also been “launched to rival low-cost passive strategies in the multi-asset space, mainly Vanguard LifeStrategy”, says Viljoen at Morningstar.
Initially six portfolios with charges capped at 0.29%, sustainable versions of three of them were launched in December 2019 with charges capped at 0.39%. Unlike Vanguard, which adopts a passive approach to asset allocation and investment, BMO uses dynamic asset allocation and mainly invests in active strategies.
“The Vanguard funds have typically held higher allocations to US equities and government bonds, both of which have performed strongly,” says Viljoen. “It is still early days for this BMO range, but it is one to keep an eye on.”
With assets of more than £13 billion, Scottish Mortgage (LSE:SMT) is the greatest success story of the investment trust universe. Astute stock-picking by managers James Anderson and Tom Slater has returned 244% over five years and 763% over 10. In the year to 7 August alone, its shares have rallied 56%.
- Is it time to take some profits in Scottish Mortgage?
- Tom Slater interview: Scottish Mortgage’s lockdown winners and new trends
- Zehrid Osmani interview: investing beyond FAANG
- Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)
Winterflood Securities highlights the £268 million Martin Currie Global Portfolio (LSE:MNP) as offering something different given its underweight allocation to the US and zero weighting to FAANG stocks. Analyst Emma Bird points to manager Zehrid Osmani’s strong performance since he took charge in late 2018 and a zero-discount policy that limits downside discount risk.
For interactive investor, Fundsmith Sustainable Equity, a fund with an ethical remit included in the ACE 30 list, is a worthy alternative. The fund launched in November 2017 and is £350 million in size. It is more expensive than Scottish Mortgage (1.05% versus 0.36%) but in its short history has returned more than double the average of the IA Global sector.
Like Scottish Mortgage, it is an out-and-out growth fund but its considerably higher weighting to defensive stocks and sustainable investment filters could bode well in a world where uncertainty prevails. It has almost 29% in healthcare and 23.5% in consumer staples, whereas Morningstar data shows the lion’s share of Scottish Mortgage, at almost 43%, is in consumer cyclicals.
City of London
City of London (LSE:CTY), run by seasoned UK equity income investor Job Curtis, has increased its dividend for 54 consecutive years, making it a firm favourite among income-seekers who have amassed almost £1.5 billion in the trust.
A good alternative according to interactive investor is BMO Responsible UK Income, another constituent of the ACE 30 list of rated ethical funds. The fund is small, with just £336 million of assets, but yields an attractive 4.4% (albeit less than City of London’s current 6%).
“Funds that are ahead of the curve when it comes to ESG considerations are likely to benefit financially from first-mover advantage,” says Dilov. “For income propositions, this financial uplift could trickle down to investors in the form of bumper dividend yields.”
Another option, suggested by Fairview, is Henderson High Income (LSE:HHI), which is smaller (£251 million) and less well known than City of London, but shares a management group in Janus Henderson and has generated similar returns since David Smith took the helm in 2014.
It mainly holds UK shares, but also invests overseas and in bonds to diversify its income streams. “At a time when income is sought-after, the trust has a higher yield (around 7%) and can be bought at a wider discount than City of London (7.4% versus 3.3%),” says Haynes.
Discount figures, sourced from Winterflood, are correct as at 25 August.
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.