What’s your ISA investor fund personality?

by Cherry Reynard from Money Observer |

Pessimist, thrill-seeker or beginner? There is a fund to suit every type of investor.

Know thyself: the Greek aphorism is not just handy in life, but also when investing.

No one who lies awake at night fretting about their savings should be in an artificial intelligence fund, while someone with 40 years to invest doesn’t need the constraints of a boring defensive fund. With that in mind, we consider a smorgasbord of options for a variety of different investor types and situations.

Youthful beginner

Youth is a superpower in more ways than one. Let’s look at two investors: one who starts putting £100 away each month at the age of 20 and another who puts £200 away at 40. Assuming investment growth of 5%, by the time they are 60, the one who started at 20 will have built a useful pot of £152,602. In contrast, even though she put in the same total amount – £48,000 – as the early starter, the investor who started investing at age 40 will have built up just £82,206 over 20 years. Such is the power of compounding returns (whereby gains themselves generate further gains, and so on).

That long-term horizon also allows youthful investors to take more risk. After all, they can readily afford to ride the highs and lows of stock markets. It also means  liquidity isn’t such a problem. If an investor doesn’t need to buy or sell, they may as well reap the benefits of less easily accessed, more rewarding investment types.

James Calder, research director at CityAsset Management, says:

“We use a number of global investment trusts for our younger clients. In reality, many will have a time horizon of 50 or more years. That means they can get involved in areas such as  biotechnology, private equity or fintech – high-growth, globally oriented funds.”

He picks Scottish Mortgage (LSE:SMT), a well-priced investment trust managed by Baillie Gifford that invests in high-growth companies. Its top holdings include Amazon (NASDAQ:AMZN), Illumina (NASDAQ:ILMN) and Alibaba (NYSE:BABA). It can be volatile, so it suits regular savers rather than lump-sum investors.  Other favourites include the Fidelity Asian Values (LSE:FASS), which has had a tough period but has a talented manager invested in an eclectic range of Asian companies.

Gavin Haynes, an investment consultant, points out that many youthful investors may prefer a sustainable investment option. After all, the last thing they want by investing is to mess up their own future. There is an increasingly broad choice, but he likes the Fundsmith Sustainable Equity fund.

He says:

“This is the same approach that Terry Smith has taken, very successfully, with his £19 billion Fundsmith Equity fund: investing in companies that have a sustainable competitive advantage. However, this fund has a number of red lines – no tobacco or fossil fuels, for example. It is smaller, at £300 million in size.”

A number of thematic fund launches may suit an investor with a long time horizon. For example, the Schroder Energy Transition fund is an impact fund that invests in the transition away from fossil fuels to new energy sources. The BlackRock Circular Economy fund invests in companies promoting a new economic model based on three principles: designing out waste and pollution, keeping products and materials in use and regenerating natural systems.

A Money Observer 2020 Rated Fund to fit

For those with a timeframe of several decades, BMO Responsible Global Equity offers a keen focus on sustainability and an impressive track record. It has a relatively high exposure to technology and 57% in the US.

Established pessimist

These are difficult times to be a defensive investor. Many of the tools that have served defensive investors well in the past – government bonds, for example – now look increasingly risky, thanks to quantitative easing and the era of low interest rates. UK 10-year government bonds, for example, have a yield of just 0.85% at a time when inflation sits at 1.5%. Investors would have to be pretty gloomy about the outlook to willingly give up 0.65% of their capital each year.

Peter Askew, fund manager and chief executive at T Bailey, says:

“Defensive  assets look hugely expensive and some could give you negative returns. We are not buying many government bonds as things stand. In general, we’re out of fixed income where possible.”

The same has been true to a lesser extent with equities. Low bond yields have pushed investors into safe companies with reliable dividends. However, this shift has pushed share prices higher. Nestlé (XETRA:NESM), for example, now trades at 33 times its annual earnings and its dividend is just 2.4%. At these prices, such companies no longer look like safe hiding places to ride out a market storm, but instead may be vulnerable to the slightest change in investor sentiment.

Absolute return funds may be an option, but it is difficult to get excited about a sector where the average fund has delivered, at most, 3.4% in any calendar year among the past five. Many of the sector’s flagship funds - Standard Life Investments Absolute Return GlobalBond Strategies, Jupiter Absolute Return – are in negative territory over three years.

This doesn’t leave the defensive investor with a particularly wide choice. Haynes suggests infrastructure. He says:  “It has a good yield and it’s not too cyclical. Spending on infrastructure in the developed and emerging world is increasing.” He picks the First State Global Listed Infrastructure fund. Askew agrees: “Real assets provide real yield and we have been looking among some of the investment trusts,” he says.

Another option might be a blended multi-asset fund, where the fund manager aims to find individual securities likely to protect capital in more difficult markets. The Investec Diversified Income, which looks to generate return primarily from income with half the volatility of the broader stock market, would fit the brief.

Manager John Stopford says:

“Indicators suggest that the risk of recession is higher than it has been at any point in this cycle, so the message is to be cautious, not to be a hero, to look for individual securities that appear mispriced.”

He is holding higher-yielding government bonds – such as those from New Zealand, the US and Canada – plus a range of emerging market bonds, around a third of the portfolio in equities and a smattering of property.

Gary Potter, co-head of the multi-manager team at BMO Global Asset Management, likes Clive Beagles, who runs the JOHCM UK Equity Income alongside James Lowen. Beagles is a value-focused manager, often with a different perspective on the market. Today that manifests as an overweight position in financials, alongside a significant weighting in small companies. Potter says:

“He’s a very established manager with a long track record. His financials position hasn’t worked yet, but we believe it will.”

A Money Observer 2020 Rated Fund to fit

Cautious investors keen to preserve their wealth could consider Baillie Gifford Multi-Asset Growth, which aims for growth with low volatility, whatever the weather. Since launch four years ago it has achieved this, returning an annalised 5.4%.

Confirmed contrarian

It has been a good year for most types of investor: bond and equity prices have risen, in spite of some gloomy predictions at the start of 2019. The problem is that this has left prices higher and reduced the number of opportunities for contrarian investors.

However, there is one region where political uncertainty continues to weigh on assets, notwithstanding the recent UK election result: UK equities – particularly UK domestic stocks – have lagged their international peers for some time.

Over the past three years, the average fund in the UK all companies sector has risen by 21%, while the average North American fund is up 36%. With headwinds from Brexit, a sluggish economy and the weakness of sterling, UK assets look cheap.

For Potter this represents a potential opportunity. He says:

“UK small company funds have been caught up in the Brexit debate. To us, this part of the market now appears quite seriously undervalued. We like funds such as LF Tellworth UK Smaller Companies, run by Paul Marriage.”

Marriage was previously at Schroders, where he ran more than £1 billion in a similar strategy.

This is also the view of investment trust managers polled by the Association of Investment Companies. Its annual poll shows that, in spite of the Brexit challenges, a third of respondents think the UK has the best prospects for the coming year. Some of the UK smaller companies trusts remain on wide discounts to net asset value (NAV). Highlights include the Chelverton Growth Trust (LSE:CGW), which is trading at a 15.4% discount, and some micro-cap funds that are also on wide discounts.

There are other parts of the investment trust market that are conspicuously unloved. European smaller companies trusts, for example, trade at an average 11.4% discount to NAV at a time when Europe appears to be recovering. Emerging market trusts  have also had a tough time, trading at an 8.4% discount.With some positive noises emerging from US-China trade talks, this area could make progress in 2019.

Haynes favours India:

“There aren’t many areas where investors haven’t made money this year, but India is one of them. There  have been some short-term headwinds, but it seems a good time to increase exposure with a fund focused on India. We like the First State Global Emerging Markets Focus fund, which has more than 25% in India.”

A Money Observer 2020 Rated Fund to fit

For contrarians Europe remains an unloved market worth investigating. TR European Growth (LSE:TRG) is a value-oriented choice run by a highly regarded manager. It currently trades at an 11.5% discount to NAV.

Hardened thrill-seeker

The first place any thrill-seeker is likely to look is the technology sector. Investors who have been in the sector over the past five years will certainly have found it pretty exciting. The average  fund is up 125%, a full 20% ahead of any other sector.

The problem for thrill-seeking investors is not, usually, identifying areas of strong growth in the economy, but ensuring that they don’t pay too much for that growth. This may be the problem for technology-focused investors today.

Nevertheless, myriad funds now target specific sectors of the economy slated to be areas of unassailable growth. For example, for investors keen to take advantage of growth in the artificial intelligence sector, there is the Polar Capital Automation & Artificial Intelligence and the Smith & Williamson Artificial Intelligence fund. CPR Asset Management has its Global Disruptive Opportunities fund (distributed through Amundi). BNY Mellon Investment Management has launched the BNY Mellon Mobility Innovation fund. A number of passive funds are available, such as the LGIM Future World range.

Gary Potter believes there is merit in some of these ideas and thinks the outlook for cloud computing is particularly bright. He says:

“These businesses are disrupting the world, and we believe in the growth of the cloud. We would probably play the theme through a dedicated technology fund, such as Polar Capital Technology (LSE:PCT). There will always be ups and downs, but it is not aggressively speculative.”

Gavin Haynes says smaller companies across the globe have been unloved and should be a source of long-term growth. He likes the Vanguard Global Small Cap Index fund.

Kay Ingram, head of policy at LEBC, suggests a blended index portfolio. In the group’s funds, the highest-risk investor will hold the highest weighting in two UK index funds, iShares UK Equity Index (UK) and the Fidelity Index UK, plus two  international funds – the Fidelity Index US and the Fidelity Index Emerging Markets fund.

A Money Observer 2020 Rated Fund to fit

Adventurous investors with an eye to environmental issues could look at Impax Asian Environmental Markets, which aims to profit from the shift to greater sustainability among Asian superpowers over coming years.

Mind the trap

Ingram cautions investors against allowing their personality type to be the sole driver of their investment decision-making: She says:

“With any investor, we would ask them what they want to achieve with their investments and place this at the centre of any recommendation. While mindset plays a part in determining an investor’s tolerable level of risk, it should not be the uppermost consideration when selecting an investment, as it could stop them achieving their financial objectives.”

However, investors need to be heedful of their mindset if they want to ensure they are comfortable with the investments they hold and know what to expect from them. Nervous investors may harm their long-term investment prospects by selling at the first sign of market trouble. Know thyself, and investment should come more easily.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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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