It’s been an eventful start to 2018, with a return to a more volatile environment as global markets climbing to record highs in January, before several days of dramatic correction at the start of February.
The FTSE 100 index has seen falls of almost 10% since its high point in mid-January, while in the US the S&P 500 fell by a similar amount but has since recovered about half of its losses.
Ben Yearsley of Shore Financial Planning points out that ironically, those market falls are actually a consequence of strong economic figures from various economies as investors anticipate more interest rate rises and the negative impact they could have on corporate and economic performance.
February nonetheless saw positive returns in a handful of fund sectors:
Top-performing sectors in February:
| Tech & telecommunications | +2.4% |
| Global em mkt bond | +0.9% |
| UK index linked gilts | +0.7% |
| UK gilts | +0.6% |
| North American smaller companies | +0.5% |
Meanwhile specialist sectors dominated the mainstream investment trust sectors table:
Top-performing investment trust sectors:
| Country specialists: other | +3.2% |
| Forestry & timber | +3.2% |
| Property direct: Asia Pacific | +3.0% |
| Tech, media and telecoms | +2.2% |
| Insurance & reinsurance | +2.0% |
The most popular funds on the Interactive Investor website during February suggested investors have hardly changed their investment inclinations as a result of the market upheaval, with only one fund, Henderson China Opportunities, leaving the top 10 over the month.
Most-bought funds and performance in February:
| Fundsmith Equity | -2.9% |
| Lindsell Train Global Equity | +1.5% |
| Legg Mason IF Japan Equity | +2.9% |
| Vanguard LifeStrategy 80% Equity | -1.3% |
| Baillie Gifford Greater China | -1.0% |
The investment trust line-up, meanwhile, reflects ii customers’ continuing love affair with Scottish Mortgage, and the strength of the Japanese market. It also reveals their eye for a bargain, as Woodford’s Patient Capital trust slipped onto a 13% discount, down from the one-year average of -6.2%.
Most-bought trusts in February and performance (to 6 March):
| Scottish Mortgage | +2.9% |
| Baillie Gifford Shin Nippon | +5.8% |
| Woodford Patient Capital | -3.3% |
| City of London | -1.3% |
| Monks | +1.3% |
With an eye on the approaching Isa season, multi-manager firm Architas produced some revealing research on the fund sectors that have produced the best long-term returns since Isas were launched in 1999. It found that smaller company sectors dominated the top 10, but the top place went to China/Greater China.
Best-performing sectors and total return performance since 1999:
| China/Greater China | 824% |
| European smaller companies | 639% |
| UK smaller companies | 557% |
| Asia Pacific ex Japan | 527% |
| Global emerging markets | 500% |
| N Am smaller companies | 406% |
| Asia Pacific inc Japan | 357% |
| Global emerging market bond | 327% |
| Japanese smaller companies | 317% |
| Specialist | 235% |
Looking ahead, commentators have been hard at work producing recommendations for investors looking for ideas for their Isa as the 2017/18 tax year enters its final month.
At The Share Centre, Sheridan Admans suggests six funds for a well-diversified Isa:
Pyrford Global Total Return: Offers inflation protection, low volatility capital preservation without the use of derivatives and selling short stocks.
GAM Star Credit Opportunities: A high-quality bond fund to minimise the risk of rising interest rates forcing defaults. Holds fixed Income issues as well as floating rate notes (FRN) and convertibles, which should provide a cushion regardless of rates rising or falling.
LF Miton UK Multi Cap Income: This multi-cap approach provides broad diversification, producing attractive income flow plus some capital growth.
Fundsmith Equity: A high-conviction, highly concentrated global portfolio with a long long-term ‘buy and hold’ strategy. The portfolio is more defined by those companies it will not hold, than by those it will.
Legg Mason Japanese Equity: ‘One of our preferred regions’; this fund aims to benefit from the economic, demographic and structural changes taking place there.
Threadneedle US Equity Income: Good choice if you believe there’s a way to go yet for the US economic expansion story. Focus on large multinational names.
Jason Hollands has six more suggestions for a similarly broad-based Isa:
Lindsell Train Global Equity: A concentrated global portfolio of 25-35 quality companies; buy and hold approach with very low portfolio turnover.
Evenlode Income: The team seek out “asset-lite” businesses, those where returns on equity are not dragged down by the wear and tear of replacing plant and machinery, and which have robust balance sheets.
Liontrust Special Situations: ‘Has delivered everything you could wish for from an actively managed fund: significant and consistent outperformance with relatively low volatility. It is an approach which has worked well in both tough market conditions and in rising markets.’
Fidelity Emerging Markets: A core emerging market holding with 75 businesses in the portfolio and a good spread of emerging economies.
FP Crux European Special Situations: A multi-cap fund run by a manager with three decades of experience and ‘an outstanding track record’. He ‘targets well-managed companies that he believes have business strategies that can deliver a high return on capital and can weather changes in the economic cycle.’
Morant Wright Nippon Yield: Run by a boutique fund house specialising in Japan, this is a conservatively managed fund that taps into the growing dividend culture there.
For investment trust fans, the Association of Investment Companies has tapped into adviser ideas and put together a selection of trust suggestions for Isas, with an eye to different age groups.
Millennials with time on their side:
Dennis Hall of Yellowtail Financial Planning suggests both Lindsell Train and Scottish Mortgage: ‘The secret is to buy well and hold.’
Tim Cockerill of Rowan Darlington likes Downing Strategic Micro Cap, ‘a small specialist investment company which runs a very concentrated portfolio of micro-cap companies – one for the long term, so ideal for patient millennials’.
Neil Mumford of Milestone Wealth Management recommends Witan as ‘an ideal investment for millennials saving on a monthly basis’.
Middle years with retirement on the horizon:
Hall says investors who want to lower their risk profile a little could look at a couple of globally diversified trusts: Baillie Gifford’s Monks or Janus Henderson’s Bankers.
Jim Harrison of Master Adviser suggests a smaller companies fund for more experienced investors with some time still to go: Henderson Smaller Companies offers ‘impressive total return, surprising strong dividend for a smaller companies growth fund and available at almost a 9% discount.’
Cockerill likes Mercantile from JP Morgan. It holds around 100 stocks, reducing specific stock risk, ‘and yet this is still very much a stock picking fund – a good long-term, core holding providing exposure to the higher growth part of the UK stock market which historically has outperformed large-cap stocks.’
Retirees employing the return:
Mumford picks one of the AIC’s dividend heroes, Scottish American from Baillie Gifford. ‘Currently providing an income yield of 3%, more impressively this investment company has continually delivered a rising dividend income, which has increased by 46% over the last ten years.’
Cockerill points out that Merchants is a UK equity income investment company which pays an attractive yield of 5.2% per annum, which has increased, year on year, for the past 35 years. A great choice for ‘a high and reliable income stream’.
Harrison identifies JPMorgan Claverhouse as a trust ‘to buy, put in a safe place and never touch again’. It ‘has been described as a fortress in terms of dividend cover and revenue reserves, having materially more of both than their peers,’ he adds.
Finally, if you fancy giving your portfolio a bit of a kick, Darius McDermott of FundCalibre has five suggestions for ‘satellite funds’:
Aberdeen Latin American Equity: The growth potential of emerging markets over the long term is very exciting but investing in them can be a bumpy ride. This fund is managed by Aberdeen’s renowned emerging markets team, whose primary investment concern is quality, followed by value. The strategy has had considerable success across a range of regions.
First State Global Listed Infrastructure: Many infrastructure companies involved in areas such as water, hospitals or bridges have government-backed contracts and the underlying assets are often inflation-linked. This means infrastructure can offer a defensive source of diversification.
M&G Emerging Markets Bond: Rising interest rates are usually bad for bonds, as it means yields should rise but in doing so, could cause the price to fall, resulting in capital losses. But emerging market bonds still offer value and a good level of income. This fund has a very experienced manager and yields 5.3%.
Polar Capital Global Insurance: Another defensive choice. In the good times, we may pay less attention to insurance renewals, but in the bad times we are likely to cut other expenses before we cut our insurance policies. Polar Capital has many years of experience in risk and casualty insurance markets.
Premier Pan European Property Share: This fund does not invest in ‘bricks and mortar’ property but in the shares of property companies across Europe, including the UK. The manager is incredibly knowledgeable about his sector and has managed to differentiate the fund meaningfully from both its benchmark and its sector.
