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Funds

11/10/2018

The Basics

What is a fund?

Funds are ready-made baskets of investments managed for you by an expert. A great way to avoid making a clanger by choosing one duff share. Great for investing overseas and for outsourcing the decision making to a professional.

A fund will typically have about 30-60 different investments in it - this spreads the risk around and hedges your bets. Think of it liked buying a mixed case of wine - you don't have to be an expert and someone else picks the contents. They come in lots of different flavours such as global share funds and property funds - you can choose different types to get a good mix. Most investors have betweem about 8 and 16 to get a good mix and spread their bets around.

In a nutshell

• Typically has about 30-60 investments in
• On average will cost about 0.75% a year
• Typically a safer bet than simply buying a few shares
• Buy in an ISA to keep the profits tax-free

Is It Right For Me?

Good if you ...

  • Want a broad mix of different shares
  • Want to invest abroad too
  • Aren't a whizz trader

Not Good if you ...

  • Don't want to pay a fee
  • Want to pick your own shares
  • Want to trade regularly

People like you ...

On average, investors hold

49%

of their investments in funds

The Numbers

The Benefits

• Access to a ready-made, diversified bunch of investments 

• Allows you to invest in a wide range of brands and businesses, bonds, property and more

• Passive funds keep costs of investing this way super low 

• Get a very broad mix of investments from around the world 

The Detail


What sort of fund do I need?

A fund is simply the compilation album of the investing world. It’s a nice way to get someone at the sharp end of finance to pick and manage your investments from the bewildering array of bonds and shares on the market. Let’s give a really simple example. If we ran the Boring Money UK Shares fund (which we don’t) we might look at all the UK shares out there and say that HSBC, Shell, ITV and GlaxoSmithKline make the grade. And add them to our investment mix. But chuck out Barclays and Burberry and Sainsburys. (All random examples by the way, not tips!). Building a fund We’d end up with say 50 shares in our compilation album which we bought for £1 each in our pretend world. So our fund would be worth £50. And we might sell 50 units to people for £1 each. The benefit is that for a small investment of just £1, our investors would have a teeny fraction of an investment in 50 different British companies. And we would run and manage this pool of investments. There are thousands of funds out there, all with different flavours. This means it can be hard to separate the wheat from the chaff. But funds are the best way to get expert help on picking the right investments.

 

 

 

(i) Do you want bonds or shares or property:
Owning a bond is kind of getting an IOU from a government or a company – you buy their bond and you’re lending them money. The dicier the prospect of getting your cash back, the more ‘interest’ they will pay you to compensate for the risk. So an Ecuadorian mining company bond would pay a gazillion times more than the relatively staid UK Government, for example. It’s a riskier loan so they’ll compensate you more for taking this extra risk. Bonds are influenced by interest rates so they’re behaving a bit weirdly at the moment. If you lend the UK Government money for 10 years, they’ll pay you about 1.1%. And inflation is more than 2%. So you’ll see why bonds are feeling a bit “mweh” at the moment. Shares are also known as ‘equities’ or ‘stocks’. If you own shares, you buy little pieces of the world’s biggest companies. And tie your fortunes to theirs. As a rule of thumb, most ‘equity’ funds will have about 40-60 shares in them, although some fund managers have fewer, sticking to their convictions more about which shares are duds and which ones are winners. Shares are also one of the few investments where you can get a decent income. Companies often pay out a share of their profits as dividends. The key is to look for an ‘equity income’ fund. Pick the right one and you could get an income of around 3-4% a year. Quite a few funds will include Vodafone, for example, which currently pays out about 5.6%. Bond or shares? Many suggest diversification which means a sort-of Combo Meal of bonds and shares. Over the long-term bonds are seen as safer and less choppy than shares but many believe they will make you less over the long-run too. As a rule of thumb, if you’re a spring chicken and investing for ages in the future, you should probably look at mostly shares. If you’re getting on and likely to need your money soon, people typically prefer bonds because they’re less likely to crash as dramatically as shares, leaving you high and dry if you need to cash in your investments. Not putting all your eggs in the basket is the mantra.


(ii) How long are you investing for?
Owning a bond is kind of getting an IOU from a government or a company – you buy their bond and you’re lending them money. The dicier the prospect of getting your cash back, the more ‘interest’ they will pay you to compensate for the risk. So an Ecuadorian mining company bond would pay a gazillion times more than the relatively staid UK Government, for example. It’s a riskier loan so they’ll compensate you more for taking this extra risk. Bonds are influenced by interest rates so they’re behaving a bit weirdly at the moment. If you lend the UK Government money for 10 years, they’ll pay you about 1.1%. And inflation is more than 2%. So you’ll see why bonds are feeling a bit “mweh” at the moment. Shares are also known as ‘equities’ or ‘stocks’. If you own shares, you buy little pieces of the world’s biggest companies. And tie your fortunes to theirs. As a rule of thumb, most ‘equity’ funds will have about 40-60 shares in them, although some fund managers have fewer, sticking to their convictions more about which shares are duds and which ones are winners. Shares are also one of the few investments where you can get a decent income. Companies often pay out a share of their profits as dividends. The key is to look for an ‘equity income’ fund. Pick the right one and you could get an income of around 3-4% a year. Quite a few funds will include Vodafone, for example, which currently pays out about 5.6%. Bond or shares? Many suggest diversification which means a sort-of Combo Meal of bonds and shares. Over the long-term bonds are seen as safer and less choppy than shares but many believe they will make you less over the long-run too. As a rule of thumb, if you’re a spring chicken and investing for ages in the future, you should probably look at mostly shares. If you’re getting on and likely to need your money soon, people typically prefer bonds because they’re less likely to crash as dramatically as shares, leaving you high and dry if you need to cash in your investments. Not putting all your eggs in the basket is the mantra.


(iii) Do you want to make life as simple as possible and go for a single multi-asset fund?

‘Multi-asset’ is a little jargon-y, but in practice it means holding lots of different types of investment within one fund. So you might have a little bit of bonds, a few UK shares, a few emerging market shares, a splash of property and so on. It is, if you like, a ready-meal, rather than preparing all the ingredients yourself. The best thing is that instead of you having to decide whether now is the right time to be invested in this or that company, or this or that country, someone does that for you. There are different types of multi-asset fund, but many will come with a handy indication of the type of investors that should consider them. For example, they might be a ‘cautious’ investor. This would only have a small amount in the stock market, with the remainder in less volatile investments such as government bonds. More ‘adventurous’ or ‘aggressive’ options may have a higher weighting in the stock market. You can also get options that pay an income. Once you are up and running with a multi-asset fund, you don’t need to do very much. You can just keep topping up and ignore it.


(iv) Active or Passive?

Most funds in the market are what we call ‘active’. An active fund manager by definition thinks he or she is smarter than the average investor. A clever clogs. They think they can spot a bargain. Spot the dog before others. Identify the region that is about to go belly-up. So they pick and choose. If you buy an active fund which invests in shares, you will usually pay a fee to the fund manager of about 75p- 95p for every £100 you entrust to them. Passive funds are devoid of ego and opinion. They are the well-behaved end of the fund market. Noone makes a call on whether Share A is better than Share B. They simply follow what we call an index, or a list of shares or bonds in any given market. They buy them in proportion to their size and no judgement calls are made. If you buy a passive fund which invests in shares, you will usually pay a fee to the fund manager of about 8-12p for every £100 you entrust to them. It’s a lot cheaper because it’s run by a computer, not an expensive human. The jury is out on which is best. But by definition passive funds will return the average of any market. Some active funds will smash it – others will underperform and charge you for the privilege.


Passive 'Multi-Asset' Funds - the experts' picks

Passive Multi-Asset Fund Options

These are all low-cost collections of investments where the fund manager is choosing and managing the countries, sectors and types of investments on your behalf. All you have to do is to pick which investment house you like the look of. And then you pick which ‘flavour’ you want. Typically you’ll have about 5 choices which will range from the most cash-like, least volatile choice, up to the most spicy and bumpy ride.

You’ll read about asset allocation. This just means the choice of where to allocate the money – is it to shares, to cash, to property etc? Does the manager stick it all in US shares or just a portion? This is asset allocation. Like any good cook, this ability to blend the right mix of investments makes for a good ‘multi-asset’ manager.

Your decision should really be made by timeframes. Even though no-one likes thinking of taking risks with their money, we have to balance this against the risk that our money won’t work hard enough if it sits in cash for 20 years, going backwards. So try and avoid the human tendency to plump for the “mid range toaster” or “third cheapest bottle of wine on a list” and think hard about timeframes and peace of mind. Even if you are investing for 10 years +, there’s no point in choosing a more spicy portfolio with 80% or 100% shares in it if you’ll have endless sleepless nights as the shares go through the inevitable turbulence.

We have partnered with independent fund research house Square Mile and asked them to come up with 4 investment houses which all offer decent, low-cost ‘multi-asset’ funds:

HSBC Global Strategy Portfolios
The five Global Strategy funds managed by HSBC offer investors a diversified mix of global equities, global fixed income and global property investments which target a specified level of risk over the longer term. The team amend the exposure to these types of investments in response to economic changes. They deliver this for an ongoing charge fee that is around 0.20%. Square Mile believe that the funds offer investors good value for money and are structured to be able to adapt to the changing economic environment.

Fund manager, Jane Davies, is an experienced multi-asset investor who is supported by the well-resourced Global Multi-Asset Team. Square Mile believe that HSBC's robust proprietary optimisation process and their sensible forward-looking market assumptions help form a strong strategic asset allocation framework for the funds, which is on a par with other approaches we have seen. This essentially means that this team knows what it’s doing and have great inputs to program their investment sat nav with. The HSBC passive funds, which are likely to represent a significant portion of the portfolio, are well managed by HSBC's passive management team.

L&G Multi-Index funds
L&G has created a range of low-cost risk-targeted funds which Square Mile think plays to a number of the business’ key strengths. The group has a proven track record in building and managing risk aware multi-asset strategies, as can be illustrated by the success of its long-running with-profits fund. Additionally, L&G is a market leader within index funds and one of the largest providers in the UK. Their range of index funds is broad and this permits the managers to build portfolios that are well-diversified across asset class and via regions.

The resources at L&G are deep and strong across asset allocation, fund management and risk management. Square Mile think this gives them a good platform from which to build multi-asset solutions. The lead manager of the funds is Justin Onuekwusi and he is experienced in managing risk-targeted and other multi-asset products. He is well-supported by the asset allocation team which has grown over recent years to meet the growth in assets they are responsible for as well as the wide opportunity set now available to multi-asset investors.

Square Mile believe that L&G has the capability within the business to provide high-quality risk-targeted investment solutions. The Multi Index funds offer investors access to five portfolios that are low cost and actively managed and which are well-diversified by asset class. The overall cost of the funds makes them a particularly compelling proposition for investors that wish to have a greater control over the level of risk they are prepared accept to meet their financial goals. Investors should remember that as the funds predominantly use passive strategies as building blocks, the returns of these strategies will be limited to the returns of the index they are tracking.

Standard Life MyFolio Market range
This fund is part of a strong overall risk targeted proposition offered by Aberdeen Standard Investments (ASI). The three main facets to the funds’ strategy - strategic asset allocation (long-term view) , tactical asset allocation (shorter-term tweaking) and fund selection - are all well-resourced and contain suitably experienced individuals. This includes the ASI Multi-Asset Investment team, who are responsible for the popular Global Absolute Return Strategy (GARS) fund, providing the tactical overlay. The whole process is overseen and controlled by a committee of senior executives within ASI. This combination is one which Square Mile feel is robust and can deliver an outcome for clients which should meet their expectations. This is a low-cost solution that will predominantly invest in index tracking funds.

Having merged in August 2017, ASI is the combined entity of Aberdeen Asset Management plc and Standard Life plc. In time, there will undoubtedly be integration of various parts of the businesses but the investment teams are currently operating in the manner that preceded the merger.

(Note: Aberdeen Asset Management is a 10% shareholder in Boring Money, just to be totally squeaky clean and above board. But a) we didn’t write this original piece and b) sunlight is the best disinfectant!)

Vanguard Lifestrategy funds
The Vanguard Lifestrategy range are a fixed-weighted range of five funds which provide investors with a graduated exposure to equity assets. This means the funds follow a predetermined asset allocation which is set in stone and doesn’t change. For example you might pick the 80% equity option.

Vanguard believe that this is the best approach as over time investors have found it difficult to add value through tactical asset allocation. The short-term tweaking. However, from a risk perspective it could be argued that this approach has its drawbacks as the fund could be “blindly” investing into highly valued assets without any regard to the price that the assets are trading at. The funds care made up of Vanguard’s own passive index tracking funds, and therefore the ongoing charge figure (OCF) for the funds is very low. Square Mile believe at this level the funds represent good value for money, as investors can obtain access to a diversified global portfolio for about one- third of the price of a standard active equity fund. Square Mile also have a high regard for the constituents in the portfolio and think investors are accessing one of the best passive providers in the market.


Active Funds - the experts' picks

A shortlist of nine good funds

We’ve partnered with independent fund research house Square Mile to bring you a few suggestions of decent funds which all specialise in different areas and geographies. As always, what’s happened in the past cannot be taken to mean that the same performance is a given in the future – there are no guarantees and no-one has a crystal ball.

Worldwide Share Funds

Standard Life Investments Global Smaller Companies

“Looking for future leaders”

This fund looks to invest in a collection of smaller sized firms from across the globe which it thinks will go up in value over time. The fund manager is trying to pick quality, growing companies that have the ability, or potential, to be future leaders in their fields. Getting a fund manager to do this for you could be viewed as a lower risk way to access what can be a potentially higher risk area of financial markets - as smaller businesses tend to be less established and the future less certain. Ultimately, Square Mile would expect the fund’s bias for high quality and growing firms to add value for investors over the long-term and help minimise losses when investor sentiment turns sour; though there will undoubtedly be times when it struggles for example, when its investment style falls out of favour, and bigger companies have their day in the sun.

Cumulative Performance (28/02/2018) 5 Years 1 Year
Standard Life Investments Global Smaller Companies 116% 20%
MSCI ACWI Small Cap 85% 6%

Stewart Investors Worldwide Sustainability

"Sustainable global growth"

The investment strategy seeks to generate long-term growth through a portfolio of global shares. The team search the globe looking to invest in only the highest quality companies. These firms tend to be run by extremely capable management teams and have strong financial characteristics. Furthermore, the company itself has a long-held belief in the responsible stewardship of capital. In practice, this means that the integrity of those running the companies that they invest in must be of the highest order. This can be judged not only by their attitude to shareholders but also through their interaction with employees, suppliers, and customers alike, as well as the impact of their business activities on the local community and environment. Square Mile see the fund as an attractive choice for the long-term investor who is seeking a global portfolio of quality businesses that are ideally positioned to contribute to, and benefit from, sustainable global development.

Cumulative Performance (28/02/2018) 5 Years 1 Year
Stewart Investors Worldwide Sustainability 75% 7%
MSCI AC World 78% 7%

 

British Share Funds

Liontrust Special Situations

“Steady Eddy”

This fund is managed using a very well-considered and defined investment process that steers the managers towards steady businesses that are gradually growing and generating high levels of cash. The preference is for companies that have a clear competitive advantage. The team consistently operates with a disciplined adherence to their investment process and are fully prepared to sell those companies that lose their advantage or fail to translate it into superior returns. This discipline means that there is a low turnover of shares in the portfolio.

Whilst this is not designed as an income paying strategy per se, the companies within the portfolio tend to generate a high level of dividend growth over time as shareholders participate in the companies' success. Often these types of businesses are not seen as being the most dynamic of firms but they do tend to steadily generate attractive returns. It is important to note that the fund tends to avoid companies in certain parts of the market, for example those associated with mining, and utilities. Therefore, the fund could underperform the broader FTSE All Share index if these types of companies perform well.

Cumulative Performance (28/02/2018) 5 Years 1 Year
Liontrust Special Situations 67% 8%
FTSE All Share 42% 4%


Threadneedle UK

“Blue chip Brits”

The bulk of this fund tends to be invested in well run blue chip UK companies that have strong franchises, barriers that deter potential competitors and are profitable. These types of companies should prove reliable and attractive holdings for investors over the longer term. These positions are supplemented by holdings that can gyrate in and out of fashion depending on the strength or weakness of the broader economy.

It is run by Chris Kinder, who is a conviction led manager who forms his investment views with a deep level of research. He’s not afraid to go against the herd. To assist with this he makes good use of (Columbia) Threadneedle's sizeable UK equities team. The team stick to a well-defined research process and boast an impressive array of experienced investors. Mr Kinder is a thoughtful and frank person and is plainly driven to continue the success of this strategy.

Given this fund's clear investment philosophy and process, the support network behind Mr Kinder, his investment experience and passion to succeed, Square Mile consider this an excellent strategy to gain exposure to the larger end of the UK market.

Cumulative Performance (28/02/2018) 5 Years 1 Year
Threadneedle U 50% 4%
FTSE All Share 42% 4%


Unicorn Income

“Mid-sized income”

With Simon Moon and Fraser Mackersie at the helm, this fund is run by a pair of managers who appear to have formed a strong working relationship with an acute focus on the needs of their investors. Their process has been designed to highlight higher quality companies that are committed to paying and delivering sustainable dividends.

The fund has a natural bias to small and medium sized companies and as a result it can and does look very different from a large number of competitor strategies - many of which invest in large, blue chip companies, especially from an income perspective. It should be noted therefore, that the fund's performance is likely to be far more aligned to the smaller cap portion of the UK market. This could result in a more volatile return profile, particularly when viewed against the FTSE All Share, for example. However, the attributes sought in the companies held should provide some defensive characteristics during more troubled periods. The managers are also aware of the risks of investing in this specialist asset class and construct the portfolio with a sensible balance of conviction and providing adequate diversification.

Overall, Square Mile feel this strategy should appeal to investors who are keen to diversify their UK equity income streams away from the market's more significant distributors, but are prepared to accept some additional volatility over shorter time frames.

Cumulative Performance (28/02/2018) 5 Years 1 Year
Unicorn Income 66% 12%
FTSE All Share 42% 4%

Jupiter Distribution

“A smoother path”

Square Mile believe this fund may have some appeal for the more risk averse investor. Indeed, the experienced managers are very aware of the investor base and consider risk as the permanent loss of capital.This fund has two core chunks – one made up of shares and one made up of bonds. These are blended and balanced to produce the final outcome. The bond part of the fund invests in the debt of reliable businesses which have sensible longer-term strategies and where the manager feels comfortable holding each issue until its maturity. On the shares side, the emphasis is on higher quality dividend paying companies.Whilst the fund may appear less diversified than other multi asset offerings (which may have a broader mix of investments), Square Mile feel the collegiate approach of the managers and the understanding of the investor base are a compelling combination for a fund such as this.

Cumulative Performance (28/02/2018) 5 Years 1 Year
Jupiter Distribution 27% 1%
IA Mixed Investment 0-35% Shares 20% 2%

Specialist/’funky’


Polar Capital Technology


The Polar Capital Global Technology fund is managed by experienced investors who are skilled in identifying changing industry trends and the companies that are poised to benefit as a result. Technology is constantly evolving and continued vigilance is required by the managers and their supporting team to keep informed of developments. The fund benefits from the experience of its managers, who have witnessed first-hand a plethora of seemingly promising businesses that have fallen by the wayside as well as the gains that can be generated through companies that have been successful. Square Mile believe this is an attractive fund for long term investors who are looking for exposure to rapidly growing technology companies. It should be noted that the managers have a long investment horizon and this is reflected in the fund’s objective which is to outperform the Dow Jones World Technology index over a period of five to seven years. Therefore, this fund should only considered by investors who are prepared to hold this strategy for a least this timeframe.

The fund's annual charge may seem higher than most equity funds but it is common for more specialist strategies to be priced more aggressively. The fund has a performance fee in addition to the annual management charge, the managers receive a 10% share of any performance that is ahead of the fund's benchmark. In principle, Square Mile are not against such fees since they arguably greater align the managers interests with those of the fund's investors. This will increase costs for investors, but Square Mile think it is a price worth paying for a strategy such as this.

Cumulative Performance (28/02/2018) 5 Years 1 Year
Polar Capital Global Technology 92% 21%
Dow Jones World Technology 74% 413%

Bonds or Fixed Income

JPM Unconstrained Bond

“Cautious pick ‘n’ mix”

This is a solid bond fund that can invest across a range of fixed income securities, run by an experienced team of investors. The investment process is thorough and well applied, with a strong focus on risk at both the individual security and portfolio level and should result in a diversified portfolio with varied sources of returns. The fund is very much managed with a defensive mindset and therefore chunky losses and turbulence should be limited. Historically this has indeed been the case, and other than some minor volatility, the fund’s return profile has been remarkably smooth. Square Mile believe this fund is likely to be suitable for investors who wish to gain exposure to fixed income markets in a risk-controlled manner, with a strong focus on capital protection.

Cumulative Performance (28/02/2018) 5 Years 1 Year
JPM Unconstrained Bond 11% 2%
ICE Overnight GBP LIBOR 2% 0.3%

Past performance is not a guide to future returns.

 

Henderson Preference & Bond

“Income generating”

The managers of this fund are experienced investors who work very well as a team and have proven themselves adept at managing macroeconomic, market and security specific risks over a range of market conditions.The strategy has a specific focus on income, with the managers seeking to achieve a level of income which is high but, at the same time, consistent with the preservation of investors' capital.
The fund tends to have a bias to corporate bonds in order to meet its income objective and is therefore likely to perform strongly when these markets are rising. However, this can be at the expense of more variable performance in falling markets. Overall, Square Mile believe this fund may be suitable for investors seeking a high but sustainable level of income, with a focus on capital preservation over the course of a market cycle, but who are prepared to accept a some degree of volatility, particularly over the shorter time frames.

Cumulative Performance (28/02/2018) 5 Years 1 Year
Henderson Preference & Bond 28% 2%
IA Sterling Strategic Bond 21% 3%

 

 


Exchange Traded Funds

ETFs are a low-cost convenient way to get exposure to a region or a type of investment. It's like buying a mixed case of wine which is put together for you and saves you picking all the individual bottles. You just buy the case and let someone else worry about what goes into it!

Here's an example. Imagine you buy an ETF.  A FTSE 100 ETF. With just one trade you get an investment which has the biggest 100 firms in the UK already in it. Proportionate to their size.

Today HSBC is about 7% of the FTSE 100. So stick £100 in a FTSE 100 ETF and £7 of this will be allocated to HSBC shares for you. 

Unfortunately there is often some hieroglyphics to wade through. One of the most popular indices for global markets for example is called the MSCI (a historical coming together of Morgan Stanley with a group called Capital International.) So, for example, the ACWI (All Country World Index) from MSCI is a basket of about 2,500 shares from about 47 countries which lil' ole you could buy with one click. Bear with the jargon and wade through it. Financial people love an acronym or 12!

  • Low-cost – you're not paying fancy-pants investment types to make expensive, subjective decisions - investment charges wont usually be more than 0.1% a year

 

  • A quick way to access major markets – for example the S&P 500 in the US or the FTSE All-Share in the UK

 

  • If you buy this online, most services will charge you a one-off transaction fee of about £10 and no other administration fees

Where Can I Get One?

Funds are the easiest possible way to get a bundle of shares. In addition to the suggestions above, here are three more investment providers which will let you buy funds online in an ISA or a pension. Vanguard is simple and low-cost - read up on Multi-Asset funds above. Charles Stanley is one of the lowest-cost investment services which will let you buy and keep funds from lots of different fund managers. And AJ Bell Youinvest is another popular option which recently won the best provider award at the 2018 Consumer Investment Awards we co-hosted with The Telegraph. Check out our Best Buys pages for details. 

 

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