GROWTH EQUITY
GLOBAL GROWTH (5 FUNDS)
Global equity fund managers can pick the most promising stocks from around the world, but beating the market is no easy feat. US equities form a huge chunk of the MSCI World index, and when the US tech giants are racing ahead it can be hard for active funds to compete. We’ve seen this so far in 2023, with just 116 of 551 funds in the IA and AIC Global sectors having stayed ahead of the MSCI World index as of late August.
Global trackers’ reliance on a few big US stocks may, however, provide good motivation to seek an active manager who differentiates themselves. Plenty of global funds have an appealing and distinctive approach, and the five funds that featured in 2022’s list have maintained their place this year.
Scottish Mortgage (SMT)
Never a dull holding, this trust made enormous returns over much of the last decade thanks to its focus on racy tech and healthcare stocks, culminating in huge gains in 2020 in particular. The last 18 months, however, have been something of a downward spiral. Both the listed and unlisted elements of the trust’s portfolio have struggled in the face of interest rate rises, and SMT’s shares have plummeted. Shareholders had to stomach a 45 per cent loss in 2022 and since then, the trust has failed to take advantage of this year’s recovery. Instead it has racked up another loss, of nearly 8 per cent for 2023 at the time of writing.
Some worry about Scottish Mortgage’s high level of exposure to unlisted private companies, others wonder if its holdings in general are fundamentally ill-equipped for an age of higher interest rates. The trust’s board also had a very public spat this year, resulting in some personnel changes, while the fact the portfolio has been bumping up against its limit on investment in unlisted stocks means it could struggle to provide such businesses with further financing in a difficult time.
And yet the trust still does what it first became known for: focusing on disruptive companies that should deliver great change – and fat investment returns – in the long run. Investors who can stomach volatility, and who realise this is more of a niche holding than some other global funds, can still benefit from holding it. The fund was also lingering on a share price discount of around 20 per cent to net asset value (NAV) at the time of writing – something that might reflect investor mistrust of the portfolio valuations, but might also provide a margin of error for new buyers.
Rathbone Global Opportunities (GB00BH0P2M97)
A name that tends to attract little in the way of adverse commentary from our panellists, Rathbone Global Opportunities has a more conventional approach than Scottish Mortgage. The team focuses on listed companies in developed markets, although they too very much follow the growth model of investing. The fund targets “innovative and scalable businesses that are growing fast and shaking up their industries”, with a preference for companies that are different to their competitors, durable to change and hard to imitate. Such companies must be able to grow quickly without overstretching their resources.
As we noted last year, the portfolio does display the ability to go against the grain: its allocation to tech stocks, which make up around 15 per cent of the fund, is lower than that of some peers, even if names such as Nvidia (US:NVDA) and Microsoft (US:MSFT) feature reasonably prominently. At the same time, a focus on strong business models has fed into some very strong returns over the long run.
That doesn’t mean the fund is immune to a growth sell-off; last year it lost just over 20 per cent. But we believe this is a solid option for long-term investors wanting to target the growth stories of now and the future.
Lindsell Train Global Equity (IE00BJSPMJ28)
A fund that comes without much of a tech focus and looks much sleepier than many of its peers, it has done well over the longer term and should display resilience in tough times. Like other Lindsell Train portfolios it focuses on the power of established brands, meaning a big focus on consumer stocks. The fund is also extremely concentrated, with London Stock Exchange (LESG) making up 9 per cent of the portfolio at the end of July, followed by Diageo (DGE) and Nintendo (JP:7974) on around 8 per cent. Heineken (NL:HEIA), Relx (REL), Intuit (US:INTU), Mondelez (US:MDLZ) and Pepsico (US:PEP) also feature fairly prominently, which all told means the gains or losses to be made from stock-specific developments can be higher than with many other funds.
The fund has done reasonably well lately without shooting the lights out: it made a more modest loss than many of its peers in 2022, and had made a 3.4 per cent gain so far this year at the time of writing.
As that implies, it’s unlikely to experience the highs and lows of a fund exposed to the tech majors, but it should still benefit from some structural growth stories. To give one topical example, on the subject of artificial intelligence, manager James Bullock recently noted: “Are [our holdings’] moats robust enough to allow these new and powerful tools to accelerate growth without lowering barriers to entry? We may of course be wrong, but our still almost unchanged portfolio reflects our ongoing answers, in the only way that really matters.” There are also potential upsides: Relx, for one, could use AI to enrich its proprietary datasets.
This Lindsell Train fund might require patience but we still believe in the durability of its holdings and their ability to weather changes and produce strong returns over time.
Jupiter Global Value Equity (GB00BF5DS374)
Our global category has so far had a distinct ‘growth’ flavour: Scottish Mortgage targets more speculative but promising growth narratives while the Rathbones and Lindsell Train funds also focus on structural growth stories, if in a much more restrained fashion.
With its value bias and focus on underpriced shares, this fund remains in the list to add some balance in terms of investment style. It certainly did its job in 2022, making a total return of around nearly 16 per cent in a year that saw the other portfolios in this category register losses, and sometimes painful ones at that. So far in 2023 it has made a slight gain of 1 per cent – it trails the rebound enjoyed by the likes of the tech stocks, but this does not negate its use as a diversifier within a growth-heavy portfolio.
The fund is well diversified by sector, with consumer discretionary shares, consumer staples and financials making up its biggest allocations. Top holdings include Intel (US:INTC), Shell (SHEL), BP (BP.) and Standard Chartered (STAN), although the position sizes are relatively modest. Geographically, around half the portfolio is in developed markets in Europe and the Middle East, with the Americas making up around a fifth of the fund.
There are numerous well-established value funds and some investors will have different favourites; for example, our panellist Rob Morgan prefers Ninety One Global Special Situations (GB00B29KP103), a portfolio that has admittedly performed better in recent history. Much as we appreciate both options, we stick with the Jupiter fund for now, in part because of the long pedigree of its co-manager, value specialist Ben Whitmore.
Stewart Investors Worldwide Sustainability (GB00B7W30613)
Another notably differentiated option, this fund seeks out “shares of high-quality companies which are positioned to contribute to, and benefit from, sustainable development” in both developed and emerging markets. Its search for high-quality names leads to a focus on the quality of the management team, the quality of the company itself as judged by metrics such as its social usefulness and environmental impact, and the strength of the company’s finances.
Stewart Investors is known for its focus on sustainability and on well-managed businesses, and it’s partly this fact that makes this name stand out as a core option for those interested in environmental, social and governance (ESG) investing. However, an ESG focus often tends to translate into a quality growth investment style, meaning these portfolios were hit hard in last year’s sell-off. This fund lost 17.5 per cent last year, and is yet to show signs of a recovery.
We continue to like this as an ESG-minded core holding for investors. But its style biases, and the effect this can have on performance, should be considered.
EUROPE (3 FUNDS)
Europe is back in the spotlight this year and in some aspects this is for the right reasons; its equity indices having rallied hard so far in 2023. That won’t last forever, but the continent continues to host many world-leading companies. Our list highlights some funds with very different takes on European markets.
BlackRock European Dynamic (GB00BCZRNN30)
This fund has delivered a gain of around 12 per cent so far in 2023, a pleasing bounce back after an especially painful 2022. But there’s more to BlackRock European Dynamic than its ability to ride a market rally: we like the fact that the team is well resourced, can be flexible in its approach, and has tended to generate some highly impressive long-term returns.
Like many an active fund, this portfolio comes with a stated remit that sounds hopelessly vague, with a focus on companies that are “undervalued” or have “good growth potential”. But the team usually shows some flexibility and the fund holds a combination of European market favourites – think weight-loss drug maker Novo Nordisk (DK:NOVC) or semiconductor equipment maker ASML (NL:ASML) – and lesser known names such as pharmaceuticals play Lonza (CH:LONN). The team also has a relatively high conviction approach, with its top 10 holdings making up nearly half of the portfolio.
We continue to like this fund as a way into some of the continent’s best companies. However, a dismal 2022 performance should remind us that it’s not immune to the occasional bad patch.
Lightman European (GB00BGPFJN79)
A desire to showcase a mixture of growth and value funds led us to add this name to the list in 2022. The fund certainly held up nicely last year, with a total return of 11 per cent, although it has slipped somewhat so far in 2023.
Performance woes aside, we like this as a dedicated value investing option. The fund, which has a hefty exposure to the materials and energy sectors, should perform well in good times for more cyclical stocks and offset problems for more growth-oriented funds. However, investors should accept that it can be fairly volatile, and might prefer more middle-of-the-road options.
NEW: Fidelity European (FEV)
Speaking of which: ‘middle-of-the-road’ might be a harsh label for this fund, but two of our panellists made the case for including this trust as a solid, core Europe ex-UK holding.
It should prove less volatile than the likes of Lightman European, and has a preference for quality growth investing. That means it should hold some of the stalwart constituents of the European indices, from ASML to LVMH (FR:MC), and therefore might have some overlap with BlackRock European Dynamic at points. But we like this option as another steady European fund to keep in your portfolio.
As Winterflood’s Bird notes: “The managers have been consistent in their emphasis on investing in high-quality companies with good dividend growth prospects on attractive valuations. The fund has developed a strong performance record under Sam Morse’s stewardship, and, in our opinion, it benefits from Fidelity’s considerable research resource.”
JAPAN (2 FUNDS)
Like Europe, Japan has often been fairly unloved as an investment region. That has changed this year as the country’s stock markets enjoy a fierce resurgence. Market observers also remain enthusiastic about the corporate reforms that have been working their way through the system since the premiership of the late Shinzo Abe – with many investors arguing that a more shareholder-friendly regime is finally setting in. Much as narratives like these can sometimes sound repetitive, we acknowledge the credence of the corporate reform story with the introduction of a new fund – while a former stalwart holding exits the list on the back of performance concerns.
NEW: Nippon Active Value (NAVF)
The Japanese corporate governance story is one that can be tapped into fairly easily via different funds. One such option is Nippon Active Value which, in the words of its chairman, focuses on “undervalued targets, mostly small market capitalisation stocks, where engagement with management could unlock value to all shareholders”, and has a preference for companies that are fairly cash rich. The adoption of such a hands-on strategy is partly based on the view that, against a backdrop of general corporate reform, investors with more of an activist approach will achieve superior returns in Japan.
The fund had 31 holdings at the end of June, and is pretty concentrated with nearly 12 per cent in top position Intage Holdings (JP:4326), which focuses on marketing research and consulting. In terms of sector preference, the fund has a good chunk of exposure to industrials.
Investors may rightly ask what activism and engagement can actually entail, and in one monthly update this year the NAVF team noted it had recommended 13 of its portfolio companies to take up measures including higher awards of restricted stock to management, the appointment of a majority of independent directors to boards and strategic share buybacks.
Some panellists also pointed to AVI Japan (AJOT) as another activist benefiting from the corporate reform story. We opt to go with NAVF due to its strong performance and the fact it has strong growth prospects, in part due to the plans now under way that will see it absorb two rival trusts (Abrdn Japan (AJIT) and Atlantis Japan Growth (AJG)).
To this end, we should note that NAVF’s expansion means there are plans for some “modest revisions” to the trust’s investment policy, lowering the maximum amount the fund can have invested in any one holding (from 30 to 20 per cent), upping the typical number of stocks that will be held, and including more mid-cap stocks among its prospective holdings. As the investment team put it: “The portfolio will remain selective and focused, while we will be acknowledging the existing direction of travel”.
Man GLG Japan CoreAlpha (GB00B0119B50)
We introduced this last year as a dedicated value fund and for now it has continued the fairly strong run of recent times. Man GLG Japan CoreAlpha made an impressive sterling total return of nearly 17 per cent in 2022, and was up by more than 7 per cent for this year at the time of writing.
However, the portfolio stays in the list not because of its strong recent returns but because it offers a value focus that could help to diversify an investor’s Japan exposure. All the same, investors should be aware that its style can fall out of favour, leading to periods of bad underperformance. This can therefore be a good one to hold alongside other Japanese equity funds, rather than on its own.
DROPPED: Baillie Gifford Japan (BGFD)
One of the biggest names in its sector, a continued run of dire performance for this fund has started to worry several of our panellists, to the extent that many are keen to go with another option. As noted above, we have in its place introduced a fund that should be able to take advantage of the improved corporate environment in Japan.
On the other hand, Nippon Active Value has a fairly specific remit, and some investors might still want more conventional forms of exposure. Genevra Banszky von Ambroz, one of our panellists, pointed to Jupiter Japan Income (GB00B6QC0Z69) as more of a core holding, while JPMorgan Japanese (JFJ) might serve as a growth-oriented fund to replace this Baillie Gifford vehicle.
ASIA SINGLE-COUNTRY (3 FUNDS)
Ashoka India Equity (AIE)
We introduced this fund to the list last year thanks to multiple traits that help it stand out as an active fund. The investment manager has a large team of researchers who use proprietary analysis to pick the best stocks in India.
What’s more, its fee and pay structure offers good incentives for talented stockpickers: analysts are partly remunerated based on how much their picks have contributed to the portfolio’s performance and the investment manager does not take an annual fee from the trust. Instead, it takes a performance fee capped at 30 per cent of outperformance based on rolling three-year periods.
As we argued last year, the fund looks “well designed to encourage true stockpicking in a promising market”. The trust launched in 2018 and shareholders have done well over a five-year period with a total return of more than 100 per cent.
That said, we should reiterate the fact that single-country markets can be extremely volatile, and this trust would be far from immune to a broad downturn for Indian shares. It’s also worth highlighting that the investment manager has taken to holding more companies than in the past, in part for liquidity reasons following the growth of the trust. On the plus side, this should hopefully help lessen the risks within the portfolio without diluting its returns.
Fidelity China Special Situations (FCSS)
For proof that markets do fall dramatically out of fashion, look no further than Chinese equities. The MSCI China index is down by around 10 per cent so far this year in sterling terms and all four of the dedicated China investment trusts are having an even worse time of it. That follows what had already been a brutal couple of years in terms of performance.
The debate about whether the fruits of the Chinese economic reopening are still to appear, and about whether China as a country is even investable given its various political, economic and regulatory headwinds, will continue to rage for some time. For those who do want dedicated China exposure we continue to like this Fidelity trust, which we profiled in more depth earlier this year.
It has a very experienced manager and extensive resources, including a team based in China. The fund also makes good use of gearing, something that should amplify returns if performance does turn around. But the poor returns of the fund (and its underlying market) in recent years are another reminder that single-country emerging market funds should only play a small role in most portfolios.
NEW: Vietnam Opportunity (VOF)
Frontier markets are even riskier than their ’emerging’ counterparts but they can also generate some impressive returns. Vietnam, one of the standout frontier regions, is a case in point. It also has a compelling narrative behind it, thanks to its manufacturing clout, a growing middle class and its increasing urbanisation. We think it’s worth adding one of the UK’s three dedicated Vietnam trusts to the list.
We’ve previously discussed the fact that those three options, Vietnam Enterprise Investments (VEIL), Vietnam Opportunity (VOF) and VietNam Holding (VNH), have a fair amount in common, including chunky exposures to specific sectors (think banks and real estate) and the presence of certain names in their top 10 holding lists. That should be expected in a relatively small market. Another similarity is that all three currently see their shares trading on double-digit discounts to NAV, and that the trio have all produced some very strong shareholder returns over a three- and five-year period.
We opt for the Vietnam Opportunity Fund because it has tended to hold up well against its rivals over a five-year period, but also because it has a good level of exposure to private companies. Vietnamese regulations mean foreign shareholders can only own up to 49 per cent of listed companies, unless such a company specifically requests an increase to the cap. With no foreign ownership limit on private companies, fishing in this pool allows the trust to buy into promising companies with fewer complications. VOF is also the only dedicated Vietnam trust to pay dividends, with the shares recently trading on a dividend yield of around 3 per cent.
SPECIALIST EQUITY (5 FUNDS)
Some of the best-known sector-specific funds have taken a battering in the last year or so – meaning now could well be a time for those with a contrarian bent to think about buying in. We continue to rate the four options from last year’s list, and add one fund that looks unglamorous on the surface but has really delivered the goods over time.
Impax Environmental Markets (IEM)
The first trust to have a dedicated ESG mandate, Impax looks to “enable investors to benefit from growth in the markets for cleaner or more efficient delivery of basic services of energy, water and waste”.
We still like the trust, thanks to the knowledge and experience of its investment team, and the fact that it focuses on the push toward a more sustainable economy in a fairly diversified manner. It had 62 holdings at the end of June, with a variety of sector exposures, from resource efficiency and waste management to alternative energy, digital infrastructure and water infrastructure. The fund has managed to make some handsome returns in the good years – such as the huge gains seen in 2019, 2020 and 2021 – although performance has been fairly weak in the past 18 months.
As ever, ESG investors will have pretty idiosyncratic requirements in terms of what they want to see in a portfolio. But while the number of funds on offer has multiplied in recent years, this remains an established way of backing companies that are contributing to ‘positive change’ across the economy. It’s also worth noting that Impax looks cheap by some metrics: its shares traded at a 5.7 per cent discount to NAV on 29 August, compared with an average of 2.6 per cent for the preceding 12 months.
Worldwide Healthcare (WWH)
In keeping with investors in many of the growth equity portfolios we profile here, fans of the healthcare and biotech trusts will be hoping a period of difficult performance is now behind them. Shareholders in WWH certainly know that feeling, having stomached a loss of around 10 per cent last year. Its share price has continued to slide so far in 2023, but shares in this trust and a handful of its peers currently look pretty cheap relative to their own history. And if interest rates are close to peaking, better times could lie ahead.
The healthcare and biotech sectors come with different traits that will suit different investors, and WWH stands out for the fact that it holds some pharma companies but also ups the ante via a penchant for biotech stocks as well as small- and mid-cap shares. The portfolio also tends to have some exposure to emerging markets. All these preferences invite volatility, but they also potentially boost returns over the longer term.
This still stands out as a broad healthcare fund that is less volatile than a dedicated biotech portfolio but nevertheless has some exposure. The shares recently traded on a discount of around 10 per cent to NAV, not a bad entry point for bargain hunters. Having said that, it is worth shopping around the sector to see which portfolio might suit your specific preferences or interests.
Allianz Technology (ATT)
The two major tech trusts, Allianz Technology (ATT) and Polar Capital Technology (PCT), have done a great job of demonstrating just how aggressively investor sentiment can swing at a given time. Shareholders in both took a hit to the tune of around 40 per cent in 2022, but each was sitting on a share price gain of more than 20 per cent for 2023 at the time of writing. This year’s bounce back, of course, also comes with concerns about a narrow market rally built on too much hype.
Whatever the role of euphoria in the price movements of the last eight months, we continue to see the Allianz trust as a good holding for fans of the tech space. We again prefer it to the Polar Capital fund simply because it pays less attention to a benchmark and favours some companies further down the market-cap spectrum. That means the Allianz portfolio should have less overlap with the already tech-heavy US and global equity funds (both active and passive) that many investors are likely to hold.
The Allianz team is not exactly shunning the best-known tech names, with a 9.1 per cent position in Apple (US:AAPL), 9 per cent in Nvidia, 8.4 per cent in Microsoft, 5.2 per cent in Alphabet (US:GOOGL) and 3.3 per cent in Amazon at the end of June. We expect that this exposure, coupled with bets on some lesser-known names, will continue to get the most out of an exciting sector in the years to come.
BlackRock World Mining (BRWM)
BlackRock World Mining was a rare bright spot among equity funds last year, with shareholders enjoying a 26 per cent gain. Events have certainly taken a turn since then: falling iron ore and coal prices have dented profits for BRWM holdings such as Shell and Glencore (GLEN), and the trust’s shares are down by around 15 per cent so far this year. That explains why they no longer command a premium, instead trading on a small discount to NAV in late August.
A global economic slowdown is unlikely to be kind to the commodities sector, but this trust still provides diversified exposure for those who want to invest in the asset class. Its holdings range from companies focused on copper, to gold, to industrial minerals and beyond, and the portfolio does not seem unduly concentrated in other respects, either. Regardless of the outlook for the sector, this remains a well-run and well-established play on the commodities complex. Investors may also feel somewhat compensated for holding it by the 7 per cent share price dividend yield recently on offer.
NEW: Polar Capital Global Insurance (IE00B5339C57)
From medical advances to cryptocurrencies, investors have plenty of newfangled developments to consider when picking a specialist fund. In that context it can be easy to overlook those themes and sectors that lack glamour but nevertheless produce some excellent returns.
That’s certainly the case for this fund, which targets companies from across the insurance industry. As panellist Ben Yearsley notes: “In the long term it has delivered about 10 to 12 per cent a year, and you rarely find the holdings in other funds so it acts as a good diversifier, too.”
This is a concentrated stockpicking fund, typically holding between 30 and 35 shares. The investment team had a 9.3 per cent position in top holding Arch Capital (US:ACGL) at the end of July, with 6.9 per cent in Marsh McLennan (US:MMC) and 6.6 per cent in Chubb (US:CB). It has a spread of exposures to different sectors and company sizes, although most of the fund’s holdings are in the US.
Like other specialist funds this is unlikely to make up a big proportion of most portfolios. But it has delivered strong returns with little correlation to broader markets: the fund has managed the rare feat of beating the MSCI World index over one, three, five and 10 years to 29 August. Less exciting than many specialist funds, it has quietly enjoyed great success.
Click below to download a performance table for all the funds in this year’s list:
