Fund managers don’t have that luxury – they are judged on medium term performance, often finding themselves out of work if they fail to outperform on a five or even a three year basis.
But what would they be buying if they had a thirty or forty year time horizon, and didn’t have to worry about a bumpy ride along the way?
Here we find out, asking five fund of funds managers which collective they would buy if they wanted to give their children or grandchildren many decades from now…
Polar Capital Technology Trust
FE Alpha Manager David Coombs, who heads up the Rathbone Multi Asset range, says he would target a portfolio with exposure to disruptive technology.
“These technologies, designed to create efficiencies, are game-changers, and include big data, the cloud and embedded intelligence,” Coombs (pictured) explained. “Typically, investors adopt tech innovation in stages – there is the initial hype, followed by ‘revulsion’, ‘recovery’ and ‘apathy’. One of the vehicles I would consider for inclusion is The Polar Capital Technology Trust, which recognises the potential at the ‘hype’ stage, whilst valuations are still attractive.”
The Polar Capital Technology Trust was launched in 1996 and is currently managed by Fatima Lu, Ben Rogoff, Nick Evans and Xuesong Zhao.
Our data shows that the closed-ended fund has returned 206.48 per cent over 10 years, beating the MSCI World Technology index by more than 90 percentage points.
Performance of trust vs index over 10yrs
Source: FE Analytics
Coombs says the trust is likely to be more volatile than others in the sector as the managers avoid some of the “old guard” such as Microsoft. However, he says this makes it an ideal long-term investment.
“The trust plays three key themes – cloud computing, broadband applications and mobile computing,” he said. “Polar foresees these trends as commonplace in the not too distant future, and so the portfolio is geared toward IT applications/businesses that should benefit from this secular shift.”
The trust isn’t geared and is currently trading on a 3.3 per cent discount. Ongoing charges are 1.18 per cent.
Fidelity Emerging Markets
Toby Ricketts, a former FE Alpha Manager who runs the Margetts fund of funds range, has a structural overweight position in emerging market portfolios, believing countries like Brazil and China offer the best opportunities for long-term investors.
If he was buying for a 30 year horizon, he says he’d go for Nick Price’s five-crown rated Fidelity Emerging Markets fund.
“We hold a number of emerging market funds and many of those are income focused. However, if I were looking over that time you would want something a bit more growthy,” Ricketts said.
“I would go for Fidelity Emerging Markets. The manager has quite a big consumer theme within the portfolio and if you are looking for long-term growth, you’ve got to be focusing on the emerging markets.”
Price launched his £619m Fidelity Emerging Markets fund in June 2010.
According to FE Analytics, it has been the ninth best performing fund in the IMA Global Emerging Markets sector over that time with returns of 19.8 per cent. This is nearly twice as much as what the MSCI Emerging Markets index managed.
Price’s largest regional overweights are South Africa, Hong Kong and Nigeria. The manager also invests in developed markets such as the US, as long as they have indirect exposure to developing economies.
The fund has ongoing charges figure (OCF) of 1.03 per cent.
Morgan Stanley Diversified Alpha Plus
James de Bunsen, who runs the Henderson Multi Manager range with FE Alpha Manager Bill McQuaker, is more cautious in nature.
Just because investors have a 30 year time horizon, doesn’t mean they should take too much risk within their portfolios, he says.
For that reason, he recommends the five-crown rated Morgan Stanley Diversified Alpha Plus fund, which he holds in his £176m Henderson Multi Manager Absolute Return fund.
“I probably shouldn’t be recommending a competitor, but if you’re not using a Henderson Multi Asset fund, I would choose Morgan Stanley Diversified Alpha Plus,” de Bunsen said.
“It’s not an out-and-out absolute return fund, but it does have a level of volatility that it can’t exceed.”
“Though it’s a very long-term horizon, you will still be looking at the value of your investment. This fund can give you equity-like returns, but with very low volatility. We don’t know what the market environment will be like 30 years from now.”
The $3.4bn fund, which is domiciled in Luxembourg, was launched in June 2008, but the current management team of Cyril Moulle-Berteaux and Sergei Parmenov didn’t arrive until July 2011.
According to FE Analytics, Morgan Stanley Diversified Alpha Plus has returned 12.16 per cent over that time. This puts it well short of global equities, but it has been significantly less volatile.
Performance of fund vs index since July 2011
Source: FE Analytics
The trio of managers play various macro themes via relative value pair trades. He is currently long the lowest dividend-paying global companies versus the highest payers, for example, as they think the latter will come under pressure from rising interest rates.
The fund has ongoing charges of 1.01 per cent.
Lindsell Train Global Equity
Simon Evan-Cook, a manager across Premier’s fund of funds range, says investors can afford to take risk via equities over 30 years, though he says he’s rather go for a more diversified global fund rather than an emerging market fund.
“Honestly, I’ve put my own money into our Premier Worldwide Growth fund for that sort of time horizon,” he said. “I want to spread the risks fairly wide and so I would choose a global equity fund.”
“Aside from Premier, one fund that I would pick, which we don’t hold because it does a broadly similar thing to our own fund, is Lindsell Train Global Equity. [FE Alpha Manager Nick Train] invests in companies that have huge global brands and which he believes will still be market leaders in 30 years’ time.”
The £420m Lindsell Train Global Equity fund, which is domiciled in Ireland, was launched in March 2011. The fund implements exactly the same strategy as Train’s CF Lindsell Train UK Equity fund, which has been a standout performer in the IMA UK All Companies sectors in recent years.
According to FE Analytics, Lindsell Train Global Equity has been the eighth best performing portfolio in the IMA Global sector since launch, with returns of 51.36 per cent. This puts it ahead of its benchmark – the MSCI World index – by more than 10 percentage points.
Top 10 holdings include Pearson Group, Unilever, Heineken Group, Diageo and eBay.
Evan-Cook says that though both Train is unlikely to be running the portfolio 30 years from now, he has hired a young team of analysts who he’s “indoctrinating” with his own philosophy.
He adds the fact that Train has a large stake in his business means that his interests are aligned with investors’, meaning he is likely to maintain his long-term approach to investing.
Lindsell Train Global Equity has charges of 0.95 per cent.
Law Debenture IT
Richard Scott, who runs the PFS Hawksmoor Distribution and Vanbrugh funds, likes the structure of investment trusts for long-term investors. His pick of the bunch for a 30 year horizon is FE Alpha Manager James Henderson’s Law Debenture IT.
“I like Law Debenture, viewing it as a genuinely unique investment trust, as it is a combination of two distinct parts,” Scott explained.
“Alongside the conventional investment trust, with its predominately UK equity portfolio, sits a separate but complementary financial services business. This provides a range of independent fiduciary services such as trustee provision, advice on corporate governance and Safecall – an outsourced whistleblowing service.”
Scott says the profit streams from these businesses help to boost the trusts dividend and reduce overall costs, thus propping up total return.
Henderson has managed Law Debenture since June 2003. Our data shows that it has returned 305.46 per cent over that time, while its benchmark – the FTSE All Share – has returned just 170.16 per cent.
Performance of trust vs index since June 2003
Source: FE Analytics
Law Debenture has regularly traded on a premium to its NAV, but Scott says this shouldn’t deter a long-term investor because though it may look expensive, it doesn’t include the price of the financial services business.
“I think the current premium of 7 per cent is too modest, being well below the 12 month average of 12.5 per cent,” he explained.
“The trust’s shares therefore represent an excellent long-term investment, and I am confident they will stand the test of time over a 30 year period.”
The trust has ongoing charges of 0.47 per cent and is currently yielding 3 per cent.
