With investors and advisers now more used to the new system, FE Trustnet thought it would be a good time to highlight ways to build different types of portfolio with cheap funds.
Starting with core equity exposure, we look at some of the bargain options with strong track records across the emerging and developed world.
UK equities
CF Woodford Equity Income attracted more money than any other in its launch period in June [£1.6bn], and the inflows haven’t stopped there. FE Analytics data shows that the fund has grown to £2.4bn, making it the fifth largest fund in the IMA UK Equity Income sector already.
The biggest lure of the fund is of course Neil Woodford, whose long-term value style has reaped huge rewards since he started running money in 1988.
Performance of manager and peer groups composite since 2000
Source: FE Analytics
Woodford tends to focus on large caps, taking very large sector and stock bets. Pharma and tobacco giants AstraZeneca, GlaxoSmithKline, British American Tobacco and Imperial Tobacco are among his largest holdings, making up more than quarter of his portfolio. As well as having one of the highest-profile FE Alpha Managers at the helm, CF Woodford Equity Income is very cheap, charging investors just 0.75 per cent, and as low as 0.65 per cent on some platforms. This compares to 0.9 per cent from arguably its biggest rival, Invesco Perpetual High Income, run by Mark Barnett. Woodford previously headed up the portfolio, until his exit in March of this year.
Another big advantage of Woodford’s costing is transparency. The 0.75 per cent charge absorbs all trading fees, meaning that investors will never pay more than this figure.
European equities
Henderson European Growth is a favourite with FE Research’s Rob Gleeson (pictured), who holds it in his personal pension portfolio.
It’s also a member of the FE Select 100 list. The £996m portfolio has been a strong long-term performer under FE Alpha Manager Richard Pease, achieving top quartile returns over 10 years with returns of 175.49 per cent.
Performance of fund, sector and index over 10yrs
Source: FE Analytics
Pease and co-manager Simon Rowe run a concentrated portfolio of just 40 stocks, focusing on quality franchises that tend to hold up well during times of stress. This, the FE Research team says, makes it a good option for core European exposure.
“The team has extensive experience of identifying companies that can grow steadily over the long-term and become leaders in certain niche markets,” said the team.
“The co-managers’ different sets of skills complement each other well: Rowe will meet face-to-face with company directors to assess their pedigree, while the large network of contacts that Pease has created over his career allows him to generate unique ideas.”
“The steady nature of the fund makes it a good core holding, despite its decision to focus on medium-sized businesses more than large ones.”
Most funds in the IMA Europe ex UK sector have a standard 0.75 per cent annual management charge (AMC), but Henderson European Growth’s extra charges are much lower than most, meaning that the OCF is currently just 0.85 per cent. This compares to over 1 per cent from popular choices such as Jupiter European.
North American equities
It has been notoriously very difficult to add value in the US in recent years, and finding one with a low level of charges is an even harder task.
One fund that has a strong record of beating its benchmark is the Threadneedle American Extended Alpha fund. As the fund’s name suggests, this is a high conviction portfolio of less than 50 stocks. Consumer stocks and tech, telecoms & media make up more than 50 per cent of assets.
According to FE data, the fund’s bets have largely paid off; it has returned just over 98 per cent since its launch in October 2007, putting it almost 30 percentage points ahead of the S&P 500.
Cormac Weldon left the fund when he exited Threadneedle for Artemis earlier this year, though incoming managers Ashish Kochar and Neil Robson are highly regarded.
The fund is one of the cheaper strong performers in the sector, with ongoing charges of 0.81 per cent.
Emerging markets
Emerging markets tend to be more expensive than their developed market rivals, with research costs tending to send OCFs higher.
Some groups have made a big effort to make their portfolio competitive compared even to UK and US funds, however.
The standout fund in this regard is the Newton Emerging Income fund, which has ongoing charges of just 0.88 per cent. This makes it cheaper than many developed market-focused core options, including Invesco High Income, BlackRock European Dynamic and GAM North American Growth.
Headed up by Sophia Whitbread and Newton Asian Income’s Jason Pidcock, the fund has had a difficult time of late, lagging behind its sector since its launch in October 2012.
Performance of fund and sector since launch
Source: FE Analytics
It remains a popular choice with professional investors however, already attracting £225m in assets.
Mexico and South Africa are among Whitbread’s favourite countries, making up 23 per cent of assets between them. The manager is wary of direct exposure to China, preferring to get it instead from Hong Kong.
Independent financial adviser Adrian Lowcock says he likes the team’s bias towards quality companies, noting that the emphasis on dividends will help the fund perform better than its peers in difficult periods.
Japanese equities
While Japan remains unpopular with investors still hurting from a disastrous period in the late 1980s, 1990s and much of the 2000s, the sector is a good place for bargain hunters.
Among the cheapest is Sarah Whitley and Matthew Brett’s £563m Baillie Gifford Japanese portfolio, which is as cheap as 0.68 per cent on most major platforms.
The fund, which is top quartile in its IMA Japan sector over three, five and 10 years, aims to balance the portfolio between large Japanese companies with global strategies and smaller companies that are gaining strength in niche domestic markets.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
Gleeson and his team note that the fund is in many ways similar to other core funds in the sector, with one major difference.
“The investment approach used by Baillie Gifford is nothing new; however, the high returns achieved over recent years show the team’s expertise at executing it,” they said.
“This highlights the efficient teamwork and superior knowledge of the Japanese equity market.”
“FE Research has also been impressed by the team’s consistency: the fund invests for the long-term and is happy sticking with a position over a lengthy period of time.”
How you want to combine these five funds in terms of weightings is of course up to the individual, but it’s worth pointing out that the MSCI AC World index has almost 50 per cent in North America and just 8 per cent in the UK.
In the next article of the series, we will look at cheap funds that offer diversification benefits to an equity portfolio.
