Earlier this week, FE Trustnet identified five potential funds with low OCFs that could be used to add core equity exposure to portfolios.
We now cast our eye over actively managed funds that can offer diversification to equities, which have seen a strong rally over recent years.
Below, we examine highly-rated absolute return, strategic bond, property, infrastructure and natural resources funds that combine strong track records with attractive fees.
Absolute return
Standard Life Investments’ behemoth Global Absolute Return Strategies (GARS) fund is a popular option for both advisers and private investors, being the largest in its peer group with assets of £20.7bn.
FE Analytics data shows the portfolio was the bestselling in the IMA Targeted Absolute Return sector over the past year, with more than £2.1bn in inflows.
It is also one of the cheapest absolute return funds that has a high rating by FE, with an OCF of 0.89 per cent.
The fund appears on the FE Research Select 100 list owing to its success in meeting its absolute return performance target and its low correlation with major asset classes.
Standard Life Investments Global Absolute Return Strategies beat its Libor GBP 6-month benchmark in 2010, 2011, 2012 and 2013 as well as the year to date.
Even in periods where the fund struggled, such as in June 2013 when global markets dropped during the ‘taper tantrum’, losses have been made back relatively quickly.
Performance of fund vs benchmark over 3yrs
Source: FE Analytics
FE Research said: “Risk management is in the DNA of the fund and every strategy is viewed in terms of its contribution to risk.”
“Over the last two years, the team had to increase the number of strategies it employs after identifying more investment opportunities. Although running more strategies may make it harder to generate returns of above 5 to 6 per cent a year, the managers should still be able to meet their absolute performance target.”
Strategic bonds
The £984m Artemis High Income fund is another member of the FE Research Select 100 list, winning its place through an “outstanding track record” and a pair of FE Alpha Managers in the form of Adrian Frost and Adrian Gosden.
It has an OCF of just 0.70 per cent.
Artemis High Income does have an impressive performance profile and sits in the first quartile of IMA Sterling Strategic Bond sector over one, three and five years. Over five years to 5 August the fund has returned 80.22 per cent against the peer group’s 46.62 per cent average gain, according to FE Analytics.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The portfolio, however, is riskier than some of its peers. The managers are largely avoiding government bonds and have a high exposure to high yield bonds; they also have 14 per cent in equities.
The avoidance of sovereign debt hampered performance in 2011 and saw the fund make a loss, but it outperformed strongly in the following two years.
Close to one-quarter of the portfolio is in financial services, with another 17.5 per cent in insurance and 8.8 per cent in banks.
Some 9.4 per cent is invested in utilities, 8.8 per cent in telecommunications and 4.9 per cent in travel and leisure.
The FE Research team said: “This fund is designed for investors looking for one thing only: an attractive yield. To achieve this, Frost and Gosden use the same approach that has proved so successful in their Artemis Income fund, focusing on companies whose corporate bonds their analysis indicates will deliver the promised yield.”
Commercial property
While investors had their fingers burnt by commercial property during the financial crisis, they have been returning to the asset class in droves as they seek exposure to assets other than stocks and bonds while looking for income.
IMA Property was the second bestselling sector in June with net retail sales of £316m; this followed the £491m of retail sales in May, which made the sector the most popular in that month.
Marcus Langlands Pearse and Ainslie McLennan’s £1.9bn Henderson UK Property fund, which has an OCF of 0.87 per cent, has been popular with investors over the past year.
FE Analytics shows it has captured roughly £870m in fresh money over this time.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The fund is second quartile over one year, returning 10.11 per cent against the sector’s average gain of 5.85 per cent.
However, it sits in the third quartile over three and five years with respective returns of 20.68 per cent and 50.49 per cent.
Henderson UK Property has an FE Crown Fund Rating of four out of five and is also found in Square Mile Investment Consulting & Research’s Academy of Funds.
“The managers are acutely aware of the importance of income, liquidity and the key drivers of the property market and the impact that these may have on managing an open-ended fund in what can be an illiquid asset class,” Square Mile said.
“They therefore seek to invest in good quality properties with financially sound tenants in order to mitigate these risks.”
Infrastructure
The impact of RDR did not solely revolve around charges - it also requires advisers to consider all relevant investment options for the clients, including vehicles such as investment trusts and exchange-traded funds.
This means there could be greater interest in closed-ended funds, which are seen as more appropriate for asset classes such as infrastructure.
The £1.5bn HICL Infrastructure investment trust is a well-regarded fund in this space - which is reflected in the fact it is trading at a 15.3 per cent premium to net asset value - and has an ongoing charge of 1.16 per cent.
Looking at performance, the fund has outperformed its sector over one, three and five years.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The trust’s portfolio of 96 infrastructure projects, which are mainly UK-based, operational social and transportation infrastructure schemes with public sector clients, has a low correlation to the stock market and UK government bonds.
The fund has a beta of 0.1 - compared with the 0.48 for the listed utility sector.
Natural resources
Commodities are another common diversifier, although correlations between these assets and the stock market have yet to return to the lows seen before the financial crisis
Pure commodities exposure, which often volatile, is not always needed to achieve diversification.
Investors such as Stephanie Flanders, chief market strategist for UK and Europe at JP Morgan Asset Management, argue that resources-related equities can offer smoother returns while maintaining a lower correlation to the wider stock market.
The BlackRock Natural Resources Growth & Income fund, which is managed by Josh Freedman, Tom Holl, Catherine Raw and Desmond Cheung, has a FE Crown Fund Rating of four and an OCF of 1.04 per cent.
Over one year, the fund has returned 4.77 per cent while its three-year return stands at 6.62 per cent.
Performance of fund over 3yrs
Source: FE Analytics
The managers have 47.3 per cent of their £12m portfolio in energy sectors, an overweight to the 41.2 per cent of the S&P Natural Resources Index.
It is underweight in mining and agricultural, with respective weightings of 26.3 per cent and 22.9 per cent.
In the last article of this series, FE Trustnet will highlight five cheap satellite funds.
