The end of the tax year is fast approaching and investors will no doubt be looking to utilise their tax-free allowance, meaning that the annual scramble for funds and investment trusts is well under way.
With that in mind, Andy Parsons – head of research at The Share Centre – highlights five equity offerings from his list of recommended funds for investors wanting to add risk to their portfolio.
CF Miton UK Value Opportunities
First on the list is Georgina Hamilton and FE Alpha Manager George Godber’s CF Miton UK Value Opportunities fund, which focuses on out of favour companies and has performed strongly since its launch in March 2013.
“Using a robust, bottom-up stock selection policy, the managers identify UK companies they believe are trading at a significant discount to their intrinsic value. Companies must have strong balance sheets and good cash flow. The majority of underlying investments are mid to small-cap companies,” Parsons said.
“Despite its short investment history, this fund adopts a deep value investment strategy with the managers having already demonstrated their stock picking ability and we believe they have the attributes to continue doing so.”
According to FE Analytics, the £170m CF Miton UK Value Opportunities fund has been a top decile performer in the highly competitive IA UK All Companies sector since its launch with returns of 34.66 per cent.
As a point of comparison, the FTSE All Share has gained 17.37 per cent over that period.
Performance of fund versus sector and index since Mar 2013
Source: FE Analytics
Godber and Hamilton’s strategy meant the fund outperformed the sector and index in the strongly rising market of 2013 as well as the much more difficult market conditions of 2014. It also means it is becoming increasingly popular with the experts.
Its ongoing charges figure (OCF) is 0.89 per cent.
Invesco Perpetual UK Strategic Income
Sticking in the UK, Parsons says FE Alpha Manager Mark Barnett’s Invesco Perpetual UK Strategic Income fund is a good option for investors this ISA season.
Barnett has been in the press a lot over the past year or so as he was handed Invesco Perpetual’s flagship High Income and Income funds in March 2014 following star manager Neil Woodford’s decision to leave after 25 years’ service to set up his own fund management group.
While Barnett has successfully re-shaped the two giant funds to his liking and has steered them to the top decile over the last year, Parsons likes his more nimble five crown-rated UK Strategic Income fund which he has run since January 2006.
“Mark Barnett adopts an unconstrained style. He seeks companies that he perceives are undervalued, with clear visibility on revenue performance, profits and cash flow, and an ability to maintain and grow dividends indefinitely,” Parsons said.
“Ideally, these companies will place shareholder value at the heart of everything they do.”
“The portfolio generally comprises around 60 to 80 stocks and the manager always considers the potential downside to an investment. It is worth noting the fund is better suited to a market trading sideways or with less momentum.”
Data from FE Analytics shows the £1bn Invesco Perpetual UK Strategic Income fund has been a top decile performer in the IA UK All Companies sector since Barnett took charge with returns of 133.32 per cent.
Performance of fund versus sectors and index since Jan 2006
Source: FE Analytics
The fund recently moved into the sector, but as a point of comparison, the only IA UK Equity Income fund to have beaten Barnett’s portfolio over that time is Unicorn UK Income.
It has been top decile for its maximum drawdown, annualised volatility, downside risk and risk-adjusted returns – as measured by its Sharpe ratio – in the sector over that time as well. The fund has a yield of 3.2 per cent and its OCF is 0.92 per cent.
Rathbone Global Opportunities
Investors may want to diversify their portfolio away from the UK market this year given the upcoming election and Parsons says FE Alpha Manager James Thomson’s Rathbone Global Opportunities fund is a good choice for those seeking broader exposure to equity markets.
“Global investments offer investors exposure to the world’s abundance of high-quality, well-managed, financially strong and innovative companies with pricing power. We believe the Rathbone Global Opportunities fund is ideally suited to take advantage of these,” he said.
“James Thomson has been at the helm since its inception in 2001. With a flexible, unconstrained investment mandate, James can be specific with his investments and avoid sectors that don’t appear to present investable opportunities.”
Since launch, the £509m fund has comfortably outperformed both the IA Global sector and its benchmark – the FTSE World index – with returns of 169.13 per cent.
Performance of fund versus sector and index since May 2001
Source: FE Analytics
The manager admits that he was caught holding some highly leveraged companies in 2008 and its huge drawdown that year is shown on the graph above. However, Thomson shifted his investment process to a more cautious style and it means the fund has been among the sector’s best performers ever since.
Parsons added: “The portfolio comprises between 40 and 60 companies that demonstrate a scalable and repeatable strategy without incurring significant costs.”
“He also looks for a clear business model, barriers to entry and catalysts for share price movement. Investors will find that this fund has no direct exposure to the emerging markets, has a greater mid-cap presence than many of its peers and there is no currency hedging.”
“It is worth noting, James is not a value investor and will therefore be prepared to pay a premium to own a company he has clearly identified as an opportunity.”
Rathbone Global Opps is overweight US equities, which make up 62 per cent of the portfolio, with the likes of Visa, Facebook and Mastercard featuring in the top 10. Its OCF is 0.8 per cent.
Legg Mason Clearbridge US Aggressive Growth
In keeping with the diversification theme, Parsons also rates the five crown-rated Legg Mason Clearbridge US Aggressive Growth fund, which is co-managed by Evan Bauman and Richie Freeman.
Most investors will usually go down the passive route for their US exposure and a number of FE Trustnet studies how poorly active managers in the IA North America sector have performed relative to the index.
However, the Legg Mason fund is one of the few that have actually added value and justified its higher charges as it has beaten its Russell 3000 Growth benchmark over five years with returns of 122.21 per cent. It has also beaten the index in four out of the last five years.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
“Given that the US market is hailed as the most efficient in the world, there has been much debate as to whether US fund managers can outperform it. We believe Evan Bauman and Richie Freeman, managers of Legg Mason Clearbridge US Aggressive Growth fund are a prime example of a management team that are capable of such strong performance,” Parsons said.
“Driven by a pure bottom-up stock picking approach, the fund generally looks to hold between 50 and 70 stocks. The top 10 holdings generally comprise of around 50 per cent of the overall portfolio, while the remainder aid the portfolio’s development.”
“The managers seek to identify opportunities from across the market cap. However, with an extremely low portfolio turnover rate and a strict valuation discipline, investors are unlikely to see any significant changes to market cap and sector exposure in the short term.”
The fund’s OCF is 1.14 per cent.
Polar Capital Healthcare Opportunities
The final fund on the list is also the most niche. However, Parsons says the five crown-rated Polar Capital Healthcare Opportunities fund is a good choice for investors who want more specialised equity exposure within their portfolios.
“The Polar Capital Healthcare Opportunities fund gives investors exposure to a sector that has continually delivered positive returns in recent years,” he said.
“Given the global rise in ageing populations, obesity and the wealth of the emerging economies, we believe advances in medical and healthcare technology will continue at a rapid pace. Due to the nature of companies in this sector, the fund is likely to retain significant geographical exposure to the US, with market cap weightings split across the spectrum.”
“For investors seeking an opportunity to identify ground breaking advancements, this fund may well provide appropriate rewards over the medium to longer term.”
Dan Mahony and Gareth Powell launched the $920m fund into the IA universe in April 2009 and over that time the fund has beaten its MSCI AC World Healthcare benchmark by 70 percentage points with returns of 244.99 per cent.
Performance of fund versus index since Apr 2009
Source: FE Analytics
The fund is made up of just 57 holdings and its 10 largest positions include the likes of Roche, Shire and Merck & Co. Polar Capital Global Healthcare has an OCF of 1.21 per cent.