In light of this, Chelsea Financial Services managing director Darius McDermott (pictured) outlines the funds that he has his eye on to diversify his ISA.
“I’m not keen on bonds at the moment,” he said.
“I’m also neutral on equities. I’m sure that over time they’ll continue to go up, but I find it hard to have a lot of conviction in equities right now given that we’ve got an election coming up. The Saudi Arabian air strikes in Yemen today have also spooked markets and that might have a greater geo-political impact.”
“To that end, I’m favouring absolute return funds at the moment. I would use a couple of absolute returns for diversification, then a global income fund, a core solid UK income fund and then an Asia fund for some good, long-term growth.”
Smith and Williamson Enterprise
The first absolute return fund McDermott has chosen is the £71.4m Smith and Williamson Enterprise fund, which primarily invests in the UK.
He said: “That is an equity long/short fund. It’s not a market-neutral type of fund and they do try to generate alpha on both the long and the short side.”
The fund, which was launched as an unregulated scheme in 2006 by Rupert Fleming before a UCITS launch in 2010, has achieved 4.17 percentage points less annualised volatility than the FTSE All Share over three years, at 6.07 per cent.
It has also posted 28.8 per cent total returns since its UCITS launch in January 2010, which is an impressive 11.35 more percentage points more than its peers.
Performance of fund vs sector since launch
Source: FE Analytics
“It’s got a very good track record of delivering 8-10 per cent with volatility well below that of equities,” Darius added.
Smith and Williamson Enterprise has a clean ongoing charges figure (OCF) of 0.97 per cent.
Old Mutual Global Equity Absolute Return
McDermott said: “This [fund] is a little more complicated. It is an equity market neutral-type fund. So again it can perform in up, down or sideways markets, and it has five pipes of stock that it invests in - it moves around between those depending on climate and momentum.”
Co-managed by Ian Heslop, Amadeo Alentorn and Mike Servent, the fund’s five strategies are dynamic valuation, market dynamics, sustainable growth, analyst signal and company management.
“It’s not a black-box process, but they like to call it a glass-box process. So it is heavily quant-driven but it’s not totally a quant process. They’re always improving the inputs into the quant,” McDermott explained.
The Old Mutual Global Equity Absolute Return fund boasts a strong total return, delivering 43.28 per cent since its launch in 2009.
Performance of fund vs sector since launch
Source: FE Analytics
“It can occasionally lag a little when markets turn,” Darius admitted, “but it’s now got a strategy which is very well-proven over a decent length of time.”
Old Mutual Global Equity Absolute Return has a 0.98 per cent clean OCF. The fund charges a performance fee of 20 per cent of outperformance of hurdle rate subject to high watermark.
CF Woodford Equity Income
Woodford’s funds have been popular with McDermott’s clients for over 20 years.
He said: “Clearly we do still like equities as well, for the long term. One that particularly springs to mind is Neil Woodford’s new fund and I still think that the fund is an absolute solid core UK fund for the majority of investors.”
The £5bn fund was only launched in June last year, and already it’s rocketing ahead of its peers and its benchmark, delivering total returns of 18.62 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Over a period of six months, it has achieved a top decile Sharpe ratio of 2.75 per cent, which is more than double that of its peers.
What’s more, the fund boasts a top decile max drawdown over the same time period of 0.42 per cent. Woodford is famed for his defensive investment style and has a good track record in protecting investor capital in difficult markets.
“Another positive is that you can re-invest your dividends or you can re-invest the income instead of taking it for growth,” McDermott added.
CF Woodford Equity Income has a clean OCF of 0.75 per cent.
Rathbone Global Opportunities
McDermott said: “For some global exposure I would choose Rathbone Global Opportunities. It has a mid and small-cap bias and I think these companies will outperform over long periods of time, so it’s a nice structural bias to the fund.”
Run by James Thomson, the £523.1m fund looks for undervalued growth opportunities as a means of providing above-average long-term capital growth.
“We’ve followed James for a number of years and we added him into our core list about four years ago, after another pull-down in the market,” McDermott said.
“He had a very bad 2008 because it was out-and-out growth and he under-performed. But he added what he called a ‘defensive growth bucket’ to it at that time, and that has proven to be very resilient when markets fall.”
In the last three years, the fund has pipped its peers to the post, delivering 8.5 per cent more percentage points than the global sector average.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Over the same time period, the Rathbone Global Opportunities fund has also achieved a top decile max drawdown of 5.87 per cent.
The fund has a 80 per cent clean OCF.
Hermes Asia ex Japan Equity
Unfortunately, this fund was soft-closed earlier this month. However, if you are already holding it, McDermott recommends not letting it go.
“Despite having a global fund out of my five already, I still think I want some exposure to Asia generally because it’s one of the fastest-growing parts of the world,” he said.
Hermes Asia ex Japan Equity, which is run by Jonathan Pines, was launched in November 2012.
“Whilst the fund is not that old, [Pines] has been running the same strategy in an institutional mandate since 2010,” McDermott added.
“The fund itself has shown very good performance since its launch. When we looked at it we were able to look at the longer term track record based on the institutional fund.”
The Asia fund, which does not invest in Australia or New Zealand, has a concentrated portfolio of 59 holdings.
“It has a very high active share and they have a strong Asian team. It’s a good fund,” McDermott added.
The fund has raced well ahead of its peers since its launch, boasting total returns of 65.88 per cent, which is more than double that of its sector average.
Performance of fund vs sector since launch
Source: FE Analytics
Hermes Asia ex Japan Equity has a clean OCF of 0.89 per cent.