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The funds for cautious investors to buy this ISA season

15 March 2017

In its latest series, FE Trustnet asks industry experts which funds for cautious investors they are recommending clients look at this ISA season.

By Jonathan Jones,

Reporter, FE Trustnet

With market uncertainty the name of the game for much of 2016 and 2017 investors could be forgiven for being a little more cautious when it comes to their long-term savings. 

Looming Brexit negotiations, a Donald Trump presidency, European elections – just some of the known issues – are all expected to make headlines in one form or another this year.

Investors now have less than a month to make use of their £15,240 ISA allowance for 2016/17 which ends on 5 April at the start of the new tax year.

This period – the three months before the new tax year – is when investors routinely rush to make use of the tax-wrapper allowance before the deadline has passed.

In this article, FE Trustnet speaks to the investment experts to find out the funds they are backing for investors with a cautious outlook for their ISAs.

Adrian Lowcock, investment director at Architas, said: “On the whole this would suit someone who is perhaps less comfortable with the volatility of stock markets and is willing to sacrifice some of the potential growth for a lower return and less stress.

“Generally the funds suit an older generation closer or in retirement where capital preservation is important.”

 

Invesco Perpetual Distribution

Lowcock’s suggestion for the cautious investor is the £3bn Invesco Perpetual Distribution, run by Paul Causer, Paul Read and Ciaran Mallon.

“This fund combines Invesco’s experience of UK equity income and corporate bonds to provide a more cautious portfolio whilst delivering a steady income capable of some growth,” he said.

“The equity exposure tends to be more defensive in nature with a focus on higher quality UK companies, whilst the bond exposure is through higher yielding lower quality names to provide an income boost and balance the more cautious equity approach.”

The Invesco Perpetual Distribution fund aims to achieve a combination of income and capital growth over the medium to long term and as such currently has a yield of 4.77 per cent.

Over the past five years the fund has returned 42.35 per cent, placing it in the second quartile over the period, however over 10 years the fund is a top quartile performer, returning 80.38 per cent.

Performance of fund vs sector over 5yrs

 

Source: FE Analytics

The fund has managed this despite historically rarely exceeding 35 per cent equity exposure in the IA Mixed Investment 20-60% Shares sector which allows up to 60 per cent exposure to the riskier asset class. Currently the fund has 33.68 per cent in equities with 61.49 per cent in fixed interest.

In its latest factsheet, the managers wrote: “The fund’s corporate bond exposure reflects our overall defensive stance with positioning focused on high quality companies.

“In equity markets, we favour companies that offer visibility of revenues, profits and cash flows, which are managed for the primary purpose of delivering shareholder value in the form of a sustainable and growing dividend.”

The fund has a clean ongoing charges figure (OCF) of 0.82 per cent.


F&C MM Navigator Moderate

Also in the IA Mixed Investment 20-60% Shares is the F&C MM Navigator Moderate fund, which Informed Choice managing director Martin Bamford suggests for the cautious investor.

“There is a lot of choice for cautious ISA investors within the IA Mixed Investment 20-60% Shares sector, where funds offer a blend of equities and bonds,” he said.

“F&C MM Navigator Moderate is a good choice for more cautious investors who want to delegate asset allocation and fund selection decisions to the manager of this unfettered fund of funds.

“Over the past five years, this fund has returned 49.09 per cent compared to a sector average of 36.05 per cent, placing it in the first quartile.

“The management team of Robert Burdett and Gary Potter are well respected within the multi-manager community and have delivered consistently good performance for investors.

“The ongoing charges of 1.65 per cent are a little pricey, but take away the hard work of selecting a wider portfolio of funds.”

The £406m fund is 28.6 per cent invested in fixed income, 20.7 per cent in UK equities and 13.6 per cent in ‘specialist non-equity’ with 11.9 per cent in cash.

 

Jupiter Distribution

Another option investors could look towards if they are cautious is Jupiter Distribution, according to Darius McDermott, managing director of Chelsea Financial Services.

The £926m, four crown-rated fund is run by FE Alpha Manager Alastair Gunn and Rhys Petheram.

“This fund has an approximate 70:30 ratio between holdings in fixed income and equities, with the allocation actively managed and a focus on risk control and capital preservation,” he said.

“UK investments must form a minimum 80 per cent of the equity portion and investment grade bonds must take up a minimum 90 per cent of the bonds portion.

“I really like the fact that the managers attend company meetings together and decide not only whether or not to invest, but if the investment would be best made via the company’s equity or debt.

“While exercising caution and diversification, the fund has a record of consistently outperforming the sector average and is a strong contender for cautious investors.”

Performance of fund vs sector over 5yrs

 

Source: FE Analytics

Indeed, over the last five years the fund is a top quartile performer in the IA Mixed Investment 0-35% Shares sector, returning 40.43 per cent, and over the last decade it is ahead of the sector average, returning 56.98 per cent.

Jupiter Distribution has a yield of 2.7 per cent and an OCF of 0.63 per cent.


 

Newton Real Return

In the absolute return sector, Sheridan Admans, investment research analyst at The Share Centre suggests the £9.8bn Newton Real Return run by Iain Stewart.

“This fund's multi-asset universe will include equities, government bonds, corporate bonds, cash, derivatives and other assets,” he said.

“This is one of the largest in the absolute returns funds in the universe and it also boasts a strong track record of steady returns and low volatility.

“It does not use complex computer modelling, shorting or leverage strategies, thereby making it relatively easy to understand.”

The fund has returned 16.66 per cent over five years and 66.27 per cent over 10 years: significantly ahead of the IA Targeted Absolute Return sector but below its LIBOR 1m + 4% benchmark.

However, the fund has been more volatile than the sector – (7.66 per cent versus 2.78 per cent). It is also worth noting that given the wide range of funds in the sector, comparisons like this can be difficult.

The fund has an OCF of 0.79 per cent and currently yields 2.51 per cent.

 

Pyrford Global Total Return

Mark Dampier, research director at Hargreaves Lansdown, says Pyrford Global Total Return is a fund investors should look at if they are feeling particularly cautious this year.

Like the Newton Real Return above, the fund invests in a combination of shares, government bonds and cash and its exposure will vary depending on how the team view global markets.

“At present they are very cautious, but what I like about the fund is that they will increase equity exposure should the market fall, something few investors do themselves.”

The £2.3bn fund is a low turnover, concentrated portfolio which has a total return approach, using equities with a focus on dividend yield and earnings growth with high quality government bonds.

It is a long-only unconstrained fund which has a value approach which has team management approach.

Performance of fund since launch

 

Source: FE Analytics

Since its inception in 2009 the fund has returned 55.37 per cent, slightly less than half the average return of the IA Flexible Investment sector (114.80 per cent).

However its volatility of 4.13 per cent over the timeframe is the lowest in the sector and the fund also has the lowest maximum drawdown in the sector of 3.32 per cent.

It is also worth noting that like the Targeted Absolute Return sector, the Flexible Investment sector includes a variety of funds and can therefore be tricky to compare.

Pyrford Global Total Return has an OCF of 1.06 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.