Investors shouldn’t sell out of their equity positions despite the rallying market and the increased political uncertainty as we head through the year, according to a selection of investment professionals.
In an article published on Monday, FE Trustnet asked the same panel about our latest reader poll, which found that 53 per cent of participants favoured equities as an asset class for the second half of 2016.
While they generally agreed that it is important to hold equities, they warned that investors must be very selective and adopt a long-term view given the current macroeconomic environment.
“Investors are being pushed into making difficult choices on where to invest but with interest rates heading lower and growth anaemic there are still opportunities to be found which will provide significant returns over the longer term for patient investors,” AXA Wealth’s Adrian Lowcock said.
In the below article, we take a look at the equity funds and trusts that the professionals favour given the likelihood of medium term market volatility:
“I still feel we have trickier times ahead of us, as the EU exit process is still at a very early stage,” Neil Jones (pictured), investment manager at Hargreave Hale, said. 
“I can also see a certain amount of investment being held off as a result and the Brexit vote being used as an excuse by some companies to cut dividends and justify some poorer results, so this may knock general sentiment yet.”
“So with this in mind, I feel having some more cautious exposure within portfolios is sensible and we have been looking at the Ruffer Investment Trust, due to its high index linked gilt and gold exposure.”
The £337m trust was launched by the Ruffer Investment Team in 2004 and aims to at least double the Bank of England rate on an annual basis after all expenses. It does this through a multi-asset portfolio which is able to invest across different regions and currencies, although its largest weighting is currently in global equities at 38 per cent.
The trust also holds 24 per cent in non-UK index-linked gilts, 13 per cent in long dated index-linked bonds, 9 per cent in regular index-linked bonds and 7 per cent in gold and gold equities. The remainder is currently held in cash and in Ruffer’s in-house illiquid assets fund.
Thanks to its defensive nature, the trust has underperformed the MSCI AC World index over one, three, five and 10 years following a period of poor relative returns over recent time frames.
Performance of trust vs index over 10yrs
Source: FE Analytics
However, it has achieved a significantly lower annualised volatility and downside risk (which estimates the potential to make a loss in down markets) over the same time frame.
Ruffer Investment Trust is trading on a 0.5 per cent discount, yields 1.6 per cent and has an ongoing charge of 1.13 per cent.
It is unlikely to come as a surprise to readers that Woodford’s equity income fund has made it onto the list, given its consistent performance track record and the manager’s defensive positioning.
“The fund is well positioned for a defensive world view. It isn’t particularly sensitive to the UK economy but will benefit from the fall in sterling,” AXA Wealth’s Adrian Lowcock said.
“The manager is also looking through Brexit and remains cautious on the global economy. Woodford is a long-term patient investor and that is what we need in the current climate.”
The £8.7bn fund was launched by the star manager in 2014 following his departure from Invesco Perpetual. Since then, it has returned 22.29 per cent, outperforming its sector average and benchmark by 16.42 and 16.25 percentage points respectively.
Performance of fund vs benchmark and sector since launch
Source: FE Analytics
Woodford’s fund is able to invest across the cap spectrum although its top 10 largest positions – which account for just less than half of the portfolio – are predominantly large-caps and include the likes of Imperial Brands, GlaxoSmithKline and AstraZeneca.
He is also able to allocate up to 20 per cent of the fund to overseas equities and currently holds 12.96 per cent in the US, 3.42 per cent in Switzerland, 1.19 per cent in Norway and 0.89 per cent in Ireland. The manager mostly uses his overseas allowance to invest in healthcare and pharma companies such as Roche and AbbVie.
In terms of risk metrics, the fund has achieved a top-quartile downside risk, maximum drawdown (which measures the most potential money lost if bought and sold at the worst possible times) and Sharpe ratio (which measures risk adjusted returns) since its launch. However, it is in the third quartile for its annualised volatility over this time frame.
CF Woodford Equity Income has a clean ongoing charges figure (OCF) of 0.75 per cent and yields 3.52 per cent.
Martin Bamford, managing director of Informed Choice, said: “Our preferred equity fund is Fidelity Index UK, which is one of the lowest cost ways to gain equity exposure, at only 0.08 per cent ongoing charges.”
“It is an index tracker fund which tracks the performance of the FTSE All Share, giving investors broad UK equity exposure at a very low cost. As a fund to buy cheaply and hold for the long-term, it is difficult to beat.”
Fidelity Index UK was launched in 1996 and is £2bn in size. It has a passive crown rating of five and aims to fully replicates the FTSE All Share index, which means it holds the same securities at the same weights.
Performance of fund vs benchmark over 10yrs
Source: FE Analytics
The Square Mile research team has awarded the fund an ‘R’ or ‘recommended’ rating for its low charges and the team’s credibility.
“We believe that Fidelity have a strong commitment towards managing passive strategies,” it said.
“Our rating on this fund is based upon our opinion of the suitability of the index tracked, the management group's commitment to operating passive strategies, the size of the fund, the fund's cost and good historic record of tracking the index.”
Fidelity Index UK yields 3.12 per cent.
