Lindsell Train UK Equity, Woodford Equity Income and Newton Global Income are among some of the highest quality funds that also have attractive ongoing charges figures, according to a number of investment professionals.
The funds were highlighted following research by FE Trustnet last week, which found a positive correlation between funds with lower charges and the total returns they were able to provide for investors.
Of course, it is a widely-held belief that investors should focus on performance net of fees first and foremost as it may be worth paying more for better returns.
For those looking to pinch the pennies, however, we talk to several industry commentators about their ‘go-to’ funds for those that want to pay notably low charges while also achieving stellar long-term returns.
Woodford Equity Income – 0.75% OCF
It won’t come as a surprise to investors that star manager Woodford’s open-ended offering received a number of nods from the professionals. The manager has always been vocal about the need for competitive charges and charge transparency. Last year, he announced that he will publish full details of his funds’ charges on their factsheets, including trading fees, stamp duty and spread costs.
The £9.9bn fund, which was launched in 2014, has returned 33.48 per cent since launch, outperforming its sector average and benchmark by 13.35 and 13.2 percentage points respectfully. It has done so with a top-decile maximum drawdown (which measures the most potential money lost if bought and sold at the worst possible times) of 6.49 per cent. If an investor had put £10,000 into the fund at launch, they would have received £925.41 in income alone.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Adrian Lowcock, investment director at Architas, said: “Neil Woodford looks for companies he believes are undervalued by the market with good visibility of earnings and the ability to generate a high cash flow.
“Woodford takes a cautious view on the UK and global economy and the fund has a defensive tilt to it which should help protect investors in the event of a recession. The fund takes some high conviction positions in sectors, particularly healthcare and tobacco.”
However, he warns the fund will require investor patience given the recent market rotation from growth into value. That said, he reasons that his track record has still held up well compared to peers.
Lindsell Train UK Equity – 0.71% OCF
Another household name, Nick Train’s five crown-rated Lindsell Train UK Equity fund was launched in 2006 and is £3.4bn in size.
As with Woodford’s fund, it has a quality growth bias and a high-conviction portfolio, with his largest holding Unilever accounting for more than 10 per cent of the overall portfolio.
Over five years, the fund has returned 115.34 per cent compared to its sector average and benchmark’s respective returns 62.27 and 56.86 per cent. Over the same time frame, it is in the top decile for its maximum drawdown of 7.82 per cent.
Jason Hollands, managing director at Tilney Group, said: “With charges at the lower end of the spectrum for active equity management at 0.71 per cent, the CF Lindsell Train UK Equity fund is a concentrated portfolio of quality growth companies, including many consumer brands firms.
“Manager Nick Train is very much a buy and hold investor, looking for businesses that he believes will still be trading profitably decades ahead.”
Lowcock says his focus on strong brand and cash flow has led to his focus on consumer stocks.
“He seeks conservatively financed companies that produce a high and stable return on capital and above average profit margin,” he explained. “He also looks for companies which will benefit from long-term trends such as rising demand for goods and services in developing markets and digital technology.”
7IM UK Equity Value – 0.35% OCF
With one of the lowest OCFs in the IA UK All Companies sector (including several index trackers), Informed Choice’s Martin Bamford says the £122m 7IM UK Equity Value fund is a good option for cost-conscious investors.
“This fund was only established in April 2015, but with its second anniversary approaching has delivered some impressive returns,” he said.
“It invests in a portfolio of UK companies which have been assessed by 7IM as trading below their intrinsic value, which makes it a good choice for long-term investors. The OCF for the Class C Income units is 0.35 per cent, which offers excellent value for money.”
Since launch, the fund – which adopts a team-based management approach – has performed largely in-line with both its average peer and benchmark and has done so with a bottom-quartile maximum drawdown of 14.45 per cent.
However, it must be noted that value mandates often experience greater levels of volatility than their peers. Funds also tend to experience heightened volatility when they have shorter-term track records.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
7IM UK Equity Value counts HSBC, Shire and BP as some of the largest holdings within its 62-stock portfolio.
Scottish Mortgage investment trust – 0.45% OCF
On the closed-ended side, Hollands says Scottish Mortgage investment trust combines the “win-win nirvana” of strong actively-produced returns and low costs.
“Scottish Mortgage investment trust pursues an unconstrained approach to global equity investing, targeting high growth companies from the US to China, including the likes of Tesla Motors, biotech giant Illumina, Facebook and Chinese web-plays Baidu, Tencent and Alibaba,” the managing director said.
“The trust has delivered blistering outperformance over multiple time periods, but has a very low OCF of just 0.45 per cent.
“One caveat though is that the trust’s shares have long traded at a premium to NAV (currently 3.1 per cent) and as it has recently been elevated to the FTSE 100, will likely continue to do so as tracker funds buy it.”
Headed up by James Anderson and deputy-managed by Tom Slater, the £5.2bn trust has a focus on the technology sector, which is shown through its concentrated portfolio. For instance, its largest individual weighting is in Amazon.com at 9.9 per cent.
As such, it has a higher drawdown than its average peer and benchmark at 12.9 per cent. That said, investors willing to ride out any volatility have been well-rewarded as, over this time frame, it has returned 173.55 per cent compared to its sector average and benchmark’s respective returns of 83.68 and 96.09 per cent.
It is 5 per cent geared and has an average dividend growth of 2.7 per cent per annum.
The final fund on the list is the four crown-rated Newton Global Income fund, which is £5.7bn in size and managed by Nick Clay.
As with most Newton funds, it adopts a cautious approach to investing and uses a thematic approach, which looks at where we are in the market cycle as well as potential headwinds and tailwinds.
“Newton's research team follows themes and currently believes that the world has become over-indebted, hence seeking to reduce debt is a natural consequence,” Lowcock explained.
“Therefore, the current focus is on large, well-financed, defensive businesses, particularly in the healthcare and consumer goods sectors.
“The fund is fairly concentrated at 50-70 stocks and has historically had a bias towards larger companies, though it can invest in higher-risk smaller companies.
“The fund adopts a strict buy discipline - companies must have a prospective yield of 25 per cent greater than the FTSE World index yield before they can be purchased. Currently the fund is biased towards developed markets.”
Over five years, the trust has performed largely in-line with its benchmark but has outperformed its sector average by 22.72 percentage points with a total return of 96.33 per cent. Given Clay’s cautious positioning, it has done so with a top-decile maximum drawdown of 6.97 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics