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Toogood: The areas and funds to hold for a long-term portfolio

The Advisor Centre’s Peter Toogood and Gill Hutchison outline what they would include in a long-term portfolio.

Jonathan Jones

By Jonathan Jones, Reporter, FE Trustnet
Monday June 19, 2017

With asset classes across the board continuing to trade at ever higher valuations, long-term investment options are much harder to come by. 

However, backing trends such as technology, the turnaround in India and smaller companies investing could deliver returns in the long term, according to The Adviser Centre chief investment officer Peter Toogood.

Earlier this week, the analyst explained why he believes the pool of assets for investors to make money has been rapidly diminishing.

He said a portfolio that is 40 per cent invested in fixed interest and 60 per cent in equities should produce a total return of just 4.5 per cent per year in the medium term – a less than attractive return for investors.

“Every way you cut the cookie it means that returns are substantially low and that’s the best case of them holding the line,” Toogood said.

With returns expected to remain low and the macroeconomic environment unlikely to provide much support, he said investors should consider the key themes below when investing for the long term, defined as a 10-year time frame.

 

Smaller companies

The first area he recommends is to back UK and US smaller companies, two areas where he said that is likely to keep improving.

“I would still [back] US small cap over time. Their constant ability to innovate is not going to change and while it’s a bit expensive at the moment we are building a long-term portfolio here not a short-term one,” he said.

Meanwhile, he said that UK micro-caps and stocks in the alternative investment market (AIM) are innovative and should be able to produce better returns over the long term.

In the US, Gill Hutchison, research director at The Adviser Centre, said there are two funds that the team have been looking at.

“There are two flavours, one we feature and one we don’t. Schroder US Smaller Companies is a very solid fund that has been knocking about for ages run by (FE Alpha Manager) Jenny Jones,” she said.

“It is growth-focused but she has got a lot of balance in the portfolio so you don’t get too many fireworks with her fund.”

Performance of fund vs sector and benchmark over 10yrs

 

Source: FE Analytics

The £838m fund must be 80 per cent invested in companies in the bottom 20 per cent by size of the North American market.

The fund is diversified, with 132 stocks in the portfolio, and over the last decade has been the least volatile fund (16.44 per cent) in the IA North American Smaller Companies sector, 2.69 percentage points less volatile than the Russell 2000 benchmark.

Overall, the fund has returned 226.11 per cent over the last decade, third in the sector out of seven qualifying funds, outperforming the benchmark by 40.93 percentage points.

The other fund Hutchison mentioned is the Legg Mason Royce US Small Cap Opportunity run by Bill Hench.

The $1bn fund has been the best performing fund in the sector over the last year, and since he took over the fund in 2009 the fund has returned 300.51 per cent, 24.13 percentage points ahead of the Russell 2000 benchmark.

“If you want proper fireworks you’ve got Legg Mason Royce US Smaller Companies and that’s a value play,” she said.

“That’ll be all over the place but it is a phenomenal fund actually and he does dig around in the dirt quite a bit in that effort to find cheap stocks.”


Turning to the UK, Hutchison recommends the £20m Liontrust UK Micro Cap fund run by FE Alpha Managers Anthony Cross and Julian Fosh as well as Matthew Tonge and Victoria Stevens – known as the Liontrust Economic Advantage team.

“It’s all about the intellectual property side of it, the alignment and the idea that as a company you want repeatable contract-type business,” she said.

“Because they have such a distinct process that has worked for small cap I think they are just using that to go for the lower market.

“There’s four of them dedicated to that sort of area and they have a lot of experience.”

However, she cautions for those looking at the lower end of the UK market that it can be a boom or bust proposition.

“The danger is that the small-cap world historically has been a bit of a punters paradise so you have to be a bit careful of who you are picking up and you need a process behind it,” Hutchison said.

The fund, launched last year, has slightly underperformed the benchmark since launch, though it is being recommended by Toogood and Hutchison for a portfolio with an investment period of 10 years.

It invests in UK companies with a market capitalisation of less than £150m and currently holds 8.4 per cent in cash.

 

Technology

The next area Toogood suggests investors buy for the long term is technology, with the Polar Capital Global Technology fund as the best option for such a strategy.

“Over the long term stick with tech. There is no doubt that it is going to win hands down,” the CIO said.

“When we say long term we do mean 10 years because the winning strategies moving forward will be all about that constant, continuous Moore’s Law-type company with a continuous refurbishment of the next big thing.”

Moore’s Law refers to an observation made by Intel co-founder Gordon Moore, who said the number of transistors per square inch on integrated circuits had doubled every year since their invention.

This trend of technological innovation should continue into the future, according to the theory, something Toogood suggested can apply to technology companies.

The Polar Capital fund has been in the top three performing funds in the IA Technology & Telecommunications sector over the last one, three and five years.

Performance of fund vs sector since launch

 

Source: FE Analytics

It has returned 183.58 per cent over the last half-decade, beating the sector by 51.68 percentage points over the period.


The $1.4bn fund is run by Ben Rogoff and Nick Evans and typically holds between 60 and 85 positions.

Its top holdings include Apple, Alphabet, Facebook, Samsung Electronics and Microsoft, with 41 per cent in mega-caps.

 

India

The final area Toogood recommends for investors trying to build a long-term portfolio is India, which he sees as one of the countries with the best prospects moving forward.

“It’s a democracy, it has got a massively growing population and the most important thing of all is that the only thing they care about is making money,” he said.

“They are incredibly monetarily incentivised and well-capitalised. If I am going to buy an emerging market I will stick with that one thanks.”

Hutchison added that the fund they recommend is the GS India Equity Portfolio, though the manager – Prashant Khemka – who had been heading up its India equities team has recently left.

“The other manager – Hiren Dasani – is still there so we are looking at it but he’s very experienced and we think that is still a good shout.”

The $2.3bn fund is overweight financials, with five banks among its top 10 holdings, but is more weighted to the mid- and small-cap sector of the market.

Over the last five years, the fund has returned 183.18 per cent, 87.77 percentage points ahead of the MSCI India.

Performance of funds vs benchmark over 5yrs

 

Source: FE Analytics

Also recommended is the five crown-rated Jupiter India fund, run by FE Alpha Manager Avinash Vazirani, which has returned 160.03 per cent over the last five years.

“Avinash is very good,” Toogood said, noting the long-term track record of the fund.

The £1bn fund invests slightly higher up the market cap spectrum than the Goldman Sachs fund above, with 60.7 per cent in large caps and 24.4 per cent in mid-caps.

The manager aims to buy into companies that have growth potential but are currently being mis-priced by the market, something that has been beneficial since prime minister Narendra Modi’s radical monetary policies last year.

In an FE Trustnet article earlier this year, the manager said: “I don’t think I have ever been as positive on the profitability and growth prospects of companies as I am now.”

The FE Alpha Manager was referencing the recent demonetisation measures and upcoming tax changes, which he said look to have permanently changed the country for the better.


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Data provided by FE. Care has been taken to ensure that the information is correct, but FE 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.

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