Individual funds can shoot the lights out when market conditions are working exactly in their favour, but Fidelity Personal Investing’s Daniel Lane argues that combining funds can often yield better results. 
“Sometimes a manager will give you exactly what you’re looking for in a certain sector or geography but more often than not it’s the combination of a few strategies that will give you what you need over the long term,” he said.
“The question then is how best to select your team so that it’s capable of tackling whatever comes next; ready to hand leadership back and forth over time for the good of the overall portfolio.”
Below, Lane highlights a number of funds that could work well when combined with each other, although the exact choices that investors make will depend on their individual goals, risk tolerance, time horizon and current asset allocation.
Across the cap scale
One common way of using funds together is to combine those that invest in companies of different sizes, as some portfolios will focus on the large-caps in the FTSE 100 while others spend their time on mid- and small-caps.
Lane highlighted Lazard UK Omega as a potential option for exposure to the top end of the market cap spectrum. Managed by Alan Custis and Lloyd Whitworth, the £201.3m fund has 81.9 per cent of its portfolio in large-caps including names such as BP, Diageo and GlaxoSmithKline.
This could be complemented with James Thorne and Philip Macartney’s £66.6m Threadneedle UK Mid 250 fund, according to the Fidelity commentator. The managers look for high-quality mid-caps that they believe can deliver sustainably high returns in excess of cost of capital over longer time periods; QinetiQ, Cineworld and Britvic are some of its biggest holdings.
Performance of funds vs sector and benchmarks over 5yrs
Source: FE Analytics
“In the UK it’s particularly important to think about where fund managers are looking, given that companies become more and more tied to the UK economy the further you go down the cap scale,” Lane added.
“Around 75 per cent of FTSE 100 company earnings comes from outside the UK. In the FTSE 250, this drops to 50 per cent and is lower still among smaller businesses serving the domestic economy.
“This means performance can vary significantly when currency movements, consumer spending and national politics come into play. Finding a balance that suits you between these strategies means different parts of your portfolio can pick up the slack if another begins to wane.”
Lazard UK Omega has an ongoing charges figure (OCF) of 0.80 per cent while Threadneedle UK Mid 250’s is 0.90 per cent.
Value and growth
Another way that funds can be differentiated is by their investment style. The value approach looks for unloved companies that could improve while growth investors focus on the big names that dominate their industries.
Using both kinds of approach in a portfolio means that investors can benefit from value and growth environments, without needing to switch holdings depending on which is performing well.
Lane offered Alex Wright’s £3bn Fidelity Special Situations fund as an example of a good value strategy. It holds companies such as CRH, Imperial Brands and Legal & General.
“The rationale behind Wright’s process is that highly-valued companies have little potential to rise much further, whereas undervalued shares can rise sharply if things turn out to be better, or no worse, than the consensus expects,” he explained.
Performance of funds vs sector and benchmark over 5yrs
Source: FE Analytics
To make sure that a portfolio isn’t entirely relying on turnaround stories, he suggested the addition of a quality-growth strategy such as the £443.1m Liontrust UK Growth fund. Holdings here include AstraZeneca, Compass Group and RELX.
“Managers Julian Fosh and Anthony Cross look for companies with distinct intellectual property, strong distribution and high levels of recurring revenue,” Lane said. “Then it’s a case of figuring out how they translate into concrete value and so, what price the Liontrust team is prepared to pay for the company’s shares.”
The OCF on Fidelity Special Situations is 0.91 per cent and Liontrust UK Growth’s is 0.89 per cent.
Core/satellite
Some investors prefer to use a core/satellite approach, whereby a core of traditional assets like equities or bonds are combined with more unconventional satellite holdings.
When it comes to contenders as a core holding, Lane highlighted Franklin UK Equity Income. This £865.6m fund is managed by Colin Morton (who has run the fund since 1995), Ben Russon and Mark Hall.
The managers focus on companies that pay a high dividend compared with the market. However, a key element is that this dividend must be sustainable and likely to grow.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Franklin UK Equity Income counts the likes of Royal Dutch Shell, Unilever and British American Tobacco among its top holdings.
The list of funds that could be held alongside a strategy such as this is a long one, according to Lane.
“Investors with equity income at the heart of their objectives will be able to combine an offering like this with funds from different sectors, making sure income diversification comes from geographical exposure and asset classes,” he finished.
Franklin UK Equity Income has a 0.52 per cent OCF and is yielding 4.41 per cent.