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Three complementary funds you can hold and sleep at night

01 August 2017

Martin Bamford, managing director at Informed Choice, tells FE Trustnet which three funds give investors coverage across asset classes and have performed consistently well over time.

By Lauren Mason,

Senior reporter, FE Trustnet

Fidelity Index UK, Royal London Sterling Credit and Legal & General UK Property are three diversified funds that investors can hold together in a portfolio and sleep at night, according to Informed Choice’s Martin Bamford (pictured).

This comes as the first part of a series in which FE Trustnet asks investment professionals for three fund picks that complement each other and have solid track records of giving investors a smooth ride over the long term.

With Bamford’s picks, he said all three give investors broad exposure to three main asset classes – equities, bonds and commercial property.

Through combining these, he said investors can get a decent level of diversification to help reduce short-term volatility but without removing the opportunity for long-term investors.

“These are uncomplicated funds, with the Fidelity Index UK offering a very low cost way of tracking the FTSE All Share, using full physical replication and therefore avoiding the addition of any counterparty risks,” the managing director explained.

“Royal London Sterling Credit and Legal & General UK Property have performed consistently well over time and offer investors a good way to confidently access these assets.

“All three funds come from major fund providers which have a high level of financial strength and are very capable when it comes to fund management and administration.

“While the individual funds are likely to go up and down in value, holding a portfolio of all three funds is unlikely to cause sleepless nights for investors.”

In the below article, we look under the bonnet of Bamford’s three fund picks and what each of them can offer investors.

 

Fidelity Index UK

First up is Fidelity Index UK, which has a five FE Passive Crown Rating and tracks the FTSE All Share index. The £2.4bn fund was launched in 1996 and holds 645 stocks, although it can also use derivatives to reduce risk or cost or to generate additional capital in-line with its risk profile.

The technique manager Matt Jones adopts is known as ‘sampling’, which means he carefully selects a basket of securities to closely mirror the index’s performance.

If the fund is overweight or underweight stocks relative to the index in extreme conditions, its performance can diverge from the index if it is not remedied.

Over five years, for instance, it has a tracking error of 2.3. According to FE Analytics, a tracking error of below 2 generally indicates that the fund is passive.

Performance of fund vs benchmark over 5yrs

 

Source: FE Analytics

The FE Research team has awarded the fund a spot on its FE Invest Approved list for Jones’s ability maintain a straightforward approach to passive investing.


“Its approach of keeping things simple and efficient is a core quality for any passive manager, and lends itself well to its team-based portfolio management approach,” it said.

“Although Fidelity’s range of index funds do have the capacity to perform stock lending, in practice this is very rarely done, so there is virtually no counterparty risk involved with [Fidelity’s range of index] funds.”

Fidelity Index UK has a clean ongoing charges figure (OCF) of 0.08 per cent and yields 2.54 per cent.

 

Royal London Sterling Credit

Next on Bamford’s list is Royal London Sterling Credit, which has five FE crowns and has been managed by Paola Binns since 2008.

The £1.3bn fund has an average duration of 7.7 years compared to its benchmark’s duration of 8.2 years. It aims to maximise income through a diversified portfolio of corporates which range in quality from ‘AAA’ to ‘BB’; it also has an 8.5 per cent allocation to ‘unrated’ fixed interest.

In terms of sector weightings, the fund has 29.8 per cent of assets in structured finance, a 20.2 per cent weighting in banks and financial services and smaller weightings in insurance, utilities and social housing.

Over five years, the fund has outperformed its average peer by 9.02 percentage points with a total return of 39.53 per cent. It has done so with a maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of 5.47 per cent and an annualised volatility of 5.45 per cent.

The FE Research team has awarded it an FE Risk Score of 34 which means it deems it to be just one-third as risky as the FTSE 100 index.

Performance of fund vs sector over 5yrs

 

Source: FE Analytics

Had an investor placed an initial £10,000 into the fund five years ago, they would have received £1,864.68 in income alone.

Royal London Sterling Credit has a clean OCF of 0.5 per cent and yields 3.31 per cent.


Legal & General UK Property

The third and final fund on the list is Legal & General UK Property, which has been headed up by FE Alpha Manager Michael Barrie since 2006 and co-managed by Matt Jarvis since 2010.

The fund hit the headlines last year – along with several other open-ended property funds – after it closed its doors to traders hoping to sell during the immediate aftermath of the EU referendum.

It re-opened shortly afterwards however and, over the last 12 months, it has comfortably doubled the return of its average peer with gains of 10.4 per cent.

However, due to events last year as well as a difficult 2012, the fund has underperformed the IA Property sector average by 161 basis points with a total return of 44.7 per cent. This should be caveated with the fact that many vehicles in the sector invest in property securities, which are of course far more liquid.

Another caveat investors should bear in mind is that, while the fund looks as though it has very little volatility, physical property trades far less frequently than equities and so to monitor its risk metrics relative to its average peer could be misleading.

Had an investor placed £10,000 into the fund five years ago, they would have received £1,714.01 in income alone.

Performance of fund vs sector over 5yrs

 

Source: FE Analytics

The £2.7bn fund has a 24.36 per cent cash weighting for liquidity purposes – some of which is lent to banks who repay the deposit plus interest – and has a highly-diversified portfolio in terms of region and sector.

It has been awarded an ‘R’ (‘recommended’) rating by the research team at Square Mile, who said: “In many ways this is a traditional property fund, however, at the margin, LGP [Legal & General Property Group] offer something different in the way that the cash position is managed.

“Through investment into Reits and derivatives that seek to replicate the returns of the IPD index (use of the latter is a key differentiator compared to many competitors), the team attempt to make more effective use of cash.”

L&G UK Property has a clean OCF of 0.75 per cent and yields 3 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.