Fidelity Global Dividend, Old Mutual GEAR and TwentyFourDynamic Bond funds would all sit well together in a portfolio for those looking to minimise risk and maximise diversification, according to Architas's Adrian Lowcock (pictured).
This comes as part of a series, in which FE Trustnet asks investment professionals for three fund picks which would complement each other and, by using different processes, philosophies and asset classes, help drawdowns as a collective.
"I think first it is important to remember that investors will vary with their comfort levels and some may sleep comfortably invested in risky assets whilst others may prefer cash," the investment director pointed out. "So, when considering the funds, the key issue is around the attitude of the manager and the funds objectives not specifically the asset class – as all investments are capable of losing money at various points."
In the below article, the investment director talks through his three choices and why he believes they work well together.
First up is FE Alpha Manager Daniel Roberts' four crown-rated Fidelity Global Dividend fund, which is £842m in size and aims to grow income ahead of inflation as well as by 25 per cent more than the MSCI All Country World index. He also targets long-term capital growth and aims to achieve this through a portfolio of simple companies with strong cash flow generation.
"Roberts believes value is the most important determinant of future returns and focuses on long term returns through the appreciation of longer term earnings performance across business cycle," Lowcock explained.
"He looks for businesses which are understandable, transparent, not complex with predictable return distributions and a proven ability to allocate capital.
"The fund is a fairly concentrated global equities fund with about 50 holdings and is focused on large companies. The dividend element means the fund is looking for companies which pay an income, typically these types of companies are managed with a focus on shareholder returns and long term sustainability."
Over five years, the fund has outperformed its average peer and benchmark by 25.7 and 2.72 percentage points respectively with a total return of 101.07 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has done so with a top-quartile maximum drawdown (which measures the most money lost if bought and sold at the worst possible times), downside risk (which predicts a fund's susceptibility to lose money during falling markets) and Sharpe ratio (which measures risk-adjusted returns).
Had an investor placed an initial £10,000 into the fund five years ago, they would have received £1,971.42 in income alone.
Fidelity Global Dividend has a clean ongoing charges figure (OCF) of 0.98 per cent and yields 2.76 per cent.
Old Mutual Global Equity Absolute Return
The second fund on Lowcock's list is Old Mutual Global Equity Absolute Return – or Old Mutual GEAR – which is domiciled in Ireland and resides in the IA Targeted Absolute Return sector.
The investment director said: "This is systematically-run fund using in-house quantitative tools. The system is constantly monitored with adjustments and improvements made regularly.
"The team believes that markets are not fully efficient and that stock prices often diverge from their fundamental value due to investors’ behavioural biases and style drifts.
"The investment process behind the GEAR strategy seeks to exploit these biases in a dynamic and efficient way, resulting in outperformance driven principally by bottom-up stock selection. This is a stable and repeatable process."
Over five years, the $9.4bn fund has returned 39.47 per cent (it is misleading to compare targeted absolute return funds' performance with the sector average due to the wide variety of mandates) and has done so with a maximum drawdown of 4.48 per cent.
Performance of fund over 5yrs
Source: FE Analytics
The fund, which has a diversified portfolio of 582 holdings, has won a spot on the FE Invest Approved list as the research team has praised its "robust" team and its capabilities as an "excellent diversifier".
Old Mutual GEAR has a clean OCF of 0.85 per cent.
The final fund on the list is the £1.5bn TwentyFour Dynamic Bond fund, which is £1.5bn in size and is headed up using a team-based approach.
Over five years, the fund has returned 45.41 per cent compared to its average peer and three-month Libor benchmark's respective returns of 27.83 and 2.58 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
"This fund is run on a team basis with each member having specialisms in fixed income," Lowcock said. "The investment committee establishes the bigger picture view of the world leaving the managers to decide how and when to reflect this within the fund.
"The fund can go anywhere in the fixed income space and as such could be considered a best ideas fund."
TwentyFour Dynamic Bond has a credit spread duration of 3.48 years. Geographically, its largest weighting is in the UK at 36.12 per cent followed by continental Europe at 35.23 per cent and North America at 17.27 per cent.
It has a third-quartile downside risk, maximum drawdown and annualised volatility, which suggests it may not be suited to particularly cautious investors.
Patient investors seeking income though have been rewarded as, based on a £10,000 investment five years ago, they would have received £2,513.10 in income alone.
TwentyFour Dynamic Bond has a clean OCF of 0.78 per cent and yields 5.05 per cent.