Passive funds and index trackers are an easy and cheap way to access a specific market and a popular way to invest. When owning them, however, it becomes more complicated to maintain an adequate level of diversification, as many active funds that are benchmarked against the same index will have exposure to many of the same companies.
Index investors who don’t want to double down on the same risk should therefore be particularly careful when selecting their next active investment and make sure to follow a Monty Python approach, said Rob Morgan, chief investment analyst at Charles Stanley.
“It is easy to double up on large global businesses when you own both a tracker and an active global fund that contains many of the large US technology and e-commerce giants,” he said.
“Investors seeking greater diversification should adopt a Monty Python approach – ‘And now for something completely different…’”
Below, we asked three expert fund selectors which active fund they would hold alongside the most-bought tracker of the past year – Fidelity Index World, which has received inflows for £902.7m over the past 12 months.
This fund has a tilt towards technology, financials and healthcare stocks, with the top 10 holdings including some of the largest businesses in the world like Apple, Microsoft and Amazon, which are well held in many exchange-traded funds (ETFs).
Morgan’s pick was “the highly differentiated” AVI Global Trust, which aims to achieve capital growth through a portfolio of equities that stand at a discount to their estimated value.
Performance of trust over 1yr against sector and index
Source: FE Analytics
“The portfolio is unique, combining family-controlled holding companies, selected closed-ended vehicles and Japanese special situations. The common theme is that all assets have intrinsic value that can be unlocked and AVI seeks to do this through engagement and occasionally public activism,” he said.
“There is nothing else that looks like this trust in the peer group, nor any index, and the eclectic mix of assets have idiosyncratic drivers of return. The long-term returns, despite the handicap of limited US equity exposure, have been solid.”
As a global thematic investor, Shannon Lancaster, fund analyst at Ravenscroft Group, believes that active managers should be able to outperform passive funds like Fidelity Index World and picked the Lazard Global Equity Franchise for its “concentrated portfolio that looks nothing like the index”.
Performance of fund over 1yr against sector and index
Source: FE Analytics
“It is an excellent fund with a fantastic, experienced team. The manager has strong valuation discipline and uses an intrinsic value rank to dictate what stocks go in and out of the portfolio,” she said.
“The underlying companies are truly unique and not found in many other global equity funds. This means it performs differently to the sector, providing us with more value-like performance without owning energy, mining or financials – the classic value sectors.”
Lastly, Tom Sparke, investment manager at GDIM, selected a fund with “strong conviction and a clear, differentiated mandate” – Redwheel Global Equity Income, which would be “an excellent fund to use here”.
Performance of fund over 1yr against sector and index
Source: FE Analytics
“It has a style agnostic mandate and aims to gain a moderate yield and an above-average total return and it does so with a lower than average level of volatility,” he said.
“The global index is lacking in dividend payers within its top positions so adding to companies such as Qualcomm, Cisco and Inditex tends to add a value tilt and brings about a steadier journey for the long-term investor.”
“Manager Nick Clay has a long history of success in this space and is using his time-tested philosophy within this concise global equity income fund.”
