Portfolio construction: Dampier’s funds for an aggressive investor

Recent chaos in global stock markets means the job of choosing funds for an aggressive investor has become a more subtle art than it once was. Whereas five years ago a selection of UK Smaller Companies funds and a couple of emerging market plays would be all investors needed, top IFAs today think they should now consider a broader range of options.

"You shouldn’t be aggressive for aggressive’s sake," said Mark Dampier, head of research at Hargreaves Lansdown. "There’s no point piling into something that looks like it might be an aggressive play unless there’s a valuation anomoly which means that it is genuinely cheap."

Russia, Dampier says, stands out among the emerging markets thanks to ongoing political strife surrounding elections.

"The Russian market has picked up a little recently, so it’s not at the bottom any more, but it’s still not expensively valued, trading at only five and a half or six times [earnings]. That’s a massive discount compared to the other emerging markets. The politics put it on a discount because nobody understands what’s going on."

Russia’s connection with oil is another factor in its favour.

"The oil sector is very cheap. As long as oil is trading at over $70 a barrel then the Russian government can take a huge amount in tax, which is good for the economy."

Dampier thinks Robin Geffen’s Neptune Russia & Greater Russia fund offers an attractive way to gain exposure to the market. Neptune’s flagship Russian vehicle is the best performer in the IMA Specialist sector over three years, and an investment of £1,000 in the fund made in February 2009 would now be worth almost £2,382.

This comes at the price of great volatility, however, and it sits at the top in risk versus reward terms in the IMA Specialist sector – which houses some of the riskiest funds in the UK retail market.

Over three years, Neptune Russia displays a volatility of 29.99 per cent, well above the average of 14.02 per cent for the funds in its peer group.

For investors looking to trade this volatility, Dampier rates JPMorgan Russian Securities investment trust, which offers investors access to Russia without having to pay an initial or annual charge. The trust has seen stellar returns over three years, and investors who put £1,000 in at the start of 2009 would now have £3,344.

It is even more volatile than Geffen’s fund, however, recording a volatility of 39 per cent over the same period.

Russia's performance is linked closely to the fortunes of the oil price, but for investors that want to gain direct exposure, Dampier thinks Angelos Damaskos' MFM Junior Oils Trust is worth a look. The fund invests in profitable but small oil companies which, Dampier believes, are strongly positioned to perform.

"Giant companies like Shell are massively short on reserves, so a lot of smaller stuff is being taken over. They [Junior Oils] had at least half a dozen takeovers in that portfolio."

However, volatility here too is an issue.

"It’s an incredibly volatile fund," Dampier said. "It was one of the best-performing funds on the market this year and one of the worst last year, so it is one to watch at the moment because I think it is something you’d only buy after it has been through a hard time. I shouldn’t really be saying this but it’s one to trade a bit more – if you’ve had a good run with it you should probably say thanks and go away."

Fixed interest is rarely considered as an aggressive play, but Dampier thinks certain funds fit the bill at the moment very well.

"You shouldn’t be too blinkered, you should try and have something that will do well in any environment," he explained.

The offshore Royal London Sterling Extra Yield fund is among his most favoured offerings. It is domiciled in Jersey but recognised by the FSA and available through various well-known UK retail investment platforms. It is by some distance the best performer in its sector.

An investment of £1,000 three years ago would now be worth over £1,800 and the fund is less volatile than many of its peers despite this strength.

Dampier said: "It has lagged a bit, so it is not back to its former glory days, but it tends to be a slow burner. If you see things picking up it will catch up slowly but surely with that."

"It offers a yield of about 8.5 per cent, which if you consider the additional capital uplift of a couple of per cent, is a great return."