For most, investing in a blend of equities and bonds split between all of the major regional markets more than suffices, which they can either do themselves or via a discretionary manager or a fund of funds.
However, for savvier investors, it is common practice to increase and decrease weightings to certain markets and regions depending on their appreciation of the macro outlook. After all, if someone is convinced Japan has finally turned the corner but China is on the verge of a major banking crisis, it does not make sense to have equal exposure to both.
Fund of funds manager Martin Gray, of the CF Miton Special Situations Portfolio, has a proven track record of correctly calling the macro, which has helped his fund to significantly outperform its IMA Flexible Investment sector over the long-term.
Rather than hedge their bets with low-risk funds, Gray and co-manager James Sullivan pick those that they believe will perform best when their market performs well.
"The way Gray and Sullivan pick funds is very interesting, in that they only invest in managers who do well when their area of investment does well," said Laith Khalaf, pensions investment manager at Hargreaves Lansdown.
"This sounds obvious, but not many managers do things this way. Their philosophy is: 'If I don’t think the UK will do well, I won’t invest in it, but if I do think it will do well, I want the manager who can give me the best possible returns.'"
"They look to manage risk with their own asset allocation, but they want their managers to be the best they can be."
Of course, Gray and Sullivan are professional investors and so have plenty of time, resources and, perhaps most importantly, experience to make informed decisions on asset allocation; however, for anyone who is particularly bullish on a certain region or sector and wants to put their money where their mouth is, there is a lot of logic in picking a fund with a proven track record in rising markets.
In the first of a new series, we ask industry professionals to identify the funds they would back to lead their sector in the good times.
UK All Companies
Richard Troue, analyst at Hargreaves Lansdown, says Ed Legget’s Standard Life UK Equity Unconstrained fund is a good choice for those who are confident about the outlook for the UK equity market.
"You’d have to back this to do well when the outlook for the economy improves," said Troue.
"Legget (pictured) has positioned the fund towards more economically sensitive companies. He sees the most opportunities in things like industrials and banks, and has seen any weakness as an opportunity to buy them at a cheaper price."
Year-on-year performance of fund vs sector 2008-2013
| Name | 2013 returns (%) |
2012 returns (%) | 2011 returns (%) | 2010 returns (%) | 2009 returns (%) | 2008 returns (%) |
|---|---|---|---|---|---|---|
| Stan Life Inv - UK Equity Unconstrained | 16.81 | 44.14 | -20.47 | 38.5 | 99.17 | -41.05 |
| IMA UK All Companies | 10.05 | 15.05 | -7.04 | 17.53 | 30.4 | -31.96 |
Source: FE Analytics
"It has always done very well when the UK market has done well, but naturally the opposite has happened during tougher patches."
"However, if you take a positive view on the UK economy, this is a good option," he added.
Among Legget’s major stock positions are International Personal Finance, Lloyds and Easyjet.
Although the fund has lost significantly more than its sector during down periods, its cumulative record still makes for very good reading: according to FE data, it has returned 118.4 per cent since Legget started running it in April 2008, beating the average IMA UK All Companies portfolio by almost 90 percentage points.
The £580m fund is available for a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.9 per cent.
UK Equity Income
On a total return basis, UK Equity Income funds tend to lag their rivals in the IMA UK All Companies sector during up periods, because dividend-paying stocks are by their nature more defensively focused.
However, for anyone who wants a regular income stream as well as competitive growth, Troue points to the £1.9bn JOHCM UK Equity Income fund as the ideal compromise.
"I see this fund as quite a nice dovetail to the more traditional, defensively focused equity income funds," he said.
"Whilst those tend to have a lot in pharmas and tobacco, which are traditionally quite defensive plays, this one has a little bit more in economically sensitive areas like banks, where the emphasis is on dividend growth in the future."
"It also has a lot in mid caps, which tend to do better when the market is rising," Troue added.
JOHCM UK Equity Income has been one of the standout funds in the sector recently, achieving top-decile performance over a five-year period with returns of 92.51 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
JOHCM UK Equity Income is currently yielding 4.6 per cent. The group is no longer marketing the product, but investors can still gain access to the fund for an OCF of 1.28 per cent – excluding performance fee.
UK Smaller Companies
On average, UK small caps tend to perform best when the UK market does well, but within the IMA UK Smaller Companies sector, some funds do a lot better than others during rallies.
Troue points to two bottom-up growth investors – Harry Nimmo and Alex Wright – as managers that tend to stand out from the crowd during fast-rising markets. They head up the Standard Life UK Smaller Companies and Fidelity UK Smaller Companies funds, respectively.
"The risk-on risk-off environment doesn’t really suit a manager like Harry Nimmo, who focuses on quality growth stories," he said.
"However, when investors feel a bit more comfortable about things, it’s a fund that tends to do very well."
Troue points out that a lot of the growth stocks Nimmo invests in are expensive in terms of their price-to-earnings (P/E) ratio, meaning they often get hit hard during market sell-offs.
"Alex Wright at Fidelity is quite similar, in that he focuses on quality long-term companies. When the economy is on a stronger footing and sentiment is positive; then companies with robust growth earnings potential are in high demand."
The Fidelity UK Smaller Companies fund was a top-decile performer in 2009, 2010 and 2012 – years when IMA UK Smaller Companies was among the best-performing sectors in the IMA universe.
Year-on-year performance of fund vs sector 2009-2013
| Name | 2013 returns (%) | 2012 returns (%) | 2011 returns (%) | 2010 returns (%) | 2009 returns (%) |
|---|---|---|---|---|---|
| Fidelity UK Smaller Companies | 23.77 | 41.63 | -7.8 | 40.08 | 93.72 |
| IMA UK Smaller Companies | 11.37 | 22.6 | -9.04 | 31.56 | 50.18 |
Source: FE Analytics
The fund also protected against the downside more effectively in 2011.
Both funds are closed to new money, although Nimmo’s Standard Life fund is still available via certain platforms.
Investors can still get access to the managers if they are prepared to buy their investment trusts. Nimmo runs the Standard Life UK Smaller Companies trust, while Wright runs the Fidelity Special Values IT.
