I recently wrote about the lessons I’d be bringing forward from six months at Trustnet into my own portfolio. And having built a portfolio of core funds that I felt confident holding for the long term – of which I’ll write soon – I wanted to start planning for next year and looking at ways to enhance my own stocks & shares ISA with satellite funds.
Satellite funds have a flexible definition and can really be anything that help diversify a portfolio or add something different. Whether income or growth strategies, they often come from niche or specialist areas of the market.
“The point of satellite funds is to offer something different,” Rob Morgan, pensions and investment analyst at Charles Stanley Direct told me.
“Having diversification and a source of returns that is driven by different factors than the rest of your portfolio, which is likely to made up of equities and bonds.”
As such, the fund picks below cover different sectors and themes of the market, including gold, insurance and future trends.
The importance of diversification has been reaffirmed during the Covid-19 pandemic and, in light of that, Trustnet spoke to four market experts for the satellite funds they recommend for investors heading into next year.
BlackRock Gold & General – Rob Morgan, Charles Stanley Direct
Staying with Morgan, he explained that there are still plenty of reasons to be bullish on gold right now.
As such, his satellite fund pick is BlackRock Gold & General, which invests in gold and other precious metal-related companies on a worldwide basis.
The portfolio contains between 50-80 companies, the vast majority of which are established producers of gold, with exposure to pure exploration stocks.
He explained that in a continued environment of loose monetary policy and large amounts of government spending, this would further dissuade investors from backing sovereign currencies.
“Central banks will willingly keep interest rates low while allowing inflation to run above target to help the economy recover and to gradually reduce their debt burden,” said Morgan.
Given this environment of low inflation, the analyst expects gold to flourish and offers a lower opportunity cost than holding cash or government bonds.
“However, it can become deadweight in a portfolio, or worse because it can be unpredictable and potentially volatile due to geopolitical events or supply and demand imbalances,” Morgan added.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Managed by Evy Hambro and FE fundinfo Alpha Manager Tom Holl, the fund has made 61.84 per cent over three years against its benchmark FTSE Gold Mines which made a return of 74.33 per cent. It has an ongoing charges figure (OCF) of 1.16 per cent.
Tellworth UK Smaller Companies – Jason Hollands, Tilney Investments
A satellite fund that Tilney Investment Management Services managing director Jason Hollands likes is the £284.2m TM Tellworth UK Smaller Companies fund, managed by Alpha Managers Paul Marriage and John Warren.
“This relatively small-sized fund is an advantage in my view for a fund investing in small-cap stocks where liquidity can be a serious constraint for large funds,” said Hollands. “The managers have always been very mindful of limiting capacity to manageable levels in the past and are committed to doing so in their new business.”
Running a portfolio of approximately 60 names with no holdings representing more than 3 per cent of the portfolio, the managing director explained that risk is managed through diversification.
“The strategy provides exposure to many high-growth businesses that you won’t find in a bog-standard UK equity fund and is a good way to get some UK tech exposure,” he added.“Overall, tech represents less than 1 per cent of the UK market but this fund currently has around 24 per cent in innovative UK tech businesses.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The TM Tellworth UK Smaller Companies fund made a total return of 1.90 per cent over three years, compared with 5.92 per cent for the average IA UK Smaller Companies sector peer. Over the same period, the Numis Smaller Companies plus AIM benchmark returned 1.79 per cent. It has an OCF of 1.32 per cent.
Polar Capital Global Insurance – Ryan Hughes, AJ Bell
For investors looking for a satellite fund to add to their portfolio, Ryan Hughes, AJ Bell’s head of active portfolios, picked the £1.3bn Polar Capital Global Insurance fund.
“Insurance is never going to be most interesting of topics, even fund manager Nick Martin will admit that,” he said. “However, we all know how it works and invariably premiums just keep on rising.”
Hughes explained that with major weather events, insurance often gets a bad press when it comes to claims, and it was assumed that the industry would be inundated with Covid-19 claims.
“However, legal activity so far seems to have kept that in check and right now commercial insurance pricing is increasing at its fastest rate for 17 years as insurers look to re-price risk,” said Hughes.
Martin, who is an Alpha Manager has been involved with the five FE fundinfo Crown-rated fund since 2001.
Hugest added: “The team at Polar are hugely experienced in this specialist market and given the niche nature of the product, it makes for a very interesting satellite holding.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The Polar Capital Global Insurance fund had made 10.89 per cent since October 2017, compared with 5.70 per cent for the IA Specialist sector and 0.22 per cent for the MSCI World/Insurance benchmark. It has an OCF of 0.88 per cent.
Heptagon Future Trends – Andy Merricks, independent fund strategist
The Heptagon Future Trends Equity fund is the choice of Andy Merricks, independent fund strategist and manager of the 8am Focussed fund.
“Not the easiest of funds to find, it covers a range of themes through individual equity selection,” said Merricks.
Being an offshore fund and a specialist strategy means it’s an expensive choice, but Merricks believes its worth paying more for a well-diversified fund that is in touch with today’s opportunities.
Managed by Alex Gunz, the fund aims to invest in businesses exposed to long-term growth trends, the increased efficiency they bring and their inherently disruptive potential.
PayPal, Mastercard and Novo Nordisk, which were all beneficiaries of the Covid-19 pandemic, are within the top holdings.
“In Alex’s words it invests in cloud to wind – cloud computing to wind energy – and from fish to chips – sustainable salmon farming to microchips,” said Merricks. “It’s a very good route into a variety of companies that one may not be able to access, or importantly analyse, sufficiently through a DIY approach.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The $144m Heptagon Future Trends fund has made 47.90 per cent over three years, while the MSCI World index returned 27.92 per and the FO Equity – International sector made 17.67 per cent. It has an OCF of 1.36 per cent.