Over the long term it’s often better for an investor to take on higher levels of risk because they will be able to “ride-out” short-term falls in markets, according to Tom Sparke, manager at GDIM Discretionary Fund Managers. 
Sparke clarified that although investors maybe able to take on more risk “mitigating the downside along the way can help overall returns too.”
This week Sparke (pictured) has selected two equity funds and one bond fund for his portfolio, with the latter acting as “mitigation against painful stock market conditions”.
ASI Global Smaller Companies
The first fund chosen by Sparke is the £1.3bn ASI Global Smaller Companies fund managed by Alan Rowsell since the fund launched in January 2012.
The fund targets long term growth using the firm’s propriatery ‘Matrix’ quant tool to build a concentrated portfolio of 50 stocks.
Sparke said: “In rising markets this fund has added enormous amounts of value above the market’s return.
“Over a longer-term time frame, I believe the compounded result could be significant, as it has in the past.”
He added: “With lower than average US exposure – within the global universe) and a diverse geographical base, this fund also provides a degree of diversification too.”
The fund’s overall investment process is routed in GDIM’s ‘Focus on Change’ philosophy, where they effectively believe that the market is inefficient when it comes to valuing a company’s fundamentals when it is going through a period of “structural change”.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The fund made a total return of 109.11 per cent since launch compared with a 66.24 per cent gain for the average IA Global peer. It has an ongoing charges figure (OCF) of 1.05 per cent.
Baillie Gifford Emerging Markets Leading Companies
The next equity fund recommended by Sparke is the five FE Crown-rated Baillie Gifford Emerging Markets Leading Companies fund, a high conviction, bottom-up fund overseen by Will Sutcliffe.
“Concentrating on the larger companies in emerging markets can mitigate some of the difficulties posed by higher-risk investing and the level of growth within these leaders is enviable,” said Sparke.
“This fund has been very successful in upward and downward moving markets, which makes it a strong choice for a range of portfolios and has placed it in the top decile of emerging market funds over one, three and five years.”
Sutcliffe runs a portfolio of 40-80 stocks, with the majority of the holdings deriving from China, which makes up 29.4 per cent of the portfolio.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
The £612m Baillie Gifford Emerging Markets Leading Companies fund has generated a total return of 69.54 per cent over the past five years, compared with a 41.89 per cent gain in the MSCI Emerging Markets index and a 38.81 per cent rise for the average IA Global Emerging Markets peer. It has an ongoing charges figure (OCF) of 0.78 per cent.
Rathbone Strategic Bond
Finally, to offset the higher levels of risk from his equity selection GDIM’s Sparke chose the five FE Crown-rated fund Rathbone Strategic Bond fund, managed by Bryn Jones and Noelle Cazalis.
Sparke said the addition of a strategic bond fund would mitigate risk in tougher market environments and but not detract in more positive conditions. In addition, he said, the Rathbones fund has proven one of the least volatile options in the IA Strategic Bond sector.
“The fund has effectively moved its duration and credit risk positioning to take advantage of market events and to take down risk in tougher market conditions,” he said.
“In terms of risk-adjusted performance, this fund has done very well over numerous timeframes and would provide an efficient diversifier in an equity-heavy portfolio.”
Rathbone Strategic Bond predominantly sterling-denominated bonds although half of the portfolio will typically be held in other funds.
Jones and Cazalis deliver lower volatility by investing across a range of fixed income assets. As such, the fund’s yield is not a specific nominal target and is instead determined by asset allocation.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The £189.9m fund has made a total return of 20.12 per cent over the past five years compared with a 19.88 per cent gain for the IA Sterling Strategic peer. Rathbone Strategic Bond has an ongoing charges figure (OCF) of 0.71 per cent and yielding 2.30 per cent.