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Chelsea's McDermott: Our top ISA picks from across the asset classes

21 February 2018

Darius McDermott, managing director of Chelsea Financial Services, highlights funds from a range of asset classes that should provide investors with peace of mind and genuine diversification.

By Darius McDermott,

Chelsea Financial Services

With just a few weeks left for investors to make the most of their tax-free ISA allowance, it's exactly the right time to put portfolios under the microscope.

Repositioning at the moment is easier said than done though, given that interest rates have started rising in the UK and the US, our home market is still grappling with Brexit uncertainty and valuations across asset classes appear stretched.

This type of environment calls for plenty of portfolio diversification. For instance, we have no bias towards either growth or value at the moment and, while we favour equities as an asset class, we don't believe investors should place all their eggs in one basket.

Here, I'll take a look at a range of different funds which I believe can provide investors with piece of mind and genuine portfolio diversification.

 

UK equities

While there are uncertainties on the horizon for the UK economy, that's not to say there aren't select opportunities within the home market – it's all about picking the right managers.

For investors looking for growth, Marlborough UK Multi-Cap Growth may present itself as a good option. Manager Richard Hallett adopts a bottom-up stock selection process to find companies that should perform well throughout an entire market cycle, but also incorporates a macro overlay to minimise thematic risk.

The £358m fund has a genuinely multi-cap approach to stock selection and tends to look very different from the benchmark; it currently has a 22.8 per cent active underweight to FTSE 100 stocks relative to the FTSE All Share index, for instance. This means it should be better-protected against any potential market corrections.

For investors looking for income from their UK equity exposure – and for something to perhaps dovetail with Hallett's fund – they may wish to consider Adrian Frost and Nick Shenton's Artemis Income. The £6.1bn fund predominantly holds large-caps and counts Royal Dutch Shell, Lloyds and BP among some of its largest holdings. It also has a marked overweight to UK financials at 37.1 per cent, which is a result of the managers' bias towards value stocks.


 

Fixed income

Fixed income is a tricky area of the market to invest in at the moment, given that interest rates and bond yields are on the rise. As such, conventional fixed income – particularly government bonds – are looking less attractive at the moment.

For those wishing to diversify their asset class exposure and retain some weighting to fixed income, however, corporates may be a good asset class to hold as they are slightly less sensitive to interest rate risk (although that's not to say they aren't susceptible).

In this space, we like Invesco Perpetual Corporate Bond, which is headed up by Paul Causer and Michael Matthews.

The managers are fully aware of the fact that, even though there is less interest rate risk with credit than there is with government bonds, it still presents itself as a significant headwind to the asset class. As such, they are positioned cautiously and this sits in-line with our views.

We think Invesco Perpetual has one of the most skilled and well-resourced fixed interest teams available and, given today's challenging backdrop, are well-equipped to deal with any nasty surprises.

For investors looking for a fixed income fund with a more flexible mandate, another option to consider could be the £1.7bn TwentyFour Dynamic Bond fund, which is managed using a team-based approach.

The fund is completely unconstrained in terms of where it is able to invest. For instance, it currently holds 11.66 per cent of the portfolio in assets with maturities of less than one year, while more than 7 per cent has a minimum maturity of 15 years.

At time of writing, the team holds a combination of banks, US and European high yield, emerging market debt, insurance, asset-backed securities and government bonds.



International equities

For investors looking to increase their equity exposure and regionally diversify away from the home market, there are a number of attractive options available.

One region we are positive on the moment from a valuation perspective is Europe, and we believe John Bennett's Janus Henderson European Focus fund is a good way to gain exposure to the market area.

As the fund's name suggests, Bennett looks to provide long-term growth through a concentrated portfolio, which currently stands at 51 stocks. He blends both fundamental company research with industrial analysis when selecting stocks and is not tied into a particular style bias – he will simply buy into areas of the market where he sees the best possible opportunities for long-term outperformance.

For those looking for further regional diversification, we also prefer emerging market equities to many of their developed market counterparts, and we particularly like the fundamentals on offer in Asia.

Here, we think Schroder Asian Alpha Plus – which is headed up by Matthew Dobbs – presents itself as a good option. Dobbs has extensive knowledge of the Asian equity market, having lived and worked in Singapore for several years. The manager adopts a completely flexible, multi-cap and predominantly bottom-up approach to stock selection, which is supported by Schroder's large and well-resourced research team.

Real assets

Finally, it is always wise to have some exposure to an asset class which behaves inversely to your other holdings. As such, holding a portion of your portfolio in real assets – such as gold – could well be a shrewd move (particularly if you're worried about rising inflation over the medium term).

Here, we like BlackRock Gold & General, which is run by experienced manager Evy Hambro. Hambro, alongside his 16-strong team of gold experts, invests in gold mining equities and other precious metal shares.

Of course, the asset class is volatile so investors should expect fluctuations in performance. However, gold will provide genuine asset class diversification and we believe Hambro – with his focus on risk management and valuation relative to growth potential – is a capable pair of hands within this market area.

Darius McDermott is managing director of Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.

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