For those investing £10,000:
I would select 2-3 good quality managed funds. Some factors I look at when looking at which funds to invest in include:
1) Cost: annual management charge, initial charges and any performance fees. Most good quality managed funds no longer charge performance fees. Some charge an initial fee of a certain percentage of your investment, however many online brokers reduce this to zero these days. Over many years a high annual management charge can drastically affect the performance of your investment. Ideally, look for charges no more than 1%.
2) Management: Is the fund manager well regarded, and do they invest their own personal investments in the fund. It’s a good sign if the manager’s wealth is tied up in the fund! They are fully incentivised.
3) Past performance: How has the fund performed in the past, has it been consistent, were there any large negative periods of poor performance. Past performance does not determine future performance, but it is a good indication of how steady its performance has been and how it has performed relative to peers.
4) What is the funds remit: is it a growth fund, a value fund, a smallcap fund, a midcap fund, are they focused on US stocks, UK stocks, or emerging markets stocks. There are so many different types of funds. Hopefully the resources on this blog can help educate you on the different types.
I own funds across all of those types, but for an initial £10,000 investment, I would start with high quality, reasonably diverse, developed market funds. These are funds that I would choose, some of which I still own:
- Fundsmith Equity Fund T Class Acc (Ticker: FUEQUI)
This is a top quality global fund run by Terry Smith – look him up. The fund has strict criteria when deciding which companies to keep in the fund. These criteria aim to ensure that the Company invests in:
- high quality businesses that can sustain a high return on operating capital employed;
- businesses whose advantages are difficult to replicate;
- businesses which do not require significant leverage to generate returns;
- businesses with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return;
- businesses that are resilient to change, particularly technological innovation;
- businesses whose valuation is considered by the Company to be attractive.
These strict criteria significantly limits the number of potential investments for the portfolio. It is envisaged that the investment portfolio will be concentrated, generally comprising between 20 and 30 stocks.
To me, that is a decent number of stocks and a very high quality list of criteria.
It is currently comprised of 34.5% consumer staples, 23.8% technology, 22.7% healthcare.
Top holdings: Microsoft, Philip Morris, Stryker, Imperial Brands, and Amadeus.
Past 5 year returns have been very good: 8.4% (2011), 12.5% (2012), 25.3% (2013), 23.3% (2014), 15.7% (2015). That’s a 200% return over 5 years!
Annual management charge: 1%
I am confident that holding this fund for a long period of time will reap excellent returns. So much so, this is my biggest personal fund investment.
2. Woodford Equity Income fund
Neil Woodford manages this equity income fund. It is comprised of 109 holdings, mainly UK based highly cash generative companies. The fund is on a yield of 3.5% and is currently comprised of: Pharmaceuticals and Biotech 29%, Tobacco 17%, Financial Services 11%. There are many large high dividend paying companies, hence the decent yield, but also some early stage high growth companies like Imperial Innovations which is the spin off from Imperial college London. As the fund was launched in 2014, it has little to show so far in terms of past performance. However, Neil Woodford is a veteren investor, known for running the Invesco Perpetual High Income fund for 26 years where he turned an investment of £10,000 into £250,000, an annualised return of 13%. An annual return of 13% over 26 years is a fantastic return by any measure and far beyond the return of the FTSE100 index or S&P500.
Importantly, he managed to stay away from technology stocks going into the dotcom crash, and away from the banks going into the 2008 financial crisis.
Top holdings: Imperial Tobacco, AstraZeneca, Glaxosmithkline, BAT, L&G, and Roche.
Annual Management Charge: 0.6% from leading online brokers
With the fund manager’s formidable track record, it gives some confidence that the fund is in safe steady hands.
3. Lindsell Train Global Equity Fund
Lindsell Train Global Equity is jointly managed by company founders Michael Lindsell and Nick Train, supported by James Bullock. It was launched in 2011 and the managers aim to achieve its objective of long term income and capital growth by constructing a concentrated portfolio of ‘exceptional’ companies. It holds approximately 20-35 holdings. The managers’ focus is on those businesses they believe have truly sustainable business models and/or established brands. In building the portfolio, they look for companies demonstrating long-term durability in cash and profit generation.
The managers point out that one of their key business principles is to treat investors’ capital as they do their own (indeed they invest their own money in their funds). They follow four investment principles in constructing and managing portfolios: investors undervalue durable, cash-generative business franchises; concentration can reduce risk; transaction costs are a ‘tax’ on returns; and dividends matter even more than you think.
At the heart of the process is their conviction that inefficiencies exist in the valuation of exceptional quoted companies. They believe that durable, cash-generative franchises are rare and often undervalued. Once they have committed to a company they are extremely reluctant to sell it, except on a significant breach of their valuation target.
The top 3 sectors in the fund are: 23% Beverages, 17% Personal Goods, 15% Media.
The main countries are: 34% USA, 26% UK, 24% Japan.
Top 5 holdings are: Diageo, Unilever, Heineken, Nintendo, and LSE
Annual Management Charge: 0.76% from leading online brokers
With a fantastic investment philosophy that I strongly believe in, hand picked select group of strong companies and balanced exposure across 3 solid countries, Lindsell Train are worth investing in.