Mick Gilligan,head of research at Killik & Co.tells us what he'd put in his Isa now.
Over the last year, equity markets have been driven by the 'risk-on' trade, with more cyclical stocks being bought. However, with less of a tailwind behind them, we now think the markets will become much more discerning. So we have selected four Isa-eligible funds that are likely to do well in a less gung-ho environment.
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This fund targets long-term growth by investing in a concentrated portfolio of the UK equities of companies of all sizes. Fund manager Richard Penny takes an unconstrained approach with regards to economic sectors and employs a bottom-up stock-picking strategy. He chooses the 15 to 45 stocks he believes will be the best performers out of a pool of around 3,000.
As Legal & General is one of the largest managers of UK equities in the country, the management team has excellent access to the company's senior staff, which undoubtedly gives it a competitive edge. Company selection also tends towards UK-listed firms with significant exposure to overseas earnings. That's something we like.
The fund's concentrated nature (the top ten holdings represent more than 40% of its value) and its bias towards smaller companies produces a different return profile from the FTSE All-Share index. It's for this reason that its outstanding performance has been maintained since it launched in 2005, making it one of the top-performing equity growth funds. It provides investors with access to several smallcap companies also favoured by our own small-cap specialist (such as Avanti Communications, Xaar and Iomart). It is structured as a unit trust and is eligible to be included in an Isa.
2. Investec UK Smaller Companies Fund
This fund aims to achieve long-term capital growth primarily through investment in equities issued by UK smaller companies. The fund, managed by Philip Rodrigs, is one of the most consistent performers in the IMA UK Small Cap sector. It is ranked first quartile over one, three and five years, having also outperformed its benchmark and its peers in each of the last nine consecutive calendar years.
We believe this success and consistency is due in large part to the investment philosophy employed since May 2000, which focuses on four key factors: strategy, value, dynamics and technicals. Taken together, these four areas of focus have seen the fund producing high but stable returns. This approach also tends to identify attractively valued, high-quality companies with improving operating performance. We believe a well-selected and skilfully managed portfolio of smaller companies should deliver attractive returns over the longer term. So we expect this fund to continue its longterm record of outperformance.
This fund aims to provide income with potential for capital growth primarily through investments in UK companies' equity and equity-related securities. An option strategy generates additional income. Thomas See, responsible for the day-to-day running of the fund, has over 20 years' experience of structuring returns and derivatives. The equity portfolio is almost exclusively composed of FTSE 350 Index constituents.
The overall yield target is around 7%, although this isn't guaranteed. The fund's performance (+8.8%) has lagged the Morningstar UK Equity Income sector (+13.7%) over the last six months. However, its performance since launch in 2006 is impressive a total return of 30.3%, compared to 11.6% from the sector. The fund's specialist value approach looks for stocks that are lowly valued relative to their intrinsic value, able to grow their earnings over time, with a strong balance sheet and an ability to convert profit into dividends. The fund has delivered a high level of income every year since launch, despite extreme market gyrations in recent years. We believe it remains well positioned to continue generating a high level of income and attractive total returns over the longer term.
4. Veritas Global Equity Income Fund
This fund is our preferred vehicle for those investors seeking to participate in global equity growth while also requiring an income stream. Individual investments are made on the basis of bottom-up analysis.
Managers Charles Richardson and Andrew Headley often identify investment ideas as plays on a particular theme, although each investment is analysed on the basis of its business model, competitive advantages, management quality and various quantitative factors. Their strategy targets cash-generative companies and places them in a portfolio of 25 to 40 stocks. Over the past five years the fund has generated 64.13% for investors, far outperforming the FTSE World Index's 7.14% return. The prospective yield currently stands at 4.3%. The fund has outperformed all UK income funds by 17% since it launched and even the biggest loss it made was a third lower than any similar UK fund.
The managers' significant personal investment in the fund should provide additional comfort for investors. Above all, we continue to like the theme-driven investment style, which is always underpinned by thorough fundamental analysis.
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