Three passive funds that offer growth and safety

Each week, a professional investor tells us where he’d put his money. This week: Peter Sleep of Seven Investment Management (7IM) picks his top three passive funds.

My colleague Justin Urquhart-Stewart reckons there could be no-one better to write about passive funds than somebody called Peter Sleep. A psychiatrist would have a field day writing their PhD on the subject. It is called “nominative determinism” – in plain English, your name suggests your job.

Whatever it is called, I am grateful to MoneyWeek for giving me the opportunity to pick my top three passive funds. Investors all have different financial backgrounds, risk profiles and preferences, so my suggestions come with a strong “each to their own” caveat. I am not a financial adviser, after all.

However, I shall pick a broadly diversified equity fund, which could be at the core of most investors’ Sipp or Isa, a broad bond fund, which perhaps more conservative investors might fund useful, and one other income-providing passive fund, for those who want a bit of cash flow from their investments.

Small caps that pack a punch

First up is Vanguard Global Small-Cap Index Fund (020-3753 5600), which has an ongoing charge of 0.38%. This fund buys a stake in more than 4,300 smaller firms worldwide with a bias towards the US and Japan. Buying smaller companies is a slightly riskier way of investing, but I think smaller firms should show better growth in the longer term than larger ones. We call it the law of large numbers – small things grow faster than bigger things, which tend to be closer to maturity.

I wouldn’t say that there are many household names in the fund, but there are a few, such as Grubhub in the US, the UK’s Rightmove and, intriguingly, Canopy Growth Corp, the cannabis company from Canada, where cannabis has just been legalised.

Rest easy with global bonds

The next fund is an ETF, the iShares Global Aggregate Bond UCITS ETF (LSE: AGBP), hedged into sterling, which costs 0.10%. This fund invests in bonds from all over the world issued by governments and by investment-grade companies; its top-ten holdings comprise US and Japanese paper. There is a strong bias towards the US, but all the currency risk is hedged away for you. It will never make you rich, with a current yield of only 1%, but, similarly, it is one you can rest easy with when things get tough in global markets.

Steady-Eddy infrastructure stocks

Finally, I would like to add a fund out of left field. It is the Legal & General Infrastructure Index Fund (020-3124 2000), which costs around 0.45%. This invests in infrastructure companies from all over the world, so you have “steady eddy”outfits such as railways and power companies, many of whom are regulated and boast dependable annuity-like profits. The larger holdings include Duke Energy and Canadian National Railway.

These companies’ stocks tend to be higher-yielding and less volatile than most equities. The yield on the fund is a healthy 3%. So there you have my personal Sleep therapy. My preference would be to have a bias towards equity funds – especially if you are still working – but you can temper the potential downside of equities with a bond fund, or, to a lesser extent, an infrastructure fund.