What to buy, what to sell: how not to dilute your profits

published 6 July 2006

How not to dilute your profits, why vice pays, and why you should take a look at investment trusts.

Don't dilute your profits

A problem with most funds is they hold so many shares that their performance is dulled by diversification. If a portfolio holds 60 different shares, each one's performance can only have a limited effect on overall performance. This is why focus funds are currently in vogue, says Richard Dyson in The Mail on Sunday. Unlike your average fund, they tend to hold only 20-odd stocks so that a manager can really make his stockpicking count if he likes something, he can back it properly.

This strategy can pay off nicely. Invesco Perpetual's UK Aggressive fund holds only 20 to 30 stocks at any one time and is a "stellar performer", says Dyson. It has trebled unit-holders' money over three years. Another to keep an eye on is the F&C UK Opportunities fund, to be launched later this month. It will be managed by Phil Doel, who has abandoned his "highly successful" DWS UK Opportunities fund to take up his new position. The fund will hold only his "25 best UK ideas" and those ideas may well be excellent ones the DWS fund rose 91% in three years under Doel.

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Vice pays

Who'd be an ethical investor? asks Mark Atherton in The Times. It might be worthy, but there's an awful lot more money in vice.

The FTSE 100 has gained just 2.8% in the last five years, but over the same period tobacco stocks have more than trebled. And the drinks groups haven't done badly either: Enterprise Inns has returned 359% and SAB Miller 196%.

Then there is the aerospace and defence sector. Ethical investors wouldn't touch it, yet it has returned 45% over the past five years. Neil Woodford, manager of the Invesco Perpetual Income and High Income funds, knows all this and has no intention of coming over all ethical in his investing. Instead, he remains particularly keen on the tobacco sector. "Tobacco is an appealing product to invest in because the high level of demand is unlikely to fluctuate significantly," he told Atherton.

Take another look at investment trusts

Those who only invest in unit trusts should take a closer look at investment trusts when picking funds, says Richard Lander in The Sunday Telegraph. You'd be hard pressed to find a unit trust that charged a total expense ratio (TER) of less than 1.5%, but over half of the investment trusts available do just that. Better still, one in four investment trusts has a TER of below 1%. Indeed, the cheapest, Second Alliance (a global growth fund), charges a mere 0.33%.

Emma is a former digital journalist with more than 15 years of experience in national news in the UK and overseas. She was an assistant editor at MoneyWeek, covering property, funds, alternative investments and the share tips pages, then Emma moved on to The Daily Telegraph, first as a personal finance reporter and then as a business reporter.

Emma also worked as a finance correspondent for Ninemsn (Australia’s Channel 9 online) in Sydney, Australia for just over a year, and since then Emma has worked at Channel 4 News as a reporter and producer, and she spent more than 4 years at BBC online. At present Emma is a senior manager for content and thought leadership at PwC.