Global markets appear to be going through a shift from growth into value, leaving many investors stuck with a decision on which side of the fence to land on.
Growth stocks – or those that are expected to grow at faster rate than the market average – have led the market over much of the past decade, while value investing – or looking for unloved companies that appear ‘cheap’ – has underperformed.
However, value stocks are rallying as part of the ‘re-opening trade’, as they tend to do better in times of strong economic growth. Growth stocks, on the other hand, tend to struggle in these conditions and have fallen behind in recent months.
But it is never certain how long a market rotation will last for, so with this in mind Trustnet asked several fund pickers which funds they recommend for investors who want take the middle road between growth and value investing.
Franklin UK Managers’ Focus
The first pick comes from Gill Hutchison, research director and co-founder of the Adviser Centre, who recommended the Franklin UK Managers Focus fund.
The fund is run in a “collegiate” manner, with five Franklin managers contributing their top investment ideas from across the market cap spectrum, a system Hutchison called “unique” and means investors can benefit from the ideas and oversight of several experienced managers.
Franklin UK Managers’ Focus is divided between four managers with another manager overseeing the entire portfolio construction.
“Each part is invested in 10 of their best ideas, with the exception of the small-cap portion, which can be invested in up to 20 names,” Hutchison said.
Veteran UK manager Colin Morton runs the large-cap portion and Ben Russon also has a large-cap bias in his stock selection, while
Richard Bullas focuses on the mid-cap portion and Dan Green manages small-cap selection.
The whole portfolio is overseen by Mark Hall.
“With representation from across the market-cap range, the fund is naturally exposed to both value and growth names, with the focus upon robust businesses with strong balance sheets an overriding feature,” Hutchinson said.
“Given its permanent bias to mid- and small-caps compared to the broad index, the fund’s risk/return outcome is influenced by sentiment towards lower-cap stocks, but with the team investing with a healthy dose of realism, the fund is expected to tread a relatively steady path compared to other all-cap offerings.”
Over five years the fund has made a total return of 43.31 per cent, outperforming both the IA UK All Companies sector (39.36 per cent) and the FTSE ALL Share benchmark (37.74 per cent).
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Holding an FE fundinfo Crown rating of four, Franklin UK Managers’ Focus has an ongoing charges figure (OCF) of 0.83 per cent.
F&C Investment Trust
Paul Niven’s F&C Investment Trust could be an option for investors wanting a more cautious holding, according to interactive investor fund analyst Teodor Dilov.
The £4.2bn trust has a large-cap bias and invests in a “healthy mix” of defensive, cyclical and sensitive areas of the market, which Dilov said should help provide capital protection in periods of market stress and potential upside in rising markets.
F&C Investment Trust has been managed by Niven since 2014 (although it has a long history before this, being the world’s first investment trust) and invests in global equities. It is also able to invest in unlisted securities and private equity.
Over five years it has underperformed its average IT Global peer, returning 100.11 per cent, but it has outperformed its FTSE All World Benchmark.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
The trust has an OCF OF 0.63 per cent and is yielding 0.63 per cent.
R&M UK Equity Income
The next pick is the R&M UK Equity Income fund, which Ben Yearsley, co-founder and director of Fairview Investing, thinks will serve investors better over the economic cycle.
Yearsley said: “River & Mercantile UK Equity Income is one fund that does combine growth and value.”
FE fundinfo Alpha Manager Dan Hanbury splits the portfolio selection into four ‘buckets’: growth, quality, recovery and asset backed.
“The latter two are considered more of a value or cyclical play,” Yearsley added.
Currently the fund is split at 50 per cent in quality stocks – which is the usual split – and 20 per cent in the recovery and asset backed buckets. The latter are where the main changes to the portfolio are made “depending on the opportunities around”, Yearsley said.
R&M UK Equity Income is in the top quartile returns of the IA UK Equity Income sector over the past five years thanks to a total return of 36.66 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
With a four FE fundinfo Crown rating, it has an OCF of 0.89 per cent and is yielding 3.34 per cent.
Fidelity European
“Whether to stick with a fund which has a growth bias or to consider one which is more value oriented has become a vexed question over recent months,” said John Monaghan, head of research at Square Mile Investment Consulting and Research.
Monaghan’s answer to that question is the £2.4bn Fidelity European fund, which he said is “a conservatively run strategy” that could be viewed as a safe middle ground between these two styles.
“This strategy could be likened to a lower risk alternative to a passive vehicle tracking the benchmark index, the MSCI Europe ex UK, with the potential to outperform in weaker, more volatile environments,” he said.
Monaghan added that due to the cautious nature of the fund it is likely to lag its peers during periods where risker assets are outperforming.
But he continued: “The mangers’ reputation as a safe pair of hands should reassure investors seeking steady returns from the region.”
Run by Samuel Morse and deputy manager Marcel Stotzel, the fund has outperformed over five years, making 79.66 per cent beating the MSCI Europe ex UK index 65.21 per cent and the IA Europe Excluding UK sector’s 62.55 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The five FE fundinfo Crown-rated Fidelity European fund has an OCF of 0.92 per cent and is yielding 1.53 per cent.
City of London Investment Trust
The penultimate pick is Janus Henderson’s £1.6bn City of London Investment Trust and was picked by AJ Bell analyst Laith Khalaf.
The trust is run with a conservative, bottom-up investment process focusing on quality stocks as well as value. This means the portfolio holds “bona fide growth stocks like Unilever and Diageo, as well as more cyclical companies like HSBC and Rio Tinto”, according to Khalaf.
Manager Job Curtis has run the trust for 30 years, looking for quality companies with strong balance sheets but are also reasonably priced to provide protection from downside risks.
The trust has underperformed against its benchmark and sector over five years, with a total return of 29.94 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
City of London has ongoing charges of 0.36 per cent and is yielding 5.05 per cent.
Threadneedle UK Equity Income
The final fund pick is Richard Colwell’s Threadneedle UK Equity Income fund, a portfolio which Jason Hollands of Tilney Investment Management Services said takes “a very pragmatic investment approach which is focused on total return rather than dividend yield per se and which does not have a dogmatic style bias either”.
This investment style “has helped it adapt to different phases of market-leadership and deliver strong long-term returns”, according to Hollands.
Threadneedle UK Equity Income’s primary focus is stock selection. Colwell looks to build a portfolio that includes a blend of core businesses with strong free cash flow generation and which have delivered high returns on equity combined with more contrarian special situations with recovery potential.
“Together this hybrid approach leads to a portfolio that blends both quality-growth and value stocks,” he said.
Making a total return of 37.74 per cent over the past five years, Threadneedle UK Equity Income has outperformed the IA UK Equity Income sector (26.05 per cent) but has underperformed its FTSE All Share benchmark (37.74 per cent).
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has an OCF of 0.82 per cent and is currently yielding 3.04 per cent.