CF Woodford Income Focus, Lazard Emerging Markets and Jupiter Absolute Return are among the funds that have just been added to the FE Invest Approved List, while offerings such as CF Woodford Equity Income and Aviva Strategic Bond have been removed. 
The FE Invest Approved List is rebalanced twice a year to reflect the preferred funds of the FE Invest team. In the latest changes, 13 funds were added to the list and nine have left, with the uncertain macroeconomic outlook meaning portfolio diversification and capital protection have been common themes.
Rob Gleeson (pictured), head of research at FE, said: “There was significant uncertainty at the time of our March review and unfortunately the last six months have provided only limited clarity.
“The UK remains poised on a knife edge, with every bit of good news being offset by a steady trickle of negative data. This is compounded by the uncertain nature of the Brexit negotiations and by the unpredictable trajectory of the Trump White House alongside rising geopolitical tension.
“It is difficult to make market predictions at the best of times, and in these conditions covering all bases is the wisest move. Diversification remains an investor’s best defence. The latest changes to our Approved List reflect the funds we believe are best at their respective strategies within each asset class – strategies being selected for their suitability in a wide range of scenarios, not just their short-term success.”
Performance of funds vs index since CF Woodford Income Focus’ launch
Source: FE Analytics
For UK investors, the biggest change is likely to be the removal of the CF Woodford Equity Income fund and the addition of CF Woodford Income Focus, which launched in April this year. Both portfolios are headed up by FE Alpha Manager Neil Woodford.
Although the two funds are run by the same manager, there are a number of differences. CF Woodford Equity Income has a decent chunk of its portfolio in innovative unlisted companies that meet Woodford’s aim to provide ‘patient capital’ while CF Woodford Income Focus only owns listed stocks, has clear mandate for income and offers more global exposure.
Explaining the rationale behind the switch, FE research manager Charles Younes said: “We believe the Focus fund to be better for income investors as it does not include a long tail of illiquid unlisted companies, which we believe are not consistent with the aims of an income-focused fund.”
This is only change to the FE Invest Approved List’s UK exposure. But one area that has seen a greater amount of churn is IA North America funds, where two have been added to the list and two have departed.
Former list members T.Rowe Price US Equity and Legg Mason Clearbridge US Large Cap Growth have been replaced with Artemis US Select and Baillie Gifford American. Younes said: “It is hard to find an active manager able to consistently beat the S&P 500.”
Artemis US Select has been on the FE Invest team’s watchlist for a number of years, as it previously owned one of manager Cormac Weldon’s funds when he was at Threadneedle. The Artemis fund is now approaching its three-year track record and Younes said it is a core US equity fund with a bias towards growth and tech stocks.
Performance of funds vs sector and index since Artemis US Select’s launch
Source: FE Analytics
Baillie Gifford American, on the other hand, is built around a more concentrated portfolio with a clear focus on technology companies. It tends to look different to most US equity funds, but also tends to be more volatile than its average peer.
Within global equities, two funds have been added to the list: Dodge & Cox Global Stock and Goldman Sachs Global CORE Equity Portfolio.
The Dodge & Cox fund has been added to the list as the FE Invest team were looking for a global fund that has a value approach to investing. Although value as a style has been out of favour for much of the recent past, the team expects this fund to be one that should perform well when market conditions change.
Goldman Sachs Global CORE Equity Portfolio caught the team’s eye because of its “innovative approach” and strong performance track record. The process behind the fund is quant-driven and uses artificial intelligence to extract information from unstructured data – such as voice, text and images – to identify high quality, well-run companies at attractive valuations.
One IA Global fund has been removed from the list – Newton Global Opportunities – after the FE Invest team were discouraged by poor stock picking over recent months.
Lazard Emerging Markets is one of the IA Global Emerging Markets funds brought onto the FE Invest Approved List as the team looks to diversify of exposure to this asset class. Emerging markets have underperformed for a number of years but a growing number of commentators tip them for a turnaround should market conditions shift back in favour of reflation.
“Currently, all funds on the shortlist are heavily focused on the emerging consumer story,” the FE Invest team said. “[Lazard Emerging Markets] offers a distinctive value approach and, although this strategy is not currently in favour, we believe it to be the best fund in this area.”
Henderson Emerging Markets Opportunities is another addition to the list that helps to broaden its emerging market exposure. This fund, which is managed by former First State Stewart man Glen Finegan, focuses on high-quality businesses.
Performance of funds vs sector and index since Finegan joined Janus Henderson
Source: FE Analytics
The Jupiter Absolute Return fund is another new member on the list, demonstrating the need for diversification and capital preservation in the current climate. This is a global long/short equity fund that puts a focus on short selling and has a track record of performing strongly when volatility ticks up, such as in 2015 and mid-2016.
Within the IA Sterling Strategic Bond sector, Allianz Strategic Bond has been added as it has a diversifying effect on the other bond funds already owned by the FE Invest team. The portfolio was taken over by former M&G bond manager Mike Riddell at the end of 2015.
Younes said: “Manager Mike Riddell’s willingness to make bold decisions to get the best returns has impressed us. The decision to maintain long duration in contrast to many of his peers is testament to this.”
Aviva Strategic Bond has been removed, however, owing to concerns that changes to the team at Aviva means it has less freedom to follow its strategy than it previously did.
In European equities, FP Argonaut European Alpha has been taken off the list after the FE Invest team lost conviction in its earnings momentum-based strategy. Lazard European Smaller Companies has won a place thanks to its strong record; the FE Invest team has been looking for a European smaller companies fund for some time.
Aside from the addition of CF Woodford Income Focus, there has been a number of other changes to the members of the IA Specialist sector making it onto the FE Invest Approved List.
BlackRock Natural Resources Growth & Income has been dropped on the back of slight concerns about high turnover in recent years. It has been replaced with Investec Enhanced Natural Resources as the FE Invest, which the FE Invest team thinks has a stronger and more robust risk management process.
“[Investec Enhanced Natural Resources] was removed from the shortlist some time ago when the team was experiencing high turnover, raising concerns,” the team’s analysts said. “Now the new team is settled we feel confident adding the fund back to the Approved List. The fund offers low risk exposure to commodity markets.”
Performance of funds over 5yrs
Source: FE Analytics
Investec Global Gold is another addition, following several clients asking for a gold fund to be added to the list; after researching the space, the FE Invest believe this to be the best fund offering exposure. The yellow metal has gone through several tough years but investors are increasingly turning to the perceived ‘safe haven’ in light of rising geopolitical tensions.
Finally, the Sarasin Food & Agriculture Opportunities fund has been introduced. “Manager Henry Boucher believes the performance of agriculture linked equities does not depend on commodity prices but on demand,” FE’s analysts said. “He tries to benefit from long-term trends like urbanisation, emerging demand, ageing population, diet changes and need to raise agricultural yields. The strategy has proven very successful.”
