- We review ten of the best funds, trusts, and ETFs, including active and passive ones.
- Passive funds are popular because they track widely-follow indices such as the S&P 500 or FTSE 100 Index cheaply.
- We compare the pros and cons of five active funds and five passive ETFs.
2022 is a year investors would like to forget as soon as it’s over. War, inflation and bear markets. No fun at all.
In these turbulent times, portfolio returns can swing violently from month to month. To ameliorate this problem, investors sought out funds and trusts to stabilise returns and diversify their portfolio risks. But are funds really a place of safety? And which funds should investors turn to?
What to look for in a fund?
To answer these questions, an understanding of equity funds/trusts is required. For example,
- Holdings – most investment entities hold numerous financial instruments according to some pre-defined guidelines. Knowing what these guidelines are is essential. Parameters that dictate holdings include:
- Markets – where the fund is operating, eg is the fund a global, regional (eg, Asia Pacific, Europe, emerging markets) or single country (eg, UK, US, China, Japan, India etc)?
- Sectors – is the fund sourcing its ideas from a single industry, such as technology, financials, healthcare or mining?
- Themes – new investment themes give rise to dedicated funds (eg, clean energy, BRIC, electric automobiles)
- Performance – investment funds generally depend on the performance of its underlying holdings. Market cycles also play a role. In a bear market, most equity funds suffer. A single-sector fund will suffer more if the sector is experiencing a boom-bust cycle.
- Directional biased – most funds are long-biased, that is, funds tend to profit from rising prices.
- Borrowings – is the fund leverage? Some funds explicitly avoid this to make the returns less volatile.
Top 5 active equity funds and trusts
Active equity funds are funds that do not follow any equity index blindly. Managers of the fund will research and find the best stocks to hold for the fund according to the fund’s mandates. A few of the most popular ones are:
- Fundsmith Equity
- Scottish Mortgage Investment Trust (LSE:SMT)
- Polar Technology Investment Trust (LSE:PCT)
- Smithson Investment Trust (LSE:SSON)
- Blackrock World Mining Trust (LSE:BRWM)
1. Fundsmith Equity
Fundsmith Equity (www.fundsmith.co.uk) is one of the most popular active funds in the UK market. Founded by Terry Smith in 2010, the £22 billion fund has attracted plenty of attention over the past few years due to its clear and articulated guidelines (‘high quality businesses that can sustain a high return on operating capital employed‘, with owners’ manual here).
According to its public factsheet, the fund is mostly invested in the US (69%), followed by France (10%) and Denmark (9%). In other words, you can view it as a US-centric fund with some European stocks. The top 3 holdings (Nov 2022) of the fund are Microsoft (US:MSFT), Novo Nordisk and L’Oreal.
Over the years, the fund has achieved some significant returns (see below). It generated 20+ percent annual returns six times in the past decade – a fantastic run. No wonder investors like its approach.
Pros & Cons
- A global fund managed by an experienced manager with proven historical returns
- Fundsmith’s portfolio is geared towards large and liquid growth stocks, particularly in US
- Concentrated holdings (29) – meaning that returns may be more volatile
- Growth stocks may underperform value stocks during a bear market
2. Scottish Mortgage Investment Trust
The Scottish Mortgage IT (SMT) achieved lasting fame and market-beating returns by overweighting many US and China growth stocks in the last bull market. In March 2020 (annual report), for example, SMT listed Amazon (AMZN), Tesla (TSLA), Tencent and Alibaba (BABA) as its four top holdings worth 30% of the portfolio.
As we all know, Tesla soared 10x shortly after, while the other three also doubled. This concentration of superb stocks propelled SMT’s share price from £4.6 to £15 in 18 months.
However, investing in high-growth stocks works wonders only when the market is performing. As macro conditions tightened, these growth stocks are sagging. Tesla, for example, slumped 50% in the few months of 2022. Other underperforming tech stocks are too dragging the performance of SMT down significantly.
Pros and Cons
- Fund with long-term holdings in many blue-chip stocks – with a particular focus on sector leaders in tech and biotech
- Proven returns over the last bull cycle
- Growth stocks lead both ways – up and down
- SMT has multiple holdings in unquoted securities (eg, ByteDance, Stripe and NorthVolt). The value of these investments are less certain.
3. Polar Capital Technology Trust
Apart from Scottish Mortgage, Polar Capital Technology IT (PCT) is another popular choice for investors who wish to invest in an actively managed trust that specialises in just a sector, namely, technology.
According to PCT’s documents, the company selects 100 stocks from a universe of 4,000 using a rigorous methodology. PCT’s portfolio is tilted towards US and Canada (71%). This is natural because the tech sector in North America is the biggest. The region has the most opportunities. PCT’s top three holdings are Microsoft (MSFT), Apple (AAPL), and Google (GOOG).
PCT’s chart was bullish until early 2022. Now, the £2.2 billion fund looks like it is about to break lower beneath long-term support.
Pros and Cons
- Focussed on one booming sector. Fund outperforms market when sector booms; and underperforms during a cyclical downturn
- A bear market in tech stocks will lead to severe underperformance
- Cheaper alternative technology ETFs available (eg, Nasdaq 100)
4. Smithson Investment Trust
Smithson investment trust (LON:SSON) is a relative newcomer in the market. It was listed on the LSE in 2018 and has been attracting plenty of attention. An objective of the IT (factsheet) is “to invest in SMID sized companies that exhibit strong profitability that is sustainable over time and generate substantial cash flow that can be reinvested back into the business.”
Until November 2021, the Smithson was on a roll. Prices doubled from its launch price (see chart below). The past year, however, has been a rollercoaster period for SSON. The £2.3 billion fund invests in around 32 stocks with a median market cap of $6.7 billion. Two-fifth of its assets are listed in the US (42 percent) while 17.7 percent is in the UK. The top three holdings are Moncler, Recordati and Sabre.
Pros & Cons
- Covers fast-growing mid to small-cap stocks around the world
- Smaller stocks may produce higher returns over the long run.
- SSON complements other large-cap funds
- Smaller stocks could exhibit higher return volatility during a bear market
5. Blackrock World Mining Trust
Inflation is caused in large part by a sustained rise in commodity prices, such as energy, food and soft commodities. Companies that engage in the exploration, mining, and extraction of these commodities are benefiting massively from this commodity boom.
Blackrock World Mining IT (BRWM) is well-positioned to ride this boom. The goal of the fund (factsheet here) is provide a “diversified investment in mining and metal assets worldwide, actively managed with the objective of maximising total returns.“
The £1.2 billion fund has assets in major miners such as BHP, Vale, Glencore, Anglo American and First Quantum. The fund invests globally – since mining assets are distributed around the world. Within the commodity space, BRWM actively invests in diversified operations followed by copper (21.4%) and gold (12%). The fund has generally stayed resilient during 2022 despite the challenging market conditions.
Pros & Cons
- Rides the commodity boom by investing in miners and specialty materials company
- Hedge against the other bearish equity sectors such as consumer and tech
- Generous dividends – 6.5% in 2022
- Related guide – Compare the best fund platforms in the UK here
Top 5 passive equity funds
Now we turn to passive equity funds. Most of the funds below are exchange-trade funds (ETF) because they are cheaper, sufficiently diversified and easily tradeable on the market. These ETFs below cover a wide range of markets:
- Vanguard USA (VUSA)
- iShares FTSE 100 (ISF)
- Vanguard FTSE All World Equity (VWRL)
- iShares EM (EMIM)
- iShares Euro Stoxx 50 (EUE)
1. Vanguard USA ETF (VUSA)
The US stock market is the largest in the world. Any investor who wish to build a decent long-term portfolio needs to have some exposure to the American companies. NYSE and Nasdaq list some of the biggest corporate brand names in the world, such as Apple (AAPL), Google (GOOG) and Tesla (TSLA). One efficient way to buy into this dynamic market is via an ETF such as the Vanguard USA (see our full analysis of VUSA here).
The fund tracks the blue-chip S&P 500 Index and has about $32 billion under management (factsheet). The biggest sector in the fund is information technology, followed by healthcare and financials. Over the past decade, VUSA has performed well, rising from 16 to the peak of 68.
Pros & Cons
- Exposure to the largest economy in the world with many dynamic, fast-growing companies
- Holds 500+ Blue-chip Stocks – so the portfolio is diversified enough
- Tech boom is ending. Hence we are looking at a potential regression from this 10-year bull cycle. A bear market in this sector may drag the index lower.
For UK-based investors, some exposure to the FTSE 100 Index is perhaps desired since many of these LSE-listed companies derived their earnings internationally. Sterling weakness makes these foreign receipts increasingly valuable.
Over the past 12 months, the large-cap FTSE 100 has outperformed the domestic-focussed FTSE 250 by a significant margin. In fact, their return difference is the largest in nearly two decades, indicating that capital is fleeing UK companies and dashing into international ones (see below) :
Source: Financial Times (paywall)
The £11 billion fund (factsheet) is focussed on tracking the FTSE 100 Index – which, as its name implies, has 100 constituents including Shell (SHEL), AstraZeneca (AZN) and Unilever (ULVR). The three largest sectors are consumer staples, financials and energy.
Pros and Cons
- Exposure to the largest LSE-listed companies that have significant foreign earnings
- Exposure to energy and miners, which are benefitting from inflation
- Dividends is generous – distribution yield is 3.65%.
3. Vanguard FTSE All-World ETF (VWRL)
This ETF tracks the FTSE All-World Index, which, according to its factsheet covers “market-capitalisation weighted index representing the performance of the large and mid cap stocks from the FTSE Global Equity Index Series and covers 90-95% of the investable market“. The largest holding in the fund is Apple (US:AAPL), followed by Microsoft (US:MSFT) and Amazon (US:AMZN). The ETF has about $8.9 billion under management.
Pros & Cons
- Fund has about 3,700+ holdings in 50 countries. Its holding is as spread out as practically possible. A major fall in one company will not impact the fund too much.
- Concentrated in US and Europe – these two regions account for nearly 79% of the total fund. Arguably it is a developed world fund
- Returns will mimic general market indices, although VWRL’s 20% holdings in tech stocks may induce volatile price movements
Its performance since listing has been bullish since it rode the US tech boom:
iShares MSCI EM ETF is a fund that seeks to gain exposure to emerging markets. The ETF operates according to the MSCI EM Index and has about £15 billion under management. Some of the holdings including Taiwan Seminconductor (a stock that Warren Buffett bought into recently), Tencent and Samsung Electronics.
Pros & Cons
- Exposure to some of the economics swings of emerging markets (China/India)
- Exposure to large-, mid- and small-caps
- 3000+ holdings – this means EMIM’s returns will not exhibit massive swings. That said, its top 10 holdings accounting nearly 20 percent of the fund. This means that the performance of these stock impact the fund.
Its performance since listing in the LSE has been generally bullish but there were long periods of flat trading:
Europe is home to many well-known and competitive companies. German cars and French luxury brands are two outstanding sectors that have a global audience. Given UK’s close proximity to Europe, this market is important to the British economy and investors can take advantage of this by buying attractive Europe stocks.
Low-cost ETF such as iShare Euro Stoxx 50 ETF is one of the vehicles you can do that. This ETF tracks the Euro Stoxx 50 Index – the largest fifty stocks across the Eurozone. The 3.5 billion euros ETF (factsheet) has ASML, LVMH and Linde as its top 3 holdings.
Its performance since 2012 has been fairly steady but admittedly somewhat uninspiring.
Pros & Cons
- Exposure to large European stocks with global revenue stream
- Restricted to large caps only, hence missing out the mid- and small-cap
- Performance subdue over the past decade
- Want to invest in ETFs? See our guide to the best ETF platforms here