Funds for a world of no growth
Which funds offer the best chance of growth in tough times? Rosie Taylor investigates
The slowdown in China, an apparent peak in corporate profits in America and feeble growth in the eurozone might encourage investors to think they inhabit a world of zero growth. But even in these straitened times, there are glimmers of hope for those willing to shop around for returns.
Laith Khalaf, of fund shop Hargreaves Lansdown, said: “Zero growth is an aggregate figure – it doesn’t mean no companies will do well.” The key to decent returns was picking an “active” fund – run by a human stock-picker rather than a computer – that carefully chooses to invest only in the types of company that have potential for growth even when economies are stagnant.
“If you have an active manager who has consistently proved their worth, they can pick out companies that will do well even in zero growth,” he said. “Taking an active approach is probably worthwhile – there could be double-digit annual returns for investors from some companies. But you need someone to actively pick out the companies that are going to do well in this environment, or else you are just going to trundle along.”
Funds that focus on a selection of hand-picked businesses have the best potential, he said, naming as one example Lindsell Train Global Equity, which has a concentrated portfolio of quality companies.
He also recommended Woodford Equity Income as a fund that fits the bill. It is managed by Neil Woodford, one of the country’s best-performing stock-pickers. Here we look at some of the ways to achieve investment growth in a static world.
Small businesses are big
Funds that focus on smaller or unique companies are most likely to offer a chance of growth, according to Jason Hollands, of Tilney Bestinvest, another fund shop. “The types of business that can succeed will have high barriers to competition and strong pricing power, rather than being forced into destructive price wars. They will often have business models based on recurring earnings streams rather than ones that rely on occasional big transactions.”
One fund that selects this type of business is Liontrust Special Situations, managed by Anthony Cross and Julian Fosh. In their search for high-quality growth businesses, size does not matter but the firms need unique attributes such as ownership of intellectual property or
‘Look for funds that tap into changing China and businesses driven by consumers’
difficult-to-replicate distribution networks – characteristics that make them able to sustain earnings growth in good times and bad. One example in the portfolio is Emis Group, which provides software and data management to health authorities.
Maike Currie, of Fidelity Personal Investing, suggested growth could come from funds with a specific focus on small firms. “Because these companies are more nimble, they are in a better situation to offer growth,” she said. Her top picks were MFM Slater Growth, managed by Mark Slater, and Miton UK Smaller Companies, managed by Gervais Williams and Martin Turner. Small firms could also offer the chance of growth because they were often less affected by the global economy, Mr Khalaf said. He named Marlborough UK Micro Cap Growth, managed by Giles Hargreave, as a fund that gave priority to growth driven by small businesses with the potential to become much bigger.
Changing China
China’s rate of economic expansion fell from 10.6pc in 2010 to around 6.7pc this year, the World Bank estimates. Manufacturing is bearing the brunt of the slowdown but Chinese wages are rising and its middle class is expanding – providing investment prospects in its consumer market. “As China’s economy changes from manufacturing to services there is an opportunity there,” Ms Currie said. “Look for funds that tap into changing China and middle-class, consumer-driven businesses.” One is Henderson China Opportunities, while another arm of Ms Currie’s company offers the Fidelity China Consumer fund.
Heavyweight brands
With the US economy picking up despite the apparent peak in companies’ profitability, and the market’s high exposure to growth sectors such as technology and health, the US is still a favourite for growth opportunities. Ms Currie’s top picks include the BlackRock US Opportunities fund. Funds whose portfolios include US-based global brands with high customer loyalty are likely to weather most storms, though they may not see phenomenal growth, Mr Hollands added.
He picked out Fundsmith Equity, managed by City heavyweight Terry Smith. “Mr Smith hunts globally for a concentrated portfolio of typically large, quality growth companies able to sustain high rates of return on capital,” he said. “The portfolio is littered with big brands, including Dr Pepper Snapple, PepsiCo, Imperial Tobacco and Microsoft, rather than more cyclical names.”
Mr Hollands also suggested turning to funds that invest in infrastructure projects, such as businesses involved in schools, prisons, roads, railways and airports.
“These projects are very long-term in nature and typically driven by state policy priorities, so are less exposed to the ups and downs of the economic cycle,” he said. “Contracts on infrastructure projects typically provide for an annual adjustment based on inflation which could be useful if we start to see a pickup after a period of incredibly low price rises.” His favoured is Lazard Global Listed Infrastructure Equity.
Investment trusts
Investment trusts are structured differently from ordinary funds but try to achieve the same end: produce a portfolio of shares that will do better than the stock market.
Mr Khalaf recommended investment trusts that provide an income. “You will get some dividends to tide you over while you are waiting for growth to come through.”
He picked out Edinburgh Investment Trust, run by Mark Barnett, a protégé of Neil Woodford with a similar investment style. Other favourites include Finsbury Growth & Income, managed by Nick Train of Lindsell Train, and City of London, which this year increased its dividend payment for the 50th consecutive year.
What about trackers?
Tracker funds follow a set index, such as the FTSE 100, and are ideal for those who want to avoid the higher fees charged by actively managed funds. But at a time of negligible growth, following the market is likely to lead to limited returns. Finding growth in the current climate is all about being selective, said Mr Hollands.
“There is a strong case for investing in funds that focus on companies that have very unique characteristics which make them resilient and less sensitive to the overall ups and downs of the economic cycle,” he said. “For investors that means being superselective and not just buying the overall market through investments such as trackers.”
Mr Khalaf agreed. “You could put your money in a tracker but if you are expecting zero growth you may not get anything back,” he warned.