The standout mutual funds you should be looking at
The cult of the mutual fund manager has waned in recent years, as sceptical investors question whether actively-managed funds are really worth their high fees.
Surveys repeatedly show that three- quarters of fund managers fail to beat their benchmark index, despite charging high initial and annual management fees for attempting to do so.
The result is that more and more investors now opt for so-called passive investing, using index trackers and exchange traded funds (ETFs) to follow their chosen indexes regardless of whether they move up and down.
Passive funds have much lower charges, giving investors more of their returns, so generally this is a good trend.
However, there are times when it pays to be active. Some “star” fund managers are an exception to the rule, boasting a proven track record of beating their market over the longer run.
Tracker funds may be the right option for following established indexes such as the S&P 500 or FTSE 100, but do less well in specialist areas, such as smaller companies or emerging markets.
You can typically invest in them through a UAE-registered broker, an international platform or even direct from the fund manager, with no minimum limits for lump sums or regular monthly savings. Here are five of the best active mutual funds on the market today.
CF Lindsell Train UK Equity
The result of the Brexit referendum may have cast a shadow over the UK economy, but stock markets have proved surprisingly resilient.
The sharp drop in the value of the pound has boosted the value of UK companies’ overseas revenues once converted into sterling. Companies on the FTSE 100 generate three-quarters of their earnings outside the UK and the index has flown to around 7,000 since the referendum, near its all-time high. This also makes them cheaper for dollar-earning investors.
However, this must be offset against the fact that UK companies will now find importing raw materials more expensive, hitting margins. The economy could also take a hit if and when Article 50 is triggered to exit the EU.
Ashley Owen, head of investment strategies at AES International in Dubai, names CF Lindsell Train UK Equity as his preferred mutual fund for investors seeking exposure to the British economy.
The fund’s manager Nick Train (pictured) has assembled a concentrated portfolio of stocks in a limited number of sectors, which should generate market-beating growth providing he makes the right calls. “He has a bias towards mid-cap consumer branded goods, internet, media and software companies, and the financials and healthcare industries,” Mr Owen says.
The fund favours a buy and hold approach, so stock turnover is very low.
Over the past five years, the fund has delivered total growth of 124 per cent, according to trustnet.com. This is roughly double the UK All Companies index, which grew 70 per cent.
This is a UK-registered fund, but you can buy it through some UAE-registered independent financial advisers, typically those regulated in the UK. You can also buy through UK platforms.
Charges: There is a provision to charge but it is generally waived. The ongoing charge is 0.75 per cent a year.
Minimum investment: $500,000 but this is waived if you buy through approved platforms.
Legg Mason ClearBridge US Aggressive Growth
The US stock market has been one of the best performers over the past five years, more than doubling in value over that time.
Some fear it is now due for a correction, especially in the wake of Donald Trump’s shock election victory, so investors may want to wait until markets settle down.
However, everybody needs exposure to the world’s biggest economy and Mr Owen tips mutual fund Legg Mason US Aggressive Growth as the best actively-managed option.
As its name suggests, this fund lies at the riskier end of the scale, but the rewards have flowed. It has grown 120 per cent over the past five years, ahead of the US index as a whole, which returned 111 per cent.
Mr Owen says it is quite rare for an actively-managed fund to beat the US index, which is broad, diversified and heavily researched, and most investors should stick to low-cost trackers or ETFs.
The Legg Mason fund is a rare exception. “The fund’s joint managers Richard Freeman and Evan Bauman (pictured) have a combined 56 years of investment industry experience between them. They have a similar mindset to private equity investors, where they look to have a forensic knowledge of a company and invest for the long term, which leads to a very low turnover of positions.”
How to buy: Legg Mason does not directly offer funds for sale in the UAE but you can buy it through UAE-registered independent financial advisers.
Charges: There is no initial charge from the fund manager on purchases, but ongoing charges total 1.1 per cent a year. You may pay a fee if you purchase through an adviser or platform.
Minimum investment: initial investment is $1,000.
Global investment fund Fundsmith Equity has caught the eye of many investors after thrashing its benchmarks.
This five-star fund has grown 170 per cent over the past five years, according to trustnet.com, more than double the return on the average global growth fund, which is 73 per cent over the same period.
Patrick Connolly, a certified financial planner at UK-regulated Chase de Vere (pictured), says the fund was set up by Terry Smith in 2010, who remains the manager today. “His investment philosophy is simple but very effective. He only invests in good quality large companies which have repeatable earnings, he doesn’t overpay and then he does nothing, he just leaves them to grow.”
Just over 60 per cent of the fund is invested in the US, around a quarter in the UK, with further exposure to Spain, Finland, France and Switzerland. Top stock holdings include Microsoft, tobacco companies Philip Morris and Imperial Brands Group, PepsiCo and PayPal.
Mr Connolly adds: “Smith doesn’t try to time markets, trade frequently or panic and there are many sectors that he avoids entirely. He looks to buy companies that are today’s rather than tomorrow’s winners.” The result is a fund that should beat the market during the good times but provide better protection during the bad times.
How to buy: Although this is a UK-listed fund, non-UK residents, including those in the UAE, can invest. Fundsmith Equity is a UCITS offering, which means it can be marketed across international borders. You may also be able to buy it through advisers and platforms either in the UAE or your own country.
Charges: There is no initial charge but the UK fund imposes annual total annual charges of 1.08 per cent. Your adviser or platform may impose their own charges on top.
Minimum investment: £1,000 or monthly payments of £100.
Lazard Emerging Markets
Dan Dowding at Killik & Co picks out Lazard Emerging Markets, which aims to deliver long-term capital growth from investing in companies that are either based in emerging markets, or do significant business in these territories. “Fund manager James Donald (pictured) looks for companies with high or improving productivity that are trading at attractive valuations and have above average profit potential,” he says.
Some analysts are concerned about China’s economy, fearing a credit and property bubble, but Mr Dowding says these fears are reflected in today’s relatively low emerging market share valuations. “Measures such as cash flow, the price/earnings ratio and return on equity are close to the lowest level recorded.”
More than half of the fund is invested in the Asia-Pacific region, with smaller allocations in emerging Europe, Latin America, the Middle East and Africa.
Top company stocks include semiconductor manufacturer TSMC Taiwan, the China Construction Bank, Samsung, China Mobile, Banco do Brasil and Tata Consultancy Services.
Mr Dowding warns that emerging markets tend to be more volatile than developed countries such as the US, UK and Europe. “Corporate governance in emerging markets tends to be less robust than in developed regions. Political instability, volatile growth, capital controls, higher inflation and foreign exchange swings can all add to the uncertainty.”
Lazard Emerging Markets has returned 43.3 per cent the past five years in what has been over a volatile sector, against 38.7 per cent for the global market emerging markets index as a whole.
Over the past 12 months it is up a storming 48.3 per cent, against sector growth of 38.3 per cent.
How to buy: UAE residents can buy through a financial adviser, fund platform or from the fund manager, as this is a Dublin-domiciled Ucits fund.
Charges: There is no initial charge on purchases, but an annual management fee of 1 per cent. You may have to pay a fee if you purchase through an adviser or platform.
Minimum investment: There is no minimum; it is at the discretion of the fund manager. Buy through a platform/adviser and there is no minimum.
BlackRock Frontiers Investment Trust
If emerging markets aren’t exciting enough, you could always try investing in frontier markets instead.
Frontier markets look beyond the big four emerging markets of Brazil, Russia, India and China, collectively known as the Brics, to the next generation of developing global economies.
Goldman Sachs economist Jim O’Neill, who identified the Brics in 2001, has also named the “Next 11” to follow in their footsteps: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea and Vietnam.
These economies are at an earlier stage of development than the Brics, which makes them riskier, but potentially more rewarding.
Mr Dowding tips the award-winning fund BlackRock Frontiers Investment Trust as the best fund targeting this theme. It has delivered a storming performance over the past five years, growing 112 per cent against just 36 per cent growth on its benchmark emerging equities index.
Argentina, Pakistan, Romania, Bangladesh, Kazakhstan, Vietnam, Sri Lanka, Morocco, Ukraine and Kenya are currently its largest investment territories, and the fund also has exposure to Mena countries.
Mr Dowding says: “We rate portfolio manager Sam Vecht (pictured) and his team highly as they have a very strong long-term track record in this area. The trust also yields an attractive 3.5 per cent income.”
How to buy: An investment trust is a special type of mutual fund that is traded on the stock market like stocks and shares. It is listed in London and you can buy it through any online stockbroker, or through a fund platform or IFA.
Charges: There is no initial investment charge, although you may have to pay stamp duty as with any other share purchase, and platform dealing costs. The ongoing charge is 1.6 per cent a year, including a performance fee.
Minimum investment: None.
Tax position on mutual funds
Many living in the UAE are uncertain about their tax position when investing in mutual funds registered in other parts of the world.
With offshore funds, the position is fairly straightforward. There is no income tax on any dividends paid by the fund, and no capital gains tax (CGT) on any growth.
However, Dan Dowding at Killik & Co, says the picture can become more complicated for the internationally mobile. “Your income and capital gains could become liable for tax if you become resident in a taxable jurisdiction in the future.”
Given London’s role as an international financial hub, many of the most popular mutual funds are registered in the UK. Also, many expat Britons will continue to hold funds bought before they moved overseas.
Mr Dowding says there is still no CGT to pay on your fund growth even if the asset is held in a UK account, while you are resident in the UAE. “However, the dividends you receive may be liable for UK income tax.”
Some funds do not pay income but many do, in some cases yielding as much as 4 per cent a year.
Mr Dowding says you will have to go to the trouble of completing a UK tax return, although for most investors the bill should be low. “UK investors enjoy dividend allowance of £5,000 a year, and most will be safely under this. For example, Fundsmith Equity yields around 2 per cent a year, you would need to have £250,000 in this fund to be liable for income tax.”
However, if you have a large portfolio of funds you could still generate enough dividends to be liable for income tax.
Mr Dowding adds: “This could be a complicated area and we therefore always recommend speaking to a qualified tax adviser.”
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Updated: November 11, 2016 04:00 AM