Bullish Bounce or Bearish Blues? Some Investment Ideas for the Small Investor (Part I)
Updated: Jun 28
As markets react wildly to the coronavirus crisis, investment management consultant MATTHEW FEARGRIEVE suggests some affordable investment ideas for a small personal portfolio, starting with UK, US and Global equities.
AT TIME OF WRITING (14 June 2020) the record-beating rally enjoyed by the S&P500, during which the US large-cap index regained all of its losses since the coronavirus crisis low of 23 March, has ended dramatically with the 40% recovery that it had, until a day or two ago enjoyed, now largely wiped out. The FTSE100 has reacted similarly. The sudden curtailment of what many on Wall Street and in the City considered would be a short-lived bear rally comes on news from the US that the Fed is deeply pessimistic about US economic prospects and the US Center for Disease Control (CDC) warning that the US, despite the country-wide relaxations of lockdowns, is "not out of the woods". Fears of a second wave of COVID19 infections continue to spook the markets.
So how should the small investor, with a small savings or pension plan, respond? Many retail investors panic-sold their investments back in March as news of the coronavirus market crash began to break. Some moved their equity positions into bonds. Others redeemed some or all of their shareholdings for cash. Some - perhaps wisely - did nothing, intending to sit tight and ride out the storm. But whether you're sitting on cash, a new portfolio or the same one you had before COVID reared its ugly head, what do you do now? Buy, sell or hold? How do you protect your investment portfolio from possible future stock market losses?
It is a fact that history teaches us that big market drops are often followed by a sudden (and ultimately short-lived) rise. This is known as a "bear rally", and is what we have seen in the last two weeks: the S&P500 and the FTSE100 going up and up, in spite of dire economic warnings from all quarters. The first thing an investor must learn (the easy way or the hard way) is that the markets and the ecomony are not the same thing. There is a disconnect between them, one that has been particularly pronounced recently as markets bullishly rose in apparent disregard of the bleak prospects for our national and global economies.
The bear rally of the last two weeks has sucked in many investors, large and small, who worried that they were being left behind. Many investment professionals on Wall Street and in the City bought shares. Others were more mindful of pessimistic macro economic data, and chose not to buy. It is not possible at this time to see which camp will do best. But we do know that the US bear rally has now been extensively curtailed, following the market drops of June 10, 11 and 12.
The uncertainty and concern about further market losses - maybe a further global market crash - are profound. Nevertheless, we now take a deep breath and steel ourselves to suggest some reasonably-priced investments that have had good historic returns and which - though by no means COVID-proof (no investment can claim to be that) - would be compatible with the retail investor's aim of investing in an index-beating or index-tracking return at a reasonable cost.
Our objective throughout is to identify managers who have delivered returns that have beaten or at least tracked the markets over the previous five year, with investment products that have an OCF (the "ongoing charges figure": broadly speaking the annual fee you pay the manager) of less than 1.00% per year (we think that any fee greater than 1.00% per year is too high). We divide them into two groups: actively managed investments and passive investments (index trackers). We suggest an active fund for you and couple it with a passive one, so you have both sides of the coin - active/passive- covered.
Here we will look mainly at large-cap equity (shares) investment strategies in the UK (FTSE100), US (S&P500) and globally. We provide click-links to the manager's current factsheets, so you can see their portfolios, performance and fees for yourself. We won't parrot the data here, because it changes frequently and we want you to access the most up-to-date fund information straight from the horse's mouth. Where the click-link takes you to a factsheet that has not been produced by the manager, it's because no cookie-free link to the manager's website is possible. That shouldn't stop you from visiting their website yourself, though, when checking out these products.
Note: the OCFs mentioned below, whilst taken from the funds' latest (June 2020) available factsheets, do not include transactional charges. You should look at the factsheets to ascertain the total cost of investment.
A popular actively-managed investment fund focused mainly on UK large-cap equities is LF Lindsell Train UK Equity Fund. Nick Train is a "star" manager (no, not like Neil Woodford was touted to be) with a proven track record of delivering returns in excess of the index. This fund is focused mainly on UK large-cap equities (Unilever, Diageo, Burberry, etc), although the manager has the discretion to invest in non-UK equities. The fund is actively managed and comes with an attractive (for an actively managed fund, that is) OCF of 0.65%. Discounts on this fee are offered by some investment supermarkets like Fidelity.
A passively-managed stablemate to this fund could be the Royal London UK All Share Tracker Z Fund. The fund tracks the FTSE All Share Index (giving you proxy access to large- and mid- cap UK listed companies), has a reasonable positive correlation between its 5-year performance and the index's, and comes with an OCF of 0.15%.
We opened this article by saying that the S&P500 bear rally had just petered out, and that the economic prospects for the US are bleak. But you need some exposure in your portfolio to US large-cap equities (that's just the way it is) and so our actively-managed fund suggestion is the Baillie Gifford American Fund. The fund was named Money Observer's Best North American Fund in 2018 and highly commended in 2019. It targets a modest annual return of 1.5% more than the S&P 500 over rolling five-year periods, and has been the top-performing fund in this sector over three and five years. It is invested in US large-cap stocks like Amazon, Tesla and Netflix.
The fund is growth-oriented, so you should be prepared for setbacks in periods of market stress. Like now. And anyway, value stocks are looking distinctly peaky right now. The fund was one of the weakest among its peer group in the latter part of 2018, when the US market had a rocky ride, and struggled again during 2019, when its growth style suffered what appeared to be a short-term setback. That said, a glance at the fund-versus-index graphic shows a decent performance in excess of the benchmark index (S&P500) and this comes with an attractive active-management OCF of 0.52%.
An OCF of 0.52% isn't at all bad for an actively-managed fund that has a track record of indiex-beating returns. But what about a passively-managed counterpart for your portfolio? Have a look at the UBS S&P500 Index Fund. This fund has a good 5 year record of tracking the index and has a low-impact OCF of 0.09%. For that price, you can't really go wrong. An alternative product would be HSBC S&P500 UCITS ETF, but with a higher OCF of 0.12% and a performance graph that tracked the index a little less well, we preferred the UBS option.
For proxy exposure to a basket of large-cap stocks in the world's developed countries (yes, there will be some overlap here with your UK- and US- focused funds), we are going to suggest two actively-managed funds, one with (for our taste) rather a high OCF but impressive performance, the other costing you less but still delivering decent, index-beating returns.
Expensive one first. We are hardly alone in liking Scottish Mortgage Investment Trust. This fund is managed by Baillie Gifford and is very popular, with good reason. Just look at the separation on the performance chart between the index (FTSE All World), the fund's peer group and the fund. And look at how it has coped with the COVID market crash in March. Our only scruple wit this fund is the naughty way its advertises its OCF as 0.37%, whereas when you add on the other charges disclosed in the Key Information Document it turns out that the annual cost to you your investment in this product is closer to 0.86%. Still, given the fund's 5 year (including COVID) returns and its popularity, it is hard to resist a punt.
What about the cheaper one? If you have more self-control than we have, you might be attracted by an alternative, the Rathbone Global Opportunities Fund., delivering similar (albeit slightly inferior) 5-year returns to Scottish Mortgage Investment Trust, but with an appreciably lower OCF: 0.52%.
When it comes to large-cap global equities, we quite like the look of Terry Smith's Fundsmith Equity Fund, but with an OCF of 1.05% it falls foul of our self-imposed rule of paying less than 1% for an actively-managed fund. And its historic 5-year returns, whilst attractive, don't tempt us to break this rule.
Now for a passively-managed coupling for your global equities portfolio. We like the Fidelity Index World Fund. This Morningstar rated (four stars), index-tracking fund has delivered index-beating returns over the past 5 years, and for an OCF of just 0.12%. An alternative could be the Legal & General International Index Trust which is currently cheaper to buy (GBP1.24 compared to GBP1.99 for the Fidelity fund) and has marginally better returns over the last 5 years. It has a slightly higher OCF (0.13%) than the Fidelity fund. Either fund is a worthy passively-managed candidate for a global large-cap play. You might also consider the BlackRock Overseas Equity Fund I as a third passive option.
We have suggested, for your savings or pension (including ISA and SIPP) portfolio, some low-cost investment funds (actively and passively managed) with reasonable historic returns in the key sectors (or "asset classes") of UK, US and Global equities. In the next part of this article we will suggest some investments in other sectors, including Europe ex-UK, Japan, Asia-Pacific ex-Japan and Emerging Markets. Check back here for this, or message us to subscribe to this blog.
Important information: the views expressed in this article are opinion only, and are not intended to be relied upon as financial advice or treated as a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.