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10 wealth managers reveal their star ISA fund picks

Two weeks into the new ISA season, we asked our readers to name their favoured funds

Miles Ashworth, Creechurch Capital, Douglas

Carmignac – Portfolio Euro-entrepreneurs

Firstly, we admire Carmignac’s ability to blend a strong bottom-up approach and high conviction top-down macro-economic analysis, within a flexible risk management framework.

The Euro-entrepreneurs strategy is a European equity small and mid-cap fund which provides an interesting opportunity set over a medium to long-term investment horizon given the improving dynamics within the European economy. That being said we are cognisant of the risks to our positive outlook including key European elections and upcoming Brexit negotiations, which have the potential to significantly impact sentiment and asset prices in the short-term.

Therefore a stock selection process with a focus on asymmetric risk/return profiles, with clear catalysts for entry and exit, is preferable to a pure beta strategy with less focus on downside risk. A value driven investment style (with a margin of safety), dynamic exposure framework and sophisticated risk management/hedging techniques, provide a flexible tool-kit to protect capital in difficult market conditions.

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Miles Ashworth, Creechurch Capital, Douglas

Carmignac – Portfolio Euro-entrepreneurs

Firstly, we admire Carmignac’s ability to blend a strong bottom-up approach and high conviction top-down macro-economic analysis, within a flexible risk management framework.

The Euro-entrepreneurs strategy is a European equity small and mid-cap fund which provides an interesting opportunity set over a medium to long-term investment horizon given the improving dynamics within the European economy. That being said we are cognisant of the risks to our positive outlook including key European elections and upcoming Brexit negotiations, which have the potential to significantly impact sentiment and asset prices in the short-term.

Therefore a stock selection process with a focus on asymmetric risk/return profiles, with clear catalysts for entry and exit, is preferable to a pure beta strategy with less focus on downside risk. A value driven investment style (with a margin of safety), dynamic exposure framework and sophisticated risk management/hedging techniques, provide a flexible tool-kit to protect capital in difficult market conditions.

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Colin Mcinnes, Quartet Capital Partners, Richmond

GAM Star Credit Opportunities

Dependent upon one’s risk tolerance our two picks for this year’s ISA are; on the more aggressive side the Lyxor JPX-Nikkei 400 (USD hedged) ETF or alternatively on the more conservative side the GAM Star Credit Opportunities fund.

Given elevated valuations in many developed markets we still think decent money can be made in Japan. Valuations are reasonable, company balance sheets are in good shape with much lower levels of debt than competitors in other regions of the world and share buybacks are rising, indicating improved corporate governance.

Alternatively, the GAM Fund has significant exposure to the debt of financials. As interest rates slowly rise the profitability of financials will improve, reducing default risk. At the same time half of the portfolio is invested in FRNs so not sensitive to interest rate rises. The Fund pays out a yield close to 5% which is attractive.

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Jonathan Moyes, Whitechurch Securities, Bristol

Downing UK Micro Cap Growth

My top ISA fund pick this year is the Downing UK Micro Cap Growth fund. For longer term investors who have the time horizon required to take the level of risk associated with concentrated micro-cap investing, I believe this represents a good choice. Judith Mackenzie who heads up the fund has a wealth of experience investing within small AIM listed companies and has an enviable track record of adding value in this space.

The fund also represents what I see as the future of active fund management; managing small, capacity constrained, high conviction funds with an activist approach. This is essentially private equity for the public markets.

On the macro front, the UK economy has beaten almost all doom-laden expectations, and yet consensus appears to continue to favour safety-first high quality, globally diversified earnings streams. With an open and entrepreneurial approach to Brexit negotiations, I believe UK companies will soon look enticing for overseas investors.

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James Barber, Epoch Wealth Management, Bath

Odey Absolute Return

In the second half of 2016 the strategy experienced the largest drawdown since launch. Having been an investor for most of the fund's life, this isn’t the first time the strategy has seen a tough period, but equally there have been periods of exceptional performance. I have confidence in the team and am reassured by the re-focus on the stock positions, and move away from macro positions.

In the context of already having sufficient equity exposure, and with many equity markets looking fully valued, adding to this position makes sense. It has displayed low correlation to equity markets, but importantly carries enough risk to target high investment returns. The fact the strategy has seen a tough nine months makes me believe the entry point is that much more attractive. Not a strategy for everyone, but with a relatively long time horizon this is my ISA fund pick.

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Mike Ast, Aspinalls, London

L&G Global Real Dividend Index fund

We took the decision to allocate to Reits in order to provide our clients with exposure to property. In a departure from what is common practice, we treat this allocation as part of the equity component of portfolios for optimisation purposes given the historic volatility profile and high equity correlation of Reits.

Our chosen fund in the space is the L&G Global Real Dividend Index fund. A key factor was the fund’s OCF of 20bps which was the most inexpensive of those screened.

The fund provides passive exposure to the FTSE EPRA/NAREIT Developed Dividend Plus Index as opposed to the core FTSE EPRA/NAREIT Developed Index. The Dividend Plus version requires constituent companies to have a forecast dividend yield greater than 2.00%. This enhanced income feature and the global exposure provided by the fund are both appealing aspects.

The Dividend Plus index has outperformed both the base Developed Index as well as the MSCI ACWI All Cap TR index (both in GBP terms) over a ten year period. This outperformance has come with a higher degree of risk, however this volatility is a factor inherent to Reits and investors should be aware of this when considering the asset class for portfolio inclusion.

The relatively high income yield coupled with the strong historic capital return profile of the underlying index makes the fund an attractive holding, particularly for moderate to higher risk investors with longer time horizons. However, this combination of high income and high return also makes it a potentially punitive investment from a taxation perspective – an issue which can be solved by holding the fund within an ISA.

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Dan Norman, TCF Investments, London

There are a few key elements of successful long term investing.

  • Having a plan (best created with an expert financial planner / adviser)
  • Aligning your portfolio risk with your liabilities (time horizon, attitude and capacity for loss)
  • Diversifying (not having all your eggs in one basket)
  • Reducing costs (leading to a portfolio of low cost, passive instruments)
  • Occasional rebalancing (don’t fiddle!)

So, for a balanced investor, a portfolio of passive funds / ETFs would be ideal.

With bond yields, having fallen so much over the last ten years we remain cautious and therefore would use some short-dated instruments for gilts and corporate bonds to reduce duration risk. Inflation is also a looming risk so being skewed towards real assets (equities / property) is, in our view, a sensible positioning.

A balanced portfolio (c35% fixed income: 65% real assets)

Vanguard FTSE U.K. All Share Index

SPDR Barclays Capital Stg

Vanguard S&P 500 ETF

iShares Sterling Corporate Bond 0-5yr ETF

HSBC European Index

Fidelity Emerging Markets / Asia Pacific and Japan Index funds

Lyxor UK Gilts ETF

iShares Global High Yield and EM Corp Bond ETFs

iShares FTSE EPRA/NAREIT UK Property ETF (or an active commercial property fund)

iShares FTSE Gilts UK 0-5 ETF

Cash

The total TER for this would be around 0.15%pa.

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Alistair Campbell, Sarasin & Partners, London

TwentyFour Absolute Return Credit

With equity and bond valuations looking stretched, it can be difficult to know where to look for ideas. Whilst not the most bold suggestion, we believe that TwentyFour Absolute Return Credit serves as a strong foundation for portfolios.

The fund aims to return 2.5% above cash and achieve a positive absolute return over any three years regardless of market conditions.

The manager, Chris Bowie, does this mainly by investing in shorted-dated, investment-grade rated bonds. The short-dated nature of the portfolio results in the fund being reasonably resilient to potential interest rate rises, whilst the relatively high level of income generation also helps to offset any headwind from rising rates.

Depending on market conditions the fund may add small amounts of either government bonds or high yield bonds – both allocations remain low today. We hold Chris Bowie in high regard and have been impressed with his focus on downside protection.

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John Prior, Patronus Partners, London

Old Mutual Global Equity Absolute Return Fund

This is for investors looking for diversification from traditional assets classes. The fund is a globally diversified long/short equity portfolio, targeting positive absolute returns over 12 month periods with a target volatility of 5-6%. The team is led by Dr Ian Heslop, Dr Amadeo Alentorn and Mike Servent who have worked together for over 10 years.

When selecting an absolute return fund for diversification it is important that the returns are genuinely uncorrelated, not asset class beta in sheep’s clothing. The fund resets its net market exposure to zero with each trade and has firm constraints on exposure at country, sector and industry level.

It has delivered positive returns in each of the last five years at a compound return of 6.14%. The return profile has been robust in periods of equity market drawdowns. Between July 2009 and December 2016, the fund was up in 24 of the 34 down months for the MSCI World Index.

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James Clark, Hawksmoor Investment Management, Exeter

Hawksmoor Vanbrugh

My ISA fund pick is Hawksmoor Vanbrugh. This multi-asset fund of funds is co-managed by Daniel Lockyer, Richard Scott and Ben Conway of Hawksmoor Fund Managers.

It features on our private client Buy list and it’s my pick at the current time because I share the managers’ caution on the prospects for financial markets. My Hawksmoor colleagues are very experienced fund managers who are at the heart of the firm’s specialism in collective investments. They have forged a very strong performance record since the Vanbrugh fund was launched in February 2009, posting top quartile performance in the IA Mixed Investment 20-60% Shares sector over multiple time periods.

The fund has a cautious total return mandate and has been designed as a one-stop wealth management fund, giving broadly diversified exposure to financial markets. The fund (currently £110m in size) is nimble and its managers can meaningfully invest in favoured areas including micro-cap UK equities, specialist REITs, secured lending and loan funds.

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Ben Williams, Saunderson House, London

Standard Life Equity Income Trust (SLET)

The trust has had a challenging past year. This has largely been due to manager Thomas Moore avoiding a number of mega caps that, in his view, have significant dividend risk (e.g. Shell, BP, HSBC and GSK) and ‘bond proxy’ stocks that, despite having stable dividends, trade on rich valuations (e.g. Unilever & Diageo).

On top of this, the fund’s significant allocation to mid and small cap domestic facing stocks resulted in a sharp period of underperformance in the aftermath of the ‘Brexit’ vote. However, Moore believes that a number of these stocks, such as Virgin Money and ITV, are now trading on compelling valuations alongside high free cash flow yields, strong balance sheets and healthy dividend cover.

The trust offers an attractive 3.8% dividend yield and, having fallen from a 5% premium to NAV pre-Brexit to a current 9% discount, which is towards the bottom of its historical range, we believe this offers an appealing entry point to access this well-managed trust.

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