Hargreaves Lansdown’s five funds for 2022

Income funds and recovery stocks are the main ways analysts at the UK’s largest fund platform, Hargreaves Lansdown, are approaching investing in 2022.

Emma Wall, head of investment analysis and research at the firm, said income is “always a focus” for investors using its platform, suggesting both a global and UK income fund.

First up is the £1.3bn Artemis Global Income, managed by Jacob de Tusch-Lec and James Davidson. The managers look for companies with the potential to earn a lot of cash through revenues that can be then used to pay dividends.

“They look beyond the usual names that make up many global income portfolios and often invest in out-of-favour companies at attractive prices, such as those that are more sensitive to the health of the economy and those lower down the size spectrum, including higher-risk smaller companies,” she said.

Over the past year the fund has been a top-quartile performer, making 23.2%, beating both the MSCI ACWI benchmark index and the average IA Global Equity Income peer, as the below chart shows.

Total return of fund vs sector and benchmark over 1yr

Source: FE Analytics

It also has a strong long-term track record, making the fourth-highest returns in the sector over 10 years, although it has failed to beat the index over that period.

Another key theme is the rise of environmental, social and governance (ESG), with investors wanting their cash to do good as well as make strong returns.

As such, the second income fund has an ethical tilt. Trojan Ethical Income “could bring diversification to an income-focused portfolio or be a good addition to a responsible investment portfolio built to provide income,” said Wall.

The £331 fund, managed by Hugo Ure, sits in the IA Unclassified sector but is a UK equity portfolio that is centred around providing sustainable income from ethical companies.

The manager can invest up to 30% of the portfolio in overseas stocks however, meaning it has a larger remit than those in the IA UK Equity Income sector, which are required to have no more than 20% in overseas shares.

“He doesn’t invest in companies deemed unethical, such as those with significant involvement in armaments, tobacco, and fossil fuels, although the fund is still diversified across a range of industries, with the manager tending to find opportunities in consumer goods, healthcare and business software firms,” said Wall.

If there are stocks that require improvement, however, he is willing to engage rather than outright banning companies from the portfolio.

Staying with ESG, Wall suggested L&G Future World ESG Developed Index, a passive fund that invests across developed stock markets while being mindful of ESG issues, focusing on sectors such as technology, pharmaceuticals and financials.

“Given the focus on developed markets, it could help diversify funds focused on emerging markets and is a good addition to a broader investment portfolio aiming to deliver long-term growth in a responsible way,” she said.

For risk averse investors, the Pyrford Global Total Return makes for a good option, she said, as the fund can invest flexibly, but aims to keep things simple by focusing on a mix of shares, government bonds and cash, investing in companies across the globe, with the option to invest in emerging markets.

The fund sits in the IA Flexible Investment sector, where funds typically have a large allocation to equities. But the £2bn fund has its main weighting in bonds, more than 60%, versus just 37% in stocks, which explains its consistent fourth-quartile performance among its peers over one, three, five and 10 years.

Its main aim is to not lose money, making it akin to an absolute return fund. Indeed, the fund has the lowest maximum drawdown (5%) of any of its peers over the past decade and has been the least volatile.

Finally, for those investors on the opposite end of the risk spectrum, “emerging markets offer opportunities for long-term growth”, Wall said.

JPM Emerging Markets is the pick here. Managed by Leon Eidelman and Austin Forey, the fund is “well-placed to take advantage of the changes taking place across these markets”, Wall said.

“Investing in emerging markets comes with risks, however, especially as their political and regulatory environments are less evolved, or different, than developed markets, creating more volatility than regulated markets,” she added.

Total return of fund vs sector and benchmark over 10yrs

Source: FE Analytics

The £3.2bn fund has made top-quartile returns over three, five and 10 years, but had a poor past 12 months as its high allocation to China (42.8%) has weighed it down. Indeed, over the past year the fund is down 5%.