Four high-risk funds to buy, hold and forget about

Market volatility is expected to stay higher for longer and for the bolder investors there are several more adventurous options for delivering consistent returns long-term.

The past few months have been tough for investors, with a rotation out of growth and into value challenging investors to look outside the narrow areas they had being relying on for returns over the past decade.

This market shift was driven by the highest inflation in years and central banks’ programme of raised interest rates and monetary tightening to combat it. This came after years of stringent Covid measures stalling economic growth and months of supply chain issues.

On top of this, investors are now contending with Russia’s invasion of Ukraine, which has heightened volatility and shaken equity markets. Although this will hopefully be a short-lived event commentators have been forecasting a more volatile 2022 as a result.

Given this some investors may want to build their portfolio around more conservative options, but others might prefer to take that volatility on headfirst, embracing some higher levels of risk into their core portfolios.

Below, fund pickers highlighted several higher-risk options that are not overly perilous and can still deliver in the long run.

Orbis Global Balanced

First up was the Orbis Global Balanced fund which, according to Jason Hollands, managing director of Bestinvest, is ideal for investors “who have filled their boots with Terry Smith’s now gigantic Fundsmith Equity”.

Launched and run by Alec Cutler, it has a 10-step ‘confidence criteria’ screening for potential holdings, including requirements such as a proven track record of growth through hard economic times and businesses that are mature, as well as sector tailwinds, high returns on invested capital, little or no debt and business diversification.

Gill Hutchison, research director at The Adviser Centre, also picked the Orbis fund as an ideal option for higher-risk investors looking for a mixed-asset fund “that is managed with pragmatism and objectivity”.

She said Cutler places “intrinsic value” at the core of his investment mantra, harbouring no fears of missing out if he cannot get a clear, fundamental case for an investment. “This gives the fund a distinctly contrarian flavour,” she said.

Hollands also noted this characteristic, adding that it has protected the fund from going into “stocks exhibiting bubble-like characteristics”.

Overall, Hutchison said: “The risk and return outcome can be bumpy at times but the approach rewards investors with patience and a long-term investment horizon.”

Indeed, since it launched in 2014 the fund has performed better than the average IA Mixed Investment 40-85% Shares fund, making 100.7%. It has also held up well over shorter periods, ranking in the top quartile in the past three-to-six months.

Performance of fund vs sector since launch

Source: FE Analytics

The fund’s fee structure is also important to note. While it charges nothing to own, it has a performance fee which kicks in when the fund has beaten its benchmark.

M&G Global Dividend

For higher-risk income investors, one option is the £2.3bn M&G Global Dividend fund, highlighted by Charles Stanley’s chief analyst Rob Morgan.

He picked this fund because it offered investors growing income as well as compounded returns, which was achieved via “dividend bankers” – a combination of stable multinational businesses in dominant industry positions and disciplined companies in more economically sensitive industries.

“As such the fund has the scope to add value in various market conditions,” Morgan said. “It should gradually compound returns over time and makes for a good core portfolio holding.”

He said it was “quite a well-rounded” income fund as it is not wedded to one investment style and the manager, Stuart Rhodes, “has the opportunity to flex between different areas to grow income and capital”. That being said, the fund has favoured value areas such as materials, energy and financials lately, “however, it is certainly not an extreme ‘value’ fund”, Morgan noted.

This allocation has benefitted the portfolio’s recent performance as investors have been worried about inflation, Morgan added. However this weighting hurt performance over five years, when it ranked in the third quartile of its peer group.

However, even without excessive growth exposure, the fund has still delivered over the long term, making 171.8% over 10 years, ahead of the IA Global sector (168.7%) but behind the MSCI ACWI benchmark (201.1%).

Morgan added that the fund is not a member of the IA Global Equity Income sector despite being an income fund because Rhodes “wished to harness a growing income and doesn’t want to necessarily have to adhere to the yield criteria of the former.”

Lazard Emerging Market

Next up was the Lazard Emerging Market fund, which Fundhouse’s managing director, Rory Maguire, picked for two reasons.

First, the general opportunity in emerging markets, where equities were running cheaper valuations than developed markets, offering up more future growth potential.

“Even selecting a tracker fund would be beneficial over the long term here,” he said.

Lazard’s value bias added another layer to this opportunity, according to Maguire, as this style is “particularly depressed within emerging markets”, suggesting investors may benefit from a “double tailwind”.

It is not an option for the faint-hearted though, he said, and investors “should expect a bumpy ride”, but long-term investors “should be rewarded”.

Over 10 years the fund has made 44.1% total returns, less than the MSCI Emerging Markets benchmark and IA Global Emerging Markets sector.

Performance of fund vs sector since launch

Source: FE Analytics

Edinburgh Worldwide

Last up was an option for closed-ended investors, as James Carthew, head of investment companies QuotedData picked the Edinburgh Worldwide trust.

Led by FE fundinfo Alpha Manager Douglas Brodie and deputy managers Luke Ward and Svetlana Viteva, the trust steps slightly away from Baillie Gifford’s house style of highly concentrated portfolios.

While it is still invested in growth, it holds between 75 and 125 companies that have a lower than $5bn market capitalisation at the time of initial investment.

Carthew said that the team “aims to identify tomorrow’s winning businesses when they are still relatively small, and hang onto them as they become successful.”

The recent shift out of growth in markets has caused the trust’s returns to slump, something that has been widespread across funds that employ this investment style. But this has created a major buying opportunity for investors, according to Carthew, with the trust now running on an 8.81% discount.

He added that the recent performance dip should not put investors off the trust since it has proven itself over the long term “as the best-performing global smaller companies trust over five years and in fact is the best performing of all global trusts over that period barring Scottish Mortgage.”

Performance of fund vs sector since launch

Source: FE Analytics

The trust made a total return of 295.8% in the past decade, beating the IT Global Smaller Companies sector (87.5%).