This is why experts say it is vital to spread capital across a variety of different investment products, such as bonds, equities and property.
In light of the recent market rally, many financial experts now say that equities should make up the majority of any portfolio, but it is important not to forget about other assets for diversification purposes.
With this in mind, FE Trustnet asked the experts for their choice of core funds in each of the major asset classes.
Equity income
Danny Cox (pictured), head of advice at Hargreaves Lansdown, says a core holding of income-generative equity funds is the key to success in the long-run.
"For long term investors – so looking over 10 years – I think nearly all of their portfolio should be in equities," he said. "Obviously, they might want some exposure to assets such as high yield bonds, but the likelihood is that the core of the portfolio will be equity funds. I would use some of the major UK equity income funds as the main starting point."
"The likes of Neil Woodford’s Invesco Perpetual High Income, and Artemis Income and JOHCM UK Equity Income, are all trusted favourites," he added.
"Once you have those core holdings then, depending on your own outlook, you might want more growth-orientated funds. Diversifying could mean going into more risky areas such as smaller companies, Europe, the US and emerging markets."
| Name | JOHCM UK Equity Income |
|---|---|
| Fund Size | £1.4bn |
| Min. Investment | £1,000 |
| TER | 1.28% |
| Yield | 4.60% |
| Manager | James Lowen and Clive Beagles |
| FE Crown Rating | 4 Crowns |
Source: FE Analytics
One of Cox’s picks, the JOHCM UK Equity Income fund, has delivered strong returns for investors and is currently yielding a relatively high 4.6 per cent.
The fund was launched in 2004. James Lowen has managed it since September 2007 and he was joined by Clive Beagles six months later.
According to FE Analytics, JOHCM UK Equity Income is a top-quartile performer over one and three years. Over five years, it is the second-best performer in the IMA UK Equity Income sector, with returns of 70.99 per cent – falling just short of Unicorn UK Income.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has beaten its benchmark – the FTSE All Share – over that time, but it has tended to be more volatile than the index and its sector.
Bonds
Cox says the current fixed income market is particularly unattractive for investors, but he adds there does need to be exposure to bonds on some level.
He says strategic bond funds are the best way to go in that respect.
"At the moment, fixed income is quite out of favour, but some are saying that there is still value in investment grade bonds," he explained.
"However, I would go for a strategic bond fund – my favourite being Jupiter Strategic Bond – because the manager can choose which bonds he wants to invest in, instead of just sticking to one area of the market."
His enthusiasm for strategic bond funds is shared by Patrick Connolly, head of communications at AWD Chase de Vere.
"Within the fixed interest market it is becoming increasingly difficult to find funds that can give investors that security," he said.
"For instance, government bonds, which used to be seen as safe-haven assets, have the potential to make considerable downside losses."
"Therefore, the approach we like is to use strategic bond funds, so leave fixed income decisions to the manager instead of picking an area of the market."
Connolly highlights Fidelity Strategic Bond, M&G Optimal Income and Jupiter Strategic Bond in particular.
| Name | Jupiter Strategic Bond |
|---|---|
| Fund Size | £1.4bn |
| Min. Investment | £500 |
| TER | 1.51% |
| Yield | 5.80% |
| Manager | Ariel Bezalel |
| FE Crown Rating | 5 Crowns |
Source: FE Analytics
FE Alpha Manager Ariel Bezalel’s five crown-rated Jupiter Strategic Bond fund has been a consistently high performer in the IMA Sterling Strategic Bond sector since its launch in late 2008.
It has returned 31.65 per cent over three years, beating its Iboxx Sterling Non-Gilt All Maturities benchmark and lifting it into the top quartile of its sector in the process.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The fund’s highest weighting is BB rated bonds, but Bezalel’s top-three holdings are all Australian government bonds.
Property
While Cox warns investors to tread very carefully when considering property, other experts say that exposure to this area offers good diversification benefits.
Chelsea Financial’s Darius McDermott (pictured) recommends Henderson UK Property, L&G UK Property Trust and Ignis UK Property for anyone tempted to play the UK market."I’m not talking about equity property funds, I’m talking about bricks and mortar based funds," he said.
McDermott adds that the sector is also an income play because physical property is always collecting revenue and so can offer investors a steady payout over the long-term.
However, he warns that property is focused heavily on London and the south-east in the UK, as it is difficult to find value elsewhere.
Connolly is also a fan of including property funds in a portfolio as it offers another method of diversifying an income stream.
"We like commercial property funds – so real bricks and mortar. These include M&G Property Portfolio, Henderson UK Property and Ignis Property."
| Name | Ignis Property |
|---|---|
| Fund Size | £952m |
| Min. Investment | £500 |
| TER | 1.52% |
| Yield | 3.40% |
| Manager | George Shaw |
| FE Crown Rating | 2 Crowns |
Source: FE Analytics
Ignis Property has returned 6.02 per cent over the last five years, while the IMA Property sector has returned just 0.43 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
George Shaw’s fund is yielding 3.4 per cent and has 42 per cent of its assets in the retail space. Ignis Property has a 63.3 per cent weighting to London and the south-east, making it the fund’s largest regional allocation.
Passives
Cox says that there is merit in holding passive funds – or trackers – especially when investors want exposure to notoriously hard-to-call markets, such as the US.
"You need to understand what you are investing in of course, but investors use them in markets where they don’t think a manager can add any real value," he said.
"Usually the US market is a difficult one to find a manager who can add value, so they can work well there."
Cox thinks that BlackRock CIF North American Equity Tracker is a good fund for this purpose.
"Normally you don’t want to have a portfolio made up of trackers, but it is a good way to get exposure to other areas of the market. However, first-time investors who want a low-cost approach may hold trackers as well."
BlackRock CIF North American Equity Tracker was launched in 2005 and now has more than £1bn assets under management.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Over the last three years, the fund has returned 48.39 per cent, beating the IMA North America sector, which has returned 41.91 per cent over the same period. It has slightly underperformed its benchmark – the FTSE World North America index – but it has a tracking error of just 3.16 per cent over the period.
| Name | BlackRock CIF North American Equity Tracker |
|---|---|
| Fund Size | £1.3bn |
| Min. Investment | £1,000 |
| TER | 0.22% |
| Yield | 1.40% |
| Manager | Nimish Patel |
| FE Crown Rating | 2 Crowns |
Source: FE Analytics
Investing in the BlackRock CIF North American Equity Tracker fund provides exposure to large multi-nationals such as Apple, Google and Microsoft.