There is no doubt that equities can lose investors a lot of money, but with that comes a chance of stronger capital appreciation.
However, with the inherent risks associated with cash and the bond market in particular, more and more investors with a shorter-term time horizon are parking their cash in equities.
With this in mind, FE Trustnet asks industry experts to identify funds that suit three-, five-, or 10-year time horizons across a number of different asset classes, starting with UK equities.
Three-year horizon – Trojan Income
Whitechurch’s managing director Gavin Haynes (pictured) says three years is a very short period of time to invest in equities, but says the poor performance of the bond markets makes it understandable.
Nevertheless, he says such investors should focus on a fund where capital preservation is the number-one priority, such as the five crown-rated Trojan Income."Three years is the most difficult time-frame to choose a fund for. We are very cautious about using an equity-based portfolio for that period of time because of the volatile nature of the asset class," he said.
"However, if an investor were to want a fund for that time it would have to be a very cautious one. I would go for Trojan Income. It is very much focused on capital protection."
The £1.2bn Trojan Income fund has been run by FE Alpha Manager Francis Brooke since its launch in September 2004.
According to FE Analytics, the fund is a top-quartile performer in the IMA UK Equity Income sector over five years, with returns of 73.94 per cent, beating its FTSE All Share benchmark and the sector average by more than 20 percentage points.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has been considerably less volatile than both the sector and index over that time. Although it has not participated fully in rising markets, Brooke has a proven ability for defending his investors' money.
This can be seen by its performance in 2008 – while the market lost 30 per cent, his fund was down just 12 per cent and in 2011 the fund made positive returns while his peers and the index lost money.
Trojan Income yields 4.09 per cent, which it derives from a concentrated portfolio of 45 holdings. He has a bias towards blue chip FTSE 100 stocks, with the likes of GlaxoSmithKline, British American Tobacco and HSBC sitting in his top-10.
The fund is soft-closed, but is available on certain platforms.
Five-year horizon – Cazenove UK Opportunities
Haynes says investors can afford to take a higher degree of risk when they are looking at cashing in their equity exposure after five years; however he still thinks they should err on the side of caution.
Because of that, he recommends the five crown-rated Cazenove UK Opportunities fund.
"I would go for a core UK growth fund, something like Cazenove UK Opps which invests in mid and large caps," he said.
"It is a very active fund. It is based on Cazenove’s business-cycle investment strategy, which is very well employed by Julie Dean."
Dean, who is an FE Alpha Manager, has been in charge of the portfolio since December 2002.
The £1.8bn fund is a top-quartile performer in the highly competitive IMA UK All Companies sector over one, three, five and 10 years. The best of those performances has been over 10 years, where it beat the sector and the FTSE All Share by more than 100 percentage points.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
As Haynes mentioned, Dean uses the business cycle strategy when running her fund. That approach means that her portfolio turnover rate is quite high. As a result, a high level of flexibility is crucial, which is why management has attempted to discourage inflows into the fund in recent months. It remains open to new money, but a soft-closure could well be on the horizon.
However, Haynes says this should not be a concern for investors buying into the fund now.
"I would expect that if size were ever to become an issue, Julie would be very pro-active to close the fund and to protect her current investors. Though she certainly takes a thematic business cycle approach, she still tends to invest in large and mid caps," he added.
Cazenove UK Opportunities has an ongoing charges figure (OCF) of 1.58 per cent and requires a minimum investment of £1,000. Cazenove was recently bought out by Schroders, but the fund continues to use the former's name.
Ten-year horizon – Aberforth UK Smaller Companies
Haynes says investors can afford to take a high degree of risk if they are happy to commit their money for more than 10 years and because of that he favours the £96.7m Aberforth UK Smaller Companies fund.
"Over 10 years you can be more aggressive, so I would look at smaller companies. Aberforth is one we like as they are an investment boutique that specialises in UK small caps," he said.
"They have a value-based philosophy to investing and over the last 12 months that has been a good approach. The economic climate is improving so the managers should find good opportunities. Yes, it will be more volatile but should reward its investors."
Our data shows that Aberforth UK Smaller Companies has beaten the IMA UK Smaller Companies sector over three, five and 10 years but has failed to beat its benchmark – the Numis Smaller Companies ex ITs index – over these time frames.
However, Haynes expects that to change in the future.
"Apart from the last 12 months, growth funds really have been the place to be as the market has favoured companies that are less cyclical, with more reliable earnings. However, if you look at their much longer numbers, Aberforth’s value approach has worked well."
"I think their style will be back in favour in more normal market conditions and the team are very well qualified stockpickers, so the fund should be a good place to be," he added.
As Haynes points out, Aberforth UK Smaller Companies has returned a hefty 520.81 per cent over 15 years – eclipsing the returns of both its benchmark and the average fund in the sector.
Performance of fund vs sector and index over 15 years
Source: FE Analytics
The fund's largest sector weighting is to industrials, at 34 per cent of AUM.
Aberforth UK Smaller Companies has an OCF of 0.86 per cent and requires a minimum investment of £1,000.