Funds with a bias to UK large-caps, off-the-radar growth stocks and inefficient parts of the bond market are options for core funds this ISA season, according to FundCalibre’s Darius McDermott. 
With the current tax year ending on 5 April, some investors may be looking to make some last-minute additions to their ISAs. With this in mind, FundCalibre managing director McDermott has come up with a number of fund picks that look attractive.
This article will focus on three funds that are potential ‘core’ holdings – or solid and dependable products that can form the bulk of a portfolio over a market cycle – with a following piece looking at satellite funds.
Artemis Income
First up, McDermott highlighted the £5.6bn Artemis Income fund, which is managed by Adrian Frost, Nick Shenton and Andy Marsh. Frost has worked on the fund since 2002, with Shenton joining in 2014 and Marsh in 2018.
“The trio focus their analysis on a company’s cash flows and its ability to drive sustainable and growing dividends for their shareholders,” he said. “The managers will also look specifically for companies with a competitive advantage and where barriers to entry are high.”
Performance of fund vs sector and index over 15yrs
Source: FE Analytics
Artemis Income tends to hold between 50 and 70 stocks with a bias to UK large-caps; currently 78 per cent of the portfolio is in large-caps, with 17.2 per cent in mid-caps and 2 per cent in unquoted stocks. Top holdings at the moment include BP, RELX Group and GlaxoSmithKline, with financials, consumer services and oil & gas being the biggest sector exposures.
As a member of the IA UK Equity Income sector, the portfolio can have up to 20 per cent in overseas stocks. McDermott noted that overseas exposure has provided “extra opportunities for additional returns” at times.
Over the past 15 years – which captures the financial crisis and the following bull market – the fund has made a 261.31 per cent total return, outperforming the FTSE All Share and ranking it fourth out of 29 funds in the sector.
Artemis Income has ongoing charges figure (OCF) of 0.80 per cent and is yielding 4.25 per cent.
Rathbone Global Opportunities
For his second pick, McDermott moved away from the UK and opted for the £1.5bn Rathbone Global Opportunities fund. This has been run by FE Alpha Manager James Thomson since 2003, with Sammy Dow joining as deputy in 2014.
The concentrated portfolio of 40-60 holdings is built around under-the-radar and out-of-favour growth companies, with no restraints when it comes to geography or sector although it tends to avoid emerging markets. Amazon, Adobe Systems and MasterCard are among its current top holdings.
Performance of fund vs sector and index over 15yrs
Source: FE Analytics
“This fund is a truly active, unconstrained growth fund run by an experienced manager. James' high conviction contrarian strategy has proven itself over many years,” McDermott said. “He is not afraid to admit his weaknesses or past errors, a refreshingly honest approach, which allows him to concentrate on his core strengths.”
Over the past 15 years, Rathbone Global Opportunities’ 517.94 per cent return is the third highest of 101 IA Global funds and significantly better than the FTSE World’s gain.
However, the fund’s maximum drawdown (the loss that would have been made if the fund was bought and sold at the worst possible times) during the financial crisis stands at 44.34 per cent – one of the highest in the peer group.
This prompted Thomson to overhaul his investment process by adding a defensive bucket of reliable growth stocks that are less economically sensitive with slower and steadier growth prospects, which help to bring down the fund’s volatility and has contributed to its sector-topping returns.
Rathbone Global Opportunities has an OCF of 0.79 per cent.
Baillie Gifford Strategic Bond
McDermott’s final pick is a fixed income offering: FE Alpha Manager Torcail Stewart and Lesley Dunn’s £852.7m Baillie Gifford Strategic Bond fund.
He likes funds in the IA Sterling Strategic Bond sector as they have a flexible approach and essentially outsource the decisions around whether to hold government, corporate or high yield bonds.
“This fund has a straightforward, bottom-up selection process,” McDermott said. “The managers buy bonds that are undervalued and hold them until their potential is realised and the price has appreciated.”
The process behind the fund believes that inefficiencies exist at the bond level and that exploiting these inefficiencies leads to outperformance. The managers think that most of these inefficiencies are around the investment grade/high yield border, leading to a bias to this part of the market.
Performance of fund vs sector over 15yrs
Source: FE Analytics
Baillie Gifford Strategic Bond has made a 5.97 per cent total return over the past 15 years. This makes it the fourth highest returner in the IA Sterling Strategic Bond sector over this time frame.
Insurance is the portfolio’s biggest sector exposure at 14 per cent of assets, followed by utilities, retail, media and telecommunications.
“The high conviction approach means the fund can be more volatile than some of its peers; however, the strategy also benefits from the diversification that investing on a global scale across a broad range of sectors can provide,” McDermott added.
Baillie Gifford Strategic Bond has a 0.52 per cent OCF and is yielding 3.40 per cent.