The coronavirus lockdown has had two big effects on my professional and personal life: it’s given me much more to write about, and it’s given me much more time to think. 
As an investment journalist who reported on the global financial crisis of 2008, I had not imagined that I would again live through such an unprecedented and challenging time for markets and the economy.
But the lockdown conditions that have been imposed as the Covid-19 coronavirus pandemic spread to the UK have surpassed anything that I could imagine.
The impact on markets and economies around the world has been every bit as frightening as the earlier crisis and continues to affect our everyday lives.
At the same time, the lockdown has given me time to think and that has made me turn my thoughts to the subject I cover every day: investing.
While I’m not trying to suggest that I am the wisest investor on the Trustnet team (another member of the team’s investment in a well-known brewer has certainly been the most profitable), I have enjoyed some success before.
My most recent fund pick – Fidelity China Consumer – has performed strongly, albeit in spite of the reasons I chose it for. Of the four fund picks the Trustnet editorial team thought would do well in 2020, the Fidelity China Consumer fund has lost the least and is down by just 2.04 per cent.
Performance of Trustnet fund picks YTD
Source: FE Analytics
I previously held a small portfolio using some of my Lifetime ISA money as I saved towards my first home, where I took some modest profits. Having ascended onto the property ladder at the start of the year, I’m keen to put my LISA to work for the long term.
And I’ve become keen to invest in what many consider the most unloved and undervalued markets in the world: the UK.
The FTSE All Share has been one of the laggards among its developed market peers for the past few years as the referendum on EU membership and then preparations for Brexit continued to pile uncertainty on the outlook for the UK economy.
There had been some signs of a recovery towards the end of last year as Boris Johnson's Conservatives secured an increased majority at the Christmastime general election and ended speculation over what type of relationship with the EU would be sought. However, that early optimism at the start of the year evaporated as the coronavirus spread around the world and the UK government was found to be flat-footed in its response.
As I’ve noted previously, however, I am no expert, hold no qualifications and am not allowed to give investment advice. But I thought you, dear reader, might find my fund choices interesting. So, I’ve decided to tell you about them.
Royal London Sustainable Leaders Trust
The first fund that I’ve chosen is one that might be familiar to many investors: the £1.4bn Royal London Sustainable Leaders Trust, overseen by FE fundinfo Alpha Manager Mike Fox.
The fund – which holds five FE fundinfo Crowns – targets capital growth over the medium term (classified as three to five years) in companies deemed to be making a positive contribution to society.
Since the onset of pandemic and the lockdown there’s been a perceptible change in the British people: we’re becoming a bit less stuffy and a lot more caring.
People under lockdown are trying to support the health service by not spreading coronavirus. They clap NHS workers every Thursday at 8pm and are checking-in on their elderly neighbours. They also expect companies to their bit in helping society to get on top of the coronavirus.
Maybe I’m too optimistic, but I believe that these expectations of companies doing their bit for society to last beyond the lockdown and the pandemic.
As such, I think the companies that Fox invests in – those having a positive impact on society – will be the future winners and should do well once the lockdown and pandemic are memories.
Looking for undervalued companies that have strong ESG (environmental, social & governance) qualities and the potential for growth, Fox aims to outperform the FTSE All Share benchmark index over a rolling five-year period.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Over the past five years to last month-end, Royal London Sustainable Leaders Trust has made a total return of 38.52 per cent – notwithstanding the coronavirus-inspired sell-off in markets during March – compared with a 2.89 per cent return for the FTSE All Share and a loss of 1.76 per cent for the average IA UK All Companies peer.
Analysts at FE Invest note that the manager’s investment style is different than other IA UK All Companies funds and other ESG strategies in that it uses both rigorous financial analysis and positive qualitative screening, which have resulted in outperformance of both markets and the sector peers. Furthermore, Fox has a preference for larger companies – reducing liquidity risk – and foreign companies for which there are no UK alternatives.
The fund has an ongoing charges figure (OCF) of 0.76 per cent.
Liontrust UK Smaller Companies
The second fund that I’ve had a lot of time to think about is the £880.8m Liontrust UK Smaller Companies fund, managed by the asset manager’s Economic Advantage team.
The team behind the fund is led by veteran investors – and also FE fundinfo Alpha Managers – Anthony Cross and Julian Fosh alongside Victoria Stevens and Matthew Tonge. Its proprietary Economic Advantage process is well documented and aims to identify companies able to sustain higher-than-average levels of profitability for longer than expected, surprising the market and resulting in rising share prices. These typically have one of three characteristics: intellectual property, strong distribution channels, or significant recurring business (at least 70 per cent of annual turnover).
And I believe companies that were in strong positions at the start of the pandemic will likely be among those that fare better once the UK emerges from lockdown.
Given the process, Liontrust UK Smaller Companies does have a high active share of 96.47 per cent and differs significantly from its benchmark – the FTSE SmallCap ex Investment Companies – with an overweight in technology stocks and significantly less exposure to financial names.
While there is greater liquidity risk associated with small-cap strategies, the team employs strict risk scoring to determine position sizes, including criteria such as financial risk, product dependency, customer dependency, pricing risk, regulatory change, licence dependency, acquisition risk and valuation. As an added screen every holding in the Liontrust UK Smaller Companies has at least 3 per cent of its equity held by senior management and main board directors which the team believes "motivates key employees, helps to secure a company’s competitive edge and leads to better corporate performance".
It does have a relatively high OCF of 1.37 per cent but this is aimed at discouraging large new investors and limiting the size of the strategy, according to analysts at Square Mile Consulting and Research, helping to prevent any potential liquidity issues further down the line.
“The fund's annual management charge is above the average of the IA UK Smaller Companies peer group and was purposefully designed as a mechanism to reduce the pace of inflows," they noted. "Including further expenses, the OCF, is also above the sector median. However, in our view, the premium is warranted as the fund offers investors access to a unique, tested and well-proven strategy."
Performance of fund vs sector over 5yrs
Source: FE Analytics
Liontrust UK Smaller Companies has a long-term (five years or more) capital growth target. Over the past five years to last month-end, it has made a total return of 67.62 per cent against a gain of 18.03 per cent for the average IA UK Smaller Companies peer and a 5.04 per cent loss for the FTSE SmallCap ex Investment Companies peer.