F&C Global Smaller Companies, Smith & Williamson Enterprise and Artemis Global Income are three funds which would work well together in a portfolio to minimise drawdowns while generating superior gains over the long term, according to Chelsea Financial Service’s Darius McDermott (pictured). 
This comes as part of an ongoing series from FE Trustnet, which has sought the views of several investment professionals including FE Research’s Charles Younes, Hawksmoor’s Ben Conway and Shore Financial Planning’s Ben Yearsley.
In the below article, the Chelsea Financial Services managing director discusses his choices and why, when held together in one portfolio, he believes investors will be able to sleep at night knowing they will achieve attractive and steady long-term returns.
Artemis Global Income
First on the McDermott’s list is the Artemis Global Income fund managed by Jacob de Tusch-Lec, which was also selected by Younes last week (albeit alongside two very different investment vehicles).
The £3.7bn fund, which has a diversified portfolio of holdings, aims to provide both rising income and capital growth over the long term. It is able to invest across the market cap spectrum and is unrestricted in terms of either region or sector.
“It’s a global fund and it definitely has a value tilt to it, although it’s not strictly a value fund per se,” McDermott explained. “It also generates a yield which you don’t have to take – you can have that reinvested – and the reinvesting of dividends is a good long-term growth strategy if you’re not dependent on the yield.”
In terms of region, the fund currently has a 46.2 per cent weighting in European equities, 31.1 per cent in North American stocks, 12.5 per cent in emerging markets, and smaller weightings in Japan and the UK. Its largest individual holdings are Norwegian financial services company Storebrand, US vehicle manufacturer General Motors and Citigroup.
Over five years, the fund has returned 126.63 per cent compared to its average peer and benchmark’s respective returns of 81.16 and 106.91 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has done so with a top-quartile maximum drawdown (which measures the most money lost if bought and sold at the worst possible times) and Sharpe ratio (which measures risk adjusted returns) over this time frame. However, it is in the bottom quartile for its annualised volatility and downside risk ratio (which predicts a fund’s susceptibility to lose money during falling markets), which suggests it may not be best-suited to shorter term investors.
In terms of income alone, an investor would have received £2,815.95 based on an initial £10,000 investment five years ago.
Artemis Global Income has a clean ongoing charges figure (OCF) of 0.81 per cent and yields 3.49 per cent.
Next on McDermott’s list is the four FE Crown-rated Smith & Williamson Enterprise fund, which is managed by Rupert Fleming, Mark Boucher and Mark Swain.
“I am not going to opt for something too racy given we want a solid, sleep-at-night portfolio. So, in that sense, this is another fund we like a lot,” he said.
“It is a long/short fund. Historically it has had very low drawdowns during negative markets periods, if any. It targets a steady 6 to 8 per cent return with a much lower volatility than the broader market.”
Smith & Williamson Enterprise has a portfolio of 40 long positions and 34 shorts. Within its long book, it has a 21.6 per cent exposure to FTSE 100 stocks, 25.6 per cent to UK mid caps and less than 2 per cent in FTSE Small Cap and AIM stocks. Its largest long positions include food and hospitality company Compass Group, building material company CRH and Unilever.
On the short side, it has 18.9 per cent exposure to UK blue chips and 19.3 per cent to FTSE 250 stocks.
Over five years, the £124m fund has returned 37.08 per cent compared to its FTSE All Share benchmark’s gains of 62.73 per cent.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
However, its aim is to achieve positive returns on a rolling 12-month basis with low risk and low volatility, with a specific targeted return of 3 month Libor plus 4 per cent irrespective of market conditions.
With this in mind, the fund has a maximum drawdown of 4.89 per cent compared to the FTSE All Share’s drawdown of 11.12 per cent, an annualised volatility of 3.78 compared to its benchmark’s 9.49 per cent volatility and a downside risk ratio of 3.5 per cent compared to the All Share’s ratio of 10.10 per cent. It has also achieved higher risk-adjusted returns, with a Sharpe ratio which is 10 basis points higher than its benchmark’s 0.81 per cent.
Smith & Williamson Enterprise has a clean ongoing charges figure of 0.95 per cent.
The third and final vehicle on McDermott’s list is F&C Global Smaller Companies, which is an £812m investment trust.
“Over time, smaller companies do outperform larger companies – that’s been proven over many long periods of time,” he said. “Again, it’s about all three funds on the list being complementary.
“It’s investing in small companies with growth potential, so we have a value fund on the income side and small-cap growth within the F&C Global Smaller Companies investment trust.”
Headed up by Peter Ewins since 2005, the trust invests in a combination of smaller companies funds and individual stocks from around the globe.
Its largest individual holdings are currently collective vehicles, with the likes of Eastspring Investments Japan Smaller Companies, Aberdeen Global Japanese Smaller Companies and Scottish Oriental Smaller Cos investment trusts taking the top spots.
Healthcare service solutions Steris and US bank holding company State Bank Financial Corp are the only two stocks to make it onto the trust’s list of top 10 holdings, both accounting for 1.1 per cent of the overall portfolio each.
Over five years, the trust – which is currently trading on a 1 per cent premium to NAV – has outperformed its average peer by 21.2 percentage points with a total return of 132.41 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
It has done so with a top-quartile maximum drawdown, annualised volatility, Sharpe ratio and downside risk ratio.
F&C Global Smaller Companies is 4 per cent geared and has an ongoing charge of 0.61 per cent.