The new growth and income stocks being picked by professionals

With returns driven by a handful of stocks, recent years have been brutal to professional investors trying to outsmart the market.

This is especially the case for global equity funds, which like their US peers have had to contend with the rise of the ‘Magnificent Seven’ stocks. Less than a quarter of funds and trusts in the UK’s main global equity sectors have beaten the MSCI World index over a five-year period.

In response, many investors have voted with their feet: Investment Association figures show that tracker funds now account for roughly a quarter of the assets it monitors, up from 11.3 per cent at the end of 2015.

Much as some investors might worry about the concentration of market returns, it’s clear others are losing patience with stalwarts such as Fundsmith Equity (GB00B4Q5X527) following some challenging years.

We have sought to identify those companies that do not currently dominate market narratives, but that appear to be attracting attention from the professionals

Whether active strategies can turn things around is the million dollar question of the moment, particularly as global indices are no longer being driven higher by a small group US tech stocks.

But whether we invest with them or not, we can still take inspiration from professional investors. Fund concentration limits and good risk management practices mean they can’t simply bet on the Magnificent Seven. Equally, the other shares they place faith in could be well worth investigating by the DIY investor.

With this in mind, we have analysed the major holdings of a sample of 20 active global equity funds, including Fundsmith Equity, Morgan Stanley Global Brands (GB0032482498), Scottish Mortgage (SMT), F&C (FCIT), Alliance Witan (ALW), Rathbone Global Opportunities (GB00B7FQLN12), Lindsell Train Global Equity (IE00B3NS4D25), AVI Global (AGT) and Schroder Global Recovery (GB00BYRJXL91), among others.

We have sought to identify those companies that do not currently dominate market narratives or private investor portfolios, but that appear to be attracting attention from the professionals.

A second analysis focuses on 10 global income funds. Despite their name, these portfolios often feel obliged to back at least some growth stocks in a bid to avoid underperformance against the index. But it’s worth looking more closely at the stocks they back that offer decent yields.

Unearthing growth

It’s unsurprising to see the market darlings appear prominently in funds that have to compete with the MSCI World index: the Magnificent Seven crop up often; Broadcom (US:AVGO) and JPMorgan Chase (US:JPM), also among the top 10 constituents of the index, appear fairly regularly, too. But there are other names gaining traction.

Intercontinental Exchange (US:ICE) is one such business. The owner of the New York Stock Exchange, it’s far from a huge presence in global markets given its 0.1 per cent weighting in the iShares Core MSCI World ETF (SWDA). Yet it appears in the top 10 holding lists for four of the funds from our sample.

The company operates exchanges across the world, as well as offering data services, and also has a sizeable business helping banks streamline mortgage lending processes. It is also keeping an eye on emerging trends. Take, for example, the news last week that ICE is looking at using Circle Internet Group’s ‘stablecoin’ to develop new products.

“We believe Circle’s stablecoins and tokenized digital currencies can play a larger role in capital markets as digital currencies become more trusted by market participants,” said New York Stock Exchange president Lynn Martin.

Whether or not investors believe activities in the cryptocurrency space will pay off, ICE, like London Stock Exchange Group (LSEG), is banking on the power of big data to prosper in future.

The company also seemingly appeals to a wide range of different investors: it crops up in the top 10 lists of Morgan Stanley Global Brands, which targets “high-quality companies build on dominant market positions and underpinned by power intangible assets”, Guinness Global Innovators (IE00BQXX3K83) and JOHCM’s Global Select (IE00B3DBRN27) and Global Opportunities (GB00BJ5JMC04) funds.

Relx has been seen as a safe pair of hands for some time and an update from earlier this year supports that narrative

The JOHCM offerings employ two similar but distinct approaches. The Global Select fund follows the growth at a reasonable price (Garp) valuation methodology while the Global Opportunities managers want cases where the market is “underestimating the value created by well-managed companies that reinvest wisely to create sustainable compounding returns”.

Investment teams don’t always elaborate on exactly why they like a certain stock. None of the four funds in our sample have recently commented on the case for backing ICE, for example.

But the managers of another fund that backs the company, Harris Associates US Value Equity (LU1201861249), recently argued: “Intercontinental Exchange is a stock exchange and software business that does not have credit risk, is capital light, and tends to benefit from the activity spikes that accompany market declines.”

A home favourite

The UK accounts for less than 4 per cent of the MSCI World index and, with US equities hogging the limelight, shares native to these shores have become an extremely rare sight among the top holdings of global equity money managers.

But one favourite of the UK market is bucking that trend: data, publishing and analytics business Relx (RELX). Morgan Stanley Global Brands ranks it among its largest positions, as does the UK-heavy Lindsell Train Global Equity as well as Invesco Global Equity (GB00B3RS9Q62), whose team likes “sustainably growing, cash-generative companies, with strong balance sheets, trading at a discount to long-term intrinsic valuations”.

Relx has been seen as a safe pair of hands for some time and an update from earlier this year supports that narrative, with the group expanding its buyback programme and proposing another dividend increase after seeing its revenues edge up.

The company’s vast data sets are an attribute in a world in which artificial intelligence (AI) makes data even more valuable, although as with many a market darling its 2025 forward price/earnings ratio is hardly cheap at 29 times.

If Relx and ICE are seen as tapping into growth trends, another name from our list, cigarette maker Philip Morris (US:PM), operates against quite a different backdrop.

Amazon is so much more popular than most other Magnificent Seven members

Its core offering is in structural decline and comes with many a regulatory hurdle, although the company has thrown plenty of resources at smoke-free products, something that has helped drive group sales in recent times.

Investors might be able to guess one of the backers here. The stock was one of the top contributors to the returns of the Fundsmith Equity fund in 2024 and has been a stalwart of the portfolio for many years.

As Terry Smith put it in an annual shareholders meeting held in February: “It’s the world’s biggest tobacco company but also a pioneer . . . that has developed heat-not-burn products and . . . nicotine pouches.” Sales of the Zyn brand of the latter have proved particularly successful for the company in recent quarters.

The team behind Blue Whale Growth (GB00BD6PG563), another of the funds in our sample to hold the company, has struck a similar note, describing Philip Morris as “capitalising on the ongoing shift away from traditional cigarettes”.

Most global funds still manage to distinguish their portfolios in some way: there is a long tail of stocks only held in the top 10 list of one fund from our sample, and as the chart shows, a few businesses such as insurer Aon (US:AON), and South American ecommerce play MercadoLibre (US:MELI) crop up twice.

Turning to the upper end of the scale, the names that appear most often should come as no surprise, given their dominant position in markets.

However, it’s interesting to note that Amazon (US:AMZN) is so much more popular than most other Magnificent Seven members.

That said, unlike joint favourite Microsoft (US:MSFT), Amazon has nonetheless divided opinion among some managers.

It’s not held at all by some very well-known funds, with Fundsmith Equity dropping it after a brief period of ownership in 2022-23. Still, Smith himself suggested at Fundsmith’s recent shareholder meeting that he was unsure whether selling the company had been the right decision.

Lone riders

For those who do want to consider the funds themselves instead of just the shares they hold, parsing top 10 lists can give a simple indication of which investment teams are looking beyond the most prominent names in the market.

AVI Global, for example, shares none of its top 10 holdings with other funds in our sample. That’s in line with its distinctive approach, which involves the team trying to pick up holding companies, closed-ended funds and Japanese businesses that look cheap, as well as sometimes taking activist measures.

Its top 10 includes investment trusts such as Chrysalis (CHRY), HarbourVest Global Private Equity (HVPE) and Oakley Capital Investments (OCI) and companies such as News Corp (US:NWS).

Elsewhere, Schroder Global Recovery, a ‘deep value’ fund, also has no top 10 holdings in common with the rest of the sample, although its approach is more conventional than that of AVI Global.

Its top 10 includes BT Group (BT.A), Standard Chartered (STAN), Molson Coors (US:TAP) and Continental (DE:CON).

It’s also worth remembering that some funds specifically claim to seek out lesser-known businesses. This is part of the stated remit for Rathbone Global Opportunities, which lists Nvidia (US:NVDA), Microsoft and Costco (US:COST), but also medical tech firm Boston Scientific (US:BSX) and fibre-optic connector provider Amphenol (US:APH), as its top five holdings.

The team focuses on spotting solid businesses “before they become household names”.

The income story

Our income analysis is a more modest affair, given the fact there are simply fewer high-profile portfolios in this space.

We have looked at the biggest holdings of 10 major global income funds, with the sample including the likes of Guinness Global Equity Income (IE00B3PB1722), BNY Mellon Global Income (GB00B8BQG486), Fidelity Global Dividend (GB00B7778087), JPMorgan Global Growth & Income (JGGI) and Artemis Global Income (GB00B5N99561).

Looking at funds that have appeared at least twice as a top 10 holding, we see a disparate mix. With trailing dividend yields of more than 3.5 per cent, UK stalwarts Unilever (ULVR) and Reckitt Benckiser (RKT) might seem like obvious inclusions in a portfolio focused on yield, but aren’t free from issues.

Unilever has enjoyed good returns over the past year but nevertheless abruptly ousted its chief executive in February in a bid to speed up turnaround plans.

Reckitt has had its own problems, including US litigation centring on its baby formula products, and last year announced plans to offload multiple brands in an effort to focus more closely on “high-growth, high-margin power brands”.

Elsewhere, futures and options trading house CME Group (US:CME) comes with a yield of around 4 per cent and might carry some of the same investment arguments as ICE.

A closer parallel still is Deutsche Börse (DE:DTE), which also crops up in a number of top 10 lists. Meanwhile, pharmaceuticals groups Roche (CH:ROG) and AbbVie (US:ABBV) each offer yields of more than 3 per cent.

There’s a mixture of other themes, too. Paychex (US:PAYX) provides HR, payroll and employee benefits services, and was featured in our annual US Quality Shares analysis back in 2022, while UnitedHealth (US:UNH) focuses on the US healthcare system.

Our table shows the yield figures for each of these businesses, as well as their level of dividend cover and their annualised two-year dividend growth rate, as per FactSet data.

How core income fund picks compare
Stock	12-month trailing dividend yield (%)	Dividend cover	Annualised two-year dividend growth rate (%)
Meta	0.3	14.7	-7.7
Microsoft	0.8	4	4.3
Broadcom	1.2	2.8	13.5
UnitedHealth	1.6	3.4	9.2
TSMC	1.7	3.5	9.2
LVMH	2.2	2	6.1
Cisco Systems	2.6	2.3	2.5
PayChex	2.7	1.3	5.9
Roche	3	2.1	1.5
AbbVie	3.1	1.9	3.7
Medtronic	3.2	2.1	0.8
Unilever	3.3	1.7	6.5
Reckitt Benckiser	3.9	1.7	4.7
CME Group	4	1.1	0
Source: FactSet, 26 March

The income conundrum

Yield is, of course, only one part of the picture.

The presence of companies such as Microsoft, TSMC, Meta (US:META) and Broadcom highlights a chief quandary for many a global income fund. As mentioned, they tend to have at least some exposure to low or no-yielding growth stocks in the hope of driving total returns.

Some so-called income funds do in fact openly care much more about total returns than dividends.

Guinness Global Equity Income, for one, is run on the basis that a sustained dividend can simply indicate a company’s financial strength or good management, while JGGI simply focuses on generating good returns and then pays a chunk of its net asset value as a dividend over the course of the year.

Investment trusts have increasingly turned to the ‘enhanced’ dividend policy favoured by JGGI in recent years.

Our chart shows how the funds in our sample are faring, based on both recent returns and dividend yields. Yield figures for open-ended funds are 12-month trailing numbers, while the figures for investment trusts are share price dividend yields, making them somewhat more current.

As the chart shows, some have benefited richly from a focus on growth stocks, although by the same token these portfolios might be more exposed if the tech sell-off endures.

One notable example here is JGGI, which has substantial exposure to the Magnificent Seven. By contrast, Murray International (MYI) offers more yield and seeks to look beyond the US and focus on the likes of emerging markets and Europe. That, as the chart shows, has had a bearing on returns.

As such, there are plenty of ins and outs when it comes to income investing, whether you adopt this practice via a fund or your own direct holdings. Either way, as with growth stocks, knowing how the professionals are putting money to work can be instructive.