Security company G4S is one of the holdings in M&G’s Global Basics fund
Wealth managers are advising their clients to seek out growth funds as core portfolio holdings for the long term, rather than chasing investment fads that are vulnerable to market swings.
Philippa Gee, of Philippa Gee Wealth Management, says the economic climate has encouraged investors to seek out income and yield on a short-term basis and ignore the long-term story. “Clients are very focused on instant returns and therefore advisers are as well,” she says.
But Gee says investors should be seeking out steady, long-term growth holdings for their portfolios instead, such as UK and global growth funds.
“The IMA Global sector is an unloved and underused sector, and yet it represents a useful diversification tool long-term,” Gee says. “There are a lot of funds in there so you need to pick and choose. Not every fund will be right for you.” She says short-termism only works for so long and “chasing fads will get you nowhere”.
Funds in the IMA Global sector as a whole returned an average £1,499 on an original investment of £1,000 in the 10 years to 1 January 2012. While the IMA Global Emerging Markets sector, which has become a fashionable place to invest, outperformed it during the same time period, returning £3,165, some global growth funds have proved equally successful.
M&G’s Global Basics fund, for example, returned £3,369 in the 10 years to 27 January, for an annual growth rate of 12.8 per cent. It invests wholly or mainly in companies operating in basic industries, whose products and services are in high demand in both emerging and developed markets.
Christopher Andrew, director of Clarmond Advisors, a wealth management firm, says investors should take a five to eight-year view and build the core of an investment portfolio with a mix of different assets in the cheapest possible form, such as passive funds. “What you need in the heart of your portfolio is a global growth strategy,” he says, adding: “What history shows is, if you get overly complicated, you can look good for a second, but if it goes wrong you look ridiculous for a very long time.”
But not everybody thinks growth funds are the best option. Edward Bland, director and head of research at Duncan Lawrie Private Bank, says that some pure growth funds can produce lacklustre returns because in some cases they miss out on the income element from dividends, which have been the larger component of the market’s total return for so long. “You can avoid that at your peril,” he says.
Ken Stuzin, manager of the Brown Advisory US Equity Growth fund, says, “In a slow growth, low interest rate and volatile environment, it is understandable that investors should seek dividend yield and one might argue that this was the only driver of the modest growth in the S&P 500 in 2011.”
Indeed, when markets are difficult, investors naturally develop a defensive mentality, says Tom Ewing, portfolio manager of the Fidelity UK Growth fund. “At times of uncertainty, the tendency is for people’s horizons to shorten slightly. You value near-term cash flows and dividends rather than growth in the future,” he says.
But Chris Wyllie, chief investment officer at Iveagh Wealth, the family office, says few investors complain about a lack of income when markets are booming. “There’s this tendency among US companies not to pay dividends and hoard their cash,” he says, adding that they are often strong growth holdings. “People don’t give two hoots about dividends when there’s a real growth story to be told, like with Apple computer.”
George King, head of portfolio strategy at RBC Wealth Management, says that the current market environment forces many people to adopt a short-term point of view because the recent market shocks have flattened the returns from the past decade. “The challenge is for people to have an intermediate to long-term outlook and stick to it,” King says.
Meanwhile, Stuzin at Brown Advisory says the tide might be shifting away from income-earners. “We believe valuations of many of these mega-cap, dividend paying stocks have become stretched and therefore high-quality growth stocks are becoming increasingly attractive from a fundamental and valuation perspective,” he says.
Ewing at Fidelity believes the current focus on companies paying dividends and offering near-term yield can make long-term, growth holdings cheaper to buy and, therefore, a good option right now. “People focus too much on the next six months and they might not be buying these long-term growth stories in the next six years,” he says.
Companies that generate income from worldwide demand for goods and services are the most likely to generate long-term growth in the current market, says Tim Steer, manager of the Artemis UK Growth fund.
“People are looking for structural growth; it doesn’t matter where it is,” Steer says. “You’ve got to take a look at global themes and stories and try to connect to them through companies.” His strategy for long-term growth is to “find companies that are going to do well in spite of the economic environment”.
Michael Garvey, a chartered financial planner at Edinburgh Wealth Management, agrees that the current economic climate favours low volatility stocks that pay dividends, but a strong recovery move is to aim for growth holdings.
Bland at Duncan Lawries adds: “If you choose this point in time as an entry point to buying growth funds, it doesn’t look so foolish.”
Geordie Clarke is deputy editor of Money Management, a Financial Times magazine