Taking an aggressive approach to investing doesn’t mean getting nasty about it – no violence here. But it can mean taking more risks – being prepared to suffer some volatility around your investments in the hope of securing a higher return than if you were to take a more passive approach and go for more steady investments like, ordinarily, bonds and gilts.
How you manage your risk is of course up to you and whether you select your own funds or shares or go through a platform or an adviser there is help around to help in your decision making.
If you invest in a fund of course you are tapping into the experience and expertise of a fund manager and while your investments can go down as well as up, it is that manager’s aim to ensure where possible the latter.
To help focus on some options Patrick Connolly, financial planner at IFAs Chase de Vere wraps up our ISA season top fund picks series by making five fund recommendations for you if you are happy to consider an aggressive approach.
Fund manager views
Small companies we know can offer a higher risk so no surprise they comprise an aggressive approach portfolio. Enter therefore, the Liontrust UK Smaller Companies fund onto Connolly’s aggressive fund recommendations.
Anthony Cross, Julian Fosh, Victoria Stevens and Matt Tonge are co-managers on the fund. They accept that smaller cap companies are sometimes overlooked because investors are cautious about the perceived risks of venturing into this part of the market. However, they also argue that small caps ‘are not a homogeneous group of companies.’ As with any investment, they say, the key is stock selection and constructing a diversified portfolio to try to mitigate the risks while taking advantage of the long-term opportunities.
“When investing, it is always the case that you try to pick the winners and avoid the losers, but this is all the more essential with smaller cap companies where the variability in business prospects and outcomes can be large,” says Stevens. “Many small cap companies are at an early stage in their development but looking to grow rapidly. There is a degree of risk concerning the execution of ambitious growth plans and – as you would expect – not all of these small companies go on to enjoy success.”
The managers therefore aim to capture the opportunities within smaller cap companies while reducing the chance of succumbing to the pitfalls through the consistent and rigorous application of an Economic Advantage investment process, in which it evaluates companies in the UK stock market to select those which must possess at least one of the main advantages: intellectual property, strong distribution or recurring business (at least 70% of annual turnover).
Stock weightings within the portfolios are determined based on:
- financial risk (balance sheet and accounting risk;
- capital requirements and financial gearing);
- product dependency;
- customer dependency;
- pricing risk;
- regulatory change;
- licence dependency;
- acquisition risk and valuation.
Each smaller company has to have at least 3% of its equity held by main board directors. Companies are also assessed for employee ownership below the board and changes in equity ownership are monitored.
“A risk in small caps is that of investment bubbles or fads: ‘jam-tomorrow’ stocks on lofty valuations with little to underpin them other than a good story,” says Anthony Cross. “There have in the past been small and micro-cap company bubbles in sectors such as oil exploration, technology and biotech. When these bubbles burst, the results can be painful for the investors involved. Having a clearly defined investment process such as ours helps combat emotional bias, enforcing evaluation of opportunities within a distinct framework. We also manage this risk by avoiding loss-making companies, instead focusing on stocks which generate profits and cash flow to underpin their market valuation. As a result of this investment rule, a large proportion of companies the fund holds pay a consistent dividend – often a sign of a well-managed company with a sensible strategy for generating returns for its investors,” Cross concludes.
The AIM market is of course a key source of smaller companies looking for shareholders. Liontrust’s Julian Fosh says: “Corporate governance is a factor worth considering especially when investing on AIM, London’s junior market which has a ‘lighter-touch’ approach to regulation than the main UK stock market. We address this risk by only investing in companies headquartered in the UK whose directors are subject to UK law. We also do our own due diligence, conducting as much research and analysis as possible to try to ensure we find companies that are well run and avoid those that are not.”
Another fund on the aggressive list is Baillie Gifford’s Japanese fund, arguably by nature of its single country status offering the additional risk associated with an aggressive approach. However, a focus on companies not the country itself can offer a global opportunity.
Thomas Patchett, Japan specialist at Baillie Gifford says: “By focusing on the fundamentals and seeking companies that present plausible pathways to doubling our money in five years’ time, we are able to avoid lazy market shorthand and the myopic focus on macro trends including the dispiriting impact of Japan’s demographics, debt and stagnation in favour of capturing companies offering promising growth potential.
“We invest in Japanese companies, not the Japanese economy. Such an approach provides our clients with exposure to global leaders in their field, such as premium skin care brands, biotechs with pioneering new treatment modalities, robotics and other low-ubiquity, high complexity electronic component makers.
“We believe that companies with durable competitive advantages, dynamic and competent management teams and sustainable earnings growth will ultimately outperform in the long-term in an environment of increasing short-termism.”
Patrick Connolly’s Top Five Aggressive Funds
This is perhaps as close as you can get to a pair of safe hands in what is a volatile investment sector. The fund has one of the largest and best resourced emerging markets investment teams, which are based from London, New York and Singapore. It adopts a long-term approach, seeking high quality companies which have strong growth prospects and some of the stocks within the fund have been held for more than a decade. It has been a long-term consistent performer in the past and there is every opportunity that will continue into the future.
This is a high-risk fund but one which has worked really well for those taking a long-term view. It has achieved an impressive track record as the managers have focused on investing in companies which have a sustainable advantage that is difficult for its competitors to replicate; this could be having high recurring income, distribution networks or intellectual property such as brand and culture. The turnover in the fund is very low as the managers spend more time focusing on what they already hold rather than the next buying opportunity. The fund has high charges but the performance to date has more than compensated for this.
Baillie Gifford has a distinctive investment style. They are growth investors that adopt a team approach, take a long-term stance, have low turnover, invest in good quality companies and have a high active share. This fund adopts the same strategy, focusing on their bottom up stock-picking abilities and this has produced strong performance results. However, their growth style will mean there will be periods of under-performance especially as many other Japanese funds are more value oriented.
Fund manager Matthew Dobbs has been managing Asian equity portfolios for 34 years and, while he is based in London, he is supported by the extensive research resources of Schroders including their offices in Hong Kong and Singapore. Schroder’s ‘Alpha Plus’ range is designed to give flexibility to their most talented fund managers and this is very much a concentrated best ideas fund. It has a quality growth bias, with a high active share, and invests in companies with visible earnings growth and sustainable returns. The fund manager is putting a particular focus on the rising influence of Chinese and Asian consumers.
India is on its way to becoming the world’s fifth largest economy and, with a rapidly increasing population, it will move higher in the coming decades. This fund adopts a growth style, looking to invest in good quality companies and benefit from the Indian domestic growth story. It is a high conviction fund, which Schroders should be well-equipped to manage, having research resources on the ground in India through its relationship with Axis AM. However, while India is making significant progress in terms of economic reforms, considerable improvements are still required and there are also major infrastructure issues which need addressing, including transport and energy improvements, and despite the perceived stability from Modi’s re-election, there always seem to be the potential for political risks in India.
Further reading: Passive fund ISA investing and top five recommendations