3 Funds for Your Isa

In troubled times, it can pay to focus on quality companies - and these three funds do just that

02/04/2020 10:40:00
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Number three

With current stock market conditions, you would be forgiven for wanting to wait until the dust settles before thinking about where to invest. The sharp drop in share prices across the board in the past month have pushed valuations of even the best companies down to levels last seen four or five years ago.

But a focus on quality companies is likely to stand investors in good stead whatever stock markets are doing. And with interest rates falling even further in the past few weeks, the search for income remains as important as ever. With all that in mind, here are three funds to consider if you're looking for a place to invest this year's Isa allowance before the tax year ends on April 5. 

Trojan Income – Silver - 4 stars

Morningstar analysts have a high regard for the consistency of this fund’s investment process, and the strength and expertise of the team that run it. With an Analyst Rating of Silver, it is also rated as four stars, which means it has outperformed its peers.

In the latest market correction, the fund has fallen – but less than the wider market. In the year to date, Trojan Income is off 9%, but that is 3.5 percentage points better than the UK equity income category average return, and 2.8 percentage points better than its benchmark, the FTSE All-Share.

“Over the long term, it is one of the most attractive funds in the sector on a risk/reward basis,” Morningstar fund analysts say, pointing out that it has consistently grown its payout above inflation over the long term. Its yield over 12 months is considerably above inflation at around 4%.

Its top five holdings include Unilever, which yields nearly 4%, and the fund managers have recently added to this position.

The fund has is mainly focused on the UK, but a 13% exposure to the US adds an element of geographical diversification, and it is weighted towards larger companies.

Veritas Global Income – Silver - 3 stars

This Silver-rated fund takes the theme of global income one step further, with a 19% exposure to UK equities, 30% in the US, 21% in the eurozone and 13% in developed Asia stocks. Tthe fund is off 6.5% year to date, which considering the market meltdown, shows some resilience and has outperformed its its benchmark, the MSCI World High Dividend Yield Index. However, it did slightly underperform this benchmark in 2019, with a 17.5% return for the year

Again, Unilever is the top holding and other names in the top five include Australia’s Sonic Healthcare, US real estate investment trust Welltower, cigarette maker Philip Morris and defence giant BAE Systems, a position that has been added to by the fund’s managers recently.

The fund’s 12 month yield is just under 4% and it also has an above average Sustainability Rating with four globes (out of five). According to Morningstar analyst Jeffrey Schumacher: “The time-tested approach concentrates on finding quality companies that have durable competitive advantages, a high return on invested capital, a strong management and a sustainable dividend, but valuation is equally important.”

Manager Charles Richardson is stepping down after fifteen years, to be replaced by Ian Clark, but despite these changes, the fund retains its Morningstar Analyst Rating of Silver, the second highest fund rating.

Fundsmith Equity – Gold - 5 stars

This Gold-rated Fundsmith Equity remains a perennial favourite with investors and its stellar performance speaks for itself. Of the 30 open-ended funds that Morningstar rates as Gold, Fundsmith Equity is one of just eight that has a Gold Rating and a five-star performance rating (although not all share classes are rated as Gold, because of their higher fees).

Veteran investor Terry Smith has been running the eponymous fund for nearly 10 years now and over five years the fund has delivered an annualised return of nearly 15%. “Smith is an original thinker and has often demonstrated his willingness to bet against the crowd by taking a longer-term view,” says Morningstar fund analyst Peter Brunt. This contrarianism could prove useful in the current market malaise.

Though the fund is in the Global sector so can invest across the world, some 66% of the portfolio is in US stocks, with a further 17% in the UK. Smith has a “buy and hold” approach to stocks and top holdings include Microsoft (MSFT), PayPal (PYPL), Estee Lauder (EL), Philip Morris and medical technology company Stryker (SYK).

“A longstanding manager and highly structured, disciplined investment approach are among the many strengths of this strategy,” adds Brunt, although he notes some concerns about the fund’s size – which is approaching £20 billion – and believes there is “limited scope for further growth”. But he is reassured that the fund remains suitably liquid for now. 

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