Striking a balance: Three core and satellite funds for your ISA

Building the right portfolio is all about striking a balance between growth and risk: growing your pot of money enough to achieve your financial goals, while being comfortable with the level of risk you have to take in order to succeed in that aim.

One approach investors can take is to build a ‘core-satellite’ portfolio, which aims to spread investment risk without impacting too heavily on returns.

Core funds, as the name suggests, are those that will form the core of your investment pot. They will constitute the essential elements of your overall portfolio by being solid and consistent performers, regardless of market conditions. These are often funds with a respectable growth target, a proven track record and a straightforward mandate to find quality companies that consistently create value for shareholders.

Satellite investments, in contrast, are used to build on the core and strengthen returns. They will generally make up a smaller proportion of your portfolio, but they allow investors the opportunity to take advantage of more exciting or risky opportunities, without putting their overall portfolio in too much jeopardy.

Here, we take a look at three core and three satellite funds you might want to consider for your ISA.

CORE

Artemis Income

This fund has been a stalwart in the UK equity income sector for almost 20 years and is headed by the trio of Adrian Frost, Nick Shenton and Andy Marsh. It typically holds 50-70 stocks and has a bias towards larger companies – which currently account for 78%* of the portfolio. The fund mainly invests in companies listed in the UK, but it does have the ability to invest overseas when the opportunities arise.

The trio focus their analysis on a company’s cash flows and its ability to drive sustainable and growing dividends for their shareholders. The managers will also look specifically for companies with a competitive advantage and where barriers to entry are high. The fund currently has its largest weightings in financials (36.8%*) and consumer services (20%*), while BP (5.1%*) is the largest individual holding. Over ten years, the fund has returned 191.03%**.

Rathbone Global Opportunities

The diverse nature of global funds has made them a popular choice for investors in the past 12 months – the IA Global sector was the best selling in 2018, according to statistics from the Investment Association. This fund has been managed by James Thomson for more than a decade. He invests in undiscovered or out-of-favour growth companies.

The fund reviewed its approach in the wake of the financial crisis and added a core defensive bucket of reliable growth stocks. The 40-60 stock portfolio has been a strong performer over the past ten years, returning 368.12%**. There are no restraints on geography or sector within the fund, although it tends to stick to companies based in developed markets. It currently has 62%* of assets invested in the US, while technology (19.8%)* is the largest sector exposure.

 

Baillie Gifford Strategic Bond

One way for investors to swerve the difficulties of choosing between a gilt, corporate or high-yield bond fund – and the individual challenges each sector of the bond market faces – is to use a strategic bond fund. These funds give managers the flexibility to diversify their bond holdings across a range of sectors, allowing them to shift allocations as they see fit.

Managed by Torcail Stewart and Lesley Dunn, this fund has a straightforward, bottom-up selection process. The managers buy bonds that are undervalued and hold them until their potential is realised and the price has appreciated. The portfolio is well diversified, with exposure typically between 60–80 companies. The portfolio could be characterised as comprising the “best ideas” the team can find across the high yield and investment grade markets and, over the past decade, it has returned 168.70%**.

SATELLITE

Goldman Sachs India Equity Portfolio

Having been tipped by the International Monetary Fund to be the fastest growing economy in 2019, India looks set to benefit from lower oil prices and a slower pace of monetary tightening. India’s economy has been picking up thanks to the implementation of recent policies, such as the nationwide goods and services tax. The momentum has made it an attractive alternative for investors.

This fund has a well-resourced and experienced team, based on the ground in India and Singapore. It has a solid investment process and fund manager Hiren Dasani and his team have a very long-term time horizon and a very low portfolio turnover. They are patient investors, and, because of this, they can weather day-to-day volatility to tap into significant growth opportunities. The fund currently has a strong exposure to financials (25.5%*) with banks accounting for four of the top 10 holdings* and, over the past decade, it has returned 403.12%**.

Axa Framlington Global Technology

This fund has a go-anywhere approach in searching for technology stocks around the globe. Fund manager Jeremy Gleeson has been specialising in this area of the market for more than two decades and has managed this fund since 2007.

Jeremy specifically targets new technology with proven commercial viability. He believes individual stock picking ultimately drives portfolio construction, with each holding exposed to one or more key themes that are expected to underpin technology sector growth over the coming years. Jeremy looks for companies with progressive-thinking management, dominant positions, above-market growth and sustainable or improving profitability. The fund has returned 617.17%** to investors in the past ten years.

Fidelity China Special Situations

Managed by Dale Nicholls since January 2014, this trust invests in companies listed both domestically in China and on the Hong Kong Stock Exchange. Dale makes full use of Fidelity’s investment licences in China – which are among the largest of any international investor – to offer investors direct exposure to the China growth story. He can also invest in Chinese companies listed on other exchanges around the world, as well as companies with significant interests and primary revenue exposures in China.

While the country’s economy has been slowing in recent years, it is still likely to be the second fastest growing this year, behind only India. With a bias towards smaller and medium sized companies, this trust is not for the faint hearted and investors should be prepared for large fluctuations in the value of their investment, but those willing to take the risk could be handsomely rewarded over the long term. Since launch on 19 April 2010, the trust has returned 134.83%***.

*Source: latest fund fact sheets
**Source: FE Analytics, total returns in sterling, ten years to 25 February 2019
***Source: FE Analytics, total returns in sterling, 19 April 2010 to 25 February 2019

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.