We don’t yet know the full extent of economic damage wrought by the coronavirus. Even so, it doesn’t seem too much of a stretch to say that some of this is already priced-in to the FTSE 100. Despite bouncing in recent weeks, the UK’s leading index is still far below the value it hit back in February.
Taking this on board, I think anyone in the position to continue investing in the top tier over next few months should do so.
But while a cheap exchange-traded fund is perfect for those desiring a fuss-free approach, this strategy won’t suit everyone. Those wanting to outperform the market (be it the FTSE 100 index or something else) will need to pick their own stocks, get others to do it for them, or a bit of both.
Personally, I’m in the third camp. Today, I’m going to cover two funds I’ve been adding to my own portfolio lately.
Making a splash
Set up by Hargreaves Lansdown founder Peter Hargreaves and Stephen Yiu, the LF Blue Whale Growth fund invests in a concentrated portfolio of 25 large-cap, mostly US-based stocks. Tech titans Amazon, Adobe and Microsoft are some of the largest holdings.
While manager Yiu has a penchant for tech stocks, there are some things he definitely won’t buy. Like fellow fund managers such as Terry Smith, Yu also won’t have anything to do with cyclical companies such as those in the oil and gas or mining spaces. He’s also wary of banks and pharmaceuticals. Many such businesses feature in the FTSE 100.
Blue Whale aims to outperform similar funds every 12-month period, which it has since launch in September 2017. From here to the end of April this year, it had returned 46.3% compared to its sector average of 11.8%. Encouragingly, the fund is also up 2.6% in 2020 so far. The sector average is down 7.1%.
Naturally, it’s still early days. The real test for Yiu is whether he can sustain this performance over the medium-to-long term. If he can, we could be looking at a potential rival to Fundsmith’s crown. At £300m, there’s certainly lots of room left to grow.
Likely FTSE 100 beater
A second fund likely to generate far better returns than a FTSE 100 tracker is Liontrust UK Smaller Companies.
Some may consider buying such a fund very risky when the outlook for small businesses is especially bleak. Even if a second wave of the coronavirus is contained, the economic wounds sustained so far will take time to heal. There’s also Brexit to think about.
The importance of focusing on the long term, however, can’t be overstated. Research has consistently shown that investing in minnows can deliver exceptional outperformance over the long term, certainly compared to the likes of the FTSE 100. Given this, it surely makes sense for younger investors to have some exposure.
Yes, it’s expensive to hold compared to your typical top tier tracker (the annual management charge is 1.25%). On the flip side, performance over the years suggests the Liontrust team members earn their pay.
In the last five years, the fund has delivered a near-84% return compared to the sector’s 26%. It’s also fared better over the last three months of market mayhem (-12% compared to -22%).
If you can trust yourself not to meddle and can handle the volatility, I feel confident this fund will prove a long-term winner.