The five most popular funds on our Direct Investment Service

Funds offer a convenient solution to investors looking for diversification. We take a look at the characteristics of some of the most popular.

| 14 min read

Some investors are highly active and enjoy researching and choosing their own individual shares, bonds and other investments. However, it takes time and discipline to monitor the stock market in detail and react appropriately to company news.

Funds offer a convenient solution. They spread your investment – and risk – across dozens of different companies and are either managed by a professional fund manager (in the case of ‘active’ funds) or designed to simply track a particular index (in the case of ‘passive’ funds or ‘trackers’). While it can be a challenge to devote enough time to monitor a portfolio of individual shares, it’s a lot easier to keep tabs on a few funds.

Using funds means you can easily invest across a range of asset classes, which can help reduce portfolio volatility (the extent of ups and downs) while still aiming to generate decent returns. Alongside equity and bond funds there are more specialist investments in areas such as property, infrastructure assets or commodities.

Unit Trusts and OEICS are categorised by the Investment Association into 45 different sectors, which defines the areas in which they can invest. This means investors can more easily identify funds that might meet their needs and compare them with each other.

What makes a popular fund?

Some funds become very popular with investors. In active funds, strong past performance or the ‘star’ status of a particular fund manager can draw interest. Investors shouldn’t get carried away and devote too much of their portfolio to a single manager, though, no matter how convincing their pitch or impressive their performance. Past performance is not a guide to the future and all active managers can experience periods of underperformance, which can quite often crop up immediately after strong periods of returns. In addition, evolving circumstances may mean that there are changes at the top or within the manager's support team.

For passive investments, the most popular funds tend to be ones with low charges in their respective areas. It's a competitive landscape and the greater the assets under management the more keenly priced fund groups can be. However, older passives can sometimes be uncompetitive by today’s standards so check older products carefully.

The following funds are the top five most popular holdings with our customers currently (in alphabetical order). Remember, although certain funds have been popular, this does not imply that you should follow suit. This list is for information only and any investment you choose should meet with your own personal circumstances and objectives, taking into consideration your existing portfolio.

Baillie Gifford Positive Change

This fund aims to contribute toward a more sustainable and inclusive world while generating strong returns by investing in four ‘impact themes’: Social inclusion and education; environment and resource needs; healthcare and quality of life and ‘base of the pyramid’ (companies addressing the basic needs of the global poorest). We added the fund to our list of preferred funds for new investing in November 2018 as we were excited by the potential of a high-conviction growth-oriented strategy with an ‘impact’ angle.

It shares a number of characteristics with other Baillie Gifford global funds: A high-conviction portfolio, a search for exceptional growth businesses, and a low turnover of holdings resulting from investments being kept for the long term and not actively ‘traded’.

The managers adopt a ‘concentrated’ strategy investing in a relatively small number of companies, which increases the risk of an aggressive, growth-oriented strategy still further. The fund will typically hold between 25 and 50 positions. The managers tend to run winners that deliver on their growth potential and can thereby deliver outsized returns. This philosophy results in a ‘top-heavy’ portfolio, with more than half of assets typically accounted for by the top ten holdings.

The fund has ridden a wave of technology and healthcare innovation, reflecting the managers’ success in backing the disruptive business models of companies aiming to solve some of the world’s most significant challenges. Chief among these has been Tesla whose share price ballooned over the course of 2020 and 2021. Recent performance has been poor, though, with the fund suffering the headwind of rising bond yields and inflation expectations. Investors have grown more sceptical of growth stocks and have been turning to areas that might be more resilient in a more inflationary environment such as natural resources and banks.

The fund remains a high octane option for exposure to global shares with the added benefit of aiming to be a force for sustainability and inclusivity. It is reliant on certain key holdings and stylistically on a growth-orientated approach. In addition, it has significant stakes in immature businesses whose success can be binary in nature. The fund should therefore be expected to suffer difficult periods, possibly lengthy ones, but for longer term investors able to ride out these spells, we continue to believe that Baillie Gifford idea generation in the context of long term sustainability trends represents a compelling proposition with strong long term performance potential.

Owing to the expected volatility, it could be paired with a broader global fund such as an index tracker or a more ‘value’ orientated strategy as part of a diversified portfolio. For investors interested in the impact investing aspect to the fund, it is important that you take the time to read fund literature carefully to check that values are aligned with your own.

Fidelity Index World

This passive investment offers low-cost global equity exposure and could work well at the ‘core’ of a broad portfolio. Using funds with the lowest charging structures can, over the long term especially, translate to higher returns.

The investment objective is to track the performance of the benchmark MSCI World Index after allowing for costs. The MSCI World Index captures large and mid-cap sized companies from more than 12 developed countries. This index currently reflects the dominance of the US in the companies and sectors that figure most prominently. Around 69% of the fund is currently invested in the States, and the biggest holdings are in line with a US equity market tracker – Apple, Microsoft, Alphabet and Amazon.

The surge in the US share of world markets has come with the rise of the technology giants. The top ten companies in the world index are dominated by American corporations and they are mainly technology based. Therefore, the fund, and others like it, may not be as well diversified by sector and geography as has been the case historically. It is also worth noting that the World Index doesn’t include emerging markets and exposure to our ‘home’ market, the UK, is just 4%.

Fundsmith Equity

This £25bn fund continues to attract inflows, with investors attracted to its high-conviction, 'quality growth' style and the straightforward but effective investment approach. Manager, Terry Smith, has been assisted by generally favourable market conditions since its 2010 launch with good-quality growth stocks in favour with investors during an era of low interest rates. Yet his stock selection has also been impressive, and he has added considerable value for investors over the years.

Mr Smith and his team look for a number of criteria for selecting companies including high returns on operating capital and good conversion of profits into cash flow. They tend to be attracted to businesses that sell small ticket items at short, regular intervals; industrial companies which make most of their profits from service or sales of spares to a large installed base; and franchisors that have royalties on revenues without the need to supply capital. In addition, the managers favour businesses whose advantages are difficult to replicate through brand names, high market shares, patents, licenses, distribution networks, technology and customer relationships. They believe that together these define a company’s ‘franchise’ and its ability to consistently outperform competitors.

We removed the fund from our Preferred List of collective investments in July 2019 as we were starting to become less comfortable with the trajectory of the fund’s asset growth. We felt that, at the margin, this might begin to result in some loss of flexibility in terms of the number of investments available to the manager. A stringent and exacting approach to the characteristics of portfolio holdings already limits the pool of potential investments, and this potentially gets a bit smaller still as the fund size increases. We viewed this as sub-optimal rather than an area of significant concern as Mr Smith operates a ‘buy and hold’ philosophy, rarely trades in and out of holdings, and he has never invested significantly in the less liquid small and mid-cap part of the market anyway.

There remains much to like about the fund. The investment approach is clear and disciplined and it is a convenient way to allocate to companies with quality characteristics. Inevitably, there will be periods where the fund fares poorly versus markets such as when value areas are outperforming, as indeed we are seeing at the moment. Pressure on more expensive growth companies, as a result of rising bond yields, has been a recent headwind, but in the long term the successful growth and execution of businesses in the portfolio and their resilience in terms of pricing power will be a bigger factor.

As such, it is the stock picking ability of the manager that will ultimately matter and is what investors should focus on. We think Terry Smith is a strong manager in that regard, and would tend to look past the small number of recent ‘problem’ investments such as Meta and PayPal that have disappointed. However, we stand by our previous comments regarding size.

Legal & General US Index

Passives like this one could generally be considered the ‘default’ option in the absence of a genuinely strong reason to use an active fund. Trackers represent a particularly good strategy for areas where managers consistently struggle to beat the index – often large, well-researched markets. The US market would be a prime example and investors will have done well in recent years simply to buy an S&P 500 tracker over trying to pick an active manager that can outperform.

The objective of this fund is to provide growth by tracking the performance of the FTSE World USA Index, a market-capitalisation weighted index representing the performance of US large and mid-cap stocks. It is worth noting that the inexorable rise of a cluster of large tech and e-commerce businesses has overwhelmingly driven the US market, and should these have a tougher time then a standard passive fund could struggle. However, in the absence of a crystal ball, and in recognition that it’s really difficult for an active manager to consistently have an edge over Wall Street, we believe passive funds remain a strong option for this market.

Vanguard LifeStrategy 80% Equity

The investment world can seem complicated. Markets move up and down according to a myriad of factors – economic trends, monetary policy, politics, energy prices and so on. Not to mention the timeless emotions of fear and greed among investors that serve to increase volatility. Yet many investors choose to turn their backs on such market ‘noise’ and instead take a simple, and perhaps more relaxed, approach.

The popularity of Vanguard’s LifeStrategy range is testament to this. These funds offer cost-efficient exposure to straight-forward, diversified portfolios spread across global equity and bond markets, and are automatically rebalanced to maintain a specific asset allocation. For instance, 80% equities and 20% bonds in the case of this fund. This saves the investor re-balancing the weightings of various areas themselves, and thus helps prevent the risk level changing over time. An investor can simply choose the fund most appropriate to their objectives and then sit back – at least until such a time that their needs change.

With so much information readily available to investors these days it is easy to end up procrastinating over where to allocate your portfolio. LifeStrategy funds cut through this decision making. Each fund in the range invests in a variety of Vanguard's index trackers, providing access to thousands of international stocks and bonds across the major markets to create a truly diverse portfolio.

Do not be under the illusion this fund will generate market-beating performance, though. These products are designed to deliver returns in line with a benchmark, which they will likely underperform a little due to the fund’s fees. The charges are, however, very competitive with the OCF (or “ongoing charge figure”) at just 0.22% for each fund. For those prepared to accept market-like performance in exchange for low-maintenance simplicity these funds could represent a convenient ‘one-stop shop’, or an option for investors looking for a low-cost core holding around which to build more specialist positions. They are perhaps especially relevant for those with smaller portfolios wanting to gain significant diversification.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

The five most popular funds on our Direct Investment Service

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Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.

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