Funds and trusts to add spice to a portfolio

Kyle Caldwell explains how to build a core and satellite portfolio, and outlines ideas for investors looking for adventurous investments.

27th November 2024 11:39

Kyle Caldwell from interactive investor

Funds that are higher risk, often those labelled adventurous, offer investors potentially higher rewards. However, the trade-off is the likelihood of a bumpier ride compared to more cautiously invested funds.

Adventurous funds add spice to a portfolio, but as with cooking, you need to strike the right balance. When picking funds, it’s important to weigh up risk vs reward, and ensure that you don’t have too much of your portfolio in adventurous areas that could all fall sharply at the same time.

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That’s why it’s important to have most of your portfolio, typically around 70%, in core holdings. Such holdings are those that you can, in theory, invest in for the long term, as they shouldn’t give you any nasty surprises. They are typically low-cost passive funds tracking the ups and downs of a mainstream index such as the MSCI World, S&P 500 or FTSE All-Share.

Index funds and exchange-traded funds (ETFs) that fit the bill as potential core holdings include iShares Core MSCI World ETF (LSE:SWDA), Vanguard US Equity Index and Vanguard FTSE UK Equity Income Index.

Other options are passively managed multi-asset funds, which offer exposure to both shares and bonds, such as Vanguard’s LifeStrategy fund range and BlackRock’s MyMap fund range.

For active funds, options to consider include those with a global approach. That’s because such funds are able to invest around the world and should give investors a smoother ride compared to those investing in one particular region.

Three global funds in interactive investor’s Super 60 list of fund ideas are Fundsmith Equity, F&C Investment Trust (LSE:FCIT) and Fidelity Global Dividend.

How to add spice

For investors wanting spice in their portfolio, options include single-country emerging market funds, such as those investing in China, India and Vietnam. Sector specialist funds are another option, including those that focus on technology, healthcare, biotech and commodities.

For specialist funds, there are both active and passive options. Active funds have a professional investor picking a selection of companies that they think will outperform a comparable index, whereas passive funds, which are either index funds or ETFs, invest in the entire market or sector.

As well as sectors, some passive funds also invest in themes, such as artificial intelligence (AI) and cloud computing.

Other adventurous funds invest in private companies, which could become tomorrow’s winners. One example is Scottish Mortgage (LSE:SMT), an investment trust that holds around a quarter of its money in private companies. Its approach is to invest in best-in-class growth companies.

In addition, emerging markets and Asia Pacific are also higher-risk regions compared to developed-market funds.

Smaller company-focused funds are also higher risk, but historically the returns of smaller companies have been higher.

Options in the Super 60 include the UK-focused Henderson Smaller Companies (LSE:HSL), which is overseen by longstanding fund manager Neil Hermon.

Experts share options for adding spice

The Association of Investment Companies (AIC) recently asked analysts and wealth managers to name their favoured higher-risk sectors and investment trusts.

Gavin Trodd, investment companies analyst at Deutsche Numis, picked out Odyssean Investment Trust (LSE:OIT), which runs a concentrated portfolio of 15 to 20 UK small and micro-caps.

Odyssean's manager Stuart Widdowson told interactive investor earlier this year that he takes a private-equity style approach to public markets.

Trodd adds: “It looks to take meaningful stakes in businesses that have fallen out of favour and are trading at discounts to their intrinsic value. They seek companies that can benefit from self-help opportunities and where the manager can generate value through engagement.

“Performance since launch (May 2018) has been exceptional, although investors need to be comfortable that performance may differ significantly from small-cap indices over short periods, given the concentrated portfolio of 15 to 25 positions, reflected in a period of underperformance in 2023.

“However, we believe that the stock picking record speaks for itself and that Odyssean represents an attractive and differentiated addition to a portfolio.”

The private equity investment trust sector has caught the eye of Iain Scouller, managing director of investment funds research at Stifel.

Scouller says that “private equity trusts provide access to unlisted companies across many geographies including the UK, Europe and the US, as well as exposure to a diverse range of industries including tech, retail and financials”.

He says that an added current attraction is that many of these trusts are trading on wide discounts to their net asset values (NAVs), typically of between -20% to -40%.

Scouller adds: “We expect sales of companies from these portfolios to pick up over the next year and this should be good for investors. Typically when an investment is sold, it is at a gain of 20% to 30% above its prior valuation, which results in an increase in the trust’s NAV.”

He identified three trusts from the sector: HgCapital Trust (LSE:HGT), NB Private Equity Partners (LSE:NBPE), and CT Private Equity Trust (LSE:CTPE).

Scouller said: “There are a number of trusts which specialise in private company investments, for example HgCapital Trust focuses on software companies, whereas NB Private Equity focuses on companies primarily in the US and offers a dividend yield of about 5%. Finally, CT Private Equity has a portfolio across a diverse range of industries and its focus is on UK and European companies.”

For those looking to back a theme that should endure over the long term, Trodd highlights RTW Biotech Opportunities (LSE:RTW). Biotech has plenty going for it from an investment perspective given that companies are aiming to develop drugs that are badly needed by people all around the world. However, it is a volatile part of the market.

Trodd says: “RTW Biotech Opportunities offers exposure to a sector that benefits from numerous tailwinds including increasing innovation and looming patent expiries, which is likely to support further M&A activity.

“Since IPO in late 2019, RTW Biotech Opportunities has produced net asset value total returns of 87.5% (in US$ terms) compared to 17.7% for the Russell 2000 Biotech index and 41.2% for the Nasdaq Biotech index (to 30 September), fuelled by several companies delivering clinical successes and return generating liquidity events.”

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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