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Investment ideas – alternatives to equities

Many of our clients have been asking about where to invest in the current climate. For our model portfolios, one of our key philosophies is that ‘we believe in the principle of diversification.’ Why does diversification matter? It’s one of the primary ways to manage the risks of investing.

Ben Seager-Scott Ben Seager-Scott
21 September 2016

Diversifying portfolios across asset class, geography, region, sector, fund manager and individual investments can potentially achieve better returns for less risk. There are certainly options available for those who want to consider further diversification in their investment portfolios – we highlight some of them below.

Gold: the attention seeker

Gold is receiving considerable interest and we’ve seen it be called the ‘Marmite’ of investing. We’ve held physical gold in our model portfolios since last October and increased this exposure in July.

Gold provides diversification and has a low correlation with equity and bond markets – it’s a form of reducing risk in an uncertain investment environment. Our preferred option to invest in gold by far is to use exchange-traded products tied to physical gold bars held in secure vaults. The alternative is to use gold mining equities, which the BlackRock Gold and General fund provides exposure to. We would caution however that gold mining equities are still equities, and can be more volatile than the underlying gold price.

Taking our preferred route, the ETFS Physical Gold exchange-traded product is a fund we rate highly and a great option for investing in gold. It tracks the spot price of gold with a lower ongoing fee than actively managed funds and is backed by physical gold bars stored in secure vaults by HSBC.

Targeted Absolute Return: reducing impact

Some funds use investment instruments such as derivatives to reduce the impact of general market movements on returns. These are Targeted Absolute Return funds and the latest industry figures show the sector was the best-selling one in 2015. These types of funds can be complex however and you should understand the risks before investing. Just like any other investment, you could get back less than you invested.

We recently rated Aviva Investors Multi-strategy Target Income four stars. This is a Targeted Absolute Return fund with a difference, as it actually gives an income – it aims to deliver an annual income yield of 4% above the Bank of England Base Rate before tax payable, regardless of the prevailing market environment.

Five-star rated Invesco Perpetual Global Targeted Returns has regularly featured in Our Top-rated Funds, our report on top investment ideas from all over the globe. It launched in 2013 and the same team behind the successful Standard Life Global Absolute Return Strategies fund manages it. The fund targets a high gross return above UK base rates and aims to achieve this with less than half the volatility of global equities.

Equities: an international flavour

We aren’t suggesting that you ignore equities altogether. There are many funds available that we rate highly, are popular with clients and have the potential to deliver for you over the long term. Equity funds in the global sector provide international diversification – useful with the uncertainty caused by the EU referendum – and fund managers have the entire world to scour when searching for value.

You may be familiar with Fundsmith Equity. Run by outspoken manager Terry Smith, it regularly tops our monthly list of the most popular funds among our clients and it has an impressive performance record. Smith’s strategy involves buying and then holding world-leading companies for the long term. His no-nonsense approach has brought a lot of attention to the fund and we believe it’s a great choice for your portfolio.

Finally, a great option for income investors looking for global exposure is Artemis Global Income, which we rate four stars. The fund’s approach is flexible and it invests in companies of all sizes, with manager Jacob De Tusch-Lec looking for a rising level of income combined with capital growth. De Tusch-Lec has constructed his portfolio thoughtfully, so the fund is typically not significantly correlated to the whims of wider macroeconomic events.

How to invest in top-rated funds

If you’re looking to add these funds to your portfolio, you can invest in them, and many others, through our Investment Selector. Alternatively if you have any questions about the above or your portfolio in general, give us a call on 020 7189 2400, request a call back or email us at best@bestinvest.co.uk and we will be in touch.

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Past performance is not a guide to future performance. Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing. Yields quoted are net. They are not guaranteed and can go down as well as up. Current or past yield figures provided should not be considered a reliable indicator of future performance. ETFs can be high risk and complex and may not be suitable for retail investors, so you should make sure you understand all the risks involved before investing. Funds which invest in specific sectors may carry more risk than those spread across a number of different sectors. In particular, gold, technology and other focused funds can suffer as the underlying stocks can be more volatile and less liquid. Targeted Absolute Return funds do not guarantee a positive return and you could get back less than you invested, as with any other investment. Additionally, the underlying assets of these funds generally use complex hedging techniques through the use of derivative products, which can carry additional risks which may not be immediately apparent.