Like Port And Stilton: Find Your Perfect Fund And Investment Trust Pairings

Like serving port with Stilton, blending the right funds can improve the overall flavor of a portfolio. A companion fund can bring a calmer note to a high-octane fund, or add some spice to an otherwise dull core holding. In this article, we look at some of the most popular funds on the interactive investor platform and find potentially perfect pairings.

You might wonder whether a companion fund is even worthwhile. You might think it makes sense for investors to simply pick a fund they like, invest in it, and hope for the best. And in a world of perfect information, that would be a good strategy. But – from pandemics to inflation – there are always unknowns. Introducing balance into a portfolio can be an important way to minimize volatility and avoid the worst caprices of financial markets.

​​​​Diversification is key.

Nick Wood, head of fund research at Quilter Cheviot, says: “Diversification done correctly lowers the volatility of returns and enables investors to capture a wider range of opportunities. It requires investors to find funds that offer opportunities within different styles (such as ‘value’, ‘growth’ or ‘quality’), within market cap categories (large vs small), and within asset classes to provide greater balance – lowering volatility, without reducing return, or perhaps even enhancing it.”

Achieving this equilibrium has become particularly important more recently. The abrupt rise in interest rates has changed the type of investments that have done well. The low interest rate environment flattered a certain type of growth company and the fund managers that focused on them. Many investors found their portfolios were pointing in a single direction, just as the market went the other way.

Daniel Lockyer, senior fund manager at Hawksmoor Fund Managers says: “Too many investors had a number of similar funds going into 2022 – Royal London Sustainable, Baillie Gifford Managed, Liontrust Sustainable – to name the top three in the multi-asset sector. All had large-cap, growth styles that were susceptible to rising interest rates and performed very similarly on the way up and on the way down.”

Although the focus has been on the switch from growth to value, Lockyear says achieving proper diversification goes beyond growth versus value or active versus passive. He says: “We believe a perfect pair could be a passive fund alongside a highly active and alpha-generating fund. This could be in the US with an S&P 500 tracker, together with a US small-cap fund with a very different portfolio.”

If a fund is exclusively invested in bonds and equity, such as the Vanguard LifeStrategy 60% Equity fund, he suggests mixing it with a fund with private assets exposure. “The two funds have got to be different, but not oppositely positioned so that one negates the other.”

James Calder, chief investment officer at City Asset Management, says the Royal London Sustainable World Trust would be a good pairing with the Vanguard LifeStrategy fund. He adds: “The Royal London fund invests predominantly (80%-plus) in equities with the balance in fixed-interest securities and cash. Mike Fox is the long-term lead fund manager and has an exceptional track record. He has significantly outperformed the peer group (and the Vanguard fund) over the past five years.”

How you invest in US funds is also key.

The US is probably the area where achieving balance is most important. The consumer and technology giants of Apple, Microsoft, Amazon, Nvidia, Meta, Alphabet, and Tesla – the so-called Magnificent Seven – have led the market for so long that most people have done very well out of an S&P 500 tracker and have little inclination to change anything.

Wood says: “The US market has long been known as the graveyard of active management with many funds not able to outperform consistently. That has either been because they have too distinct a style in one direction or another – which at times is out of favor – or they simply have an inability to beat the market long term.

“Our pairing with the Vanguard US Equity Index fund is the JPMorgan American Ord investment trust. This is an investment that is balanced in terms of its style biases, somewhat concentrated, and with a long-term track record of consistent outperformance from the underlying team. The portfolio holds 40 stocks – 20 in the growth camp, 20 in the value camp – alongside a small allocation to a small-cap fund.”

Calder suggests pairing a US equity tracker with the TwentyFour Income Ord Limited, a listed fixed-income fund. He points out: “This provides the foil in terms of diversification. A simple pairing of US equities and an actively managed bond fund with a European bias. The basic theory is the equity risk is diversified with a bond holding.”

But there will always be global favorites.

Then there are the perennial global fund favourites such as Fundsmith Equity, Alliance Trust, and Scottish Mortgage Ord. These will often be used as core funds, although interactive investor’s research team classes Scottish Mortgage as an adventurous option that is more suited as a satellite holding.

Gavin Haynes, investment consultant at Fairview Investing, says: “Fundsmith Equity is a good core global equity holding with a clear style bias toward quality growth stocks. However, in an environment of higher inflation and interest rates, there is a strong argument that the value approach should perform better than it did in the low interest rate environment.

“A global value fund such as Schroder Global Sustainable Value Equity could sit well alongside Fundsmith. Schroders have a well-resourced value team and this fund looks to find undervalued opportunities across global equity markets with a focus on sustainable businesses.”

Alliance Trust is another favorite as a one-stop holding for many investors. Wood says: “People have to ask what they are missing. The obvious answer here is small-cap exposure. Small and midcaps have done very poorly in recent years. As such, now is a good time to add to that exposure in an unloved asset class.”

He suggests Smithson Investment Trust Ord, which gives a selection of higher-quality smaller companies primarily focused on the US and Europe. He adds: “The team follows the mantra coined by Terry Smith of ‘buy good companies, don’t overpay and do nothing’. Today, industrials, technology, and consumer stocks make up over three-quarters of the portfolio’s assets. The trust also stands on a wide discount that represents a potentially attractive entry point.”

Calder picks JLEN Environmental Assets Group Ord, which provides a diversified approach to green energy investing to complement Alliance Trust’s sustainable mandate.

Along with a number of funds in the Baillie Gifford stable, Scottish Mortgage has been hit hard by the shift in the interest rate environment. Haynes says: “This trust is likely to be favored by investors who are looking for exciting growth opportunities and prepared to take a long-term approach. However, that doesn’t mean you should rely on one manager.”

Two trusts that exclusively focus on technology shares are Polar Capital Technology Ord Trust and Allianz Technology Trust Ord.

And there’ll always be a place for spice.

Sometimes, investors just need to mix things up a bit. While cash and money market funds have a place, they’re not a solution for long-term growth or inflation protection. As such, Calder suggests Merchants Trust Ord to balance low-risk funds such as the Royal London Short Term Money Market fund.

He says: “It provides access to UK large-cap equity investing through an active approach that has a yield target, balancing off the short-term nature of a money market fund. Merchants’ yield has stability and, through its revenue reserves, can augment weaker income years, while the money market fund will be driven purely by short-term rates.”

It's been a bruising few years for investors in the UK. While the City of London Ord trust remains a popular choice for exposure to UK blue-chip, dividend-producing shares, it makes sense to look beyond the UK.

Haynes says: “To diversify overseas, I’d consider Guinness Global Equity Income. This fund has a total return focus, but all companies must pay a dividend. It has produced impressive long-term returns with low volatility and a strong record of outperforming in difficult markets.”

Finally, there should be a nod to some other popular funds. Greencoat UK Wind, for example, has been a popular choice for income, focused on green energy production through wind power. Calder pairs this with another investment trust, Fidelity Asian Values Ord.

He points out: “Focusing on small-cap value(ish) investment within the Asian region, the focus on capital growth provides the counter to Greencoat’s income bias.”

The idea behind every pairing is that each side should enhance the other and the whole should be better than the sum of its parts. The right balance can bring stability and improve performance over time.

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.