Money Observer Rated Funds by Interactive Investor

FREE WITH THE MARCH 2013 EDITION OF MONEY OBSERVER

SPECIAL ISA SUPPLEMENT WEALTH MANAGEMENT SPECIAL REPORT

FIND YOUR IDEAL ISA FUND We give our stamp of approval to more than 100 top-performing funds and investment trusts Sector specialists Gold and commodities Mixed assets Emerging markets Bonds UK and overseas equities Mobs.0313.RATED.Cover.indd 1

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INTRODUCTION

Funds approved for you

aced with a bewildering choice of funds and investment trusts, it is not easy to whittle down the number to a manageable list of potential homes for your annual stocks and shares Isa allowance. However, Money Observer regularly draws up shortlists of decent, actively managed investment funds and trusts – and ones to avoid, for that matter – from more than 2,300 funds and 300-plus investment trusts available to private investors. We compile these shortlists for our annual fund and trust awards, our funds Premier League and our model portfolios. We have used these shortlists as the basis for Money Observer’s Rated Funds for 2013. There are some exceptions within our range of Rated Funds, but three foundations underpin our choices: consistency, consistency and consistency. Perhaps that is labouring the point but, in our view, there is no better predictor of a fund’s ability to deliver superior performance than its having delivered consistent (there’s FREE with thE MARCh 2013 Edition oF MonEY oBSERVER that word again) outperformance in the past against a relevant peer group or index benchmark. SPECIAL ISA SuPPLEMENT WEALTH MANAGEMENT Delving into a fund’s history SPECIAL REPORT of returns over each of the past three years as our starting point is a simple, but entirely adequate, method of helping our readers invest in the potential top performers of tomorrow. And surely that is a better way to ensure you hit your investment goals than We give our stamp of approval to more than 100 taking a cursory glance over the top-performing funds and investment trusts top 10 funds over the past year, or Sector specialists Gold and commodities Mixed assets Emerging markets Bonds UK and overseas equities five years for that matter. That’s what too many investors do, often to their cost, and particularly as the end of the tax year approaches, when the bulk of lump-sum money is looking for an Isa tax shelter. Markets and asset classes move in cycles, so the star of 2012 could easily be the stinker of 2013, and that is why we have divided our selections into distinct asset classes, and why you will find ‘Editor’s Choices’ among our 106 Rated Funds. So whether you are interested in specialist biotechnology funds, European equity funds or global investment trusts, we’re confident our Rated Funds Guide will help put you on the path to prosperity in 2013 and beyond. Andrew Pitts

find your ideal isa fund

Editor Andrew Pitts moneyobserver.ed@moneyobserver.com Writer and consultant Helen Pridham Published by Moneywise Publishing, Standon House, 21 Mansell Street, London E1 8AA. Tel: 020 7680 3602 Web: www.iii.co.uk/modelportfolios

Contents THE 5 HOW RATED FUND

SYSTEM WORKS Consistency is crucial in our top funds and trusts selection process

6UK EQUITIES The first port of call for a shares-based portfolio is UK equities. Target our top 20 for core exposure

10UK BONDS

14 MULTIASSET

The bull market in corporate credit underlines the value of bond funds to investors seeking secure income

The asset allocation provided by multi-asset funds is great for returns and risk control

17 EMERGING MARKET EQUITIES Low government debt and superior growth in Asia Pacific can’t be ignored

GLOBAL 21 DEVELOPED 24 MARKET BONDS EQUITIES It has never been easier to access fast-growing shares in non-UK markets

Bond investors should diversify their portfolios to mitigate risk and capitalise on the best global value

27 PROPERTY FUNDS We examine the best options for would-be investors in the reviving commercial property sector

28 SPECIALIST 30 COMMODFUNDS ITIES Investment trusts and funds have the expertise required for investing in specialist sectors

Harness commodity investments to counter the relentless rise in energy and food prices

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METHODOLOGY

How we arrived at our rated funds

he starting point for producing our Money Observer Rated Funds selection is a long list of all the funds and trusts featured among the top achievers in various Money Observer performance rankings. These include the winners and runners-up in our annual awards last year; the funds that have appeared in our Consistent 50 – having achieved topquartile performance in their sectors for three consecutive years – from which our Premier League is drawn; and the funds and trusts that feature in our model portfolios. A key element with a resounding majority of these is that they have produced consistent performance in the past and have been run by the same management teams throughout. Before we made final choices, we included funds and trusts tipped by leading investment advisers for our 2013 Wealth Creation guide. To these we added a selection of Editor’s Choice funds and trusts. They may have a shorter history or a new manager, or have been excluded from top rankings for some other reason, but we feel they can perform well in their sectors. We have created a number of broad categories of funds we feel will help guide investors through our Rated Funds system to find the type of funds most likely to fit their requirements. The fund categories

follow the main asset classes, such as UK equities and global bonds, but we have created extra divisions for clarity. Thus the equity funds have been divided into those investing mainly in UK equities; those investing in developed market equities – the mature economies of areas such as North America, western Europe and Japan; and those investing in emerging market economies and the Asia Pacific region, which includes mature economies in Australia, South Korea and Singapore. The bond funds have been divided into UK and global bond funds. Meanwhile, we have treated commodities and property as two separate asset classes. Then there are mixed asset funds, which invest in two or more of the other asset classes – some directly and some through funds of funds. Finally, there is a catch-all category for specialist funds. From our starting list we chose the most worthy funds and trusts for inclusion in these different asset categories. The final decisions were based on our expertise gained from more than 30 years of monitoring and writing about successful funds and trusts, and how managers have achieved their goals.

WHAT’S RIGHT FOR YOU? Some global and mixed-asset funds and trusts can be regarded as one-stop investment shops, especially by smaller investors, as they have portfolios that are diversified geographically and/or by asset. These funds provide a good foundation for any portfolio. However, using one product means you are relying on the skills of one investment manager. Even in a fund of funds, you will depend on one person (or a team) to choose successful funds. If you can, it is a good idea to build up a balanced portfolio by combining a number of funds from several asset classes managed by different fund managers. The advantage of having your savings spread across different asset classes is that they do not normally all react in the same way to changes in economic circumstances. One may fall in value while another rises, but they will balance each other out. We are confident the funds we have rated will provide investors with the prospect of good returns in years to come. However, we cannot give any guarantees. As we have pointed out on previous occasions, investment is more of an art than a science. Without a crystal ball, it is impossible to know precisely what will happen in future.

What’s in the tables and fact boxes? The fact boxes provide a snapshot of a fund or trust’s three-year performance to the end of December 2012 and three key statistical measures to help investors make their own judgements about the suitability of the funds to their needs. Volatility: This score shows how much a fund’s returns have fluctuated in relation to its average return over a period. It indicates how risky the fund is. If a fund returned 5 per cent on average and its volatility

was 15, its returns over the period would have swung between 20 and -10 per cent. The lower the volatility, the more consistent the fund’s returns would have been. When two similarly invested funds have similar returns, the one with a lower volatility score is preferred. Alpha: This is a measure of a fund’s over- or under-performance compared with its benchmark. If the alpha is 5, the fund has outperformed its benchmark by 5 per cent.

This score can be viewed as a measure of how far a manager has outperformed the returns the market would have produced anyway. FE risk score: This score shows how risky an investment is relative to the FTSE 100 index. Shares in the index are regarded as comparatively defensive. However, they do fluctuate. Investments more volatile than the FTSE 100 have a score above 100 and vice versa. These scores give a reliable indication of relative

risk, not absolute risk. The tables show the industry sector each constituent (fund or trust) belongs to, the ongoing charge or total expense ratio (where available), its net yield, the discrete annual performance of the constituent for each of the past three calendar years and its outor under-performance relative to the sector average in each of those years, as percentage points. • Data provided by FE Trustnet

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RATED FUNDS: UK EQUITY Artemis Income Axa Framlington UK Select Opps Baillie Gifford British Small Cos BlackRock Smaller Cos Cazenove UK Opportunities Fidelity Special Values Invesco Perpetual Income Investec UK Small Cos JO Hambro UK Equity Income Liontrust Special Situations Liontrust UK Growth Lowland Marlborough UK Micro Cap Neptune UK Mid Cap Schroder Income Maximiser Standard Life UK Ethical Threadneedle UK Equity Income Troy Income & Growth UK Select Unicorn UK Income

Type: Fund/IT Fund Fund Fund IT Fund IT Fund Fund Fund Fund Fund IT Fund Fund Fund Fund Fund IT IT Fund

Ongoing charge* 1.55% 1.61% 1.55% 0.70% 1.59% 1.14% 1.68% 1.60% 1.28% 1.92% 1.66% 0.62% 1.52% 2.00% 1.66% 1.60% 1.62% 1.31% n/a 1.59%

IMA/AIC sector UK equity income UK all companies UK smaller companies UK smaller companies UK all companies UK growth UK equity income UK smaller companies UK equity income UK all companies UK all companies UK growth & income UK smaller companies UK all companies UK equity income UK all companies UK equity income UK growth & income UK growth UK equity income

Net yield 4.2% 1.1% 0.9% 1.6% 1.5% 2.0% 3.6% 0.0% 4.6% 0.7% 1.3% 2.7% 0.0% 1.0% 6.5% 1.0% 3.9% 3.5% 2.6% 3.3%

2012 14.0% 10.6% 28.6% 30.1% 33.3% 31.0% 7.7% 24.3% 23.6% 22.4% 13.7% 32.5% 23.2% 40.8% 25.1% 21.6% 16.0% 9.2% 25.9% 33.3%

% annual return and +/-% relative to sector† Rel 2011 Rel 2010 0.0% 0.1% 3.0% 11.7% -4.5% -0.3% 6.7% 26.9% 6.0% -3.7% 5.3% 34.8% 1.3% -13.2% -3.9% 79.3% 18.3% 1.3% 8.3% 20.1% 10.7% -16.0% -4.9% 5.6% -6.3% 8.6% 11.5% 10.3% 1.7% -2.2% 6.8% 40.7% 9.6% -4.4% -1.5% 16.2% 7.3% 7.5% 14.6% 36.1% -1.3% 5.0% 12.0% 26.6% 12.5% -2.2% -0.5% 42.2% 0.6% 2.2% 11.2% 40.2% 25.8% 3.6% 10.7% 22.7% 11.1% -9.5% -6.6% 8.8% 6.6% -5.6% 1.5% 24.3% 2.0% 0.4% 3.3% 16.0% -10.8% 8.4% 10.1% 22.1% 5.7% -9.8% 1.3% 9.8% 19.3% -4.9% -2.0% 36.8%

Rel -2.8% 9.4% 3.2% 46.3% 2.6% -15.6% -4.3% 9.1% 1.7% 18.6% 9.1% 25.3% 8.7% 5.2% -5.8% 6.7% 1.5% 5.1% -11.4% 22.2%

Notes: * Ongoing charges where available, otherwise we quote the total expense ratio. † Percentage returns with net income reinvested for past three calendar years, bid-to-bid for funds and mid-to-mid for investment trusts and companies. Relative outperformance or underperformance to the sector average is quoted in percentage points. n/a = not available. Source: FE Trustnet

across a range of industries, with the aim of generating a dividend yield greater than 110 per cent of that of the FTSE All-Share. Stocks are chosen through a mixture of top-down analysis and bottom-up research. The companies selected are those likely to do well in the light of inhouse economic forecasts and key themes. Company meetings are an important part of the selection process.

SCHRODER INCOME MAXIMISER UK Equities

This fund appears +35.80% 1 3 yr yrs in Money after 3 yrs 10.06 14.40 Observer’s immeVolatility 6.17 -2.19 diate income Alpha FE Risk Score: 99 model portfolios. It was the first fund of its type, offering an enhanced yield via the sale of call options (a type of derivative) on the shares in its portfolio to raise extra income. We like it for investors who need more income than a conventional fund provides. The fund essentially consists of two parts – a traditional equity income portfolio, aimed at generating a yield of around 3.5 per cent, with some capital growth, plus the call option overlay that generates the additional income required to reach the 7 per cent target yield. The price of the higher yield is that investors do sacrifice some of the potential capital upside.

UNI UNICORN UK INCOME UK Equities

+85.40% 1 3 yr yrs after 3 yrs 9.08 12.09 Volatility 15.77 12.25 Alpha FE Risk Score: 79

Unicorn UK Income is included in two of Money Observer’s higherrisk model income

portfolios and is a current member of our Premier League. It focuses on smaller companies and is managed by John McClure, who has specialised in investing in UK smaller companies for over 20 years. The fund aims to deliver a gross yield at least 10 per cent greater than the yield produced by the FTSE All-Share index. It has a relatively concentrated portfolio of 39 holdings. Unicorn Asset Management itself is relatively small and is majority owned by the directors and management giving them an added incentive to ensure their funds perform consistently.

John McClure is a smaller companies specialist of 20 years

AXA FRAMLINGTON UK SELECT OPPORTUNITIES UK Equities

This fund is an Editor’s Choice. It is managed by the highly respected Nigel Thomas, a manager with more than 30 years’ experience. We like his management style: he looks for growing companies that are reasonably priced and he is more interested in the best opportunities than sticking close to the index. Thomas can invest in UK companies of any size, but he finds particular value in medium-sized and small companies, exploiting inefficiencies and undervalued growth opportunities in this area of the market. He achieves diversification through +55.50% 1 3 yr yrs after 3 yrs 12.28 14.10 Volatility -2.66 4.30 Alpha FE Risk Score: 97

a good spread of companies rather than sectors and prides himself on his sell discipline so potential losses are minimised.

CAZENOVE UK OPPORTUNITIES UK Equities

This fund is currently a member of our Consistent 50 and we like the manager’s approach. Its aim is to achieve long-term capital growth of 3 per cent per year in excess of the FTSE All-Share index over the medium term, but with less volatility than the sector average. It is managed by Julie Dean and she follows the business cycle approach to investing. After she ascertains where we are in the business cycle, she then decides which type of stocks to hold, as she believes stock returns are dominated by which phase the business cycle is in and moving towards. +78.90% 1 3 yr yrs after 3 yrs 9.51 14.45 Volatility 15.96 8.80 Alpha FE Risk Score: 103

LIONTRUST UK GROWTH UK Equities

This fund is +60.80% 1 3 yr yrs another current after 3 yrs 9.77 12.01 member of our Volatility 2.09 7.33 Consistent 50 and Alpha FE Risk Score: 93 we feel its managers are highly skilled in UK equity management. It focuses primarily on large and medium-sized UK companies. It is managed by Anthony Cross and Julian Fosh according to their investment process, called Economic Advantage. This means they look for businesses that possess clear competitive strengths, with pricing power, so they are able to Money Observer | Rated Funds | March 2013

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UK EQUITIES

Investment trusts LOWLAND This trust was a Money Observer award winner in 2012. It was also included in our 2020 Vision and was one of our 2012/13 trust tips. Lowland can invest in any size of UK company, but it has a bias towards small and mid-cap stocks. James Henderson, the manager, seeks to add value by investing in what he views as under-analysed areas of the market. We like his approach. He targets companies that are generating cash and are modestly valued and, in the current economic environment, he looks for companies with good global growth prospects. It now pays a quarterly dividend. UK Equities

+109.60% 1 3 yr yrs after 3 yrs 13.02 18.51 Volatility 13.42 5.67 Alpha FE Risk Score: 95

TROY INCOME & GROWTH UK Equities

+46.60% 1 3 This trust yr yrs has been after 3 yrs 10.49 9.12 managed Volatility -5.17 1.91 by Francis Alpha FE Risk Score: 71 Brooke

since it was taken over by Troy Asset Management in 2009. We think its focus – sustainable long-term income growth and an emphasis

on capital preservation and belowaverage volatility – is ideal for income investors. The portfolio is relatively concentrated and the number of individual holdings is typically between 30 and 50. The trust has been growing steadily in size since it was taken over and the board has recently negotiated an improved management fee structure, which means the fee will now fall to 0.65 per cent on net assets of over £175 million.

UK SELECT A recent change of management at this trust has prompted us to make this an Editor’s Choice. In July 2012, Threadneedle took over from Scottish Widows as the trust’s investment manager. Since then it has been managed by Simon Brazier,

Simon Brazier has taken over the trust for Threadneedle

UK Equities

This fund is a current member of the Consistent 50 and the Money Observer Premier League, and was one of our 2013 growth tips. Anthony Cross and Julian Fosh manage this fund alongside Liontrust UK Growth, and use the same investment process – but with this fund they take a higher-risk approach. It can invest in UK companies of any size, but has greater exposure to smaller companies. On the basis that talented individuals help create economic advantage, every +85.70% 1 3 yr yrs after 3 yrs 10.07 12.05 Volatility 9.51 12.44 Alpha FE Risk Score: 93

Alex Wright takes a contrarian value-driven approach and smaller companies than its open-ended equivalent in future.

BLACKROCK SMALLER COMPANIES UK Equities

+38.20% 1 3 yr yrs after 3 yrs 16.31 14.50 Volatility 9.05 0.32 Alpha FE Risk Score: 91

LIONTRUST SPECIAL SITUATIONS

FIDELITY SPECIAL VALUES UK Equities

UK Equities

protect their margins, ensuring sustained profitability. To reduce volatility and achieve greater consistency, the portfolio is kept well diversified, with careful stock limits relative to the index.

head of Threadneedle’s UK equities team, on the same lines as its openended UK Equity Alpha fund. The trust is being rebranded with the company’s name and adopting a zero discount policy. Threadneedle is reported to be keen to grow its investment trust business, so it will be doing its utmost to make this trust a good shop window.

A change of manager last year has made this trust another Editor’s Choice. In September 2012 Alex Wright took over the management from Sanjeev Shah, who still runs the open-ended version. Wright has achieved strong performance as manager of Fidelity Smaller Companies fund. He describes his approach as contrarian and value-driven. Wright will focus on companies whose share prices have underperformed, and whose future growth options are being overlooked by the market but where there is the potential for recovery. The trust will have a higher exposure to medium +38.70% 1 3 yr yrs after 3 yrs 15.57 15.77 Volatility 6.86 -2.94 Alpha FE Risk Score: 101

smaller company held in the portfolio must have at least 3 per cent of its equity held by main board directors. This fund contains the managers’ ‘best ideas’.

NEPTUNE UK MID CAP UK Equities

Neptune UK Mid Cap is a current member of our Consistent 50. Its investment universe is the companies listed in the FTSE 250 plus the top 50 companies by size in the FTSE Small Cap index. We feel it is a good way to get exposure to these companies, which tend to outperform their larger brethren, partly due to the +93.70% 1 3 yr yrs after 3 yrs 11.42 12.77 Volatility 21.68 13.29 Alpha FE Risk Score: 93

Mark Martin adapts views on global sectors to the UK market

This trust was a Money Observer award winner last year. It is managed by Mike Prentis who was previously with 3i Group. He has proved very adept in negotiating the tricky market conditions of recent years. He keeps the portfolio diversified with around 180 holdings. There is a core of high-quality growth companies that account for over half the asset value. Most trade internationally. The remainder are more exploratory, in companies that Prentis hopes will become core holdings of the future, or in very small companies. +123.00% 1 3 yr yrs after 3 yrs 15.59 20.43 Volatility -0.97 6.06 Alpha FE Risk Score:104

amount of mergers and acquisition activity in this part of the market. The manager is Mark Martin who works closely with the rest of the investment team, adapting house views on global sectors to the UK market. In order to ensure diversification, he maintains exposure to three types of stock – recovery, turnaround and structural growth. The minimum exposure to each is 20 per cent.

BAILLIE GIFFORD BRITISH SMALL COMPANIES UK Equities

This fund is a current member of our Consistent 50. It is managed by Douglas Brodie, who looks for companies that enjoy sustainable competitive advantages in their industries that will enable them to grow earnings at above the market average. +78.60% 1 3 yr yrs after 3 yrs 11.32 15.38 Volatility 4.92 5.06 Alpha FE Risk Score: 88

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UK EQUITIES

Target our UK top 20 for core exposure to equities The first port of call for a shares-based portfolio is UK equities. We’ve examined 470 funds and trusts to narrow your field of choice down

t is important for UK investors to have the core of portfolios in UK investments to avoid the risk of currency movements that can affect the value of overseas investments. These movements can wipe out gains if other currencies weaken. This makes the UK equities sector an essential area for investment. We have rated several types of equity funds in a variety of categories. Equity income funds are important not just for those looking for an immediate income, but also for growth investors who want to know their capital is accumulating steadily as these funds tend to invest in more defensive stocks. But not all are defensive – one of our rated funds, Unicorn UK Income, focuses on small and mediumsized companies. Most of the UK income funds we have chosen are investment funds. Investment trusts are a good source of income, but the shares of many of the best trusts in the UK growth and income sectors are on significant premiums to net asset value. Nevertheless, two investment trusts have been included: Lowland, which is still on a discount at the time of writing, and Troy Income & Growth, which the managers are keen to grow through further share issuance. We have rated a spread of growthoriented funds and trusts with differing styles of management and focus. Some look mainly at larger companies, others are small-cap specialists while others look across the market for their ideas. An ethically invested fund has also been included.

has a reputation as a reliable long-term performer. We believe it will serve income investors well. It can invest in companies of any size, but primarily holds large and mid cap UK companies. The managers describe their investment style as pragmatic and adaptable to changing investment conditions. They are stockpickers searching out companies with strong free cash flow, which are likely to produce a good yield and help to generate a good income stream for investors. They invest in the fund themselves.

JO HAMBRO EQUITY INCOME UK Equities

regarded as one of the UK’s leading fund managers. Although his fund does not always appear at the top of the charts, he has a strong and consistent long-term record and we believe investors will be in safe hands. Woodford is a contrarian, so is sometimes out of step with his contemporaries. He manages the fund using a mixture of company-specific and economic considerations – his views on what is happening in the wider economy influences his choice of companies that will benefit from these trends.

Woodford has a strong and consistent long-term record

INVESCO PERPETUAL INCOME UK Equities

UK Equities

+39.10% 1 3 This fund has yr yrs been managed by after 3 yrs 7.80 9.12 Neil Woodford Volatility -3.05 4.25 for more than 20 Alpha FE Risk Score: 77

years. He is widely

ARTEMIS INCOME Jointly managed +40.30% 1 3 yr yrs by Adrian Frost after 3 yrs 8.90 11.28 and Adrian Gosden Volatility 3.20 1.36 for the past 10 Alpha FE Risk Score: 79 years, this fund

Included in a +45.20% 1 3 yrs number of the after 3 yrs yr Volatility n/a 14.87 Money Observer n/a 0.17 model income Alpha FE Risk Score: 90 portfolios, we think this fund provides some variation on the equity income theme as it tends to have a medium to small company bias, though it can invest in UK companies of any size. The managers are Clive Beagles and James Lowen. Stocks are chosen according to a strict yield discipline – every stock must yield more than the FTSE All-Share index on a prospective basis. As well as signalling confidence in further and sustainable profits, the managers point out that the yield criteria provides a sell discipline and prevents them ‘falling in love’ with stocks.

THREADNEEDLE UK EQUITY INCOME UK Equities

+45.60% 1 3 This fund also yr yrs appears in sevafter 3 yrs 8.42 12.48 eral of the Money Volatility 3.40 1.95 Observer model Alpha FE Risk Score: 83 income portfolios.

It is co-managed by Leigh Harrison and Richard Colwell, who have performed well in both rising and falling markets. They typically invest in 50 to 65 companies

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We like his investment approach, which involves a three-pronged analysis looking at the opportunity available to the company, its ability to execute on that opportunity and the valuation of the business. Brodie backs his judgement by taking significant positions in companies relative to the benckmark index (FTSE Small Cap ex IT). Stocks are bought on a three- to five-year view.

INVESTEC UK SMALL COMPANIES UK Equities

This fund appears in Money Observer’s Premier League as a result of its consistent performance. It has been managed since 2006 by Philip Rodrigs, who is always on the lookout for interesting opportunities with the potential for superior returns that others have missed. He uses the company’s proprietary ‘4Factor’ stock-selection process to help him find prospective investments for the +82.10% 1 3 yr yrs after 3 yrs 11.08 15.39 Volatility 0.45 4.07 Alpha FE Risk Score: 79

fund. This means the companies must be cash generative, and have robust balance sheets and strong track records. They must also appear undervalued, have improving operating performance and demonstrate positive share price trends.

has found in recent times that there are companies with world class leading-edge intellectual property that have made significant commercial progress and are considerably cheaper than they should be.

STANDARD LIFE UK ETHICAL

MARLBOROUGH UK MICRO CAP

UK Equities

This fund is a current member of the Consistent 50. It is managed by Lesley Duncan, who must avoid investing in stocks that do not meet Standard Life’s ethical criteria, while seeking to include companies whose business activities are regarded as making a positive contribution to society. Excluded companies include those that are having a harmful effect on the environment, or are involved in animal testing, pornography, alcohol, tobacco or weapons production. She adheres to the group’s ‘Focus on Change’ philosophy to help find potential investments. +58.30% 1 3 yr yrs after 3 yrs 13.86 17.56 Volatility 4.36 3.40 Alpha FE Risk Score: 102

UK Equities

This fund is included in Money Observer’s higher risk, long-term growth model portfolio. It is run by the very experienced Giles Hargreave. It invests in companies with a market capitalisation of £100 million or less at the time of purchase. Indeed many are worth less than £50 million when they are first included in the fund’s portfolio. He looks for niche players and +92.60% 1 3 yr yrs after 3 yrs 12.16 13.25 Volatility -0.58 8.13 Alpha FE Risk Score: 67

Giles Hargreave spreads risk by holding over 200 companies

Our experts include...

On Money Observer television Uncover the secrets of investing and learn about the hottest financial topics on our free online TV channel. We have a range of bite-size interviews with top-performing fund managers, and short videos on investment and personal finance topics, from choosing the right Isa for you to introducing our model portfolios, available to watch on moneyobserver.com/TV

Gervais Williams

James Henderson

Bruce Stout

This month you can learn…

• Which three funds •

look set to shine in 2013 How star fund manager Bruce Stout is positioning his portfolio this year

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Visit www.moneyobserver.com/TV today and see for yourself Money Observer | Rated Funds | March 2013

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UK EQUITIES BONDS

Income with safety The bull market in corporate credit underlines the value of bond funds

s part of a balanced portfolio of investments, bond funds can play a useful role, especially for people who need income or are of a more cautious nature. The funds invest in fixed-interest securities issued by governments or companies as a way of borrowing money from investors. They are sometimes referred to generically as ‘credit’ or ‘debt’. Bonds normally have a fixed term and during that time the issuer pays bondholders a set rate of interest at regular intervals. At maturity the government or company pays back the borrowed money to the bondholders. In the meantime, the securities can be bought and sold on bond markets. Holding bond funds in your investment portfolio therefore has two uses. They provide a regular income and they tend to fluctuate less in value than shares because they have a fixed redemption value. However, bond prices will rise and fall when they are bought and sold. A major influence will be short-term interest rates and a worse-case scenario is that an issuer may default on its debt. But holding bonds through a fund diversifies risk because your money is spread across a number of holdings. There are a number of different types of bond funds to choose from. In the UK, there are those that focus on conventional UK government securities (gilts) or on index-linked gilts, while some specialise in investment-grade corporate bonds or high-yield corporate bonds. Others include a combination of different bonds. Since the financial crisis in 2008 bonds have been particularly popular because investors have been looking for security. As a result the prices of UK gilts and investment-grade corporate bonds have risen considerably. We therefore feel UK gilts are rather overpriced and for this reason we have not included any UK gilt funds among our rated selection. We have only included one fund that invests mainly in higher-quality investment-grade corporate bonds, Fidelity MoneyBuilder Income, as we are confident the manager will deliver good returns 10

BAILLIE GIFFORD CORPORATE BOND This fund is currently a member of our Consistent 50 and also appears in the Money Observer Premier League. Although it sounds like a plain vanilla corporate bond fund, it invests in high-yield as well as investment-grade bonds. The managers, Stephen Rodger and Torcail Stewart, take a stockpicking approach, looking carefully at the companies issuing the bonds. They characterise the fund’s portfolio as consisting of the best ideas they can find in the bond markets. Up to 25 per cent of the fund can be held in foreign currency bonds, hedged back into sterling. +40.70% 1 3 yr yrs after 3 yrs 3.21 6.26 Volatility 3.68 3.37 Alpha FE Risk Score: 37

even in current conditions. Our rated funds are mainly focused on strategic bond funds where managers are able to decide for themselves which types of bonds to hold in their portfolios, according to where they believe the most value lies. This means they can also invest in high-yielding bonds issued by companies that are regarded as less creditworthy by the credit ratings agencies and therefore have to pay higher rates of interest to compensate investors for the extra risk. One of our rated funds invests exclusively in highyielding bonds. However, by doing their own research into the companies that have issued the bonds, we believe the managers of the funds we have chosen will be able to pass on the benefits of these bonds, such as the high income they generate, while minimising risk. Several of these more flexible bond funds can also invest in international bonds, which they hedge back into sterling to avoid any currency risk. This helps to give them a more extensive range of bonds to choose from. We have also rated an ethical bond fund, which has held its own in the performance stakes, despite the manager’s more limited choice.

Our rated funds are mainly focused on strategic bonds

FIDELITY MONEYBUILDER INCOME This fund is included in two Money Observer model income portfolios. It invests mainly in high-quality, investmentgrade UK corporate bonds and can also hold gilts. It aims to produce a consistent income and capital stability. One of the reasons we like it is that income is distributed monthly, which is attractive to income seekers who rely on their savings to help pay their regular bills. Other funds normally pay out income on a half-yearly or quarterly basis. The manager is Ian Spreadbury who has more than 25 years’ experience in fixed income and we consider him a very safe pair of hands. +25.50% 1 3 yr yrs after 3 yrs 3.89 4.14 Volatility -1.99 1.23 Alpha FE Risk Score: 29

FIDELITY STRATEGIC BOND Like its MoneyBuilder Income cousin, this fund is also managed by the highly experienced Ian Spreadbury who +25.70% 1 3 yr yrs after 3 yrs 2.71 3.93 Volatility -1.12 2.11 Alpha FE Risk Score: 22

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UK BONDS RATED FUNDS: UK BONDS Baillie Gifford Corporate Bond Fidelity Moneybuilder Income Fidelity Strategic Bond Invesco Perpetual Monthly Income Plus Jupiter Strategic Bond Kames High Yield Bond L&G Fixed Interest M&G Optimal Income Rathbone Ethical Bond Royal London Sterling Extra Yield

Type: Fund/IT Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund

Ongoing charge* 1.04% 1.00% 1.21% 1.44% 1.50% 1.31% 0.92% 1.41% 1.36% 1.39%

IMA/AIC sector £ strategic bond £ corporate bond £ strategic bond £ strategic bond £ strategic bond £ high yield £ corporate bond £ strategic bond £ corporate bond £ strategic bond

Net yield % 4.4% 3.9% 3.1% 6.1% 5.8% 5.1% 4.2% 3.0% 5.5% 6.4%

2012 18.5% 10.8% 11.9% 20.2% 16.1% 17.3% 14.1% 12.9% 16.0% 22.1%

% annual return and +/-% relative to sector† Rel 2011 Rel 2010 5.1% 6.9% 4.2% 14.2% -2.3% 6.8% 2.5% 8.3% -1.5% 5.4% 2.7% 9.0% 6.8% -3.6% -6.3% 12.5% 2.7% 4.5% 1.8% 11.2% -2.0% 1.5% 5.3% 13.5% 1.1% 4.6% 0.2% 9.1% -0.5% 5.7% 3.0% 8.3% 3.0% 1.8% -2.6% 14.5% 8.7% 3.7% 1.0% 18.5%

Rel 6.1% 0.7% 0.9% 4.4% 3.1% 1.1% 1.6% 0.2% 6.9% 10.4%

we believe is well qualified to run this type of portfolio with a cautious approach. He has the flexibility to invest across all types of fixed-interest securities including high yield, emerging market and non-sterling denominated bonds as well as government and investment-grade corporate bonds. Spreadbury keeps the fund well diversified in order to reduce risk and stresses the importance of Fidelity’s in-house researchers.

models, so meeting company managements is a key part of his investment process.

KAMES HIGH YIELD

INVESCO MONTHLY INCOME PLUS This fund appears +45.02% 1 3 yr yrs in one of Money after 3 yrs Volatility 4.58 8.92 Observer’s model 3.86 -2.74 income portfolios. Alpha FE Risk Score: 41 Although it is classified as a bond fund, up to 20 per cent of the portfolio can be invested in equities. We like this combination as we feel the equity content will help to protect the long-term value of investors’ capital. The fund invests mainly in higheryielding corporate bonds. The bonds are managed by the highly experienced duo of Paul Reid and Paul Causer. They believe bank and financial bonds are the main areas of value in the corporate debt market. Neil Woodford is responsible for the equity content.

Legal & General Fixed Interest can invest in international bonds

JUPITER STRATEGIC BOND The Jupiter Strategic Bond fund is a ‘go anywhere’ fixedincome fund and is aimed at investors who want to achieve high income with the prospect of capital growth. The manager is Ariel Bezalel. He looks at economic factors such as inflation, the outlook for interest rates and the shape of the yield curve in relation to the corporate bond market, and this influences the way he positions the portfolio. The type of bonds he prefers are those issued by companies with robust business +32.40% 1 3 yr yrs after 3 yrs 1.89 5.24 Volatility 7.81 2.58 Alpha FE Risk Score: 22

This fund is included in two Money Observer higher-risk model income portfolios. It pays a significantly higher income than mainstream bond funds because it invests in lower quality, high-yield bonds. Although these bonds are regarded as higher risk, we believe the managers, Philip Milburn and Melanie Mitchell, have the skills to minimise this risk. They regard selecting the right securities as very important and point out that this contributes around 80 per cent of the fund’s performance. Although capital growth from high-yield bonds is expected to be less in future than it was last year, they should still be a good source of long-term income. +34.50% 1 3 yr yrs after 3 yrs 3.51 5.30 Volatility -1.87 0.73 Alpha FE Risk Score: 25

LEGAL & GENERAL FIXED INTEREST This Legal & General fund is an Editor’s Choice. Although it appears in the sterling corporate bond sector, it can invest in international bonds, hedged back to sterling, as well as UK bonds. So its manager, Michel Canoy, has plenty of scope, which we believe is especially useful in the current climate. It invests primarily in higher-yielding investment-grade bonds (currently holding around 75 per cent in A- and BBB-rated bonds). The manager aims to outperform principally through rating and sector selection. +27.00% 1 3 yr yrs after 3 yrs 4.01 4.56 Volatility -0.13 0.93 Alpha FE Risk Score: 32

M&G OPTIMAL INCOME M&G Optimal Income is included in several of Money Observer’s model income portfolios. It is fully flexible and can invest across the whole fixed-income universe including overseas bonds. It is managed by the much respected Richard Woolnough whose track record in this asset class is second to none. Although it is a large fund, the manager’s access to overseas bond markets gives him plenty of investment scope. +29.50% 1 3 yr yrs after 3 yrs 3.51 5.30 Volatility -1.87 0.73 Alpha FE Risk Score: 25

RATHBONE ETHICAL BOND This fund is an Editor’s Choice. Despite having ethical criteria, it has been able to produce good performance over the past three years. Its main objective is to provide a regular, above-average income, of 5-7 per cent. Bryn Jones, the manager, invests mainly in investment-grade bonds, but also holds higher-yielding and some unrated bonds. +27.80% 1 3 yr yrs after 3 yrs 5.57 5.31 Volatility 3.68 2.11 Alpha FE Risk Score: 28

ROYAL LONDON STERLING EXTRA YIELD This fund is currently a member of our Consistent 50. It has been managed since launch in 2003 by Eric Holt. The fund invests in higher-yielding investment-grade bonds (typically A- and BBB-rated), sub investment-grade bonds and unrated bonds. Holt will allocate between these three bond sectors based on where he sees the best value. His aim is to provide a higher yield without the associated level of risk. +49.30% 1 3 yr yrs after 3 yrs 3.52 5.68 Volatility 15.04 6.62 Alpha FE Risk Score: 25

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MIXED ASSET

Spread it all about

for more profits and less risk Getting asset allocation right is not easy. Buying a ready-made mixed asset fund for your core investment could be the answer

ost investors should hold a mixture of investments of asset types in their portfolios in order to spread risk. The major asset classes are UK and overseas equities (shares), bonds, property, commodities and cash. These assets tend to perform differently in different market conditions, so if you spread your investments between them it will help to avoid large fluctuations in the overall value of your portfolio. However, getting the best balance of assets to suit your risk profile is not so easy. Buying ready-made mixed asset funds are one answer and they have become increasingly popular in recent years. They come in a variety of forms. The fund industry body, the Investment Management Association (IMA), divides mixed asset funds between at least six sectors. Our rated funds are from a number of these sectors. Some have a larger amount invested in shares than others. Some are categorised as ‘absolute return’ funds because they aim to produce a positive return in all types of market conditions. Some mixed asset funds aim to provide the complete answer to investors’ requirements in much the same way as if you handed all your money to a stockbroker or wealth manager to manage on your behalf. And if you have only a modest amount of capital, this is not a bad idea. However, in most cases, we see these funds acting as core holdings – providing a solid foundation for an investor’s portfolio to which more specialist funds can then be added.

several asset classes, but is primarily weighted towards equities with some bonds and cash. It concentrates on companies making a positive impact on society and has a strong overseas element, giving exposure to global leaders in sustainability. It focuses on sustainable themes such as healthcare, urban regeneration and climate change. Fox takes a focused, long-term approach to investment so the fund has a lower than average portfolio turnover.

William Littlewood draws on expertise of the whole Artemis team

ARTEMIS STRATEGIC ASSETS +26.80% 1 3 yr yrs after 3 yrs 10.70 11.28 Volatility 0.73 1.04 Alpha FE Risk Score: 82 14

It aims to provide absolute returns, though it is not officially in the absolute return sector. Its goal is to preserve capital when markets are poor and make money when conditions are favourable by active management of its asset allocation. William Littlewood, the manager, draws on the expertise of the whole Artemis team. Shares are the mainstay of the fund but he moves between a high and a low equity content, depending on circumstances. He also uses derivatives, short selling and other financial instruments in his efforts to bolster returns.

This fund appears in two of Money Observer’s medium-risk growth portfolios.

CIS SUSTAINABLE WORLD TRUST This fund is one of +40.20% 1 3 yr yrs our Editor’s after 3 yrs 7.76 9.57 Choices. We like it Volatility 6.84 4.52 for a number of Alpha FE Risk Score: 64 reasons. It has a good performance record, an experienced fund manager, Mike Fox, and it has an ethical investment policy. It can invest in

FIDELITY MONEYBUILDER BALANCED This fund is included in one of Money Observer’s model growth portfolios, although it is actually aimed at investors seeking income. However, we think it is useful for both types of investor who like to take a relatively cautious approach. Investors who do not require income can have it reinvested. The fund consists of a separate equity and bond portfolio, fixed at 65 per cent and 35 per cent of the total portfolio respectively. Michael Clark is responsible for the equity portfolio, and Ian Spreadbury for the bonds. Both men are cautious by nature and the volatility of the fund is relatively low versus its peer group. +35.00% 1 3 yr yrs after 3 yrs 5.40 6.10 Volatility 5.63 6.46 Alpha FE Risk Score: 55

INVESTEC CAUTIOUS MANAGED This fund appears +28.10% 1 3 yr yrs in Money after 3 yrs 7.54 8.03 Observer’s two Volatility -1.92 1.18 shorter-term Alpha FE Risk Score: 50 model growth portfolios. It has been run by Alastair Mundy for more than a decade and we highly rate his skill as a manager of this type of fund. It invests in a mixture

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RATED FUNDS: MIXED ASSET Type: Ongoing IMA/AIC Fund/IT charge* sector Artemis Strategic Assets Fund 1.60% Flexible invt CIS Sustainable World Fund 1.54% Mixed invt 40%-85% shrs Fidelity Moneybuilder Balanced Fund 1.21% Mixed invt 40%-85% shrs Investec Cautious Managed Fund 1.61% Mixed invt 20%-60% shrs Jupiter Merlin Income Fund 2.36% Mixed invt 20%-60% shrs Newton Real Return Fund 1.61% Absolute return Personal Assets IT 1.15% Global growth Premier Multi-Asset Monthly Income Fund 2.26% Mixed invt 20%-60% shrs RIT Capital Partners IT 0.97% Global growth Ruffer IT n/a Global growth Standard Life Global Absolute Return Strategies Fund 1.59% Absolute return Threadneedle Monthly Extra Income Fund 1.40% UK equity & bond income Troy Spectrum Fund 1.49% Flexible invt

Net yield 0.6% 1.1% 4.0% 1.0% 3.3% 3.1% 1.6% 4.9% 2.4% 1.5% 0.9% 3.8% 0.1%

2012 10.2% 14.6% 8.0% 9.3% 10.1% 3.0% 4.2% 16.3% -5.4% 2.1% 6.9% 17.1% 6.4%

% annual return and +/-% relative to sector† Rel 2011 Rel 2010 0.1% -7.6% 1.1% 16.7% 4.7% 0.3% 5.8% 12.1% -2.0% 8.7% 14.3% 8.4% 1.0% -2.1% -0.2% 12.9% 1.8% -0.6% 1.3% 12.5% -0.4% -0.8% 0.5% 9.3% -7.9% 8.3% 16.6% 14.4% 8.0% -2.0% -0.1% 10.1% -17.4% 2.4% 10.7% 15.8% -9.9% -2.8% 5.5% 19.0% 3.5% 2.1% 3.4% 9.8% 4.9% 2.1% 3.6% 14.3% -3.8% -3.5% 5.2% 17.8%

Rel 2.1% -0.2% -3.9% 4.4% 3.9% 5.0% -6.8% 1.5% -5.3% -2.2% 5.5% 1.4% 3.2%

of equities and bonds (with a minimum allocation of 35 per cent and a maximum of 60 per cent for each) and cash. What makes it particularly attractive is Mundy’s contrarian approach to picking shares for the fund. He looks for undervalued, out-of-fashion equities he believes will recover and flourish again. The non-equity holdings in the fund are selected with the aim of reducing overall volatility.

JUPITER MERLIN INCOME This is one of the UK’s most established funds of funds. We believe it is an excellent one-stop shop for income investors who want a growing income and the prospect of some capital growth. It provides diversity not just of assets but also investment managers. It is managed by a highly respected team led by John Chatfeild-Roberts. They assess the general economic environment and then decide which individual fund managers are likely to perform best in these conditions, taking into account the managers’ skills and ‘style bias’. The fund’s investments include equity, bond, commodity and property funds. Its core holdings are UK oriented. +28.40% 1 3 yr yrs after 3 yrs 5.75 6.21 Volatility 1.71 2.97 Alpha FE Risk Score: 42

NEWTON REAL RETURN This fund is in several of Money Observer’s model growth portfolios in order to provide core capital stability. It is an absolute return fund and aims to provide a return of 4 per cent a year above cash (i.e. the London Interbank Offered Rate) over a five-year period. It is run by Iain Stewart, +15.80% 1 3 yr yrs after 3 yrs 4.71 5.46 Volatility -0.75 1.32 Alpha FE Risk Score: 38

one of Newton’s longest-serving managers, in conjunction with the global team that identifies investment themes. Its core portfolio is high-quality equities and corporate bonds that are combined with a periphery of other assets designed to offset risk and dampen volatility, such as commodities, currencies and derivatives.

to deliver a positive return over rolling 12-month periods and has a target return of 5 per cent per annum above cash over rolling three-year periods. The investment team managing the fund looks to exploit market inefficiencies using a combination of traditional assets (such as equities and bonds) and investment strategies based on advanced derivative techniques, taking short positions in markets, securities and groups of securities.

PREMIER MULTI ASSET MONTHLY INCOME This fund is an Editor’s Choice. Multi-asset funds have become increasingly popular in recent years but they are normally designed for growth investors. The objective of this fund is not only to provide an income, but to pay it monthly. It achieves this aim by investing in other funds, including investment trusts and structured products. To ensure diversification, there will always be at least 20 holdings from seven different management groups in the portfolio. The three-strong team of managers, led by David Hambidge, describe their style as ‘contrarian’.

THREADNEEDLE MONTHLY EXTRA INCOME

+30.9% 1 3 yr yrs after 3 yrs 5.19 7.41 Volatility 6.71 1.70 Alpha FE Risk Score: 39

David Hambidge describes the fund’s style as contrarian

STANDARD LIFE GLOBAL ABSOLUTE RETURN STRATEGIES Standard Life GARS fund is currently one of our Consistent 50. It was also one of the UK’s best-selling investment funds last year. We think this fund will provide a good foundation for any portfolio. It aims after 3 yrs 1 3 yr yrs n/a 3.34 4.66 Volatility 0.46 4.20 Alpha FE Risk Score : 29

This fund is currently one of our Consistent 50. It invests in a mixture of predominantly blue-chip equities, combined with investment-grade bonds. We like it because it is one of the few funds that provides a high level of monthly income, which is useful for investors who need a regular income to pay their bills, but also want the prospect of some capital growth. It has two well-qualified investment managers, Richard Colwell and Alasdair Ross. Ross manages the bond portfolio. +44.80% 1 3 yr yrs after 3 yrs 7.38 10.55 Volatility 2.84 2.02 Alpha FE Risk Score: 67

TROY SPECTRUM This fund is included in two Money Observer model capital growth portfolios. We like this product because it is essentially a fund of funds, though it can also invest direct, so it provides investors with plenty of diversification across different investment managers while benefitting from the Troy ethos of capital preservation. It holds predominantly overseas invested funds run by outside managers after 3 yrs 1 3 yr yrs n/a 5.32 7.06 Volatility 0.46 4.97 Alpha FE Risk Score: 41

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MIXED ASSET

EMERGING MARKET EQUITIES

who have strong track records in their respective areas. It does not hold any Troy funds.

PERSONAL ASSETS This trust is an Editor’s Choice. It is a self-managed investment trust and the investment adviser is the highly regarded Sebastian Lyon of Troy Asset Management, who took over from the trust’s founder, Ian Rushbrook. He has continued with the emphasis on capital preservation, with capital growth as a secondary consideration. This has meant the trust sometimes holds significant amounts of cash, or nearcash assets, when it is felt that investment markets are unattractive. +37.90% 1 3 yr yrs after 3 yrs 6.36 6.36 Volatility -1.05 7.02 Alpha FE Risk Score: 63

RIT CAPITAL PARTNERS RIT Capital Partners is an Editor’s Choice. A major attraction of this investment trust is the continued involvement of Lord Rothschild who is the chairman of the board. It is also an ideal core holding with the objective of preserving capital by avoiding significant losses during periods of market weakness, while participating in rising markets. There are two strands to its portfolio strategy. The first is its direct investment in unquoted companies and the second consists of investments with external managers, to tap outside talent. +19.00% 1 3 yr yrs after 3 yrs n/a n/a Volatility n/a n/a Alpha FE Risk Score : 117

RUFFER INVESTMENT COMPANY This investment trust, established in 2004, was one of the first to have an absolute return objective. Although the original manager Jonathan Ruffer has now stepped back, his successor Hamish Baillie follows the same philosophy and is assisted by Steve Russell, an old hand at the company. Capital preservation is a priority. A hallmark of the Ruffer style is to not follow any benchmark. The objective is to achieve a total annual return, after all expenses, of at least twice the Bank of England base rate. +21.00% 1 3 yr yrs after 3 yrs 7.23 7.22 Volatility -3.54 2.86 Alpha FE Risk Score: 63

Asia Pacific growth engine Low government debt and a superior economic growth rate means the Asia Pacific region can not be overlooked

o serious private investor can afford to ignore the Asia Pacific region and the emerging markets nowadays. The economic growth rates of these countries are far superior to those of the developed countries. And over the past decade investment funds and trusts specialising in these areas have outperformed all other types of funds. It could be argued that the reasons for investing in these markets have become even stronger in recent years. Unlike the over-indebted West, many emerging economies are in a much healthier position with low levels of government debt and high foreign exchange reserves. Although their economies have slowed down as a result of the problems in the developed world, their own domestic demand is starting to fuel their growth. This growth in domestic demand combined with the problems of the West is expected to make emerging market economies less dependent on exports in future. However, rapid growth does not necessarily deliver high stock market returns even in the emerging markets. Most investment managers stress that it is investing in the right companies on the right valuations

that are the most crucial considerations in any market. This requires a high level of research. Improvements in corporate governance in the emerging markets is making the process easier but choosing the right fund managers with the right skills to make the most of these markets is vital. Funds and trusts investing in the emerging markets have become increasingly diverse in recent years so investors can choose those which most closely meet their needs. The popularity of these funds means a number of the open-ended variety have reached capacity and have ‘soft closed’ (imposing, for example, large mandatory initial charges), indicating their reluctance to take further money. Those we have included in our rated list are not soft closed at the time of writing. Investment trusts do not need to restrict demand as their capital base is fixed, but we consider that a trust standing on a premium to net asset value of more than 5 per cent is overvalued. Other choices for investors are funds or trusts that focus on specific countries or areas such as China, Latin America or Asia. Those that invest in countries around the Asia Pacific rim often include developed economies such as Hong Kong, Singapore and Australia, and sometimes, as in the

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EMERGING MARKET EQUITIES RATED FUNDS: ASIA PACIFIC AND EMERGING MARKET EQUITIES Aberdeen All Asia IT Aberdeen Latin American Income BlackRock Frontier Markets Fidelity Latin America First State Asian Pacific Leaders First State GEM Leaders JP Morgan GEM Income JPM Chinese M&G Global Emerging Markets Newton Asian Income Schroder Asian Alpha Plus Schroder Oriental Income Scottish Oriental Smaller Cos Templeton Emerging Markets

Type: Ongoing Fund/IT charge* IT 1.30% IT 1.90% IT n/a Fund 1.99% Fund 1.56% Fund 1.59% IT 1.32% IT 1.41% Fund 1.75% Fund 1.66% Fund 1.71% IT 0.92% IT 1.01% IT 1.31%

IMA/AIC sector Asia Pacific incl Japan Latin America Global emerging markets Specialist Asia Pacific excluding Japan Global emerging markets Global emerging markets Country specialists Asia Pacific Global emerging markets Asia Pacific excluding Japan Asia Pacific excluding Japan Asia Pacific excluding Japan Asia Pacific excluding Japan Global emerging markets

Net yield 1.3% 3.8% 2.5% 0.0% 0.8% 0.5% 3.8% 1.0% 0.5% 4.4% 0.2% 3.5% 1.3% 0.9%

2012 26.4% 15.6% 15.9% 6.0% 18.4% 18.0% 21.4% 24.6% 16.0% 21.5% 22.4% 27.1% 45.1% 8.0%

% annual return and +/-% relative to sector† Rel 2011 Rel 2010 Rel 7.3% -14.3% -0.5% 28.3% 0.4% 7.4% -10.6% 12.6% 6.4% -31.2% -13.9% -1.6% -19.9% -4.1% 23.6% 3.8% 2.6% -8.0% 8.8% 26.7% 3.5% 5.1% -6.6% 12.5% 29.0% 5.4% 11.9% -10.3% 7.1% -1.2% -30.2% -0.2% 16.7% -15.7% 3.1% -18.7% 0.3% 24.2% 0.6% 5.6% -1.5% 15.3% 32.0% 8.8% 6.5% -10.8% 6.0% 32.8% 9.7% 3.3% -5.7% 9.4% 35.6% 5.8% 21.3% -12.9% 2.1% 52.2% 22.3% -1.6% -17.8% -0.5% 29.0% 1.5%

case of Aberdeen All Asia, Japan as well. Many companies in these countries do a considerable amount of business with other countries in the region. For more adventurous investors there are some trusts that invest in so-called frontier, or pre-emerging markets such as Bangladesh, Nigeria and the Ukraine. Although there is considerable potential for growth in these countries, there are high risks involved as the managers of BlackRock Frontier Markets, one of our rated funds, emphasise. There are also a growing number of funds and trusts that have been set up for investors who are seeking an income.

ABERDEEN ALL ASIA This investment trust is an Editor’s Choice. It is somewhat unusual in that, unlike many Asia Pacific funds, it invests in Japan. This gives the managers a wider investment universe and with Japan’s prospects believed to be improving, it could propel future returns. Currently some 22 per cent of the portfolio is invested in Japan. The investment team is led by Hugh Young. They work to an investment process developed in the 1990s, which is based on intense company research. +54.60% 1 3 yr yrs after 3 yrs 16.12 18.82 Volatility 1.71 1.45 Alpha FE Risk Score: 97

BLACKROCK FRONTIERS Only investors +28.8% 1 3 yr yrs prepared to take a after 1 yr 20.49 n/a high level of risk Volatility 12.47 n/a should consider Alpha FE Risk Score: 105 this trust. We have made it an Editor’s Choice because it offers exposure to some developing emerging markets that are exciting and offer potentially high growth investment 18

opportunities. We also regard Sam Vecht as a talented manager. The countries it invests in include Nigeria, Saudi Arabia, Kazakhstan, Bangladesh and Iraq. However, investors are warned that these types of markets are less well regulated and may be affected by political and social instability and other factors such as corruption.

FIDELITY LATIN AMERICA This Luxembourg3 yrs domiciled fund is n/a one of our Editor’s n/a Choices. It is characterised by its holistic view of South America – it has exposure to all countries and all sectors. Consequently, the fund is well placed to take advantage of the best opportunities on offer. Rather than being benchmarked to the MSCI Latin America, it uses a 5 per cent capped benchmark – meaning no single stock in the index can be greater than 5 per cent. This makes the fund very diversified and gives it a greater bias towards domestic companies. It is managed by Alex Duffy and Angel Ortiz. +20.80% 1 yr after 3 yrs n/a Volatility n/a Alpha FE Risk Score: 122

Angel Ortiz takes a holistic view of South America

FIRST STATE ASIA PACIFIC LEADERS This fund appears in three Money Observer model growth portfolios. It focuses on large and medium sized businesses. We believe it is a good, lower risk way to gain exposure to the Asia Pacific region. The +48.5% 1 3 yr yrs after 3 yrs 10.11 13.15 Volatility 4.92 7.03 Alpha FE Risk Score: 98

managers, Angus Tulloch and Alistair Thompson, take a conservative approach with an emphasis on capital preservation. When deciding which companies to invest in, they consider how they will perform in bad times as well as good. By focusing on those that can perform well in all market conditions, they seek to minimise losses and play safe with investors’ money while still achieving good results over the long term.

FIRST STATE GLOBAL EMERGING MARKETS LEADERS This fund is currently a Consistent 50 performer. It focuses on large and medium-sized companies in the emerging markets or companies based elsewhere whose business comes from the emerging markets. Its investment universe therefore includes companies that are listed on stock markets in the developed world, such as Unilever. This gives the managers more options than those running funds which invest only in local companies. The fund managers, Jonathan Asante and Glen Finegan, follow First State’s inherently conservative investment approach. +52.3% 1 3 yr yrs after 3 yrs 9.39 12.76 Volatility 11.32 9.74 Alpha FE Risk Score: 101

JPMORGAN CHINESE This investment trust is an Editor’s Choice. It was the first investment trust to focus purely on the greater China region. This means it can invest in companies quoted in Hong Kong and Taiwan as well as China, giving the managers a wider pool of investment opportunities. +22.3% 1 3 yr yrs after 3 yrs 19.72 21.44 Volatility -0.68 -0.03 Alpha FE Risk Score: 141

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Income in emerging markets ABERDEEN LATIN AMERICAN INCOME

asset class. Currently the ratio of equities to bonds is around 60:40. Otherwise the investment policy is unconstrained.

after 3 yrs 1 3 This yr yrs investment n/a 18.38 n/a trust is an Volatility 9.36 n/a Editor’s Alpha FE Risk Score: 105 Choice.

JPMORGAN GLOBAL EMERGING MARKETS INCOME

We like the fact that income investors can gain exposure to this part of the world through this trust, and Aberdeen has a proven reputation in emerging market investing. The senior investment manager is Fiona Manning. In order to provide a higher yield, the trust is invested in a mixture of equities and bonds. At least 25 per cent is held in each

Fiona Manning holds an equities to bonds split of 60:40

after 3 yrs 1 3 This trust yr yrs is one of n/a 12.66 n/a Money Volatility 8.18 n/a Observer’s Alpha FE Risk Score: 83 tips for

2013. It is a relatively new trust which has performed well since its launch in July 2010. It is managed by Richard Titherington. We like it because it provides investors with the opportunity to gain an income as well as growth from the emerging markets. Dividends are paid quarterly. It is well diversified across countries, sectors and companies. In order to achieve a balance of income and growth it combines higher and lower yielding stocks.

We believe closed-end funds are particularly suitable for this market, which can suffer from large inflows and outflows as investors’ appetites for risky investments ebb and flow. The trust has a four-strong team of managers, led by Howard Yang and Emerson Yip, who are based in Hong Kong.

M&G GLOBAL EMERGING MARKETS This fund is an Editor’s Choice. M&G is not known for its emerging markets expertise but this fund, which was launched in 2009, has already established a good performance record. Unlike many emerging markets funds that have reached capacity, it is still welcoming new investors on board. It is managed by Matthew Vaight, who is a member of M&G’s global equity team. He is particularly excited by the changes that are taking place in emerging market companies. As they increasingly focus on building sustainable, globally competitive business models, he sees numerous attractive long-term investment opportunities. +26.5% 1 3 yr yrs after 3 yrs 12.74 17.25 Volatility 4.8 1.67 Alpha FE Risk Score: 105

NEWTON ASIAN INCOME This fund has won the Money Observer best Asia Pacific Fund award in 2012 and 2011. It is managed by Jason Pidcock. We believe it provides excellent diversification for income investors and can also be attractive for more cautious growth investors. Pidcock maintains a strict yield discipline. Shares must yield as much as the FTSE All World Asia Pacific ex Japan index and are sold if it falls to15 per cent below. +73.00% 1 3 yr yrs after 3 yrs 9.37 11.75 Volatility 49.16 12.40 Alpha FE Risk Score: 98

SCHRODER ORIENTAL INCOME +80.90% 1 3 yr yrs after 3 yrs 19.62 13.17 Volatility 10.39 8.97 Alpha FE Risk Score: 89

SCOTTISH ORIENTAL SMALLER COMPANIES +126.80% 1 yr after 3 yrs n/a Volatility n/a Alpha FE Risk Score: 127

This trust was

3 yrs highly comn/a mended in Money n/a Observer’s 2012

investment trust awards. It is managed by First State Investments, with Susie Rippinghall as the lead manager since 2000. Although Rippinghall is about to retire, we are confident the company’s teambased approach means the trust will be relatively unaffected. They will continue to seek out companies which are wellmanaged and financially sound, that they believe can achieve consistent and predictable growth.

SCHRODER ASIAN ALPHA PLUS This fund was highly commended in Money Observer’s 2012 fund awards. It is run by the highly experienced Matthew Dobbs, who manages several other Asian +57.6% 1 3 yr yrs after 3 yrs 12.12 17.33 Volatility 5.52 6.37 Alpha FE Risk Score: 104

This trust was highly commended in Money

Jason Pidcock won our Asia Pacific award two years running Observer’s 2012 investment trust awards. The manager, once again, is Schroder’s Asia guru Matthew Dobbs. We like the trust because it targets income as well as capital growth from this part of the world. The search for income has encouraged Dobbs to seek out companies with secure growth prospects, strong balance sheets and shareholder-focused managements with the potential to grow dividends. So the trust is likely to appeal to growth investors who prefer a defensive approach as well as income seekers. Australian and New Zealand quoted companies account for around a quarter of the portfolio; other markets Dobbs likes are Hong Kong, Singapore and Taiwan.

equity products for Schroders. The reason we like this fund is it has a concentrated, unconstrained portfolio. It gives Dobbs the freedom to target the best opportunities he can find in the region, rather than having to pay attention to the country and company weightings in the MSCI Far East ex Japan Index. He is very focused on share selection.

TEMPLETON EMERGING MARKETS +34.1% 1 yr after 3 yrs n/a Volatility n/a Alpha FE Risk Score: 43

3 This investment yrs trust is included in n/a two of Money n/a

Observer’s model growth portfolios. It is one of the oldest investment trusts of its type and has an impressive longterm track record. We believe it provides a dependable way for investors to access the most promising emerging markets globally. It has been managed by Mark Mobius since it was launched nearly 24 years ago. He is supported by a large team of investment researchers around the world, who look for companies they believe are trading on discounts to their projected future intrinsic value. Money Observer | Rated Funds | March 2013

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DEVELOPED MARKET EQUITIES

Pick up a pearler It has never been easier to access fast-growing shares in developed markets outside the UK and the benefits can be considerable

he world is an investor’s oyster nowadays and it pays to make use of the opportunities available, as international diversification can undoubtedly enhance your returns. You can now invest in economies that are growing faster than the UK’s, and companies and sectors that are not necessarily well represented on the UK stock market. Although unfavourable currency movements can offset gains made in overseas stock markets, over the long term, this risk can be more than compensated for by the extra investment possibilities available in these markets. Many developed markets boast world-class, global companies as well as businesses that focus on local economies. Exposure to these markets can be achieved in a variety of ways, but in this section we have highlighted generalist and more specialist funds and trusts that offer exposure. Some of these – Fundsmith Equity, Old Mutual Global Equity, Scottish Mortgage and Witan, for example – invest globally in a spread of companies of different sizes. Some are regional specialists such as BlackRock European Dynamic and GAM North American Growth. Investors with a greater appetite for risk might consider

catered for nowadays when it comes to overseas investment opportunities. Investment trusts such as Bankers have long had an income objective, but a growing number of both global and more specialist funds and trusts that aim to provide investors with regular incomes are now available.

BANKERS This investment trust is included in one of Money Observer’s model growth portfolios. It appears in the global growth sector, but it is unique in that it aims to provide both capital appreciation and dividend growth above inflation – it has increased its dividend every year for the past 46 years. Its performance fee has recently been removed, and although the annual management fee has gone up, its total expense ratio remains at about 0.5 per cent. It has been managed by Alex Crooke, at Henderson Global Investors, for the past 10 years. He takes a value-oriented approach. The portfolio has had a significant allocation to the UK, but more exposure to Asia and Latin America is planned. +60.10% 1 3 after 3 years yr yrs 12.53 12.77 Volatility 11.32 5.23 Alpha FE Risk Score: 99

a trust specialising in smaller companies, such as F&C US Smaller Companies or Montanaro European Smaller Companies. Income investors are increasingly well

RATED FUNDS: DEVELOPED MARKET EQUITIES Bankers BlackRock European Dynamic British Empire & General Trust CF Morant Wright Nippon Yield Ecclesiastical Amity International F&C US Smaller Cos Fundsmith Equity GAM N American Growth Guinness Global Equity Income Jupiter European Opps Legg Mason Japan Equity M&G Global Basics M&G Global Dividend Montanaro European Smaller Cos Newton Global Higher Income North American Income IT Old Mutual Global Equity Pictet Premium Brands Scottish Mortgage Witan

Type: Fund/IT IT Fund IT Fund Fund Fund Fund Fund Fund IT Fund Fund Fund IT Fund IT Fund Fund IT IT

Ongoing charge* 0.44% 1.67% 0.72% 1.91% 1.58% 1.68% 1.69% 1.57% 1.99% 1.12% 1.96% 1.67% 1.66% 2.30% 1.63% 0.40% 1.94% 2.03% 0.51% 1.20%

IMA/AIC sector Global growth Europe excluding UK Global growth Japan Global North American smaller cos Global North America Global equity income Europe Japan Global Global European smaller cos Global equity income North America equities Global Specialist Global growth Asia Pacific incl Japan

Net yield 2.6% 0.5% 1.8% 3.0% 1.3% 0.0% 0.7% 0.0% n/a 0.5% 0.0% 0.3% 3.2% 1.1% 4.2% 1.6% 0.0% 0.0% 1.7% 2.6%

2012 24.2% 26.4% 17.8% 5.6% 11.0% 8.8% 12.0% 13.7% 4.7% 53.8% 8.6% 1.0% 11.1% 25.1% 10.2% 7.9% 12.9% 17.1% 30.0% 18.8%

% annual return and +/-% relative to sector† Rel 2011 Rel 2010 12.1% -3.7% 4.6% 16.7% 7.4% -17.8% -2.3% 27.5% 5.8% -13.2% -4.9% 19.0% 2.1% 1.0% 12.8% 26.9% 1.5% -13.0% -3.7% 18.0% 1.0% 1.7% 6.3% 24.2% 2.5% 7.8% 17.1% 6.8% 3.3% 4.9% 26.0% -5.0% 2.0% 4.0% 25.2% -11.4% 1.6% 42.3% 5.1% 27.1% 38.8% 19.9% -8.4% -12.3% -3.1% 27.7% 1.6% -2.4% 6.9% 19.9% -0.1% -22.8% -0.9% 33.6% 0.4% 2.5% 4.6% 13.3% -0.2% 1.0% -7.1% 20.7% 3.5% -3.9% 5.4% 20.1% 9.4% -9.6% 6.1% 38.4% 18.0% -15.2% -6.8% 33.6% -0.4% -15.3% -1.5% 29.7%

Rel -4.5% 18.9% -2.2% 7.5% 2.3% -8.8% 8.6% 35.0% 0.4% 11.9% 4.1% 12.8% -1.0% -7.1% 4.3% 18.5% 12.5% 1.8%

Money Observer | Rated Funds | March 2013

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DEVELOPED MARKET EQUITIES

This year everybody’s talking about… Japan LEGG MASON JAPAN EQUITY This fund is a current member of our Consistent 50. Japan has long been a disappointment to investors, but there is hope that its newly elected government will change things for the better. This fund is run by Shiozumi Asset Management whose founder, Hideo Shiozumi, has 30 years’ experience +78.50% 1 3 after 3 years yr yrs 18.96 19.06 Volatility 36.72 20.90 Alpha FE Risk Score: 130

Hideo Shiozumi’s approach is based on picking the right companies managing Japanese equities. His core investment approach is based on selecting the right companies. But he also takes into account general themes, and he currently believes Japan is changing from being regulated to deregulated and

BRITISH EMPIRE SECURITIES & GENERAL This investment trust is an Editor’s Choice. After going through a period of poor performance, returns rebounded last year. It may be coming back, but it remains on a relatively wide discount, so it looks like a particularly good buy at present. Its management team, led by John Pennink, focuses on identifying value opportunities. It takes a long-term approach by seeking out stocks to perform over three to four years rather than a few months. The emphasis is on companies with defensive earnings profiles, strong balance sheets and high dividend yields. It has a portfolio of around 40 companies. +35.50% 1 3 after 3 years yr yrs 13.36 16.23 Volatility 3.46 -2.04 Alpha FE Risk Score: 96

ECCLESIASTICAL AMITY INTERNATIONAL This fund was a winner of Money Observer’s Best Ethical/Socially Responsible Fund award in 2012 and is a past winner of the Best Global Fund award. So despite being limited in the companies it can invest in, the fund has achieved good results. The businesses that manager Robin Hepworth can invest in must take their responsibilities to the environment and society seriously. But he believes this stance can be an advantage, as he feels companies with respect for human rights are more likely to achieve sustainable returns. Despite the restrictions, he +28.2% 1 3 after 3 years yr yrs 12.10 12.91 Volatility 1.17 0.38 Alpha FE Risk Score: 85

from being manufacturing-based to being service-orientated. As a result, he is focusing on small- and mid-cap domestic stocks.

CF MORANT WRIGHT NIPPON YIELD This fund is a member of our Consistent 50. We like it because its management group +34.20% 1 3 after 3 years yr yrs 13.36 16.23 Volatility 3.46 -2.04 Alpha FE Risk Score: 96

manages to maintain a well-diversified portfolio of around 100 shares.

F&C US SMALLER COMPANIES This trust is an Editor’s Choice. Smaller companies in any market tend to outperform their larger brethren over time because they are more nimble and tend to be less well researched, which gives investment managers more scope to add value. Fundamental research and company analysis is regarded as key by manager Robert Siddles. He aims to exploit the entrepreneurial spirit of US-listed small and medium-sized companies. However, at the same time, he takes a risk-averse approach, emphasising capital preservation. His style is disciplined and relatively conservative. He focuses on companies with a strong franchise, free cashflow and owner managers. +91.6% 1 3 after 3 years yr yrs 7.46 21.63 Volatility 0.38 8.79 Alpha FE Risk Score: 115

FUNDSMITH Established in November 2010, this fund is an Editor’s Choice. However, manager and founder Terry Smith – who invests in the fund – has had a much longer City career. He focuses on a limited number of high-quality global businesses – the fund is currently invested in less than 30 of them. Smith has a buy and hold strategy. He stays with good companies and lets their returns benefit fund investors. That way, he avoids high portfolio turnover and the +20.00% 1 3 after 1 year yr yrs 10.19 n/a Volatility 9.93 n/a Alpha FE Risk Score: 85

concentrates exclusively on investing in Japan and it offers income investors exposure to this market. Another plus is that absolute returns and capital protection are a cornerstone of the approach taken by the management team, led by company founders Stephen Morant and Ian Wright. They invest in undervalued Japanese companies with strong balance sheets and sound business franchises, and try to identify shares that could rise in value over the longer term without undue risk.

associated high dealing costs.

GAM NORTH AMERICAN GROWTH +63.7% 1 after 3 years yr n/a Volatility n/a Alpha FE Risk Score: 87

This fund is a con-

3 yrs sistently good n/a performer and a n/a current member of

the Money Observer Premier League. It has been managed since launch in 1985 by the highly experienced Gordon Grender. He looks for the best US and Canadian companies, regardless of what sector they are in. He likes well-managed and undervalued companies and is not afraid to keep his powder dry by holding a defensive allocation to cash when appropriate. When Grender finds interesting companies he holds them for the long term. But if he thinks companies are difficult to value, he steers clear – hence the fund’s low weighting to the technology sector.

GUINNESS GLOBAL EQUITY INCOME This Dublin-based fund is an Editor’s Choice. We strongly believe income investors should diversify internationally. It helps spread risk and gives them greater opportunities to grow income. We are impressed with the investment process adopted for this fund, which is managed by Ian Mortimer and Matthew Page. Their starting point is to identify global companies that have delivered a 10 per cent return on capital for at least 10 years. They then rule out those that are over-indebted or less than $1 billion (£642 +11.50% 1 3 after 1 year yr yrs 8.97 n/a Volatility -0.83 n/a Alpha FE Risk Score: 75

Money Observer | Rated Funds | March 2013

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million) in size. From the 300 or so companies remaining they construct a portfolio of 30-40 equally weighted stocks.

M&G GLOBAL BASICS This fund appears in two Money Observer model growth portfolios. It aims to achieve growth by investing in companies in basic industries. In other words, it invests in ‘primary’ industries involved in the extraction of raw materials and ‘secondary’ industries involved in the conversion of these materials into products and services. This fund’s performance flagged in 2012, but we believe Graham French, who runs the fund, is a skilled manager and we expect this fund to produce good results over the medium to long term. +26.20% 1 3 yrs after 3 years yr 12.74 17.15 Volatility -10.95 17.15 Alpha FE Risk Score: 112

M&G GLOBAL DIVIDEND This fund comes up trumps on several measures. It was the winner of Money Observer’s Best Global Equity Income Fund award in 2012, is a current member of our Premier +48.10% 1 3 after 3 years yr yrs 11.54 14.53 Volatility 3.28 4.70 Alpha FE Risk Score: 91

League and was also one of our income fund tips for 2013. It is managed by Stuart Rhodes, who looks for companies capable of growing their dividends but are undervalued by the market. But he avoids high-yielding companies, as he regards high yields as a sign of trouble or low growth potential. Rhodes aims for a geographically diverse portfolio of about 50 holdings starting with a core of quality, well-managed companies with steady dividend growth, asset-backed cyclical businesses with good capital discipline and high-growth companies that can turn growth into dividends.

M&G Global Dividend comes up trumps on several measures

NEWTON GLOBAL HIGHER INCOME This fund is included in two Money Observer model income portfolios. We think it is important for income investors to have overseas exposure, and Newton has a consistently good record managing equity income funds. This fund is managed by the experienced James Harries. It can invest worldwide in any companies with the potential to provide growing dividends and long-term capital growth. Harries looks for high-quality, well+41.40% 1 3 after 3 years yr yrs 8.61 9.70 Volatility 3.69 3.02 Alpha FE Risk Score: 67

financed businesses with high free cashflow and a sustainable franchise that can grow dependably over time. This gives the fund good defensive qualities.

NORTH AMERICAN INCOME This trust is an Editor’s Choice. It has been around since 1997, but last year it changed from being a US index-tracker to being an actively managed US equity income trust. It now aims to provide investors with above-average dividend income and longterm capital growth. The fund, managed by Aberdeen Asset Managers, mainly invests in larger US companies, but it can also invest in medium and smaller companies and Canadian stocks. Up to 20 per cent can be held in fixed-income securities. We think it provides a good opportunity for income investors to gain US exposure. +45.10% 1 3 after 3 years yr yrs 9.90 12.82 Volatility -0.91 -0.15 Alpha FE Risk Score: 81

OLD MUTUAL GLOBAL EQUITY +50.50% 1 3 after 3 years yr yrs 13.56 15.52 Volatility 2.56 3.94 Alpha FE Risk Score: 101

This fund is a member of our Consistent 50. It has a rigorous investment

This year everybody’s talking about… Europe JUPITER EUROPEAN This fund is a a member of the Consistent 50 and was highly commended in Money Observer’s 2012 fund awards. We believe that, whatever their feelings about the EU, it is important for investors to have some exposure to this region, which is home to many world-class companies. It is these companies that fund manager Alex +53.50% 1 3 after 3 years yr yrs 12.59 16.78 Volatility 9.30 7.01 Alpha FE Risk Score: 111

Alex Darwall homes in on world-class companies in Europe

Darwall tends to home in on. He likes companies whose products are in demand internationally, not just in Europe. He also prefers businesses that are in as much control as possible of their own destinies and less subject to being damaged by external factors.

BLACKROCK EUROPEAN DYNAMIC We like this Editor’s Choice fund because it has a go-anywhere, highconviction approach. It is managed by the experienced Alister Hibbert, who is regarded as a good stockpicker, backed by a strong investment process. The fund has a focused but flexible style and a +57.90% 1 3 after 3 years yr yrs 15.47 19.28 Volatility 6.22 6.88 Alpha FE Risk Score: 123

portfolio of 35-65 stocks. It can invest in European companies of any size. Hibbert is backed by BlackRock’s research team. It provides a template for the stocks he buys and a forecast of a company’s potential over the next five years in terms of revenues and margins, and use of cashflow. The team considers all angles carefully.

MONTANARO EUROPEAN SMALLER COMPANIES This trust was highly commended in Money Observer’s 2012 investment trust awards. We particularly like the fact that Montanaro focuses exclusively +49.8% 1 after 3 years yr n/a Volatility n/a Alpha FE Risk Score: 87

3 yrs n/a n/a

Charles Montanaro looks for well-managed companies on investing in UK and European smaller companies. Although the company also runs a similar openended fund, we believe the investment trust format can be particularly useful for smaller companies, as it allows managers to take a longer-term view without the risk of being forced to sell if investors decide they want to withdraw their cash. Manager Charles Montanaro’s approach is to look for well-managed companies, typically with dominant positions in growing niche markets.

Money Observer | Rated Funds | March 2013

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DEVELOPED MARKET EQUITIES process and – unlike the many funds that take a focused approach nowadays – it has a highly diversified portfolio of nearly 300 stocks. The fund is managed by Ian Heslop, Amadeo Alentorn and Mike Servent. They assess companies using a range of criteria that includes stock price valuation, balance-sheet quality, growth characteristics, efficient use of capital, analyst sentiment and market trend support. They look for stocks they believe will outperform in the current economic climate. But they are also very risk aware and careful about controlling portfolio turnover.

PICTET PREMIUM BRANDS +65.00% 1 after 3 years yr n/a Volatility n/a Alpha FE Risk Score: 134

This Editor’s

3 yrs Choice fund is n/a domiciled in n/a Luxembourg and

managed from Pictet’s Geneva headquarters. It invests in global companies with well-known brands that provide products and services for aspirational consumers. Among its top holdings are Swatch, Nike, Diageo and Louis Vuitton. Its managers look for companies with solid balance sheets and superior revenue growth on reasonable valuations. Much of the fund’s recent growth has been driven by demand for branded products in emerging markets.

SCOTTISH MORTGAGE This trust is included in two of Money Observer’s model income portfolios to provide global diversification. The trust has a history of increasing its dividends over the past 36 years, and we see it as a strong core holding in any type of portfolio. The caretaker manager, Tom Slater at Baillie Gifford, will focus on returns from long-term structural changes rather than short-term market movements. +78.00% 1 3 after 3 years yr yrs 13.13 19.52 Volatility 7.06 4.33 Alpha FE Risk Score: 134

WITAN This diverse global growth trust appears in three Money Observer growth portfolios. Part of the portfolio is managed by chief executive Andrew Bell and his team, while the remainder is run by 11 external managers. The directly held investments consist of collective investments such as 3i Group. +42.40% 1 3 after 3 years yr yrs 16.76 16.76 Volatility -0.73 -2.14 Alpha FE Risk Score: 101

GLOBAL BONDS

Get a fix on

global mix

Bond investors should take pains to diversify their portfolios to mitigate risk and capitalise on the best global value

he more variety in your investment portfolio the better, and this applies to bonds as much as shares. Holding bond funds that invest overseas also means you grant investment managers more scope to find value. However, while the Investment Management Association groups all overseas-invested bond funds together in the global bonds sector, there are considerable variations among the funds in this category, which have very different risk profiles. Our rated selection of bond funds includes a cross-section of these variants. At the low end of the risk scale are funds such as Standard Life Global Index Linked Bond, which invests in government- and company-issued inflation-linked bonds. It is not certain to deliver a return in line with inflation, but it should give you some protection. Another fund at the lower end of the risk spectrum is the Marlborough Global Bond fund, a generalist fund that will spread your investment across a range of countries and bond types. Funds that invest overseas in high-yield bonds have a higher risk profile. These bonds are issued by companies that credit ratings agencies deem less financially sound, so there is a greater chance they will default. To minimise this risk, good investment managers will carry out their own research on bond issuers. Some funds specialise in the bonds of emerging market governments and companies. These funds have performed well recently and could be regarded as offering a lower-risk way of gaining exposure to emerging markets than equity funds. However, as always, the value of your investment can go down as well as up.

AXA GLOBAL HIGH INCOME

This fund appears +32.90% 1 3 yr yrs in one of Money after 3 yrs 2.70 n/a Observer’s model Volatility 4.27 2.70 income portfolios. Alpha FE Risk Score: 29 It invests in noninvestment-grade bonds issued by companies that have to pay higher yields to compensate investors for their lower credit ratings. The lead manager is James Gledhill. The group looks at the overall economic environment and carefully analyses businesses issuing bonds to assess the risks involved. The fund’s portfolio is highly diversified and contains 250-300 holdings across a range of sectors, ratings, currencies, issues and regions. The fund offers a good balance between risk and return.

BAILLIE GIFFORD EMERGING MARKETS BOND This fund is an Editor’s Choice. Baillie Gifford’s reputation as a bond fund manager is growing because of the good performance of a number of its fixedincome funds. We like the fact the group has a strong emerging markets equity team whose knowledge fund managers Steven Hay and Sally Greig can draw on. The fund mainly invests in local currency government bonds in emerging markets. +30.80% 1 3 yr yrs after 3 yrs 7.27 10.33 Volatility -4.37 -3.55 Alpha FE Risk Score: 64

INVESCO PERPETUAL EUROPEAN HIGH YIELD This fund is also an Editor’s Choice. It will appeal to investors seeking a high immediate income. We rate this fund because it is managed by two of the UK’s most experi+47.58% 1 3 yr yrs after 3 yrs 7.46 12.03 Volatility 1.80 2.35 Alpha FE Risk Score: 61

Money Observer | Rated Funds | March 2013

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OLD MUTUAL GLOBAL STRATEGIC BOND This fund is an +22.70% 1 3 yr yrs Editor’s Choice. after 3 yrs 4.61 5.29 We rate the Volatility -1.05 3.25 manager of this Alpha FE Risk Score: 32 fund, Stewart Cowley, highly. We believe he is an ideal person to run a bond fund that invests strategically. It can invest in government and corporate bonds, high-yield bonds and currencies. The aim is to deliver good returns in all market conditions through active management and the ‘short selling’ of bonds to profit from falling bond prices.

STANDARD LIFE GLOBAL INDEX LINKED BOND enced and respected bond fund managers, Paul Causer and Paul Read. They can invest in high-yielding corporate and government bonds – including investment-grade bonds – and incorporate an equity element. Recently, they have favoured higher credit quality, high-yield bond issuers and higher-yielding investment-grade bonds.

This fund was a highly commended joint runner-up for Money Observer’s global bond fund award in 2012. We regard the fund as a good insurance policy for investors worried inflation may erode their capital. It invests mainly in government and corporate inflation-linked bonds. Manager Jonathan Gibbs says access to inflationlinked bonds globally allows him to position the portfolio in the best-value markets. +22.30% 1 3 yr yrs after 3 yrs 2.39 3.26 Volatility 1.12 6.33 Alpha FE Risk Score: 30

returns through a further narrowing of yields relative to developed markets and currency appreciation.

MARLBOROUGH GLOBAL BOND +31.80% 1 yr after 3 yrs n/a Volatility n/a Alpha FE Risk Score: 34

INVESTEC EMERGING MARKETS LOCAL CURRENCY DEBT Another Editor’s +30.80% 1 3 yr yrs Choice, this fund after 3 yrs 7.85 9.84 was the first to Volatility -3.00 -2.98 popularise the idea Alpha FE Risk Score: 53 of investing in emerging market bonds in the local currency. Fund manager Peter Eerdmans is an expert in this area. He says many emerging economies are in a healthier state than developed markets and that government debt levels are much lower relative to GDP than in the West. Emerging market bonds offer attractive yields as well as potential for additional

This fund was the

3 yrs winner of Money n/a Observer’s Best n/a Global Bond Fund

award in 2012. It is a genuine global bond generalist. It can invest in any government or corporate bond and its managers also seek to maintain a good yield. The lead manager is Geoff Hitchin, who has been running the fund for 25 years. His co-manager is Nicholas Cooling. They aim to hold bonds from a good spread of countries from across the developed world, including the UK, as well as have exposure to emerging economies. They use currency plays to boost returns.

TEMPLETON EMERGING MARKETS BOND

Geoff Hitchin has been running the fund for 25 years

+34.20% 1 yr after 3 yrs n/a Volatility n/a Alpha FE Risk Score: 43

This fund was the

3 yrs other highly n/a commended joint n/a runner-up for our

global bond fund award last year. It invests in government and corporate bond in emerging markets and has a diverse portfolio of more than 200 holdings. Bonds selection takes into account general economic trends and the outlook for interest rates.

RATED FUNDS: GLOBAL BONDS AXA Global High Income Baillie Gifford Emerging Markets Bond Invesco Perpetual European High Yield Investec Emerging Mkts Local Currency Debt Marlborough Global Bond Old Mutual Global Strategic Bond Standard Life Global Index Linked Bond Templeton Emerging Markets Bond

Type: Fund/IT Fund Fund Fund Fund Fund Fund Fund Fund

Ongoing charge* 1.33% 1.32% 1.72% 1.66% 1.19% 1.14% 1.10% 1.88%

IMA/AIC sector Sterling high yld Global bonds Europe ex UK Global bonds Global bonds Global bonds Global bonds Global bonds

Net yield 6.1% 4.4% 3.3% 5.7% 4.5% 2.2% 0.2% 0.0%

% annual return and +/-% relative to sector† 2012 14.6% 11.8% 17.9% 11.7% 9.8% 5.2% 4.3% 13.1%

Rel -4.8% 4.9% -1.1% 4.8% 2.9% -1.7% -2.6% 6.1%

2011 2.0% -3.2% -12.6% -3.1% 5.0% 3.2% 12.0% -1.2%

Rel 5.9% -5.4% 3.0% -5.3% 2.8% 0.9% 9.8% -3.5%

2010 11.3% 17.9% 2.3% 19.4% 14.2% 10.7% 4.5%

Rel -1.1% 9.4% -6.3% 10.9% 5.7% 2.2% -4.0%

* Ongoing charges where available, otherwise we quote the total expense ratio. † Percentage returns with net income reinvested for past three calendar years, bid-to-bid for funds and mid-to-mid for investment trusts and companies. Relative outperformance or underperformance to the sector average is quoted in percentage points. Source: FE Trustnet

Money Observer | Rated Funds | March 2013

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PROPERTY

Mired market perks up The commercial property sector has been showing signs of life recently. So what are the best options for would-be investors?

or most of us in the UK, property in the form of our own home is our largest investment. A few years ago investors also started piling into commercial property funds as the market values of offices, shops and other types of business premises rose. It looked like prices would go on rising forever. However, the financial crisis led to a slump in commercial property prices, hurting many investors. After five years in the doldrums, commercial property is looking attractive again, particularly for income seekers. Yields of 8 per cent are on offer from investment trusts with direct property holdings. We believe investment trusts are normally best suited to holding physical property because they are closed ended, so they don’t need to sell properties to meet redemptions when investors want to cash in. But we have also included the L&G UK Property fund, as we believe its managers can ride out the worst the market can throw at them. We have included two openended funds investing in property shares and real estate investment trusts around the world for investors who want broad exposure to the global property market.

AVIVA GLOBAL PROPERTY This fund is an Editor’s Choice. It aims to produce long-term capital growth and stable income through investment in real estate investment trusts and other property companies globally. Reits have the advantage over direct property investment in that they provide immediate and liquid exposure to property +56.90% 1 3 yr yrs after 3 yrs 8.85 12.82 Volatility -0.87 3.50 Alpha FE Risk Score: 82

considered the most defensive of property trusts. Its portfolio is biased towards London and the south east, so it has benefitted from overseas investor support for prime London property.

FIRST STATE GLOBAL PROPERTY SECURITIES This fund is an Editor’s Choice. It invests in a broad portfolio of property shares globally. We like First State’s strong property investment team, led from Australia by Stephen Hayes, which believes world property markets are highly dependent on local economic conditions and bases its judgements on region-specific forecasts. +62.60% 1 3 yr yrs after 3 yrs 8.48 14.23 Volatility -2.76 3.50 Alpha FE Risk Score: 87

LEGAL & GENERAL UK PROPERTY A winner of Money Observer’s 2012 Best Property Fund award, this fund is managed by Michael Barrie and Matt Jarvis and mainly invests in physical property. It aims to maintain a balanced portfolio representative of the UK property market as a whole. Managers strive to find the right strategy in each sector and then track down the properties they feel can best add value. +13.30% 1 3 yr yrs after 3 yrs 0.95 2.14 Volatility 0.56 2.95 Alpha FE Risk Score: 10

markets around the world, and at a lower cost. Property company shares provide extra diversification. Manager Paul Van de Vaart says demand for high-yielding property shares is underpinned by low interest rates.

F&C COMMERCIAL PROPERTY +40.00% 1 3 yr yrs after 3 yrs 7.16 15.38 Volatility 7.95 15.83 Alpha FE Risk Score: 83

SCHRODER REAL ESTATE

This was one of our 2013 tips. It holds prime UK commercial property and is

RATED FUNDS: PROPERTY Type: Ongoing IMA/AIC Fund/IT charge* sector Aviva Global Property Fund 1.66% Property F&C Commercial Property IT 1.00% Property – direct UK First State Global Prop Secs Fund 1.58% Property L&G UK Property Fund 1.43% Property Schroder Real Estate IT n/a Property – direct UK

Net yield 1.3% 5.3% 2.2% 2.6% 9.1%

% annual return and +/-% relative to sector† 2012 Rel 2011 Rel 2010 Rel 19.5% 7.0% -3.1% 2.9% 20.5% 7.1% 8.2% 7.2% 2.0% 20.3% 26.2% 19.2% 17.1% 4.6% -0.8% 5.2% 25.8% 12.4% 1.6% -11.0% 2.7% 8.7% 9.7% -3.7% 30.2% 29.2% -6.4% 11.9% 6.6% -0.4%

Notes: * Ongoing charges where available, otherwise we quote the total expense ratio. † Percentage returns with net income reinvested for past three calendar years, bid-to-bid for funds and mid-to-mid for investment trusts and companies. n/a = not available. Relative outperformance or underperformance to the sector average is quoted in percentage points. Source: FE Trustnet

after 3 yrs 1 yr n/a n/a Volatility n/a Alpha FE Risk Score: 139

This trust was one

3 yrs of our investment n/a trust tips for 2013. n/a It has been selling

some low-yielding properties to pay off debt but is expected to refinance remaining debt in 2014, thereby reducing costs and improving its dividend. These improvements coupled with its portfolio’s heavy bias to the south east and London’s West End should revive the trust’s prospects.

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SPECIALISTS

Focus on the sectors with the promise to deliver Investment trusts and funds are ideal for investing in specialist sectors as they combine expertise with the lower risk of a spread of holdings

he first investment trusts, set up at the end of the nineteenth century, were mainly specialist in nature. They invested in companies involved in activities such as building railways in the US or providing mortgages for Malaysian rubber plantations. Nowadays, there are still plenty of industry-specific and other specialist funds available for investors to choose from. Investing in a specialist area through a trust or fund is still a better option for most investors than buying individual shares. It means your risk is spread across, say, 50 or more companies. It also means you are getting the services of a specialist investment professional. Nevertheless, even the best investment managers cannot escape market forces, and with many specialist funds investors will have to be prepared for volatility. One of the most obvious examples of this phenomenon was the technology sector, which became increasingly popular until the bubble burst 10 years ago. In our specialist rated funds section we have included two technology trusts that have performed very well in recent years as the sector has recovered. Another trust, Impax Environmental Markets, includes investments in environmental technology companies in its portfolio. Alternatively, investors may be interested in backing biotechnology and we feature two funds that are exploiting this area. Although not industry-specific, another specialist area bringing considerable rewards with commensurate risks is backing start-up companies or companies that are being bought out by their managements. We include two private equity trusts that specialise in this area. But not all our specialist selections are high risk. We also include BH Macro, a hedge fund designed to smooth out returns and provide positive growth in all market conditions.

March 2007 and feeds into Brevan Howard’s flagship Master Fund, which is incorporated in the Cayman Islands. Its aim is to generate consistent longterm appreciation mainly through trading on the global fixed income and foreign exchange markets. Brevan Howard has trading teams around the world.

ELECTRA PRIVATE EQUITY

AXA FRAMLINGTON BIOTECH An Editor’s Choice, this fund’s aim is to provide long-term capital appreciation by investing in companies involved in biotechnology, genomic and medical research globally, although in practice most of its holdings are US-based, reflecting the concentration of the industry in that part of the world. It is one of the only funds that specialises in an area for which there is a good long-term investment argument, with an ageing population driving healthcare spending higher. +63.70% 1 3 yr yrs after 3 yrs 14.51 15.99 Volatility 22.18 13.91 Alpha FE Risk Score: 120

Hugh Mumford has been involved with Electra for 30 years

BH MACRO +12.30% 1 yr after 3 yrs n/a Volatility n/a Alpha FE Risk Score: 74

This fund is an

3 yrs Editor’s Choice for n/a investors who n/a want an absolute

return product in their portfolios that should hold its value when markets go down. It is a Guernseybased hedge fund that was launched in

+64.50% 1 yr after 3 yrs n/a Volatility n/a Alpha FE Risk Score: 119

Winner of Money

3 yrs Observer’s Best n/a Private Equity n/a Trust award last

year, this trust is one of the oldest and largest of its kind. Hugh Mumford, the managing partner, has been involved with it for more than 30 years. It specialises in UK and European mid-market buyouts and invests across all market sectors. As it invests directly, it is not driven by fundraising cycles and is able to hold investments for longer than usual. This gives the managers the ability to support companies through more than one phase of growth and realise investments only when it is in the best interests of shareholders.

GUINNESS GLOBAL MONEY MANAGERS after 3 yrs 1 yr n/a n/a Volatility n/a Alpha FE Risk Score: 124

This trust is an

3 yrs Editor’s Choice n/a and is a geared n/a play on a sustained

recovery in financial assets. It is a relatively new Dublin-based fund that was launched just over two years ago. It invests in companies engaged in money management services around the world, including asset managers, investment advisers and wealth managers, stock exchanges and other service providers. The fund managers are Tim Guinness and Will Riley.

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RATED FUNDS: SPECIALISTS Name Axa Framlingon Biotech BH Macro (sterling) Electra Private Equity Guinness Money Managers Herald Impax Environmental Markets Invesco Leveraged High Yield Investec Global Gold Pantheon Int Participations Polar Capital Technology Worldwide Healthcare

Type: Fund/IT Fund IT IT Fund IT IT IT Fund IT IT IT

Ongoing charge %* 1.93 n/a 2.75 1.99 1.05 n/a 1.50 1.61 n/a 1.31 1.10

IMA/AIC sector Specialist Hedge funds Private equity Global Small media comms & IT cos Environmental Global high income Specialist Private equity Tech media & telecomm Biotechnology & healthcare

Net yield 0.0% 0.0% 0.0% n/a% 0.2% 0.8% 7.7% 0.0% 0.0% 0.0% 0.8

2012 24.3 -8.8 35.7 24.1 13.0 8.1 35.9 -12.9 41.0 11.5 20.3

% annual return and +/-% relative to sector† Rel 2011 Rel 2010 16.6 7.6 23.4 9.8 -7.9 25.0 26.1 -0.8 16.8 -16.0 -14.0 39.7 14.7 -18.7 -9.4 n/a 0.2 -5.8 0.5 43.1 2.8 -25.7 -7.1 9.4 20.4 -1.8 1.5 13.1 -20.6 -20.8 -5.1 52.2 22.2 0.1 2.1 47.1 1.1 -13.5 -2.3 47.1 -7.2 6.5 -4.4 14.9

Rel -10.0 -6.3 14.5 -15.8 -0.7 12.5 3.7 32.3 21.9 13.1 0.9

Notes: * Ongoing charges where available, otherwise we quote the total expense ratio. † Percentage returns with net income reinvested for past three calendar years, bid-to-bid for funds and mid-to-mid for investment trusts and companies. na = not available. Relative outperformance or underperformance to the sector average is quoted in percentage points. Source: FE Trustnet

HERALD This investment trust is included in one of the Money Observer model growth portfolios. It was also highly commended in our trust awards last year. It specialises in investing in smaller quoted companies in the communications and multimedia sectors. It has been managed by Katie Potts since its launch in 1994. Although it can invest globally, nearly two-thirds of the portfolio consists of UK companies. They also take a long-term view. It is well diversified with more than 230 holdings. +65.60% 1 3 yr yrs after 3 yrs 15.74 17.26 Volatility 0.62 0.27 Alpha FE Risk Score: 98

IMPAX ENVIRONMENTAL MARKETS This trust is an Editor’s Choice for investors who are interested in environmental issues. In theory this sector should be thriving as a result of increased regulation and the need for new technologies to deal with pollution and scarce resources, but in recent years it has lagged behind. However, we like the fact that this management group specialises in the environmental sector so it should be able to make the best of the opportunities that are available. To qualify for inclusion, companies must generate at least 50 per cent of their revenues from environmental markets. The trust also has a bias towards small and medium-sized businesses. +6.00% 1 3 yr yrs after 3 yrs 15.96 18.27 Volatility 6.27 6.24 Alpha FE Risk Score: 96

INVESCO LEVERAGED HIGH YIELD +48.70% 1 yr after 3 yrs n/a Volatility n/a Alpha FE Risk Score: 80

This investment

3 yrs company is an n/a Editor’s Choice. It n/a is relatively unu-

sual as there are very few closed-end funds that invest in

bonds compared to the large number of open-ended funds that do so. It is managed by Invesco Perpetual’s highly respected fixed income experts, Paul Causer and Paul Read, who also run the group’s openended funds. They focus on better quality high-yield bonds and higher yielding investment-grade bonds. The objective is to provide investors with a high level of income, while protecting investors’ capital.

INVESTEC GLOBAL GOLD An Editor’s Choice, this fund invests primarily in the shares of gold mining companies, but up to a third of the portfolio may also be invested in companies mining for other minerals and metals. It is managed by Daniel Sacks and Bradley George, who are both members of Investec’s broader natural resources team. They are very much company-focused and invest in those where they expect share price upgrades. They favour small companies already in production, which tend to be consolidation targets and can also produce earnings surprises. The portfolio is concentrated with around 20-40 shares. Around half of the fund is currently invested in Canadian-listed gold miners. +7.20% 1 3 yr yrs after 3 yrs Volatility 23.62 24.32 -25.43 1.67 Alpha FE Risk Score: 175

are interested in gaining exposure to the private equity sector. The manager, Andrew Lebus, is able to spread the portfolio’s investments across companies of different sizes at different stages of their development, including small and large buyouts, companies in the venture and growth phases as well as special situations.

POLAR CAPITAL TECHNOLOGY This investment trust is an Editor’s Choice. We believe it is a good choice for investors who want a stake in the mainstream global technology sector. Ben Rogoff, the manager, is experienced and a safe pair of hands for this type of investment. Although around two thirds of the portfolio is currently invested in larger technology stocks, Rogoff believes the future will be more difficult for larger companies and so he has begun to focus more on smaller- and medium-sized technology companies. +60.90% 1 3 yr yrs after 3 yrs 17.70 24.32 Volatility -2.76 1.06 Alpha FE Risk Score: 117

Daniel Sacks invests where WORLDWIDE he expects HEALTHCARE share price upgrades An Editor’s +56.10%

PANTHEON INTERNATIONAL PARTICIPATONS +97.00% 1 yr after 3 yrs n/a Volatility n/a Alpha FE Risk Score: 96

This trust is held in

3 yrs one of Money n/a Observer’s model n/a growth portfolios.

It is a fund of private equity funds so it provides plenty of diversification for investors who

1 3 yr yrs after 3 yrs 11.68 11.99 Volatility -0.58 -0.61 Alpha FE Risk Score: 69

Choice, this trust invests worldwide in a diversified portfolio of shares in pharmaceutical, biotechnology and healthcare companies. It is a UK trust, part of the Frostrow Capital stable, but its investment management has been outsourced since its 1995 launch to Samuel D. Isaly of OrbiMed, a specialist US healthcare investment company, which also has offices in China, India and Israel. Its top 10 holdings currently include household names such as Roche and Johnson & Johnson and it is overweight biotechnology companies.

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COMMODITIES

Promising material

Commodity investments can help counter the apparently relentless rise in energy and food prices that damages our household finances

t is difficult to imagine that anyone is unaware of the importance of commodities in our everyday lives. Rising energy prices have cranked up household costs and higher food prices are squeezing family budgets. World population growth and rising living standards in emerging markets mean prices are likely to increase over the long term. That said, it is possible to benefit from these trends by investing in companies in the commodities sector. The sector can be volatile: the slowdown has reduced demand for some commodities, and mining company shares have fallen out of favour over the past year. However, there are signs of improvement in the growth outlook for China, the US and elsewhere. Another positive is the likelihood that increases in the money supply in the US, the UK and elsewhere will lead to higher inflation. Commodity prices tend to rise with inflation, so buying into this sector can help you protect your capital. If you have a large portfolio and want to be sure it is well diversified, investing a small amount in specialised funds will give you a good spread of risk. Our rated funds consist of a general global resources fund and three specialist products investing in mining, energy and agriculture. The longterm investment case for these sectors is strong, but it is important to note that fund performance can be volatile and managers of specialist funds cannot diversify into other sectors.

ago. Key members of the team, including head of global resources Joanne Warner, are based in Australia, which is a considerable benefit given the demand for commodities emanating from Asia. The team also includes mining and petroleum engineers, as well as experts in agriculture, physics and chemistry. Their knowledge helps them understand the risks and opportunities associated with resources projects.

ARTEMIS GLOBAL ENERGY An Editor’s Choice, this fund is relatively new. It launched two years ago, and is managed by John Dodd and Richard Hulf. We like this combination. Dodd has a strong investment record and Hulf worked in the oil industry and carried out oil and gas research before joining Artemis. They follow the company’s ‘high conviction’ approach, which means the fund’s portfolio holds a relatively small number of stocks, around 40, that the managers believe will outperform their peers. Despite this concentration, they are keen on diversification. They invest mainly in medium-sized companies. n/a% 1 3 yr yrs after 3 yrs 14.05 n/a Volatility -5.02 n/a Alpha FE Risk Score: 120

to an area of increasing importance and because Barings has a convincing record in resources generally. The fund, managed by Jonathan Blake, can invest in any company where most earnings derive from agriculture and soft commodities. It could be fertiliser and machinery companies, firms involved in grain handling and logistics, and food manufacturers and retailers. Blake says this flexibility means he need not rely on rising commodity prices to add value and he can perform well in a range of market conditions.

FIRST STATE GLOBAL RESOURCES

BLACKROCK WORLD MINING

This trust is an Editor’s Choice. We like it because it has been around This fund was one +2.1.0% 1 3 yr yrs of Money after 3 yrs for 20 years, has a We have rated this +22.20% 1 3 Volatility 19.28 25.29 Observer’s growth yr yrs fund as an Editor’s after 3 yrs strong track record and possesses a talented -26.68 -9.39 tips for 2013. First Alpha 13.83 17.45 Choice because we Volatility investment team in Evy Hambro and FE Risk Score: 158 8.78 1.24 believe it gives Alpha Catherine Raw. Another plus is that the State’s global FE Risk Score: 110 trust has started placing a greater emphasis resources team was established 15 years investors exposure on yield. It invests mainly in the shares of larger mining and metal RATED FUNDS: COMMODITIES companies. % annual return and +/-% relative to sector† Type: Ongoing IMA/AIC Net Name Fund/IT charge* sector yield 2012 Rel Its portfolio is well-diversified, 2011 Rel 2010 Rel Artemis Global Energy Fund 1.65% Specialist 0.0% 1.7% -5.9% both geographically and in terms Baring Global Agriculture Fund 1.76% Specialist 0.1% 10.5% 2.8% -17.7% -2.0% 17.9% -2.0% of the commodities it is exposed to. BlackRock World Mining IT 1.42% Commodities & nat res 3.5% -4.1% 4.4% -21.5% -1.5% 48.5% 3.9% The managers focus on companies First State Global Resources Fund 1.60% Global 0.0% -9.1% -18.6% -25.8% -16.5% 37.3% 21.5% with strong balance sheets and high Notes: * Ongoing charges where available, otherwise we quote the total expense ratio. † Percentage returns with net income reinvested for past three calendar years, bid-to-bid for funds and mid-to-mid for investment trusts and companies. Relative outperformance or underperformance to the sector average is quoted in percentage points. Source: FE Trustnet asset quality.

BARING GLOBAL AGRICULTURE

+20.70% 1 3 yr yrs after 3 yrs 21.03 23.75 Volatility 7.31 3.92 Alpha FE Risk Score: 156

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