Investor Views: "Don't Pay for a Manager Who Hugs the Index"

Professional investor Charles MacKinnon likes managed funds that are highly actively - taking big stock bets for investment growth

Emma Simon 15 February, 2017 | 2:56PM

As an investment director at Tilney, Charles MacKinnon is used to building bespoke portfolios for clients, and managing their money for them.

When it comes to investing his own money he tries to follow the advice he gives to others. He says there are three key things all investors should bear in mind: invest for the long-term, save regularly and keep an eye on costs.

He says: “I’m investing for the long-term. I’m 61 now, but I’m looking still looking to invest over a 40-year time horizon. The days are long gone when people moved into cash when they reached their 70s. People now need to ensure they have enough savings to fund retirement well into their 90s. The only way to do this is to invest in equities and accept a degree of volatility.”

Regular Saving to Beat Market Volatility

To help manage this volatility, MacKinnon says he makes regular monthly savings into a number of different equity funds. “I keep putting money in regardless of what is going on in the wider world,” he says. “I didn’t stop before investing before Brexit, or after it, for example. We don’t know what is going to happen with stock markets in the short term, but I think that over the longer term the dividend-paying equities will be better than other asset classes.”

When it comes to investing his own money alongside his core fund picks he has a number of higher-risk shareholdings, which he hopes will boost overall returns.

He says: “I’m able to take these higher risks because I already have in a number of well managed funds.” He says setting up monthly savings plans and focusing on the longer-term helps, to some extent, to mitigate these volatility risks.

Five Star Fund

One of his favourite funds is Orbis Global Equity. MacKinnon says: “This fund takes very active positions. I’ve been impressed with the management team and the intellectual process and thinking they’ve shown in running this fund.”

Orbis charges a performance-linked annual fee. If the fund fails to beat its benchmark, the MCSI World Index, investors pay no fee at all. If it does beat its benchmark, the fund managers collect a percentage performance fee. This is paid over several years, to encourage consistent outperformance.

The fund has a Morningstar Analyst Silver Rating and a five-star performance rating, demonstrating that it has outperformed peers consistently, and analysts believe that it should continue to do so.

Morningstar analyst Fatima Khizou says: “The fund is managed using a team-based approach, and the team's strength and longevity are two of its distinguishing features. Their patience and disciplined investment approach have paid off over the long haul.”

While the portfolio holds a large number of stocks, 80% of them  are concentrated in the top 50 holdings. This can lead to some significant sector biases.

Passive Funds for Core Investments

In contrast to this “highly active” approach, MacKinnon has also invested directly into Vanguard’s Lifestyle Strategy fund. He says: “This is another global long-only 100% equity fund. But the key difference here is that this is passively-managed. Here I am following Warren Buffet’s fine advice: to invest the core part of your portfolio in index funds.”

By investing directly MacKinnon is paying charges of just 0.24%. “This makes it a compelling long-term option,” he says.  Morningstar gives this fund a four-star performance rating, low charges have helped the tracker perform well against funds in its peer group over the long term.

investment director at Tilney, Charles MacKinnon

MacKinnon also makes regular investments into Vanguard Global Equity. Unlike other funds in the Vanguard stable though this is an actively managed fund. MacKinnon says: “With a fee of just 0.6% this looks good value to me.” The fund launched in June 2016, so has yet to receive a Morningstar rating.

Elsewhere MacKinnon has shares in funds which have outperformed peers in recent years. This portfolio includes the Gold-rated Lindsell Train UK Equity fund, the Silver-rated Troy Trojan Income, the Bronze-rated Fundsmith Equity, Evenlode Income and Lindsell Train Global Equity.

All these funds have five-star performance ratings from Morningstar, reflecting their outstanding track record in recent years.

“These may be very different funds, but what they all have in common is that they don’t look anything like their benchmark indices,” says MacKinnon. “These are highly active fund managers who are not afraid to take positions against the index.

“I don’t think it’s a case of choosing between active and passive strategies, I think it’s good to have a spread a both. But if you are paying for active management, you want it to be active management. It’s no good paying for a manager to essentially follow the index."

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
CF Lindsell Train UK Equity Acc430.32 GBP-0.18
Evenlode Income A Acc  -
Fundsmith Equity R Acc3.93 GBP0.28
Lindsell Train Global Equity A3.14 GBP-0.34
Orbis Global Equity  -
Troy Trojan Income O Acc330.03 GBP-0.79
Vanguard Global Equity A GBP Acc155.64 GBP-0.94-
About Author Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk