Welcome to the new morningstar.co.uk! Learn more about the changes and how our new features help your investing success.

Investor Views: Should I Stick With Downgraded Funds?

Retired investor Callum Baines has built an extensive portfolio of funds and trusts, but some have faltered in more difficult market conditions

Emma Simon 13 February, 2019 | 1:28PM

Nest egg

Callum Baines has built up an extensive portfolio of both funds and direct shareholdings over the past 20 plus years.

Baines – who started his working life in a bank and ended up working for his own IT consultancy – is now retired. However, he remains an active investor.

He says: “I’ve been lucky that both my wife and I have older-style pensions. They don’t pay out a huge sum, but it is enough to cover the basics, and we know that this is coming in every month, regardless of what goes on in the economy, or markets.”

Baines’s wife, Linda, worked for the NHS for most of her working life, while he has one final salary pension from the 15 years he spent working in the banking industry.

As a result he has not needed to dip into his investments yet. “We only retired a couple of years ago. At the time there was a lump sum payment on my wife’s pension and we used this to fund a trip abroad. Our son lives in Singapore, so we visited him and then went on to Australia and New Zealand.

“We didn’t have gap years when I was younger, so it has been good to take this opportunity now we are in our late 60s. It wasn’t for a year, but we probably stayed in much nicer accommodation than our kids did when they were younger!”

Saving and Investing

When it comes to his savings and investments Baines has always adopted to the “Micawber” principle - from Charles Dickens’ David Copperfield. This states that if incomes exceeds expenditure the result is happiness.

“We were always careful to save what we could during our working life, and it’s certainly given us a lot more flexibility now.”

Baines says that he and his wife have tried to maximise their ISA contributions, where possible, and he also invested in a SIPP once he started his own consultancy.

He has a mix of both active and passive fund and tries to diversify globally.

“When it comes to the US I tend to stick to index funds, as it seems to me the market as a whole is difficult to beat.”

Bains has a holding in HSBC American Index. This Gold-rated tracker also has a four-star rating from Morningstar. 

However Baines says while this approach applies to larger US caps, he does have a holding in Schroders US Mid Cap, which as the name suggests looks for investment opportunities in growing medium-sized businesses in the US.

This fund has a Bronze Rating from Morningstar. However, this was downgraded from Silver following the announcement that its long-standing manager, Jenny Jones, is soon to retire.  Jones has run the strategy for the fund since 2004.

The current co-manager, Robert Kaynor, will take over the role. Morningstar analyst Lena Tsymbaluk says: “We don’t believe Kaynor is going to tear up the rule book. He is well acquainted with the approach and has helped tweak it during his director of research years. It would be surprising if the defensive nature of the strategy were to change.”

But given that Kaynor doesn’t have a solo track record to date, Tsymbaluk says a Bronze Rating is an “appropriate reflection of our opinion at this stage”.

Corporate Governance Concerns

Elsewhere Baines also invests in a number of active funds investing in emerging markets. This includes Aberdeen Emerging Markets.

This is another fund that has recently been downgraded, from Silver to Bronze by Morningstar.

It also has a three-star rating, reflecting the fact that it has underperformed its benchmark more recently.

Morningstar analyst Andrew Daniels says that there doesn’t appear to be immediate concern for investors. He says: “Aberdeen Emerging Markets Equity still boasts a solid investment team, but an evolving investment approach appears to be pulling the team out of its comfort zone.”

He points out that historically the team preferred to get exposure to China through Hong Kong-based companies, largely because of corporate governance and transparency concerns. But Daniels says: “The team revised its thinking on many China names in 2017 - amid poor performance - and has since been adding aggressively there.”

He says that on the one hand this shows increased flexibility, but there are niggling concerns that the team is taking a “more relaxed” approach on corporate governance issues.

But Daniels adds: “Despite lower conviction in the approach and above-average fees, the fund does have an experienced, proven, and well-resourced team to leverage, and the long-term track record remains strong. As such, investors here still have reasons to stick with this decent option.”

Baines is not planning to switch either holding at present, despite the downgrades, but he will keep an active eye on future performance. “I sometimes have been slow to switch and this can cost. But these have both been good long-term performers for me, and I am hopeful this will continue.”

Highly Rated Investment Trusts

Elsewhere Baines has a number of investment trust holdings; these include F&C Investment Trust (FCIT), Scottish Mortgage (SMT) and Dunedin Enterprise (DNE).

Foreign & Colonial Investment Trust - which has now been around for 150 years – has a Morningstar Silver Rating, and is rated five stars, reflecting the strong performance of this global investment trust against peers in recent years.

Morningstar analyst David Holder says: “Investors remain in very safe hands with Foreign & Colonial Investment Trust. The fund’s objective is to grow both capital and income and in both respects it has delivered.”

Morningstar notes that it has increased its dividend to shareholders for the past 47 years - and there is the expectation that this will continue.

Scottish Mortgage is another global trust, albeit one with a slightly higher risk profile. It seeks to invest in high growth companies and hold them for the longer term. These companies will often be new entrants or disruptors into certain markets.

This approach has paid off. The trust has a coveted Gold Rating from Morningstar. Analysts say: “This isn’t a fund for the risk-averse but does have considerable merit for long-term investors seeking exposure to the potential winners of tomorrow within a broadly spread portfolio.”

Meanwhile Dunedin Enterprise invests primarily in private equity. Baines says this trust is currently in the process winding up as an investment company and returning capital to its shareholders, in his case at a substantial profit.

Before buying any trust or fund, Baines always tries to research it thoroughly. This includes looking at various websites - such as Morningstar. “I obviously want to look at the fund, or fund manager’s track record. But I’m also interested in finding more about the particular sector and what its long-term prospects are.”

 

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
ASI Em Mkts Eq I Acc809.95 GBP1.03
Dunedin Enterprise Ord363.00 GBP0.00
F&C Investment Trust Ord746.14 GBP1.38
HSBC American Index C Acc6.38 GBP0.24
Schroder US Mid Cap Z Acc143.20 GBP-0.07
Scottish Mortgage Ord535.12 GBP1.54

About Author

Emma Simon

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

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites