3 Funds to Hold for the Long-Term

VIDEO: Investors must take the rough with the smooth, says Morningstar's Jon Miller. Here are three funds to see you through the long-term 

Holly Black 20 March, 2020 | 10:47AM



Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Jon Miller. He is Head of Manager Research at Morningstar. Hello.

Jonathan Miller: Hello, Holly.

Black: So, plenty going on for investors to digest at the moment, and this might not be a typical time that people are thinking about funds they might want to hold. But you think there are some that are quite well placed to hold up even in the current market turmoil. Where would you like to start?

Miller: Yeah, I think, we should caveat everything by saying we need a long-term view. Investors coming in to this need to take the rough with the smooth unfortunately. It's hard to stomach losses, especially after the big run we've seen in equities, especially the last 10 years or so. But it's about being positioned in the right way to suit your goals. And one fund that we quite like is a multi-asset fund with – which looks to protect a bit on the downside as well.

It's called BNY Mellon Real Return. There they have a core set of holdings generally in equities but as well as other areas such as some bonds or infrastructure, and they look to protect the portfolio with government bonds, sometimes some short-term indices, which means that they'll try and profit as markets go down. So, quite a few moving parts there to kind of try and help on the downside. It's done a fairly reasonable job. But the thing is these days, Holly, we've seen bonds, equities and gold, for example, go down the same day. So, we always say unprecedented times when we go through something like this. It was like that again.

Black: So, this fund is what's known as an absolute return fund, which is supposed to – it's not supposed to shoot the lights out, but it's supposed to deliver whatever the market environment. But they've actually been very out of favour in recent years. Could this maybe be the time for them to shine?

Miller: Well, I think, it is times like this when you look at these sorts of funds to see if they are helping on the downside. I think the ones that have become more out of favor are more multi-strategy, long-shorts, sometimes a bit more complicated to explain to Mrs. Smith or Mrs. Miggins, as we say here, an old relative, I kind of like the BNY Mellon Real Return mainly because it's got a core set of investments, as well as more traditional ways to protect on the downside. So, a bit more transparent from that point of view. But you're right, overall, it's these sorts of periods when we look at these funds to protect.

Now, what I would add is that it's hard in these sorts of markets to see where there could be positives in the future. But I don't necessarily think it's right to stay, I need an absolute return from today. They should have been part of a balanced portfolio anyway. If anything, it is hard to do. But we should be looking more long term and saying where are the opportunities. And in general, that means taking a bit more risk going into equities, let's say.

Black: And that brings us on to fund number two.

Miller: Yes. And around what's happening at the moment is, if we look to the future, yes, we will see a bounce of some sorts, cyclicals will come back. But there is a bit of me that thinks a quality balance sheet is really going to rule the roost for the coming years. Now, that's been how the markets – those sorts of stocks have rewarded – been rewarding the last decade. I kind of think it's going to be elongated. So, an example is Fundsmith run by Terry Smith, a concentrated portfolio of quality companies. A bit of bias in terms of not holding banks, oil and gas stocks, energy, a bit more consumer-heavy names. But really, these are stocks that can grow year-on-year and have got moats, the kind of protection around ways that they can pass on costs to their consumers, for example. So, one of the stars of the last decade, really an opportunity to top up or invest in that given the pullback.

Black: And even a fund like that is going to have some bad period perhaps, but it is about the long term. So, what's our final fund?

Miller: Yeah, I kind of think of it in the same vein, really, in terms of quality. I'd pick out Fidelity Global Dividend run by Daniel Roberts since 2012, got a positive Morningstar rating in terms of the analysts' view on it. And again, quality balance sheet comes through. Now, this is a global fund as well. But the overlap with Fundsmith is only about 7%. So, you're still getting something different. This fund aims to yield in terms of dividend payouts, 25% more than the market. It's generally behaved in staying in tune with markets pretty much on the way up, but done a decent job on the way down, which is what it's showing here at the moment. And again, low debt in the companies they invest in, high-quality businesses, structurally strong. So, I think from that point of view, if you think about the strong getting stronger, if you want to think about it in that way, this is another way to play that.

Black: But if I'm looking for an income or a dividend fund, obviously, there's been some market chatter about us seeing dividend cuts in the coming weeks and months. Could that impact on the yield that these funds can deliver?

Miller: It could. Now, one thing you need to look at there is the headline yield, because the stocks that have gone down massively – I mean, we're looking at some tobacco stocks that are yielding 10%. Now, are they going to be able to pay that dividend in the future? Clearly, there's issues there. But I think here it's also the discipline around the way that Daniel Roberts invests and the nature the businesses will have some sort of resilience. You're right, there could be a pullback in terms of dividends. So, the headline yield, we got to kind of be slightly careful about, but I still think the quality of the businesses is something that helps shine through.

Black: Jon, thank you so much for your time. For Morningstar, I'm Holly Black.

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.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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