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BLOG: The ISA traitors versus the faithful

BLOG: The ISA traitors versus the faithful
Your Money
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Your Money

Watching the Traitors made me realise that when it comes to picking the right fund for your portfolio, some investments can look superficially attractive.

Spoiler alert: this article contains spoilers about Season 2 of Traitors…

Who can forget the face of heartbroken Mollie as she realised she’d unwittingly bet on traitor Harry? He bagged all the cash they should have shared, leaving her with nothing.

It struck me that there is an important lesson for ISA investors everywhere. When it comes to picking the right fund, finding the faithfuls and avoiding the traitors is every bit as important for preserving wealth.

Like Harry or Paul, the traitors in an investment portfolio can look superficially attractive. Perhaps they spin a good story, and everyone else seems to like them. They will often be focused on niche areas – new technology, a biotechnology discovery.

However, in the long-term these funds can let you down. Far better to find a faithful fund that sticks by you through thick and thin.

What constitutes a faithful?

A fund investing in blockchain or quantum computing isn’t going to be faithful. If you’re lucky (and most aren’t), it may make you a lot of money, but it’s going to be a wild and unpredictable ride.

Faithful funds tend to do more boring things, like paying a reliable dividend, generating incremental returns over the long-term, and providing diversified exposure to different regions or sectors. They are more likely to be global and invest in a breadth of opportunities.

Often, they will have a long-running manager at the helm, with a significant personal holding in the fund. One example might be WS Evenlode Global Income, which has been run by Ben Peters since launch. Ben is a co-founder of Evenlode and, as such, has plenty of ‘skin in the game’. This also gives him flexibility to run the fund as he thinks best, rather than being buffeted by short-term market factors or external shareholders.

This fund has been a true faithful, returning 70% since launch, compared to 52.5% for the sector (source: FE Analytics).

A faithful fund will also stick to its knitting. If it tells you it’s going to do something, it does it, rather than chopping and changing its style to suit the whimsy of the market.

No fund manager will perform well in all market conditions, but if investors know what they’re getting and why it is happening, it makes that volatility easier to handle.

An example might be the Liontrust Special Situations fund. This is a ‘best ideas’ portfolio, encompassing UK companies regardless of size or sector. The managers have a distinctive investment process, which has been implemented with a high level of skill and consequently the fund has an impressive long-term track record.

For investors wanting high-conviction, multi-cap exposure to the UK stock market, this fund ranks among the best.

Faithful funds will be well-diversified. Multi-manager funds will invest in a range of funds from different fund companies, across a range of sectors so are naturally diversified.

The team at Jupiter has been together for a long time under the capable stewardship of John Chatfeild-Roberts. The Jupiter Merlin Income has been running since 1992 and invests across a range of stock market and fixed income funds. It pays a regular income, another nice characteristic of a faithful fund, with an historic yield of just over 3.3% (to 31 December 2023).

It also helps a fund stay faithful if they come from a group with depth of resources. Royal London, for example, has one of the strongest bond teams on the market, which is why its Corporate Bond fund has been a good choice for investors over the long-term. It is low cost and has a good long-term track record.

The ride should be smoother with a faithful fund. Investors shouldn’t be worrying that their fund is down 50% and whether it should recover or whether they need to sell out.

It should be the opposite of exciting. A number of funds explicitly look to manage that volatility and keep it low for investors. We’d highlight the Rathbone Strategic Growth Portfolio as a good example.

And spotting the traitors?

We are too polite to name names for the traitors. However, they are the funds that spin you a great line about the next big thing, and only tell you one side of the story. They tell you about the huge growth, but not the excessive valuations; the potential rewards, but none of the risks.

Most of all, they let you down. They don’t deliver what they promise – and we can think of a few fund managers who have done that over the years.

For this year’s ISA season, channel Mollie’s disappointment and align yourself with a faithful to avoid a similar fate. Traitors can have superficial charm, but they are not the pathway to long-term wealth. The faithfuls are a far better choice.

Darius McDermott is managing director of Chelsea Financial Services and FundCalibre