The £22.5bn fund rose by 8.9% in 2024, trailing both the MSCI World Index (up 20.8%) and the IA Global sector average of 12.6%.

In an annual letter to shareholders, he said a “longer-term perspective may be useful” and is more consistent with the fund’s investment aims and strategy.

Since inception in 2010, Smith said the fund has returned 2.7% more than the index per year with less downside volatility, with a Sortino Ratio of 0.87 against 0.60 for the index.

Smith said that market concentration made it a particularly difficult year to outperform, with just five stocks making up 45% of S&P 500 returns in 2024.

While US tech giants Microsoft and Meta were the two most positive contributors to performance over the calendar year, the fund’s performance has been hurt in recent years by the performance of Nvidia particularly, which is not in the Fundsmith Equity portfolio.

See also: Alex Game appointed to Liontrust UK equity funds as Julian Fosh retires

“Clearly investors want active funds to outperform all the time, but that simply isn’t possible, especially in current market conditions,” Laith Khalaf, head of investment analysis at AJ Bell, said.

“Indeed the question at present isn’t so much whether Terry Smith is underperforming the MSCI World Index, but whether the index is outperforming Smith and his fellow active managers.

“As detailed in our latest Manager versus Machine report, only 18% of active managers in the Global sector outperformed the average index tracker in 2024 to the end of November, and only 17% achieved this feat over the longer, and hence more substantive, period of 10 years.

“A large part of the strong index performance has been driven by a relatively small number of big technology names, which hold such a high weighting in the index that active managers are unlikely to be anything other than underweight this grouping, known as the Magnificent Seven, as a whole.”

Weight loss drugs impact alcohol stocks

Smith also revealed that the fund has sold its stake in Diageo amid concerns over the impact of weight-loss drugs on demand for alcohol.

Fundsmith has held a position in Diageo since inception.

“We suspect the entire drinks sector is in the early stages of being impacted negatively by weight loss drugs. Indeed, it seems likely that the drugs will eventually be used to treat alcoholism such is their effect on consumption.”

Brown-Forman, one of the world’s larges drinks companies, was one of the largest detractors over the year. Smith said that the stock has suffered from the fall in consumption from the pandemic highs and is “probably seeing early signs of the adverse impact of weight loss drugs”.

However, retaining Brown-Forman “keeps a foothold” in the drinks sector.

Smith added that the shift in consumption habits may lead to a larger bias towards premium spirits, which may help Brown-Forman to negate the impact of weight loss drugs, with consumers potentially drinking less but opting for higher quality.

“It is a company which survived Prohibition so we hope there is literally something in the DNA to help with these adverse circumstances.”

See also: 30-year gilt yields hit 27-year high

In Interactive Investors’ new index, which ranks the top 50 funds based on the number of purchases, not volume, made by customers over a three-month period, funds investing in global shares took up 15 of the top 50 slots. Funds in the US market accounted for seven of the 50, while the UK held three and India, two.

Kyle Caldwell, funds and investment education editor, said: “Going global has the benefit of spreading risk as such funds have the freedom to invest across the world in any country or sector. A global approach also means that investors, particularly those in index funds or ETFs, will gain exposure to the US technology giants, which have delivered strong returns for more than a decade with shares accelerating again at the start of 2023.”

See also: CT Fund Watch: Number of consistent top-performing IA funds falls to 1.9%

The attraction towards technology giants also showed in seven funds that were dedicated to the tech sector, including three actively-managed funds and four passive funds. However, Caldwell noted there can be danger in “identifying a theme late in the day”.

“One thing to bear in mind is that some of these passive approaches have big weightings to the largest tech stocks,” Caldwell said.

“As a result, any downturn in tech performance will have a big influence on overall returns. As ever, it is important that investors look under the bonnet and understand how much concentration risk they are exposed to. A look at the top 10 holdings will provide a quick snapshot.”

See also: Vanguard launches research centre to help advisers with ‘great wealth transfer’

The top 50 also included 20 investment trusts, including two technology trusts and four from the energy infrastructure sector. The 288 investment trusts currently publishing NAVs are trading on an average 17.7% discount, according to IpsoFacto Investor.

“Investment trusts feature much more heavily than funds, with 20 making the table versus just four funds,” Caldwell said.

“Due to their structure, investment trusts have a number of bells and whistles that private investors can take advantage of, including the ability to buy on a discount to net asset value (NAV) and in having revenue reserves, which is why many investment trusts have long track records of growing dividends year in, year out.”

By fund, the most popular for investors was the Vanguard S&P 500 ETF (distributing), Vanguard LifeStrategy 80% Equity, Scottish Mortgage, L&G Global Technology Index Trust, and the Vanguard S&P 500 ETF (accumulation). Six new funds entered the list, including the NextEnergy Solar Fund, Vanguard FTSE Developed World ETF, Supermarket Income REIT, Fidelity European trust, Henderson Far East Income and Vanguard FTSE 100 ETF.

“Those that would have made the list in the first quarter, but no longer make the top 50 in the second quarter, were India Capital Growth, Digital 9 Infrastructure, Liontrust Global Technology, Primary Healthcare Properties, iShares Nasdaq 100 ETF and L&G International Index Trust,” Caldwell said.

“The split between the number of active and passive funds, 24 and 26 respectively, remained the same quarter-on-quarter.”

The US has always been feted as the land of opportunity, where people from around the world have flocked to pursue the American dream. The ambition, aspiration and innovation of its citizens have built what is now the world’s biggest economy, and home to several trillion-dollar companies.

The strengths of these businesses have driven stockmarket returns, most notably a handful of mega-cap tech stocks. This has led to renewed concerns of concentration risk, with these stocks being such a significant component not only of the US index, but global indices as well.

Nonetheless, the scale of the US market means that there are compelling opportunities among firms across the market cap spectrum for investors with the skillset to identify them.

The US is not immune to other challenges which all countries face, not least political risk, and 2024 sees the presidential elections, the results of which seem difficult to call going by current polling.

However, in the US as elsewhere, markets have historically proved to be incredibly resilient to the outcomes of the race to the White House. When these elections have fallen at particularly challenging times – for instance in the wake of the dotcom crash of 2001 and the global financial crisis of 2008 – markets have shrugged them off and the general trend has been all but unaffected. Indeed, following Donald Trump’s shock victory in 2016, markets dropped sharply only to rebound almost as sharply.

For investors, a key consideration is the most appropriate means of accessing the potential returns of the US market. With so much of the recent market performance being driven by the magnificent seven, passive vehicles tracking the index have served investors well, but for those seeking diversification from this handful of stocks, there are many actively managed equity, fixed income and multi-asset strategies worth considering.

See also: Janus Henderson’s Lloyd: You haven’t missed the market rally yet

The Liontrust Sustainable Future Managed Growth fund might appeal to investors seeking exposure to the US with the diversification benefits of a multi-asset approach. As well as aiming to deliver capital growth through a blend of global equities and fixed income, this strategy seeks to make a positive contribution to the planet and society by aligning its assets with at least one of the team’s 20 sustainable investment themes which are linked to better resource efficiency, improved health, and greater safety and resilience.

The highly experienced team looks to invest in the economy of the future, favouring companies proactively managing their own interactions with society and the environment. The managers invest between 60%-100% of the portfolio in a relatively concentrated set of primarily international companies with 65.3% currently invested in the US.

The WS Lindsell Train North American Equity fund is a compelling option for investors seeking a pure play on US equities. As an unconstrained strategy, the fund is expected to have a high active share and a bias towards quality businesses.

While comparison to the MSCI North American index is appropriate, the manager is primarily focused on absolute returns through a concentrated portfolio of companies which offer durable and sustainable returns over time and diversification away from the market or Big Tech focused strategies.

While this approach may lag when the market is driven by a small cohort of names, it is consistent with the firm’s overall philosophy, and the fund should appeal to UK investors seeking to focus on quality within their North American equity exposure.

See also: Janus Henderson: US reports record-high dividend growth in 2024

The A rated TM Natixis Loomis Sayles US Equity Leaders fund is another concentrated strategy investing in US equities with a bias to a limited number of sectors aiming to deliver capital accumulation over the long term.

The manager adopts a sensible approach to ensure an adequate level of diversification to mitigate risk and applies a strict set of stock selection criteria. The final portfolio is constructed without reference to its benchmark, with the manager preferring to exploit a range of business drivers such as e-commerce, ophthalmology and online advertising. 

The T. Rowe Global Focused Growth Equity fund is an attractive option for investors preferring to delegate their US allocation to a fund manager with a global mandate.

Its portfolio parameters permit a 20% deviation in the fund’s US exposure from the MSCI AC World index but the fund provides broad regional and industry exposure with a distinct bias towards largely capitalised growth stocks.

The manager has a high conviction mindset and given the fund’s aggressive performance objective, it is perhaps best suited for investors with an appetite for risk. It has delivered strong relative performance in rising markets, but it may underperform the index during times of market stress.

For investors seeking exposure to US fixed income assets, the PIMCO GIS Mortgage Opportunities fund is an interesting income strategy offering access to a non-traditional asset class that is not widely accessible to UK investors.

It seeks to generate absolute returns across the full market cycle with limited correlation to traditional sources of risk such as equities, high yield, and core bonds.

It does so through an actively managed portfolio of securitised assets with a minimum of 80% allocated to mortgage backed securities. These include a wide array of agency (government guaranteed) and non-agency, residential, and commercial mortgage backed securities predominantly issued in the US.

Her clients, she explained, are owners of Ferraris, designer handbags, and beautiful homes. But she felt when it came to managing their investments, an equal level of luxury and ease wasn’t available.

Williams and co-founder Jordan Buck previously worked together at LGT Wealth Management for six years, with Williams as partner and head of private management and Buck as partner and head of private equity.

During this period, the duo watched the financial industry start to evolve with technology, creating an accessible experience for clients. But while much of the investing world was leaning into the digital space, Buck said that the “white glove service” of wealth management was still done through phone calls and paper.

See also: Testing the water: Engagement is evolving

“We’ve seen lots of innovation in the sort of mass affluent space. Great robo advisors and trading apps and saving apps and neobanks, but the wealth managers have seen luxury as still being able to chat with someone on the phone and still being sent bits of paper,” Buck said.

“However, I think times are changing, and even wealthy people are more digitally native. They’re used to consuming things as and when it suits them, whether it be five minutes in between tube trains, or whether it be when they’re on a sofa at night at 10pm. I think the industry perhaps failed to spot that.”

The melding of a luxury product with the convenience of modern technology is what led Williams and Buck to create Cadro. While still providing traditional services such as creating portfolios for clients and offering in-person connection, the team has also developed an app that is focused around accessibility. When users log on, they are met with a page that includes each of their investment portfolios. After clicking on the portfolio, clients see a spatial representation of the portfolio’s distribution across bonds, equities, and alternatives.

The layout is based on a psychological study Cadro took to see how people best process information. They found that visual and spatial representations were the majority of people’s key to understanding. Other features of the app include a separate page where clients can upload additional assets such as property and art, which Buck said can help give a more full picture of a client’s financial situation, other than just the money they are looking to invest.

“It’s funny how the wealthier someone gets, the more sophisticated the industry thinks they are. ‘Wow, they’re over £100m now, so we can start discussing structured products or hedge funds or whatever,’” Buck said.

“But you know, ultimately, someone with £1,000 might understand investing much more than someone with £100m. If [a wealth management client] made their money out of making widgets, it definitely does not mean that they have a better understanding of how to create a diversified portfolio.”

Cadro has aimed to add another level of accessibility to investing through creating a learning element. Clients are given access to short videos explaining investment topics that are relevant to their portfolio, or, if there are smaller changes, sent a short written briefing. Peter Cary, head of content at Cadro, said it allows for a more digestible understanding of the industry without jargon or a bombardment of information.

“If you use what we have referred to as the David Attenborough approach to things, where you take some quite complex subjects, but you try to impart it in a way that that brings people along with you, that makes it feel as if you’re on the same team, then people trust you more. They get better understanding, and they start to take much more active interest in looking at their portfolio and doing what we hope to do here, which is actually engage people in their investment experience.”

Cary said even for those clients who were familiar with the world of investing, there is rarely critique that something is too easy to understand. Williams added that for many clients, education can lead to a shift in investing style as they grow more comfortable with the industry.

“It makes people more confident. I think a lot of people hold back and potentially go very low risk when there’s no need. They won’t need that money, they’ve got plenty of income and other things, but they’re terrified because they’ve never done it,” Williams said.

“They didn’t understand it. But once they get the weekly updates, and they can see how it’s going, the confidence grows to ask questions, to understand, to engage, and ultimately to say, ‘Actually, I think my risk level is very low. I know what’s going on. I don’t think this is as scary as I thought it was going to be.”

Cadro gained FCA authorisation in November 2022, and in April 2023, Literacy Capital bought a minority stake in the company. The team is still working to expand its business, now in discussion with advisers in hopes of working in partnership to speak with clients, allowing them access to the app to create an online platform for contribution.

In addition to its internal investment team, Cadro holds an external investment committee meeting each month, with members including Scottish Widows chair Gayle Schumacher and Jonathon Marriott.

Williams added: “It’s like those restaurants where you can see into the kitchen.”

The report follows the FCA’s approval for the development of tokenisation of UK funds in November last year, prompting the startup of businesses looking to capitalise on the new market area, and industry players investigating how tokenisation could play into their businesses. The Investment Association is currently gathering firms who would like to be part of use case explorations until 26 April.

However, one of the main hurdles for tokenisation is distributing understanding of how the technology works, and how it will operate in the UK financial world and under UK law.

Tokenisation Structure

A tokenised equity is a representation of a share through a digital token, or coin, operating on a blockchain. The method is designed to simplify some of the bookkeeping typically associated with purchases and allows for a single system to represent ownership.

Pierre Mottion, head of DLT and Strategy at Clearstream Fund Services, a security depository, said: “Tokenisation is one way to facilitate the access and distribution of fund units towards the end investor, and opening capacity to have direct to-customer channel in a unique way where the position that you have in your wallet as an investor or distributer is the exact same position as the one identified in the book of the fund. Meaning you have full transparency on who has purchased what and you reduce the intermediaries.”

See also: Will economic green shoots entice investors back to the UK market?

In addition to tokenisation within the realm of investing, the idea is popular among areas such as property ownership and arts. Marc Proudfoot, partner and head of investment trusts at law firm Howard Kennedy, cited the example of Wembley Stadium. A proposed sale of Wembley would have allowed fans to own a part of the stadium, but Proudfoot said due to the way English property law is structured, that sort of joint ownership couldn’t be represented.

However, under a tokenisation structure, joint ownership could be represented, allowing deals such as this to potentially take place in the future.

New companies

Following the approval of the FCA last November, Tokenbridge, a technology company geared towards distributed ledger technology for wealth managers, fund managers, and infrastructure providers, launched on the market. Distributed ledger technology works in conjunction with blockchain to give access and verification to a digital record of assets.

Stephen Ashurst, CEO and co-founder of Tokenbridge, pointed out a benefit to tokenisation for fund and wealth managers could be a reduction of fees made possible through the simplicity of the system.

“The savings for investors in terms of fees could be substantial. We know that fund managers, who issue mutual funds, save more than 50%, and in certain scenarios, even over 75%, on their internal fund and transfer agency costs,” Ashurst said.

“Similarly, wealth managers, the distributors of mutual funds, are also expected to achieve similar levels of savings through the distribution and aggregation of innovative fund tokens, including those offering personalisation features.”

Legal Ramifications

However, there is a lack of clarity on how tokens would be represented under British law, and therefore what rights the assets would be afforded. The Investment Association established two use cases in its March report for how tokenisation could function. The first is through tokenising a money market fund unit and allowing it to be “pledged” in bilateral uncleared trades, or through using it as collateral in the repo market, the market for collateralised loans. The second investigates tokenised securities with an emphasis on the bond market.

“There’s so many hurdles that we need to get through before we get to be able to tokenise funds in the UK that people are still a bit weary of it. The FCA definitely made some strides forwards in terms of the regulation. The Investment Association paper talks about this baseline model, which is quite interesting. But I still don’t really see how it works from an English legal perspective,” Proudfoot said.

“The problem that you have at the moment is that English law is a historical law, it’s not really changed that much over centuries. The idea is that property is something that you can either hold in your hand, or something that gives you a right to sue someone, like money in a bank account or something like that. Whereas tokenisation is something completely different, that doesn’t fit well into either of those things. We need English Law to catch up with that development and for people to understand completely how tokenisation works in terms of ownership.”

Market Adoption

Mottion said the success of tokenisation will come down to its market adoption to help investors become comfortable with the technology, but acknowledged “you don’t play with other people’s money”. He said two of the main questions when approaching tokenisation will be if the counterparty is trusted and if there’s a thorough understanding of what tokenisation represents.

“That’s not only from a technology standpoint, there’s also some financial security behind that, there’s some risk, there’s some compliance elements, and some financial capacity,” Mottion said.

“So let’s try to make it a proof of work. Let’s do a minimal investment and see what we can achieve together. Basically, people can become convinced and then go back to their boards and report it works.”

Proudfoot pointed out that safety and security are some of the factors that make tokenisation so appealing, because it creates a unified ledger.

“Tokenisation offers a lot more security for investors. The fact it’s on a single database and that database is the authority, there’s no doubt and there’s a lot less room for human error. That is one of the positives of tokenisation. You would be amazed by the time that people spend trying to pull together lists of shareholders or lists of unitholders and make sure they’re right and keep them right.”

Ashurst believes that as market adoption takes place, tokenisation will also raise the opportunity to expand investing to a wider range of consumers who did not previously have the means to access investing in the same way, shrinking the advice gap.

“Less wealthy consumers or those with less liquid investible assets will become economically viable clients for professional advisers,” Ashurst said.

“Consequently, a new market comprising hundreds of millions (if not potentially billions) of consumers previously unreachable will now be accessible to the advice marketplace.”

However, Proudfoot said when it comes to private markets, there would be barriers in making the funds readily available to UK retail investors because of the regulation in place.

“Even if you were able to tokenise these funds, you can’t just sell them to the man on the street because there’s still so much regulation in place that prevents you from doing that,” Proudfoot said. He also noted that the UK markets may be trying to shift to a system which allowed retail investors more autonomy.

The Investment Association recognised in its report that some of the payment systems currently in use in the UK “cannot accommodate at the scale required by the funds industry” and raised awareness that the quickening of fund settlements in other markets could have an impact on the UK system.

The report stated: “As modern-day investor expectations on speedier access become more prevalent, and pressure increases on the fund settlement process, reliance upon existing payments infrastructure is likely to become more problematic.”

Though it marks a marginal fall from the 39 consistent performers in Q4 2023, it is an improvement on Q1 last year when only 23 funds recorded consistent top-quartile returns.

The Fund Watch survey highlights funds that have achieved top quartile returns over three consecutive one-year periods.

A further 258 funds delivered above-median returns consistently in the quarter, almost double the 136 recorded in Q1 2023.

See also: AJ Bell: Six companies that could IPO in London this year

The IA Japan sector housed the most consistently performing funds with eight of the 68 strategies in the quarter delivering a top quartile return overall.

The next best sector was the IA Global Mixed Bond sector, with six of 71 funds achieving this target.

Meanwhile, the IA Sterling Corporate Bond and the IA Sterling Strategic Bond sectors both had a single fund deliver top-quartile returns consistently, with  no IA UK Equity Income funds meeting this hurdle.

Adam Norris, investment manager in the multi-manager team at Columbia Threadneedle Investments, said: “Consistency was remarkably, well…. consistent between quarters, despite the large rally in equity markets.

“Once again, Japan was a rich hunting ground for solid fund performance mainly driven by corporate reforms continuing to unlock shareholder value within Japanese equities. Interestingly, with US equities comprising ever larger parts of global portfolios, it is disappointing to see a lack of consistent US equity funds.”

In terms of investment performance, the IA Technology and Telecoms sector delivered the best returns in Q1, followed by the IA North America sector.

Norris added: “Looking forward, we see continued support for equity markets with company earnings remaining relatively resolute. It is worth remembering that optically expensive markets can remain so for some time.

“Alternative assets are currently presenting some tremendous value, such as investment trusts with high dividend yields supported by strong cash generation, therefore, investors are being paid to be patient for a re-rating. Unfortunately, corporate bond spreads are once again reaching multi-year lows, limiting future excess returns.

“All eyes remain focused on central banks and their assessment as to whether we are at acceptable levels of inflation once again, or whether it is too soon to cut interest rates when the underlying strength of the economy remains robust.”

The pool of managers in the study, which hold near $123.3bn in assets under management, do not seem to think improvement is on the horizon, with 92% expecting the level of compliance breaches to increase over the next two years.

See also: FCA plans to overhaul how asset managers pay for investment research

Aron Brown, head of regulatory and compliance at Ocorian, said: “Compliance and risk teams and the expertise, insights and rigour they provide are front and centre to the bottom-line success of every fund manager. They hold a heavy weight of responsibility, and our research shows that failure to deliver can ultimately lead to lost investment.

“But compliance and risk teams must have the right investment and support in order to be able to do this – particularly when facing the challenges of an increasingly regulated operating environment. This could take many different forms, from investing in people and training, technology and systems, or third-party specialist providers who can provide a broad range of compliance services that are bespoke to individual needs.”

Nine out of 10 alternative fund managers also reported increased conflict within the fund management team and compliance team within the past two years, which is expected to rise in the following three years.

“This conflict emphasises how important the three lines of defence are to a business and how the FCA’s emphasis on them being separate and cohesive is key – when they aren’t this level of conflict arises,” Brown said.

Ocorian and Newgate outline the three lines of defence as creating policies for compliant businesses and providing training; providing oversight from a team or compliance officer; and independently auditing the company to identify gaps and ensure roles are appropriately separated and defined.

The firm said that, given China’s market size in the emerging market space, the fund enables investors to manage their China exposure separately while gaining exposure to smaller EMs such as such as Korea, Taiwan and Brazil.

The strategy consists of portfolio of 60 to 80 stocks, targeting attractive valuations with potential earnings upside.

Wim-Hein Pals, head of emerging markets equities at Robeco said: “We are launching this fund to offer clients and prospects a more balanced exposure to the EM opportunity given China’s dominance in the EM index.

“Given that emerging economies are growing faster than developed countries and have stronger balance sheets for governments, companies and households, we believe rebalancing may be overdue as investors globally are underexposed to EM ex-China.”

The funds have a last tradable NAV deadline of 29 February, except for the Amundi US Treasury Bond 0-1Y UCITS ETF MXN Hedged Acc, which will remain open until 5 March. The funds will be officially liquidated on 7 March.

Other funds on the list include four Lyxor STOXX Europe 600 media and retail UCITS ETFs, the Lyxor MSCI Europe ESG Climate Transition CTB (DR) UCITS ETF – Acc, the Amundi MSCI Europe Climate Paris Aligned PAB UCITS ETF DR (C), Amundi ETF MSCI UK UCITS ETF, Lyxor PEA Corée (MSCI Korea) UCITS ETF – Capi., and two Amundi MSCI ESG Universal Select funds for the US and Europe.

See also: Amundi to liquidate eastern European equities ETF

Amundi merged with Lyxor in 2022, and last year liquidated and merged a large set of ETFs under the two banners, including folding the Amundi ETF Euro Inflation UCITS ETF into the Lyxor Core Euro Government Inflation-Linked Bond UCITS ETF. It also announced intentions to merge four ESG ETFs in December.

Zverev and Bencke, who come from backgrounds in semiconductors and aerospace, say their backgrounds have let them go further “down the rabbit hole” than some investors may be comfortable with, attending trade shows and using the networks of local businesses to discover unique investment opportunities.

See also: ‘You’re only ever as good as today’s performance’: Amati’s Dr Paul Jourdan on the parallels between professional music and fund management

“It helps sometimes, I’m sure, but also sometimes it hurts. One of the biggest dangers of investing in innovation, as far as we’re concerned, is what we call falling in love with science,” Zverev said.

“These are fascinating subjects. Being able to understand it and the thrill of having conversations with people who are at the leading end of it can get the better of you. Although we have various technical backgrounds, all of us have pretty run of the mill business, accounting, and finance degrees that serve to remind us, along with 20-something years of experience, that companies don’t pursue innovation for the love of science, they pursue innovation to deepen the competitive moat and accelerate growth.”

The rise of biomanufacturing

In the healthcare space, biologic drugs, or drugs created from the use of living organisms, have caught the eyes of the investing duo. Biologic drugs are currently being used in treatments for diseases such as rheumatoid arthritis, Crohn’s disease, multiple sclerosis and cervical cancer.

“That transition from small molecule to biologics is similar to transitioning from cracking your crude oil into petrol in a refinery to brewing beer, making yogurt, making cheese,” Zverev said.

“It’s a bio manufacturing process. In practice, that means you have these super sterile bio reactors, you populate them with genetically modified cell lines. Most modern drugs are made with CHO cells, which stands for Chinese hamster ovary. It’s the cell that is easiest to keep alive and the easiest to manipulate, because it’s very robust, which dates back to some unlucky hamster a few years ago when it was first developed.”

Often, regulatory decisions by the MHRA or FDA in the US can cause roadblocks as companies attempt to put drugs on the market. However, Zverev noted that the regulation can also make for some insurance in the investment. One of the companies the duo invests in, Danaher, is what they call an ‘enabler’ for biopharmaceutical manufacturers, providing technology for the products.

“[The regulation] becomes a moat. The regulatory regime around it is so robust, once drugs go through this process, you can’t change it. So your business is locked in,” Zverev said.

Bencke also noted that investing in enabler businesses rather than the direct manufacturers allows them to not put all their eggs in one basket in terms of innovation.

“If you’re making a drug, designing and trying to use a drug, that approval process is very complex. It obviously requires a drug to have efficacy, but also to be approved,” Bencke said.

“We’d rather not bet on companies that are designing, we’d rather bet on the enablers, companies that are helping them or providing a service, because one company might fail, but these two will succeed. And the enabler doesn’t care which one.”

Supply chain automation

The duo has also taken an interest in the increased tracking of goods through chips and radio signatures, that allow for increased efficiency in distributing products and higher security.

“You’re now seeing this really interesting circular economy because that chip stays in the product, and increasingly it’s woven into the fabric. It’s not just a hang tag, it’s a thread inside a jumper for example,” Zverev said.

“If you design a good, you can reactivate this chip and say ‘are you real?’ and the chip will generate a little code that you can compare to some cryptographic algorithm on the cloud and say ‘okay, it is real’. Then this company that has normally been charged when this jumper goes out of the door, they can charge you again every time it’s being rebought, so this becomes a digital twin product.”

Zverev said companies ranging from Uniqlo to UPS have benefitted from the systems, which Zverev said could save UPS half a billion each year.

“UPS is now mandating [radio signatures] on every package, so every time the parcel is sent, and every time apparel is bought, you can track it as it moves around the warehouse space, exits the gates, and gets into the van,” Zverev said.

“There’s a radio signature, you can track its every move, and there are huge benefits from it.”

Investing in conflict

As conflict continues across Ukraine and Gaza, military investment has been placed at the forefront. While nuclear weapons are a looming factor in this space, Bencke said there has been a refocus on smaller-scale weaponry.

“The way that the military used to focus investments was on very big programs, through satellites, nuclear, big things that can be seen to be scary and have a very strong defensive function,” Bencke said.

“But if you take the view that the competitors you’re likely to fight against also have nuclear weapons, and you both know you can’t use them, then suddenly they’re not useful. So we need to have traditional munitions and weapons to cope with that.”

The team has also found a discrepancy in the cost it currently takes to fight drone strikes. While the drones being used cost $10,000- $15,000, the missiles used to shoot them down cost $1.2m, Bencke said.

“It’s a very asymmetric structure. The military can’t afford that. It’s just not achievable. That’s why there are a bunch of US primes and this company, QinetiQ that are looking at developing laser weapons, because you can shoot down a drone with a laser weapon for $15. Each shot is virtually nothing, like plugging in an electric toaster.”

He added: “They’re not there yet completely, but they have demonstrated that it works. Ultimately they’ll get them to the point where they can use them to shoot down missiles, and even hypersonic missiles.  It’s an area we really like.”

The investment industry has gone through many changes over the past two decades. Regulation in particular has driven businesses to adapt and change their processes, but that is just one cog in the wheel.  There are many others, the key one being fund research.

The way we look at funds and carry out research has evolved significantly, and it is something that often gets overlooked despite playing an important role in the process for investors.

When it comes to building portfolios, there might be emphasis on asset allocation or portfolio construction, but it is the underlying funds that form the backbone of any multi-asset portfolios. It is these funds that deliver the returns to investors, and without a detailed research process, we can’t have confidence in the delivery of those returns.

Simplicity is not always best

Fund research was fairly basic in the past. There was a time when I recall trawling through fund factsheets to try and sum up a fund simplify from its top ten holdings and its sector and country positioning alone. Looking back, this was a naïve approach, but the tools available were scarce and we had to make the best of the situation.

As the pitfalls of a basic approach became more obvious, demands to meet with fund managers and form stronger relationships with sales teams grew. More data and tools then became available, but there was still not much sophistication in this analysis.

It often focused on past performance, which was clearly no guide to the future. Information on investment processes was built into reports, but it lacked the detail investors have come to expect.

The devil is in the detail

We have a wealth of information at our disposal today and the demand for better quality research from investors and fund researchers continues to grow.

We want detail on every aspect of a fund. Learning about the person in charge of a fund is no longer enough – investors want to know about the teams that support the fund, those that contribute towards the stock ideas, the people responsible for risk and importantly, their willingness to challenge their own fund managers.

Investors want to know about performance and why a fund has performed in a particular way. An overweight here or underweight there is not enough – we want specifics. It is this detail that helps us understand the type of fund it is before we consider it for our own portfolios.

It would be remiss not to mention ESG. Few people knew or understood the term 20 years ago. The mandate of a portfolio will dictate how detailed a fund analyst needs to be, but as a rule of thumb, knowing how ESG is integrated into a fund is just the basics. Investors always need to delve deeper.

Evolve with the times

There is no perfect method when it comes to fund research. Different investors will have their own processes, but being willing to adapt to change is important.

Understanding the intricacies of a fund means that when some go through a tough patch, it is not a signal to sell, but an opportunity to understand the reasons why. Ultimately, investors can only get the best outcomes by having a disciplined process that evolves with the ever-changing world.

To garner a five Crown rating, funds must be in the top 10% of portfolios on alpha, volatility and consistently strong performance.

Growth funds populated this top 10% of the IA universe historically, but a more hostile market environment has allowed value funds to thrive in recent years, according to Charles Younes, deputy chief investment officer at FE Investments.

“Resilience has emerged as a key driver of financial markets in 2023,” he said. “Value and cyclical managers tend to excel in such an environment because their portfolios are often composed of companies that thrive during periods of economic expansion.”

In the latest rebalance, 19 funds were awarded five Crowns, with those in the IA Sterling Strategic Bond sector being the biggest winners. Over a quarter (28.6%) of the 77 funds in the sector now have the highest rating.

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Younes said: “In continuously challenging conditions for fixed income markets, active bond managers have shown their capacity to protect from downside by decreasing their interest rate sensitivity.”

Following shortly behind was the IA Japan sector, which has 15 of its 65 funds (23.1%) boasting a 5 Crown rating. Two new funds investing in Japanese equities were awarded the top score after making significant returns since the last rebalance six months ago, during which time the sector is up 21%.

As value funds shouldered their way to the top, many growth funds had their five Crown ratings removed in January’s rebalance.

All six of the top rated Carvetian Capital funds lost their titles in the latest rebalance, meaning the firm no longer has any five Crown portfolios.

Similarly, Quilter Investors lost three of its top rated funds and Abrdn had two deratings, leaving them with 10 and two full Crown portfolios respectively.

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