Five funds to watch in 2023

Pyrford Global Total Return

Aiming to deliver inflation-beating returns over the long term

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Inflation reached multi-decade highs in many parts of the world in 2022. Rising energy costs, caused by Russia’s invasion of Ukraine and rebounding demand, has been a key contributor to rising inflation, pushing up costs for businesses and living expenses for individuals.

Rising inflation has also seen many global central banks increase interest rates from record lows, with the aim of bringing inflation back down to their targets and cooling markets. This is a balancing act, as raising rates too far can stall economic recovery and increase borrowing costs.

While a range of investments can outpace inflation over time, there are funds that have the specific objective of beating inflation over the long term. For example, some total return funds.

Total return funds typically invest in a mix of investments including shares, bonds, commodities and currencies. The managers usually have flexibility to change the mix of investments, in line with their views, to try to generate positive returns in a range of market environments.

Total return funds are more conservative than funds that invest fully in company shares. While this means they’re unlikely to keep up with stock markets when they rise quickly, they’re more likely to offer some shelter when share markets fall. They're not guaranteed to shelter money though. Like any investment, they will fall as well as rise in value.

The team behind the Pyrford Global Total Return Fund have three key aims. Their first is not to lose money over a 12-month period. Their second is to deliver an inflation-beating return over the long term, and thirdly, to do this with low volatility – fewer significant ups and downs in value than a fund invested entirely in shares.

Inflation is running high, which makes it a tough hurdle to beat in the short term. Even tougher when both stock and bond markets, where the fund is focused, are so turbulent. We think the team at Pyrford could beat inflation over the longer term, and in the meantime could provide an element of shelter compared with many other funds.

The team invests flexibly but aims to keep things simple by focusing on a mix of shares, government bonds and cash. The shares could generate long-term growth, though they can be volatile in the short term. They can invest in companies across the globe, with the flexibility to invest in emerging markets, which increases risk if used.

The bonds and cash are expected to perform differently and bring some stability to the fund. We think this could be a good option as part of a more conservative portfolio, or a way to bring some stability to a broader investment portfolio.

As this is an offshore fund, you’re not normally entitled to compensation through the UK Financial Services Compensation Scheme.

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Schroder Managed Balanced

Diversification is core

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Schroder Managed Balanced also invests in a mix of investments, including global shares and bonds. Investments in company shares could boost long term growth potential, while the other investments provide diversification and could offer some stability in more turbulent times.

While the amount invested in shares and bonds will change over time, this fund is in the IA Mixed Investment 40-85% Shares sector, which means it has the flexibility to invest between 40-85% of the fund in shares. It also tends to invest more of the fund in company shares than total return funds do.

Schroder Managed Balanced is a 'fund of funds'. The managers primarily invest in funds run by other talented Schroders fund managers, although they can also invest outside of the Schroders range where necessary. Collectively those managers invest in hundreds of different companies and bonds. This means the portfolio offers plenty of diversification.

Schroders' highly experienced Asset Allocation team meet regularly to decide how much to invest in different areas and assets. In forming their views, the Asset Allocation team use analysis and insight from a number of specialist in-house teams. They tend to favour shares when the economic environment is positive. But in times of stress, they shift to more diversified assets, such as bonds and cash, aiming to minimise losses.

Please note that the managers' freedom to invest in high yield bonds and derivatives adds risk.

The managers also invest in alternative areas of the market and thematic funds. The alternatives part of the fund includes commodities, including energy and gold, as well as themes such as food and water and digital infrastructure.

We think this fund could form the core of a broader portfolio aiming to deliver long-term growth, or add some stability to a portfolio mostly invested in shares.

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M&G Global Macro Bond

Experience in the bond market

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Rising inflation and interest rates made 2022 a tough year for most bond, or fixed income, markets.

In 2009, global central banks slashed interest rates, making investments in bonds and the income they pay more attractive. This helped bond prices rise and their yields (a reflection of the income they pay) fall.

Fast forward to today and interest rates have increased at pace to try to curb inflation. This puts pressure on bonds and has seen their prices fall. While the interest they pay now looks more attractive, rising rates could put further pressure on bonds.

That said, if things get better rather than worse next year and central banks put the brakes on rising rates, this could put bond funds on a stronger footing.

While uncertainty persists, investors should think about maintaining balance in their portfolios. Investments in shares can boost long-term growth, while bonds provide diversification. Different bond funds also use different investment styles, and some take a more defensive approach that could provide some ballast in turbulent markets.

Jim Leaviss, this fund’s manager, starts with his 'bigger picture' macroeconomic outlook, forming a view on economic growth, interest rates and inflation globally. He then has the freedom to invest in different types of bonds, issued in different currencies to generate a combination of income and growth over the long term. We think experience is vital for a manager of this type of fund and Leaviss is one of the most experienced bond fund managers in the UK.

The fund invests across global government bonds, investment grade corporate bonds, and higher-risk high yield and emerging market bonds. The fund may invest more than 35% in securities issued or guaranteed by a member state of the European Economic Area or other countries listed in the fund’s prospectus.

Leaviss is likely to invest more in corporate and emerging market bonds when he is positive and invest more in government bonds when his outlook is cautious. He can also use derivatives to enhance returns, but this is a higher-risk approach if used.

The manager’s freedom to buy bonds issued in different currencies also means movements in currency exchange rates can add or detract value. In particular, exposure to the US dollar can impact performance compared with sterling and UK-focused bond funds.

Overall, the fund could be held alongside equity funds for a diverse source of income and growth or combined with more UK-focused bond funds to add geographical diversification to fixed income portfolios.

Jupiter Income

Where next for dividends?

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Investing in a dividend-paying company can mean your income and capital grows as the company grows. The best companies will grow their profits and dividends over the long term, though not all companies' profits – and therefore their dividends – are sustainable. The extraordinary events of 2020 provided a harsh lesson in this regard as the effects of Covid impacted many companies' ability or willingness to pay dividends.

We like equity income funds as an expert fund manager invests in a range of companies, reducing the impact if one gets into trouble. It's less risky and more convenient than trying to choose individual shares yourself.

Many companies have seen their dividends recover since the worst of the pandemic and, while some now pay dividends at a lower rate compared with pre-pandemic levels, this could make payments more sustainable over the longer term.

The UK has faced further headwinds in 2022, not least due to rising inflation and ongoing political upheaval. That said, the UK index of large companies, which features the biggest dividend payers in the UK market, has held up better than most global markets, partly helped by stronger returns from sectors including oil & gas and healthcare.

The UK is out of favour with many investors, but we expect it to remain a place for income over the long run. There is some evidence UK companies look better value than other global markets after many years of being in the doldrums, though that doesn’t mean we won’t see further volatility.

We like the Jupiter Income fund, which invests in companies that the managers believe are undervalued by the wider market. This focus on out-of-favour companies is called value investing. This style has struggled in recent years and means the fund can fall out of favour through certain periods of the market cycle.

The value investment style has the potential to do better when interest rates and inflation are rising, and the style came back into favour in 2022. This isn’t a guide to future performance though. The manager invests in a fairly small number of companies, so each investment can influence performance for good or bad which can increase risk. The fund’s charges are taken from capital, which could help boost the income but reduce some of the potential for growth.

We think the fund would work well alongside other income funds using a different investment style or add diversification to a broader investment portfolio.

Legal & General International Index

Global reach at a low cost

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A globally diversified fund could be a good choice for long-term growth potential. With so much uncertainty in markets, a tracker fund with a no-frills approach could be a sensible option.

Legal & General International Index tracks the performance of a range of global markets, as measured by the FTSE World ex UK Index. It's currently made up of around 2,200 companies, which means it offers plenty of diversification. The fund is focused on sectors such as technology, financials, and consumer-related sectors, though the makeup of the index can change over time.

While the fund diversifies across global markets, it’s heavily weighted in US companies which make up around two thirds of the fund. This is determined by the underlying index the fund is tracking.

Other countries and regions represented in the fund include Japan, Canada, Europe, Australia, and Taiwan. The fund has some exposure to emerging markets which increases risk.

This fund doesn’t invest in the UK though, so it could be useful for exposure to global markets without the UK. Other funds focused on the UK could be held alongside this one in order to gain exposure to our home market.

Legal & General has been running index tracker funds for over 30 years. It’s also one of the largest providers of tracker funds. That means it’s got the resources and expertise to track indices as closely as possible, and the scale to keep charges to a minimum. The firm is also committed to encouraging good corporate practices among the companies it invests in. It proactively engages with businesses and uses proxy voting rights to highlight important matters like environmental, social and governance (ESG) issues.

An index tracker fund is one of the simplest ways to invest, and we think this fund could be a great, low-cost starting point for a portfolio aiming to deliver long term growth. It could also be used to provide international diversification to an investment portfolio already focused on the UK.

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