A medium-risk approach is suitable for those investors who understand and are comfortable with investment risk, and that they might not get back the capital they invested. But they are prepared to accept this in exchange for the possibility of greater potential investment returns. What that means in reality is that the sort of funds they will likely invest in would have a 5% chance of losing 8% in a given month.
If we are looking for sectors that are good hunting grounds for medium risk investors then developed world equities is a good place to start.
Research has shown that over the long term, equities outperform lower risk assets such as cash and bonds. Medium risk should be more comfortable with the day to day movements of stock markets (volatility) as they maintain a long term focus.
UK Equity funds
UK equity funds are split into three sectors, UK All Companies, UK Smaller Companies and UK Equity Income. UK equity income funds tend to be more defensive in nature than UK All Companies but a medium risk investor would look to have exposure to each. While shares within funds from these sectors often have large cap exposure, smaller companies funds can give a more UK domestic focus to a portfolio, albeit with an increased level of investment risk. A medium risk investor would want limited exposure to the latter and in the current macro environment I would favour larger company focused funds over those investing in small caps.
Global Equity funds
Medium risk investors focusing on UK equities face missing out on growth opportunities globally. Funds within the Global sector and Global Equity Income sector offer exposure to a range of global equity markets. The attraction for medium risk investors are that these funds provide global equity exposure without the headache of needing to decide which countries to invest in for yourself. However, investors need to look under the bonnet to see where the funds invest.
Global equity income funds, like their growth focused peers, often don’t hedge out any currency risk which is another layer of risk, which nudges both towards the top end of the medium spectrum.
Developed world equities
These funds invest in companies listed in specific countries. This includes a range of sectors from North America, Europe excluding UK and even Japan equities. The attraction of investing in such sectors is that it allows you to have full control over your exposure to specific stock markets.
My fund picks:
UK Equity – in the current economic environment I think the recent headwinds hitting small caps is likely to continue in the near term so I would favour exposure to funds with large cap exposure from the UK All Companies Sector
JOHCM UK Opportunities – a fund with a large cap blend and strong track record. Or as an alternative there is Invesco Perpetual UK Strategic Income – run by Mark Barnett, who inherited Neil Woodford’s income funds. By their nature they are more defensive which may serve investors well as markets remain volatile
Alternatively investors wanting to keep costs low could opt for an ETF that tracks the FTSE 100.
Global
Artemis Global Growth – a slight bias to large caps but unlike many of his peers the fund manager uses his full global remit, with exposure to US, UK, Europe and Asia equities. The fund has momentum right now and is up over 10% in the last 12 months versus 6% for the average global fund.
Fundsmith Equity – investors should look for active managers with a proven record at stock picking, such as Terry Smith. The fund has a US bias which has boosted its relative performance recently. Since September’s market highs the average global fund has lost 5-6%, compared to just 1.6% for Fundsmith Equity
Developed world equities
If investors do decide to invest in developed equities then I suggest that if they are looking to invest in the US then stick with a tracker, as research has shown that managers historically underperform the market across the pond. And if they do want a small exposure to Japan then pick a fund that hedges out the currency risk, as often what investors gain on the stock market they lose on the currency exchange. So invest in Neptune Japan Opportunities fund.
