I’m a big fan of investment funds and exchange traded funds (ETFs). They’re a great way to diversify investments at relatively low cost, in my opinion. In my Stocks and Shares ISA, in addition to several individual shares, I also own a few carefully selected funds.
There are some factors to look at when searching for a suitable fund. First, I’d see if it leans towards value, growth or a blend of both. Next, I’d look at its geographical and sectoral focus. For instance, does it typically invest in the UK, US or elsewhere, and does it focus on any particular sectors like technology or healthcare. I’d then look at its top holdings, and past performance.
Top investment funds
My number one pick that I’d buy right now, even though I already hold it, is Fundsmith Equity. Managed by the highly-regarded investor Terry Smith, Fundsmith continues to be a staple in my portfolio. I really like its approach to investing. It aims to be a long-term investor in the shares it owns, so it doesn’t trade in and out of shares frequently. This keeps costs low and allows time for companies to perform. Fundsmith also tries to only own high-quality stocks with businesses that are difficult to replicate. This requirement for a ‘moat’ was popularised by esteemed investor Warren Buffett.
The numbers
So how has the fund performed so far? Well, performance at Fundsmith has been nothing short of exceptional, in my opinion. Since its inception in 2010 it has grown by 17% per year. More recently, over the past five years, it has more than doubled, achieving an annualised return of 15%. Looking at the shares that it owns, more than 70% are listed in the US and the largest holdings include Microsoft, and Novo Nordisk. Lastly, Fundsmith has been buying some new positions recently. One of these includes Google and Youtube owner, Alphabet. I reckon that’s a phenomenal business and I’m glad to see it become a holding.
That being said, there are a couple of stocks that could hold the fund back in the short term. Fundsmith owns shares in Paypal and Meta. Both of which recently suffered 20%+ share price declines after disappointing earnings reports. Overall though, I reckon it’s diversified enough to withstand near-term shocks in a few of its holdings.
UK’s top 100
When picking funds, I like to ensure they cover a few different locations and sectors. That’s why in addition to a global vehicle like Fundsmith, I’d consider a UK-oriented option like ishares FTSE 100 UCITS ETF (LSE:CUKX). The objective of this one is to replicate the performance of the FTSE 100 index. And one reason why I’d want to do that is because it includes several sectors outside technology.
I calculate 40% of FTSE 100 shares are either financials or industrials. This should provide me some diversification and allow me to invest in some established, and cash-generative businesses like Diageo, Tesco and BP. Bear in mind though, if I had invested in this UK fund five years ago, I would have achieved only an annual 5% return. That’s much less than the 15% per year achieved by Fundsmith. That said, I’d still own both right now. The next five years could look quite different to the last five, and I favour a mix of shares such as these two offer.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Harshil Patel owns Microsoft and units in Fundsmith Equity. The Motley Fool UK has recommended Alphabet (A shares), Diageo, Microsoft, PayPal Holdings, and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
