Emma Wall: Hello, and welcome to the Morningstar series, 'Ask the Expert'. I am Emma Wall and here with me today is Szymon Idzikowski, Morningstar Analyst.
Hello, Szymon.
Szymon Idzikowski: Hi Emma.
Wall: So new ISAs, NISAs, investors now have £15,000 a year to hide from the taxman or shield from the taxman. I thought today we'd talk about building a NISA portfolio. I thought we'd start by looking at what really you want from a core holding. You want diversification, you want a lot of choice, don't you, from a core holding?
Idzikowski: Absolutely. So, when you think about the core holding for example, a nice way to start building your portfolio is just maybe finding a good global fund manager. So like you pointed out, you’ve got good diversification in terms of sectors, in terms of individual investment, in terms of regions. But what it also means is that, if you think about where your returns would come from, which is mainly asset allocation and investment selection with a global fund, both of these areas are outsourced to professional investors who do this on a daily basis.
Wall: So it's sort of a one-stop shop rather than having to build up those components yourself?
Idzikowski: Exactly, which is a great way to start and then maybe choose some alternative investment or niche products to build something around it.
Wall: Let's have a look at those core holding potential trusts then. Have you got a global equity fund for us?
Idzikowski: Sure. So I think one fund worth looking at is Witan Investment Trust (WTAN). It's run by Andrew Bell and Andrew Lindsay of Witan Investment Services. So it's a quite a small boutique, which focus actually on running this fund and of Witan Pacific (WPC). What makes this particular fund quite unique is that this is a multi-manager fund.
So you've got Andrew Bell like I said and Andrew Lindsay who do asset allocation and manager selection and they get help from the board and from an external consulting company Towers Watson. But then you've got external fund managers that run individual sleeves. So you will have names such as Artemis or Lindsell Train running the U.K. sleeve. You will have Matthews running the Asian sleeve or MFS running the global sleeve.
Wall: This is a one-stop shop and this is a portfolio for your portfolio.
Idzikowski: That's exactly what it is.
Wall: So therefore people could actually have – this is just a single holding, if that's what they were looking for.
Idzikowski: Either single holding as you say, the core holding where you can use as sort of first building block in the portfolio.
Wall: And what about global equity funds to be rated highly?
Idzikowski: So another fund and quite a different one would be Scottish Mortgage (SMT). So my previous example has given a number of fund managers, it's going to be well diversified fund. This one is still quite diversified, but it's much more punchy. So you've got 60 to 80 names. You've got top 10 holdings accounting for more than half of the portfolio. You've got very strong team such as technologies. You'll probably recognise a lot of names in the portfolio, such as Google (GOOGL), Facebook (FB), LinkedIn (LNKD). But I think the bottom line here is that the fund is run by two very experienced fund managers. You've got very, very, very much tested – tried and tested process that has delivered over the time, and the fund is cheap.
Wall: You mentioned that that it takes some strong views on particular sectors. Does this mean that this one perhaps is a little bit more volatile or does it just mean that it's high conviction?
Idzikowski: Probably combination of both. I think with high conviction funds, you probably need to use – you need to know what to expect, given like I pointed out technologies, it's quite a prominent part of the portfolio. Returns of this fund will be to some extent correlated to how that sector does.
Wall: And volatility is not just necessarily a negative thing, is it. But it's something to bear in mind, so you don't get scared when you see those bumps in the road.
Idzikowski: Indeed.
Wall: And what's the third trust then?
Idzikowski: So another trust I think investors would appreciate is F&C Global Smaller Companies (FCS), particularly if people believe in what Peter Ewins believed in, that the smaller companies will outperform larger companies over long term.
So in this case, it's probably sort of hybrid approach compared to my previous two examples. So Peter Ewins does stock selection in the U.K. and he does asset allocation. Then, outside of the U.K., he employs Sam Cosh to do stock selection in Europe. Then there is Nish Patel that does stock selection in the U.S., and for other regions, he would employ external fund managers. So we believe it's quite a good use of resources.
Wall: A blended approach then.
Idzikowski: Indeed.
Wall: The smaller companies although as you say the fund manager believes they will outperform over time. Small companies do have a risk premium, especially in some of the sort of more emerging nations or even in Europe, which has had a bumpy ride over the last decade. Is that the case and would you say this is something with a slightly higher risk profile then perhaps the Witan Trust that you mentioned earlier?
Idzikowski: Probably there is a slightly higher risk profile, but given it's a global fund, I think this risk might offset by the fact that the fund manager can be more selective and we've got much bigger universe to choose from.
Wall: Szymon, thank you very much.
Idzikowski: Thanks for having me.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
