Now in his mid-40s, Keir Evoy has been investing in equity funds for 20 years. He started when he first had some extra cash that he didn’t need for anything in particular, and decided it would be fun to try and beat the interest rates on offer from high street savings accounts at the time – a much taller order than it might be today with base rate at 0.1%.
Keir, who works as a drilling engineer in oil and gas exploration, has been fairly successful in delivering on this original goal. He invests in a range of funds through both pensions and Isas to take advantage of the generous tax breaks on offer.
Outside of these investments, Keir also holds Premium Bonds and has some money invested in peer-to-peer lending, which has also delivered higher returns than bank savings accounts are offering.
Choosing the Right Funds
When it comes to choosing individual funds, Keir first looks at a fund manager's track record and uses the Morningstar star rating to assess past performance, and the Morningstar Analyst Rating to determine how confident analysts are that a fund will continue to deliver in the future. He adds: “Low fees are also important and I try to stay diversified globally, so I keep an eye on where my funds are investing to make sure I’m not too exposed to any one region.”
Keir invests in a mix of different funds types, from actively managed options to passive index trackers, and closed-end investment trusts as well as open-ended funds. Two of his best performers in recent years both have the highest Gold Analyst rating from Morningstar.
These are Fundsmith Equity and Scottish Mortgage Investment Trust (SMT). Both of these have a five star rating from Morningstar, indicating strong outperformance versus peers, as well as a coveted Gold Rating, meaning Morningstar analysts have confidence in the strong management team, their process, and ability to continue delivering for investors in future.
Fundsmith Equity has been a popular fund, which has delivered sterling returns to investors in recent years. Over five years investors have enjoyed total annualised returns of 19.3% a year, according to Morningstar data. Fundsmith was launched by Terry Smith, who manages this flagship fund. Morningstar analysts describes him as an experienced manager, with a long-standing record: “The investment philosophy [of the fund] is to buy and hold, ideally forever, high-quality businesses that will continually compound in value.”
The portfolio is highly focused, with elements of sector concentration and large parts of the market excluded. However, Morningstar analysts add: “We believe Smith has a good handle on the risks and over the long term will serve investors well. While returns have benefited from style tailwinds since launch, we believe Smith has added significant value above and beyond the strategy's style bias.”
A Buy and Hold Strategy
Scottish Mortgage is an investment trust run by Baillie Gifford, which has a similar buy and hold philosophy. But while Fundsmith is a relatively new offering in the investment world, launched in 2010, Scottish Mortgage has been delivering returns for more than a century.
The trust has a global remit and as well as listed equities, invests a portion of its portfolio in unlisted companies up to a maximum of 25% of its assets. Morningstar analysts say: “The investment approach here focuses on identifying high-growth companies and holding them for the very long-term to gain the benefit of compounded growth. These companies will often have been new entrants or disruptors into a region or industry, radically changing the landscape and challenging the business model for the traditional incumbents.”
This focus on high-growth means the trust has a bias towards technology, healthcare, and internet-related consumer cyclicals, and as a result is “likely to be volatile” analysts point out: “This isn’t a fund for the risk-averse but does have considerable merit for long-term investors seeking exposure to the potential winners of tomorrow within a broadly spread portfolio.”
Past Performance is no Guarantee
Keir admits he has learnt to his cost not to rely too heavily on the past performance of fund managers. He had, for example, been invested with Neil Woodford when he was at Invesco, and moved his money over when the fund manager went independent and started up his own investment fund house, Woodford Investment Management.
The performance of his flagship equity income fund “was a disaster,” says Kier, and the fund notoriously closed its doors in June 2019, leaving investors still waiting to get their money back more than a year later. The company has since been shut down, with administrators selling assets and returning money to investors, though in many cases people will get back a lot less than their original investment.
Keir says: “I lost a bit of money as a result of that fund closure. As a result, I’ve learned to be a bit more careful with so-called star managers, and to keep an eye on funds investing in illiquid holdings.”
More recently, the nationwide lockdown as a result of the Covid-19 pandemic has caused short-term changes to his life; he and his wife have left their home in London to stay with his mother-in-law. However, while the virus has caused changes to his lifestyle, he is not planning to make any significant changes to his investment portfolio in light of the current upheaval.
