Favourite funds update - 16 August 2024

The AJ Bell Favourite funds list is designed to lighten your research load. There are thousands of funds out there – so we’ve narrowed the field by selecting a high-quality shortlist of funds we believe can deliver their objectives over the long term. To make the list, each fund needs to pass our robust, independent selection process.

What have we changed?

We keep our Favourite funds list under constant review to ensure we have the highest conviction in the funds on the list, and to find new funds with better potential to achieve their objectives.

As a result of this work, we’ve recently made a number of changes to the list.

Additions:

• M&G Japan
• Janus Henderson UK Responsible Income
• Fidelity Special Situations
• Waverton Sterling Bond

Removals:

• Baillie Gifford Japanese
• Liontrust Sustainable Future UK Growth
• Man GLG Undervalued Assets fund

Why have we made these changes?

In Japan, following a review of the funds in the Japanese equity sector, we’ve added the M&G Japan fund to the Favourite funds list. Originally established in the 1970s, M&G have a long track record of investing in Japan. That said, the current approach is relatively young, having changed significantly in 2019 following the appointment of Carl Vine as lead manager of the strategy.

Vine is an experienced investor in Japan, having started his career in the late 1990s. He’s supported by a select group of experienced analysts with a diverse range of skillsets. They’re inquisitively minded as well, which is integral to the investment approach. Over time, Carl and his team have curated a core universe of companies undertaking thorough research assessed from a variety of lenses. This research process looks to understand how a company generates profits, the sustainability of revenues, and what might impact returns in the future. By constantly interrogating their universe, the team believe they can take advantage of mispriced opportunities.  

Carl considers risk management to be equally as important as stock selection. As such, he looks to mitigate against excessive sector over/underweights, with individual stocks additionally assessed based on their correlation with each other. The resulting portfolio is a concentrated portfolio of 40–60 stocks that can be invested across the market capitalisation spectrum. The team aren’t wedded to a particular investment style, though we expect the portfolio to be fairly core with a value tilt.

In summary, we’ve added this fund as it offers investors access to a strong analyst team who view companies from a differentiated perspective, led by an experienced and considered investor in Carl Vine. The balanced approach to portfolio construction should ensure that stock selection is the main driver of returns and limit some of the volatility historically seen when investing in a particular style in Japan. To have access to this strong team and approach at a 0.51% ongoing charge fee we also find particularly compelling. 

As well as adding M&G Japan, we’ve removed the Baillie Gifford Japanese fund from the list. Though we still consider the fund to be a solid option for investors, the fund’s growth investment style can, and has, caused long periods of variable performance versus the fund’s core index. As such, we view the more balanced investment approach of the M&G Japan fund to be preferable for investors.

In the UK, we’ve made some changes after a review of the UK equity and UK equity income sectors. After these changes, we believe the list offers greater variety within the sectors, allowing investors more opportunity to find a fund investing in the specific style they’re seeking. Below are the funds we’ve changed.

The Fidelity Special Situations fund adopts a contrarian investment approach. The manager, Alex Wright, aims to invest in overlooked companies with a catalyst for change which the market hasn’t factored in. He looks to identify companies at the early stages of their turnaround, and trim or exit once these changes have been realised.

The fund invests across the market capitalisation spectrum, and uses the wider analyst team at Fidelity to generate potential new ideas. The portfolio consists of 80–120 stocks, with the manager looking to construct the portfolio with a balance of companies at different stages of their turnarounds.

Alex is an experienced investor who began managing this this fund in 2018, having joined Fidelity back in 2001. Alex is supported by co-manager Jonathan Winton (manager of the Fidelity UK Smaller Companies fund).

The Janus Henderson UK Responsible Income fund uses exclusionary criteria in its investment universe, preventing it investing in oil and gas, tobacco, alcohol and armaments among other areas. The investment approach looks to identify strong cash-generative companies that can deliver sustainable earnings growth and solid dividends, whilst aiming to avoid value income traps. The fund offers investors a differentiated approach in its sector, as its dual mandate of income and ethical exclusions are rarely seen together.

The fund is managed by Andrew Jones, an experienced manager who has been at the helm for over a decade. Prior to joining Henderson in 2005, Andrew worked as an analyst at Invesco, where he started his career in 1995. Along with his co-manager David Smith, Andrew has the support of the well-regarded income franchise at Janus Henderson. The broader team manage some of the most high-profile investment trusts in the UK market.

We retain our conviction in the team and process of the Man GLG Undervalued Assets fund. However, as the fund has significant crossover with its income equivalent (Man GLG Income), we’ve decided to remove the fund to make way for alternative offerings. 

Additionally, though we consider the team, philosophy and process to be credible within the Liontrust Sustainable Future UK Growth fund, we have higher conviction in other funds on the list that adopt a similar investment philosophy, but with less volatility.

Within the Strategic Bond sector, we’ve added the Waverton Sterling Bond fund to complement our options. This is a carefully managed strategic bond fund that is guaranteed to be at least 80% invested in higher quality, investment grade bonds at any point. Additionally, the fund has a five-year minimum duration requirement (duration measures a bond fund’s sensitivity to interest rates). This high weighting in higher quality bonds and minimum duration threshold strengthens the fund’s likelihood of delivering an uncorrelated return profile to higher risk equity markets.

This is a feature that investors might look for in their bond fund allocations. But investors should be aware that the minimum duration and high credit quality can, at times, mean the fund has a variable return profile to the rest of the sector. However, we consider this is a benefit to investors who can be assured the fund will retain these defensive characteristics.

The fund has an experienced lead manager in Jeff Keen, who launched the fund in 2010. Jeff is supported by co-manager James Carter, who joined from Moody’s rating agency in 2018. The pair work collaboratively – though typically, Jeff focuses on macroeconomic considerations, and James looks at individual security selection.