How To Pick The Right Funds

There are thousands of funds available for individuals to invest their pension money. This is undoubtedly one of the most important parts of any advice process.

We can’t tell you what funds are right or wrong. What we can do is recommend a fund selection that works for you based on a number of factors. These include your underlying objectives, your risk profile, whether you require income or growth, future needs, market outlook, current financial position including other assets and your previous financial experience.

These are some of the factors that lead an advisor to recommend a particular fund selection or fund type. Below are some of the common options used by financial advisors when recommending a fund portfolio:

  • Financial Advisor Portfolio – a portfolio is produced using individually selected funds based on a number of criteria set out and agreed by the client and the advisor. Often there is set criteria in terms of the maximum fund cost, Standard & Poor’s and Citywire fund ratings, length of time the fund has been in existence, fund manager experience, historical performance and any ethical considerations. This will narrow down the funds from thousands to a few hundred. The portfolio is then constructed by the advisor from this reduced selection of funds.
  • Managed Portfolio Services – these are run by the pension companies in house. A selection of different funds, from different sectors are used to produce a risk rated fund. Many clients can then invest in this portfolio / fund which is run by a fund manager and his team that work within the pension provider. Many of the pension providers have these options, which are often very cost effective and provide good value.
  • Discretionary Portfolio Services – this is a portfolio managed by a discretionary fund manager or stockbroker. They will manage the portfolios on a daily basis and often invest alongside big institutions such as banks, hedge funds and private investment funds.

These are some of types of funds that are used within the above portfolios:

Cash and Money Market Funds

Investment in assets that have high liquidity and the money is easily accessible. Money is generally invested by fund managers for a period as short as several days up to a year.

Fixed Interest and Gilts

Fixed Interest securities are loans to governments or companies by private investors. Investment in gilts and fixed interest are generally considered less risky than shares. One of the major risks to any return from fixed interest or gilts is inflation and interest rate change.

Corporate Bond

A bond issued by an organisation in order to raise finance that could be used for the ongoing growth of the business / organisation. A rate of return is offered to the investor in return for the capital which is then repaid at a selected maturity date. The higher the risk of the company not repaying the capital, the greater the interest rate they offer to pay.

High Yield Bond

These are bonds with a low credit rating which means they have to pay a higher return or what is known as yield to the investor.

Equities

This is a share in a particular company or index. All public listed companies are owned by shareholders. The value of these shares determine the value of the company. Equities can be bought all across the world and are listed in global indexes such as the FTSE100, FTSE250, FTSE350, Nasdaq, Dow Jones, Hang Seng, CAC 40, DAX, AIM are just a few to name. The value of the share will move on a daily basis depending on the risk and performance of that share.

Commercial Property

Large commercial property funds operate across global markets. You can invest in a commercial property fund globally or linked to a specific country. There are a number of high profile UK commercial property funds run by large pension providers and fund managers such as Legal & General, Henderson and M&G. They buy large commercial properties across the UK and rent then out on long term leases. The return of the fund is generally linked to the ongoing rents received back into the fund and any capital growth on the value of their assets. These type of funds have been very popular in recent years and its rare they do not form an element of a client portfolio.

Emerging Market

This is investment in a number of different formats in assets in a single or group of developing countries. This is often Eastern Europe, Africa, the Middle East, Far East, Asia and Latin America. The abbreviation of BRIC is often used for these types of funds which covers investment in Brazil, Russia, India and China. These are very often high risk investments.

Commodity Funds

This is investment across the globe in assets that often comprise of natural resources such as oil, gold, natural gases and minerals. Due to the nature of underlying commodity and the location of the companies, the investments are often high risk.

Our experienced team will help guide you through the fund options and recommend a portfolio that matches your needs.