How to invest in funds
Choose an well-regarded stockbroker such as one of these below to buy units in any major investment fund:
Best equity funds to invest in 2022:
2021 has been a relatively tranquil period in the financial markets. After the trauma and revival of 2020, the new year has provided a window of relative calm for international equity portfolios. In this article, we’ll highlight the best funds to invest in and look at the top-performing funds over the last year.
This article is not financial advice. Please perform your own research when deciding what to invest in, and consider finding a financial adviser if you need assistance making investment decisions.
Best performing funds in 2021
At the time of writing, the equity fund with the largest percentage increase in NAV over the last year is Global Internet Leaders SICAV-FIS I, a Luxembourg / German listed fund that is only accessible to professional investors. The fund has delivered a 164% return over 12 months. It charges a 1.8% management fee, with a Total Expenses Rati (TER) of 1.92%.
Other star performers include:
- Morgan Stanley Global Endurance Fund – 65.83% return over 12 months. 2.4% management fee.
- Marlborough Nano Cap Growth – 79.9% return over 12 months. 1.57% management fee.
- Baillie Gifford American – 61.9% return over 12 months. 0.51% ongoing charge.
- Legg Mason Royce US Small Cap Opportunity Fund – 80.1% return over 12 months. 1.95% management charge.
- EQMC Europe Development Capital Fund plc – 114.4% return over 12 months.
Should you invest in the best performing funds of 2021?
Let’s consider the reasoned arguments for and against investing in the best funds of 2021:
Buying high selling low
The fund with the highest performance is not necessarily the best equity fund to invest in. Outperformance is often cyclical, which sees high performing sectors (such as technology, energy, infrastructure) underperform after their period of dominance.
This isn’t to say that longer-term trends aren’t also shaping investor returns. The growth investing strategy has enjoyed a multi-decade long run which has seen it thoroughly beat the value investing strategy since the 1990s. Deep value funds and other value-linked investment strategies have continued to perform well despite the subdued value picture.
Bias towards high-risk strategies
Lists of top-performing funds over a short period are likely to be packed with funds that have the following characteristics:
- High leverage
- Limited diversification
- High volatility
These high-risk strategies tend to produce extreme performance (in both directions), and therefore when on a good run, will easily outperform a vanilla stock-picking equity fund.
Another way to explain this phenomenon is to consider the following fund strategy which would guarantee that you could run a fund with an industry-beating return:
Create 500 funds, with each investing in a single stock from the S&P 500.
The fund simply holding Netflix Inc stock (NFLX) over the past 4 years would have returned about 600%. This fund would rise to the top of fund performance lists and you could understand how investors could reach the incorrect conclusion that the fund manager is a bone fide genius.
In reality, the performance of this particular fund was explained by a combination of luck and zero diversification. This illustration gives a few red flags to screen for when looking at the best funds to invest in.
Ignorance of passive approaches
Funds that follow passive approaches will never feature in the top quartile of equity funds. That’s because they intentionally track entire sectors or indices representing an entire market. Passive funds aim to return a return as close to the arithmetical average return of the entire market.
By keeping their operations simple, passive funds can charge much lower fees to investors, which over the long run should produce superior returns to a higher-risk fund that flip-flops between over and underperformance, while charging investors a premium regardless.
Passive funds charge between 1% – 1.5% less than the best funds to invest in listed above, which means the top active equity funds need to beat the market by this margin each year merely to keep pace with a passive approach. The data shows that few if any professional fund managers have been able to do so over long periods.
Top equity funds to buy within a UK stocks & shares ISA
Many of the funds listed above are not open to investment from retail investors and are not eligible to be held within a UK stocks & shares ISA.
Here’s a more accessible list of popular funds favoured by UK ISA investors, as disclosed by UK stockbroker Interactive Investor, which uses real client data to compile this up-to-date ranking:
- Fundsmith Equity
- Baillie Gifford Positive Change
- Vanguard LifeStrategy 80% Equity
- Baillie Gifford American
- Vanguard LifeStrategy 60% Equity
This list contains a mix of active and passive strategies. The Vanguard LifeStrategy funds track an index of equity and bonds, while the Fundsmith and Baillie Gifford funds are all managed by active stock-pickers.
This list is perhaps a reflection of the debate which rages in the mind of an armchair investor. Should I stick to the sensible, or chase returns by investing in funds that have recently outperformed? A glance at this top 5 list of funds to invest in suggests that the returns-chaser argument is currently winning.
It’s also worth noting that the Vanguard funds are ‘funds of funds’ and invest in a range of asset classes beyond just equities. This mirrors a trend in asset management which is to offer a ‘ready-made’ portfolio in a single fund rather than requiring investors to assemble a portfolio of 5 to 10 funds.
The equity funds held by ISA millionaires
As we report in our guide on how to become a stocks & shares ISA millionaire, here are the 5 funds most commonly seen within the portfolios of investors with stocks & shares ISA accounts worth £1m or more. Be wise to the survivorship bias inherent in similar lists. We explain it further in this article.
- Fundsmith Equity
- Pacific Horizon Investment Trust
- Keystone Positive Change Investment Trust
- Global Discovery Investment Trust
- Alliance Trust
How to invest in the top equity funds preferred by ISA millionaires:
Fundsmith Equity allows individuals to open an ISA account directly with them on their website, see https://www.fundsmith.co.uk/faq. You can also invest in Fundsmith Equity funds via any good UK stockbroker account.
Pacific, Keystone and Alliance trusts are investment trusts (read our definition), which means they are listed companies on the stock exchange with the following ticker symbols:
- Horizon Investment Trust plc (PHI)
- Keystone Positive Change Investment Trust plc (KPC)
- Alliance Trust plc (ATST)
You can buy shares in these trusts via any investing app or stocks & shares ISA. Any UK shares purchase will incur stamp duty (0.5%) and dealing fees per your stockbroker terms and conditions.
Global Discovery Investment Trust is a close-ended fund in which you can buy units through a fund supermarket or stockbroker.
Best funds to invest in now
Investors often keep tabs on the latest trends moving the financial markets before picking a fund to invest in.
Here is a summary of recent trends in the equities markets which might inform your research into the best fund to buy now:
European equities have experienced a strong 2021, with European indices posting gains in almost every month of 2021 so far. European markets have been buoyed by encouraging economic data, including low joblessness claims. These have confirmed that Europe’s economy has migrated from the crisis phase to the recovery phase.
Best European funds to invest in now to trade this trend:
- Vanguard FTSE Europe ETF (VGK) – 0.08% expense ratio
- iShares Core MSCI Europe UCITS ETF – 0.12% ongoing charge
UK equities have entered a period of stable and benign growth. Despite being beleaguered by staff shortages in the labour market, logistical constraints and acute shortages of key electronic components, the UK economy has rumbled on. The vaccine rollout across the British Isles has been impressive and has allowed for a great ‘unlocking’ of rules which has helped leisure & hospitality industries rebound.
The FTSE 100 has risen by 16% accordingly, providing UK domestic investors with a welcome bounce. This recovery has not extended above the pre-pandemic highs, however, unlike the US stock market. That the UK stock market remains relatively unloved is attributed to the unique blend of headwinds facing UK businesses following Brexit.
Best UK funds to invest in to trade this trend:
Vanguard FTSE U.K. All Share Index Unit Trust – 0.06% expense ratio
Is now the best time to invest in equity funds?
A big question concerns market timing. Is now a good time to invest in equity funds as a whole? Is it wise to invest money into the equity asset class after the market has risen?
In our article ‘Is now a good time to buy shares?’ we explain several ways to approach this question and the reason that it’s always a good time to invest in the stock market.
A very strong argument in favour of ignoring market timing is that no globally diversified investor who invested more than 2 years ago would currently be ‘down’. Why is this a strong argument?
Well think about it this way, it means that over the last century, any investor who invested in the stock market at any time, regardless of boom or bust, frothy valuations or rock bottom prices, would see a positive return in their stockbroker account today.
Of course, a perfectly timed equity investment would have increased those returns further, but this requires hindsight that we are simply not blessed with.
An investor would get a more worthwhile return on their time by using judgement and skill to ensure that they pick investments in accordance with their risk tolerance and time horizon rather than expending effort trying to pick red or black.