Having a 40-year investment horizon can free you up to take risks and invest in the big themes of the next few decades, says David C Stevenson. Here, he unveils his Kids’ Portfolio.
One of my colleagues recently became a father at 50. So I wasn’t surprised when he dropped me a long note extolling the virtues of long-term saving for his young child. This prompted me to reflect on the challenges of creating a portfolio that is intended to be tucked away for 20 to 40 years. In many ways, this problem is wonderfully liberating. You don’t have to worry about volatility – in fact, you should embrace it. You don’t require a steady income – although investing for dividends still makes sense. Instead, you can think boldly about how the world might look in the distant future.
The result of this musing is my latest portfolio: the Kids’ Portfolio. My aim is to construct a simple collection of just four funds that you can buy and hold. I don’t recommend fiddling around with picking the right buying moments – just put some money away on a regular basis, keep track of what the fund manager says every year, and then forget about them. My little twist is that I want a big theme to dominate each fund selection – something that you can explain to them when they’re old enough not to ask for extra pocket money.
The trend is your friend
I have five simple themes in this portfolio. First, successful investing frequently involves putting money to work in great business brands that disrupt traditional business models. Second, much of that disruption involves understanding how technology can transform our world and why certain sectors are now in a sweet spot. For me, biotechnology is that sector and I think we are on the edge of a magnificent 20-year opportunity.
Third, I want my children to understand that you need to weed these successors out from the great mass of big businesses that are just too slow moving. This leads on to the fourth investment theme: smaller stocks are more vital, with the greatest reward from those with the smallest market sizes. My last theme is globalisation – it has produced huge gains so far, it will continue to do so, and the next wave of economic modernisation will produce even more change in places as varied as inland China through to virtually all of Africa.
If those are my big themes, what about the funds? I could recommend using some low-cost exchange-traded funds (ETFs), covering everything from global titans and biotech stocks to frontier markets. But it’s important to understand why some businesses will thrive over the next few decades and others fail, and why an active fund manager has chosen some stocks over others. That sifting through the investment universe might reveal some wonderful insights.
So I’ve chosen four actively managed funds where the managers have a distinct world view, are running money at a reasonable cost, and have provided a real differentiator in terms of past returns.
I also like great long-term track records, where the investment structure is built to last many decades. This leads us towards investment trusts, where many are now over 100 years old.
The funds to buy now
My first choice is Scottish Mortgage (LSE: SMT), under James Anderson and Tom Slater. This is a global equities investment trust, but it’s radically different from its peers. Look down its list of top holdings and you won’t see the usual mix of large-cap income stocks such as Shell, British American Tobacco or BP. You’ll see names like Alibaba, Tencent, Amazon and many more growth-stock names. It’s not a technology fund, but it has a bias towards sectors where disruptive change is creating tomorrow’s mega corporations. Its holdings might be a tad more volatile than normal, but its managers have spent years understanding why some businesses become dominant global brands.
Next, I want to focus on biotech and next-generation pharma and medical devices. I believe we are on the cusp of a profound medical revolution in the next few decades. Smaller biotech firms have the speed and capital to crack a whole series of profound medical challenges, and as they prosper and grow they’ll be snapped up by giant pharma businesses looking for tomorrow’s blockbusters. My chosen fund in this space is the Biotech Growth Trust (LSE: BIOG), managed by Richard Klemm and Geoffrey Hsu. This fund is by far the best biotech-focused investment trust, with a fabulous track record for picking tomorrow’s medical science superstars.
When it comes to the small-cap and micro-cap theme, choosing a fund is hard and I’m genuinely conflicted. Funds such as the Athelney Trust (LSE: ATY) deserve consideration, as does a much bigger competitor, such as the Invesco Perpetual UK Smaller Companies Investment Trust (LSE: IPU) under Jonathan Brown. But when push comes to shove, I’d probably opt for the team at Strategic Equity Capital (LSE: SEC), which has spent much of the last nine years carefully sifting its way through the universe of small listed businesses on Aim and the main list. It’s had a few ups and downs and a change of leadership in the past year, but its record speaks for itself.
Last, we need some exposure to the growth of key emerging and frontier markets. This isn’t just a question of picking the right nations – it’s also understanding which sectors to go after, accompanied by the right investment style. This last requirement involves, say, picking consumer stocks that serve the greater China market, but where the share price is very cheap relative to the balance sheet. Alternatively, we might go after Africa, again via consumer stocks. Whatever your focus you need a manager who has a distinctive focus and style and a particular research methodology.
Again, competition was intense for this fund. In the emerging markets space I like the Halley Asian Prosperity Fund managed by Gregg Fisher, but unfortunately it’s closed to new investment. I’m also rather partial to the strategy behind Terry Smith’s Fundsmith Emerging Equities Trust (LSE: FEET), but I’d quite like to see more of a track record before I take the plunge. Within frontier markets – potentially much more exciting – the record of the BlackRock Frontiers Investment Trust (LSE: BRFI) is impressive, but it’s a relatively new fund.
So overall, I’d plump for the Advance Frontier Markets Fund (LSE: AFMF), led by Andrew Lister and Bernard Moody. This is a fund of funds, meaning that it invests in other specialist emerging-market funds. The managers focus on locally managed outfits in frontier markets, and in effect makes all the tricky decisions for you. It picks promising countries, then finds the right managers with a good track record and finally works out which kinds of stocks might outperform the wider market, to determine which funds offer the most attractive opportunities. Crucially, this is a dedicated, specialist emerging and frontier markets firm that really knows its area and has a huge research effort.