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Select 50 changes

Tom Stevenson

Tom Stevenson - Investment Director

Two funds have been removed from the Select 50 list of our preferred funds ahead of the half-yearly review of the list in January.

Lindsell Train UK Equity Fund and Fidelity Enhanced Income Fund have this week been taken off the list after Fidelity’s fund selectors changed their ratings on the two funds.

The Select 50 list is the result of a two-part process which focuses first and foremost on funds’ investment merits, followed by a secondary assessment of customer benefits such as discounts. The latest changes were prompted by the investment analysis phase of this process, ahead of the customer benefit review in January. Neither fund will go forward to that review.

Lindsell Train UK Equity Fund

The Lindsell Train UK Equity Fund has been on the Select 50 since the list was relaunched in July 2016. It was also one of our fund recommendations for 2019 and, until recently, it was the best-performing of those four picks.

The decision to remove the fund from our best buy list reflects three factors:

  1. Our fund selectors have concerns about the ability of the fund to continue its strong run of outperformance in light of the relatively high valuations of the portfolio’s holdings. The portfolio looks expensive versus the benchmark on a range of valuation measures.
  2. The fund’s assets under management rose to £7.3bn in September (now £6.6bn), with particularly strong growth in the current year which, given the concentrated nature of the portfolio (22 holdings and 84% of assets held in the top 10 holdings), leads to large positions in a relatively small number of shares.
  3. The long-run outperformance of the defensive ‘growth’ investment style, and the recent rotation into a more cyclical ‘value’ approach, creates some concern about the fund’s ability to outperform its peers in the near term.

It is worth stressing that the decision to remove the Lindsell Train fund from the Select 50 should not be taken as a recommendation to sell the fund. The long-term track record of the fund is excellent, and the manager, Nick Train, is a high-conviction manager we still rate highly. The sustainability of the rotation away from the fund’s style may or may not continue. For the three reasons above, however, we feel there are now better UK funds for investors to focus on.

Fidelity Enhanced Income Fund

Fidelity Enhanced Income, as its name suggests, delivers a high level of income to investors. In part this is due to the dividends paid by the companies in which it invests; in part it is due to the use of a derivative known as a covered call. This enables the fund manager to sell to other investors the right to buy shares in the portfolio in return for a premium which enhances the underlying dividend stream.

For investors whose principal concern is generating a high income, this can be a very effective strategy. However, the income benefit can come at the cost of total return. In a rising stock market, in particular, the fund can underperform other income funds. Given the niche objective of the fund (which it continues to meet), and following a period of relatively strong performance, our fund selectors believe this is a good time to reconsider the recommendation.

The next full review of the Select 50 takes place in January 2020. Additions to the list, including replacements for the two funds that have been removed this week, will be notified in the usual way at the Select 50 home page after that review.

Important Information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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