Fund Spotlight: three funds for beginners to size up

The Royal London Sustainable range is a series of funds of differing risk levels, ranging from those more heavily invested in bonds to funds entirely invested in global equities.

The three funds recently added to our sustainable Quick-start Funds options are:Royal London Sustainable Managed Growth, Royal London Sustainable Diversified Trustand Royal London Sustainable World. They all hold a mix of equities and bonds.

The other three Quick-start Funds are Vanguard LifeStrategy 20% Equity, Vanguard LifeStrategy 60% Equity, and Vanguard LifeStrategy 80% Equity.

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Our Quick-start Funds are ideas to help beginner investors looking to make their own investment decisions. For investors who want to outsource the decision-making process, check out our Managed ISA, which is a range of diversified funds with different risk levels. After answering a few questions, investors are matched to a portfolio.

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Returning to the three new active Quick-start Funds, the range is headed by Royal London’s head of sustainable investing Mike Fox. His knowledge and experience of sustainable investing stretches back decades. Fox has been part of the sustainable team at Royal London since its formation in 2003, and he works with two co-managers, George Crowdy and Sebastien Beguelin, who joined the team in 2020.

The fixed-income (bond) allocations across the range are overseen by Shalin Shah, manager of the most fixed income-heavy fund, Royal London Sustainable Managed Growth, alongside co-manager Matt Franklin. Shah joined Royal London in 2008, and is highly experienced in managing corporate bond portfolios and sustainable mandates.

What do the funds invest in?

The key focus is to invest sustainably. The approach centres around positive screening (seeking out companies that meet sustainable criteria), and continued engagement with portfolio firms. Additional exclusions (screening out certain companies and sectors not deemed sustainable) are applied, for example, to the alcohol, fossil fuel, and gambling industries among others.

The management team look for shares or issuances from companies that are delivering some positive societal or environmental benefit through their products or services. The team believe integrating sustainable analysis into investment decisions can ultimately lead to differentiation and outperformance, in addition to achieving societal and environmental goals.

Once a company is deemed sustainable, the next stage is to scrutinise the financials. In terms of company shares (equities), the team are looking for evidence of strong returns ahead of the cost of capital and a fair market valuation. From a fixed-income perspective, the focus is on downside protection of bond owners, and reducing risk through diversification.  

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The three funds have different asset-class exposures, depending on the degree of risk that an investor is willing to take. Each fund is subject to various constraints on the equity and fixed-income allocations, but it is worth noting that the funds have tended to vary the equity/bond ratio a minimal amount, preferring to add value via stock-picking rather than adjusting asset allocation.

The Royal London Sustainable Managed Growth fund, the most cautious of the three, has the lowest equity allocation. The fund currently holds roughly a quarter of the portfolio in equities, with the balance in fixed income and any cash.

The managers may allocate between 0% to 35% to equities, having to maintain at least 65% in fixed income. Much of the fixed-income exposure will be held across investment-grade corporate bonds (as is the case across all the funds). Investment-grade bonds are considered high quality, with it being unlikely that such bonds will fall into difficulty. There is a strong bias to the UK across fixed-income allocations.

Royal London Sustainable Diversified Trust holds roughly 60% in equities – a level the fund seldom deviates from and representing the top of its permitted 60% equity limit.

Finally, Royal London Sustainable World holds around 85% in equities – this allocation rarely drops below 80% and is at the top of its permitted 50%-85% equity allocation.

For these two funds, most (80%) of the fixed-income allocation must be in investment-grade, sterling denominated (or sterling-hedged) bonds.

The predominant focus of the managers is to deliver excess returns through stock and bond selection, as opposed to making substantial asset allocation calls. Across the equity allocation, the focus is on long-term growth opportunities and accordingly there is a style bias towards growth businesses. The funds favour larger-cap companies in the belief that larger companies typically have the greatest ability to facilitate sustainable objectives.

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There is a fair amount of differentiation between the funds from the perspective of the geographic equity allocation. The least risk-averse of the three – Royal London Sustainable World – holds a larger portion in the US (just over half the equity exposure is invested in the US and just 15% in the UK). Top holdings include fairly high-conviction positions in Alphabet Inc Class A (NASDAQ:GOOGL), Microsoft Corp (NASDAQ:MSFT), as well as semiconductor firm Broadcom Inc (NASDAQ:AVGO). Meanwhile, the two lower-risk funds allocate a circa 40% of equities to the US, and roughly one-third to the UK.

The bond allocations are predominantly high-quality corporate bonds, with most held in BBB-rated issuances or above. The managers find most bond opportunities in the UK, with allocations diversified across sectors, but favouring secured bonds, as well as banks and insurers.

How have the funds performed?

Each fund has achieved a strong long-term track record compared with their respective benchmarks and peers. The three are comfortably top decile (in the top 10% of the sector) of their peers over the past decade and are at, or near, the top decile over the past five years.

The exception to the strong performance came in 2022 – a difficult year for global equities and bonds alike – and worsening the funds’ three-year performance figures. During 2022, each of the Royal London funds underperformed benchmarks and peers. The fixed-income allocation suffered due to interest rates rising, which causes bond prices to fall. The types of bonds held were broadly more interest-rate sensitive than peers, due to being higher duration, which hurt performance.

For equities, the preference for growth companies, including technology stocks, weighed on performance. Furthermore, as commodity prices rose, the avoidance of fossil-fuel providers was a headwind to relative performance, as was the case for many sustainable funds.

However, performance very much recovered throughout 2023, with technology stocks in particular being back in favour.

While volatility for each of the Royal London funds does tend to be higher than peers, absolute and risk-adjusted performance is best in class over the long term and this impressive performance has been achieved alongside the funds’ focus on sustainable objectives.

Source: Morningstar (GBP) Total Return. Past performance is not a guide to future performance.

Why do we recommend these funds?

The Royal London sustainable fund range benefits greatly from the experience of manager Mike Fox – one of the longest-tenured sustainable investors in the UK – and his strong supporting resource.

The active approach that focuses on identifying quality equities with long-term growth prospects at fair prices, while building a diverse portfolio of bonds offering downside protection and secure cash flows, has succeeded in delivering outperformance over the long term across the range.

The sustainability focus of the funds may suit investors with environmental or societal objectives at the heart of their investment criteria. The sector exclusions potentially can hold back the relative performance of the funds, for example when commodities are performing particularly well, but the historic outperformance of the range is testament to the philosophy that sustainable investing and strong financial performance can go hand in hand over the long haul.

The yearly ongoing charges for the funds range between 0.67% and 0.77%, which, given the active approach and depth of expertise of the resource, represents a competitive charge.

The latest fund factsheets can be viewed here:

Royal London Sustainable Managed Growth Trust
Royal London Sustainable Diversified Trust
Royal London Sustainable World Trust