We like to think long term at Steps to Investing. And 10 years is a good time frame for looking at investments. We also think the next 10 years will be particularly interesting as the world recovers from Coronavirus, and innovation booms. Here’s four investment ideas for the next 10 years.
Start with smaller companies
According to the latest research by Morningstar, fund managers in the smaller company space perform the best in beating their benchmarks over the long term. Especially in the UK. This might be a good place to start in finding investments for the next 10 years.
Henderson Smaller Companies Trust is managed by Neil Hermon at Janus Henderson Investors, and he’s been the manager since 2002. It’s an investment trust and it buys shares in small and mid-sized UK companies. For example, in the Top 10 biggest holdings in the Trust, are companies like the national househuilder Bellway, tyre manufacturer Avon Rubber and Team17 Group. I confess I had to look them – they make computer games like Monster Sanctury and Worms Rumble.
The Trust is focused on growing the value of your money – your capital – so doesn’t prioritise paying dividends. It does provide a yield of around 2.4% at the moment (February 2021). When you think that ‘income funds’ can yield anything from 4 to 8% currently, that’s still not a bad number.
Diversify for a global view
Smaller businesses tend to be riskier investments due to their size, age and reliance on fewer sources of revenue. For these reasons you might want to diversify globally when investing small.
There are 5 investment trusts in this space. The best performing trust over the last 10 years is Edinburgh Worldwide, run by Baillie Gifford. It has a similar mandate to the Janus Henderson trust I just mentioned, but with a global remit. Global in this case does include the UK, but only 14% of the portfolio is UK companies. By far the biggest area in the world it invests in America at 65% of the portfolio.
One thing that did amuse me is that the biggest holding in the ‘small companies’ in the portfolio is Tesla which is currently valued at $697bn! When you look at bit closer at the investment mandate though, it does say that the Trust aims to grow your money from a global portfolio of initially immature entrepreneurial companies, typically with a market capitalisation of less than $5bn at time of initial investment.
Excluding the UK might be a good idea
You may be more exposed to the UK economy than you think. Is your pension heavily invested here? What about your house? Own a car? Are you employed by a UK firm or paid in pounds? Precluding the UK in your investments might be a good way to protect parts of your wealth against a domestic downturn in the economy.
TM Crux European Special Situations fund illustrates the point. Europe excludes the UK in this portfolio. It’s managed by veteran investor Richard Pease and aims to achieve long term growth of your money by investing in European equities of companies in special situations – beaten-up stocks facing specific issues.
The biggest holding in the fund is Prosus – again one I had to look up, I admit. They are a global internet and technology company. There’s also Alpabet, owner of Google, Finecobank and Novartis – the pharmaceutical company. In terms of performance, over the last 5 your money would have grown by 63%.
What about lower risk bonds?
Low interest rates don’t make bonds overly attractive right now. But bonds can be useful in ballasting your portfolio against some of the risks in equities (shares). And especially if you’re investing in smaller company shares.
Go-anywhere bond funds – in the Strategic Bond sector – are mandated to invest across the bond world. This includes the spectrum of corporate and government bonds, from lower risk ‘investment grade’ to higher risk ‘high yield’. The strategy enables the fund manager to seek out opportunities across a very wide set – important when they’re harder to come by.
The Allianz Strategic Bond Fund invests in a whopping 545 different things, much of which is government debt. Looking at the major ones, the governments of Germany, South Africa, America, Australia and Japan are all covered. In fact Japan is the largest exposure for the fund with just over one fifth of the money invested there. This is a big fund at £2.3bn in size and it pays its income twice a year.
All these are just ideas from a look at what’s available in the market today – it’s not a recommendation, and I would encourage you to have a look for yourself. Happy hunting – there are plenty of investments for the next 10 years out there.