How to invest in funds

Pick a well-regarded stockbroker from the list below to buy units in any major investment fund:

Best domestic & international equity funds to invest in 2023:

Equity investors are looking to 2023 with optimism following a turbulent year for global stock markets in 2022.

The Economist reports that many investment banks and asset managers have increased their assumptions for long-run returns for the equity asset class.

This upgrade follows a year in which the value of many companies suffered a steep write-down, following increases in interest rates by the Bank of England and other central banks. Growth stocks, which derive their value from expected cash flows falling in the distant future, suffered disproportionately as the compounding effect of interest rates means that these future flows are now worth significantly less to investors today.

Equity funds can refer to funds that buy stocks in companies listed on stock markets around the world (international equity funds) or just those from the local market (domestic funds).

Sometimes known as mutual funds, international equity funds provide investors with a better opportunity to diversify their portfolios and improve their chances of generating more revenue. But like other forms of investments, investing in international equity funds comes with some risks associated with political issues, various levels of liquidity, exchange rates, and other related factors.

International equity funds can be broadly categorized into two types. The first one is those which are invested in developed countries, such as the United Kingdom, Germany, and Japan, and the second type is those which are invested in emerging countries or those that have less-developed economic structures but with a great potential for growth.

Moreover, investing in equity funds can be a great idea, especially for individuals who are planning their retirement. For example, self-directed IRA lets you invest in alternative forms of investments, such as equity funds. From the investment perspective, equity funds can be a lucrative source of income for your IRA. Because of this, you may wonder whether IRA accounts with equity funds as an investment can be seized through a lawsuit, thereby losing a potential profit opportunity.

So, are IRAs safe from lawsuits? Well, the answer to this question would depend on some personal factors. If you’re looking for specific answers, talking to an experienced lawyer may be an excellent idea.
But whatever the answer is, one of the important things to remember is that investing in equity funds today has the potential to bring you a lot of revenue.

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 2022 

2022 was a year in which 90% of funds failed to produce a positive return. The prices of most assets fell within that calendar year, owing to the Russian war in Ukraine and subsequent supply shocks and interest rate rates that followed.

In such a market, you may be very interested in learning which funds performed well in spite of the terrible backdrop.

At the time of writing, the equity fund with the largest percentage increase in NAV over the last year is Xtrackers MSIC USA Energy UCITS ETF. This fund was up by 63.5% in 2022, at the time of writing. The fund invests in US oil & gas giants, with Exxon Mobil, Chevron, and ConocoPhillips representing more than half of its portfolio.

This fund is typical of the overachieving funds in 2022. Most of the top funds are energy sector specialists, with many focusing on a core holding of US-listed energy groups.

Other star performers include:

1. iShares S&P 500 Energy Sector UCITS ETF – 63.1% return over the same period
2. SSGA SPDR S&P US Energy Select Sector UCITS ETF – 62.2% return
3. iShares Oil & Gas Exploration & Production UCITS ETF – 50% return

Should you invest in the best performing funds of the last year?

Let’s consider the reasoned arguments for and against investing in the best funds of the previous year:

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 holding just Netflix 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 across a combination of sectors will rarely feature in the top quartile of equity funds. That’s because they intentionally track indices that represent diverse markets consistent of winners and losers. 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:

1. Fundsmith Equity
2. Baillie Gifford Positive Change
3. Vanguard LifeStrategy 80% Equity
4. Baillie Gifford American
5. 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. 

1. Fundsmith Equity
2. Pacific Horizon Investment Trust
3. Keystone Positive Change Investment Trust
4. Global Discovery Investment Trust
5. 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. 

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.