A guide to basic investment strategies

Welcome to Word on the Street's Money Plan podcast from Barclays UK where our experts share their knowledge and insights to help you manage your money and become a better and more confident investor.

CLARE FRANCIS: Hello, and welcome to another episode of Money Plan, our regular Personal Finance podcast, I'm Clare Francis, Savings and Investments Director at Barclays.

So here's the Million Dollar question, you're looking to invest and are happy to put your money away for a number of years in the hope of it growing at a higher rate than it would if it were in a cash savings account and also at a rate that beats inflation, but how do you know where to start and where to put your money, what funds should you buy and how do you make those decisions.

Well the teams at Barclays who manage our clients’ investment portfolios are dab hands at this and well-practiced, it's their responsibility to invest in what they believe to be good quality funds for the very long term, and when we say long term we're talking five years and beyond. But how do they do it, and what can we learn from them, and when I say we, I mean people like you and I.

Well to help me answer these questions I'm joined today by Mike Haslam from our Investment Funds team and Miles Sherry an Investment Consultant.

But before we start I need to remind you that when it comes to investing stock markets can fall as well as rise so there's always a chance you could lose some money, and nothing we cover today is a recommendation. We don't offer personal advice, so if you're unsure about next steps please seek independent financial advice.

So Mike, thank you for joining me, let's come to you first, you spend your days immersed in the world of funds and with our colleagues at Barclays who decide what funds to invest in for our clients, so what can you share with us today in terms of how to know where to invest.

MIKE HASLAM: Well first of all I must say that by the time you're actually considering what funds to invest in, you've already made the biggest decision you will ever take, the fact that you have realised that you need to get invested, and that is sometimes the hardest decision to make.

CF: I totally agree and it's obviously something we cover a lot because taking that first step is often easier said than done, and there are various factors that can contribute to that, and a biggie which isn't necessarily unique to those just starting out on their investment experience is deciding where to put your money?

MH: Absolutely, now the title of this session today is ‘How to spot a long-term winner’ and the key phrase there is ‘long-term’, and I know we bang on about this a lot but it is really important, it's about the long term, so we're talking here five years and beyond.

Now in the short term anything can happen, but over the longer term those day-to-day movements, and the value of your investments just look like mere blips. Now let me give you an example, ask anybody to name a successful investor and probably the most popular name that comes back is Warren Buffett.

MILES SHERRY: Yes, let's be honest, I don't think many will disagree with that one, in fact I can't immediately think of anyone more renowned than him in the investment world, particularly of course when you consider that he has not built that reputation over a short period, he's actually been investing for a pretty incredible 60 years or so.

MH: Exactly, take a closer look at how Warren Buffett invests. Now for every company that he invests in they must have the following three characteristics;

1) the company must have a simple business model, look at Coca-Cola as an example, they produce just one product and they sell it on every street corner around the world;

2) each company must produce a strong cash flow, again Coca-Cola is a good example, and

3) each company that he invests in must have little to no debt, which I guess makes sense.

Now as a result this steers him towards investing in a certain type of company, the kind that people would call ‘quite normal companies’ I guess, so Coca-Cola, Heinz, Johnson and Johnson and so on, and when you look at his portfolio of investments the companies really are quite normal.

CF: So no shares in Zoom or Tesla then?

MH: No absolutely, just more run-of-the-mill brands Coca-Cola, Heinz etc. So what this has meant is that over the last couple of years, when investors have been scrambling over buying shares in Zoom, Tesla and anything to do with technology like food delivery apps etc. investors haven't really been that excited about companies like Heinz, but we're still buying Heinz Baked Beans.

I mean every day three million tins of Heinz Baked Beans are produced and sold, and we've been buying these tins for over 100 years, and we'll probably continue to do so for another 100 years, and Warren Buffett knows this. He's fine with investors getting distracted by the latest technology fads and exciting companies, because those same investors will still be drinking Coca-Cola and having ketchup on their dinner every day.

CF: So I guess that also means that Warren Buffett will go through periods where his investments underperform, perhaps like at the moment when as you say the sort of the demand is for tech stocks and things like that?

MH: Yes, quite possibly, and that's and that's why it's really important to focus on the long term. There will be times when nobody is interested in these types of companies, yet focusing on the long term is critical, there will be times when even the best investments underperform.

MS: Yes, I totally agree, and it's really important that our listeners understand that. because this is all about long-term investing, it's certainly not short-term trading or speculation, and this also applies to the funds that we use in our client portfolios.

There are thousands of funds out there that you can buy as an investor, but we have a dedicated fund manager selection team here at Barclays and their sole job is to try and take that massive list of funds and stream line it down to a fine list of say one or two hundred funds which we think are the best out there.

But that's a long term view, they will underperform in the short term and that's because they have different allocations to the benchmark, based essentially on the fund manager's long term views for each and every company that they actually own.

CF: So for the average person, and the people listening to this, and myself, where do people start, how do you do it yourself?

MH: Well usually, like anything, when you don't know where to start the easiest thing to do is ask others, find out what other investors are doing for example. If you google the phrase ‘most popular investment funds’ it brings up a whole load of websites with list of what other people are doing and what other people are buying.

CF: Yes, and we have pages on our website which cover that as well, what we're seeing our customers invest in on a monthly or weekly basis.

MH: Yes, and I think it was you that told me about that page on the Smart Investor website is the most viewed page on the entire website, so more people look at that page on the Smart Investor website than any others. So maybe that means investors are using it to ask the very same question, what do I buy?

But I do need to make a very important point here though, just because some people are buying something, it doesn't mean it's right for you. For example the biggest selling car in the UK is a Ford Fiesta, and the most popular colour is grey, but it doesn't mean that a grey Ford Fiesta is suitable for everybody, and it's the same with investments.

MS: Yes, I look at that page Clare as well on the Smart Investor page from time to time, it's fascinating really as it just gives a bit of an insight into the mind set of investors at any point in time.

And I was looking at it earlier this week actually, so in general the most popular funds at the moment seem to be those invested in the likes of technology, as well as funds focusing on sustainable investments often referred to as ESG funds, so those that consider Environmental, Social and Governance credentials of the companies they actually buy.

Then looking further down the list you've got China that's clearly been in the news a lot lately given the extra regulation we're seeing in parts of the Chinese market, and actually again looking further down the list you've got yet more technology funds.

MH: Yes some really interesting places there Miles and most of those areas have done quite well recently, shares in technology companies have done well ,and because they've done well investors have bought more and more of those, but there will be times when the money won't be flowing into technology funds, maybe everybody will one day want to buy into the sort of companies that Warren Buffett owns.

CF: Yes, and I think it's important point isn't it, things go in and out of favour, and I remember back to the technology bubble and boom of the late 1990s and early 2000s, when it all went wrong, and it went well out of favour there, but I think the key thing here is the point that you're making is that a good quality fund could be a good quality fund but it's not necessarily going to be top of the pops all of the time, and there will be periods of under-performance, and people need to just accept that, and it doesn't necessarily mean that you need to sell out.

You've also mentioned we've got a list of funds on our website called the Barclays funds list, and it's made up of funds from each of the investment sectors we believe are key for building a diversified portfolio. As well as including funds from different sectors we also have different types of funds within the list, so we've got active funds, trackers and our own Barclays multi-manager funds.

If we look at the active funds, and there are about 40 of those on the list, these are all chosen by our funds team, the experts here at Barclays, so you know looking at that and thinking about that background, is the funds list that we have on the site a good place to start?

MH: Yes, and no. Yes, we believe this list of funds represents those which have potential to produce strong long-term returns, but like any fund they can underperform in the short term, so don't expect them to outperform every single year.

CF: Can you tell us a little bit more about how we go about analyzing the funds, and deciding what funds to include, and actually what are the main things that our investment team look at when analyzing these funds, and deciding whether or not to put them on the list, or to keep them on the list, just to help those listening who perhaps want to do the research themselves?

MH: Okay, so pick a fund, any fund and take a look at it on the Smart Investor website, and you will find a whole wealth of information. There's also a document on each fund called a factsheet, which is essentially a sheet of facts.

Now the first thing you will notice is performance, it's usually a massive chart on the very first page of the factsheet, it hits you first, and although we say time after time after time that past performance is not a reliable source of future performance, you cannot avoid that huge performance graph sitting in front of you. So let's move past that, let's move on to some of the other things that you will find on the fact sheet.

First of all the name of the company, it may seem an obvious one but it's really important. There will be names that some of you may recognise like BlackRock, Jupiter, Fidelity, maybe there will be names that you may not recognise Findlay Park, Loomis Sayles and Majedie three such names, but one thing to remember is this, the investment funds market in the UK, and is one of the most highly regulated markets in the world with a strong focus on protecting the investor, so that's you and I Clare.

And as a result companies have to go through an extremely rigorous process with the authorities before they can launch a fund aimed at UK investors. So if there's a company you don't recognise, it gives you comfort to know that they have been through this stringent process.

CF: Yes, I have to admit there are some names on there that I didn't recognise myself initially, but what more can you do though to find out about the company if perhaps it isn't a name that you've heard before?

MH: Well, as part of the work that we carry out at Barclays, Miles mentioned the dedicated team that carry out this work. We go and meet the company, we go and meet the team, we meet the team that controls the team, we look at how they're all paid just to make sure that they all stay there, we look at how the company is run, for example, is it a nice place to work.

We look at who owns the company, that's important, we look at how many people maybe have left recently, and if there are many people that have left, we ask the question why did they leave that's important, it tells you something about the culture of the company, if it's a nice place to work or not.

These are the sort of things that you and I can't do ourselves but Barclays can, we have access to the companies themselves. But what you can do is you can google the company, each company's website will include a ton of information on who they are and their history.

Also take a look on the factsheet because on the factsheet you will normally see the name of the fund manager that runs the fund. Maybe google that name see how long he or she has been running the fund.

Now for example if the fund has got a fantastic 10-year performance track record, yet the fund manager has only been running it for the last six months, that raises a lot of questions, who was the old fund manager, where did he or she go, why did they leave, when they left did they take their team with them and so on and so on.

CF: Interesting, and I guess there's some of that as you said that you can do yourself, but there are elements of that due diligence that as an individual we can't do, we can't go and meet the manager and meet the company, which I guess is where the funds list and looking at funds from that comes to the for, and potentially has a benefit there because you're benefiting from the fact that our experts have done that part of the research for you.

But again going back to the factsheets and for people who do want to research it themselves what else can the factsheet tell me?

MH: Well one of the other things you can do is look at where the fund invests, on the fact sheet there's usually a table showing the top 10 companies that the fund invests in, so these would be the 10 largest holdings in the fund. Now if the fund for example has a massive holding in Amazon shares, and the fund has performed really well over the last five years, that's probably the reason why.

Now there's nothing wrong with Amazon, it's a great company or has been a great company to invest in, but the alarm bells start ringing if one of our managers put so much money into just one company, because imagine if it had gone the other way, what if Amazon shares hadn't done so well and they had plummeted.

CF: But sometimes you know you've mentioned about being careful with performance and past performance not being a guide to future performance, but it can be difficult to ignore those performance figures can't it?

MH: Yes, yes it can be difficult. Fortunately, you've just got to look around and you will find more information. We, so Barclays are in a fortunate position in that we can go and meet the companies, meet the fund managers, the teams etc., carry out so much more detailed work on each fund that you and I simply just can't do, so we employ people to carry out this work every single day.

MS: I think the point here Mike is there will just simply be times that some managers do better than others and vice versa, and so here at Barclays we believe the solution is to try and have a diversified portfolio, with a mix of different funds each focussed on a different region or investment style.

So I guess as an example we have some funds that invest solely in US companies, which have a slightly different investment approach, so maybe looking for slightly different companies. We’ll then have a fund that maybe purely focuses on the UK market, others will target Asian companies or other asset classes like bonds or commodities, hopefully you get the point.

So the idea is to have a mix of these that our team then blend together to try to deliver effectively the best client returns we can, in line with their risk profile and that's based on how much risk a client can afford to take, and their own unique views on risk, so how much they feel they can stomach price swings otherwise known as volatility in the shorter term.

And then the team will constantly look at markets and we'll take a view on what may happen over say the next three to six months. If they hypothetically think that maybe bonds are getting expensive and stocks look a little cheap they will make short-term tweeks to our allocations, but this is usually just by two or three percent here or there, because ultimately at the end of the day and as much as we would like to, no one has a crystal ball and no one can accurately predict the future.

So that in a bit of a nutshell is effectively how we go about managing money for our clients here at Barclays Wealth.

CF: And as you touched on there Miles, you know it's diversification that's the key and I suppose diversification and long term, they're the important the mantra that we keep always talking about when it comes to investing, and investing for your future. And I think as I touched upon earlier when I was talking about the funds list, we've created that to try and help people achieve that all-important diversification by ensuring that it includes funds from each of the sectors we believe are a key to achieving that.

But there's another way too isn't there Mike, an alternative option which can particularly be a good place to start for first-time investors or for those who perhaps don't feel that they've got the time to do it themselves, and that's a Ready Made Investments, so can you explain a bit more about what they are?

MH: Yes of course. There is an alternative to buying individual investment funds and that alternative is called Ready Made Investments, which are essentially investments that are ready made. Now these investment funds will invest across many different markets. from the UK to the US, to the far east and the emerging markets, and they invest not only in the shares of companies but they also invest in the bond market, so they're actually like mini investment portfolios.

And there are five different ready-made investment funds on offer you simply select the one that matches the level of risk that you're comfortable with. So they're essentially a convenient one-stop solution which can be ideal if you're not sure about making your own investment decisions or are short on time.

CF: Mike, Miles, thank you so much for that, I'm sure listeners will have found it really useful and you've hopefully armed them with some tips and ideas to help with their investment decisions.

And thank you all for listening we've got lots more information and research tools on our website which if you go to www.barclays.co.uk/smartinvestor.

I'll be back again next month with another episode of Money Plan and I hope you'll tune in to that, in the meantime I hope you enjoy the rest of your day.

All investments can fall as well as rise in value and their past performance is not a reliable indicator of future performance. This podcast is not a personal investment recommendation.