Hello, welcome to the Q3 Recommended Funds newsletter.

We’ve summarised the highlights and lowlights over the quarter for the funds on our Recommended Funds List.

The past quarter has seen some unprecedented volatility in the markets and this update outlines what’s happened, what it means for investors and what the future holds.

We also provide an update on changes to the list in response to our ongoing monitoring, and there’s a focus on dividend reinvestment. All of this is to help you feel confident in the investment decisions you’re making.

Before you get started Michelle McGrade, TD Chief Investment Officer provides a video overview of her thoughts and opinions on the past quarter and what lies ahead.

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The information we provide in TD Recommended Funds and ETFs are opinions provided by TD or one of its partners on whether to buy a specific investment. Please note that none of the opinions we provide are a personal recommendation, which means that we have not assessed your investing knowledge and experience, your financial situation or your investment objectives. Therefore you should ensure that any investment decisions you make are suitable for your personal circumstances. Remember that stock market investments can rise and fall in value and returns are not guaranteed, which means that you may get back less money than you originally invested. If you are unsure about the suitability of a particular investment or think that you need a personal recommendation, you should speak to a suitably qualified financial advisor.

Past performance is not a reliable indicator for future results


Q3 2015 Performance Summary

There is no denying that it has been a difficult quarter for investors as stock markets fell following fears of slowing growth in China and indecision in the US on whether to raise interest rates.

As a result of this market uncertainty the FTSE All Share was pushed down to its steepest quarterly loss since the summer of 2011.

Such a steep fall to the FTSE All Share has impacted the overall performance of TD Recommended Funds.

17of 51 Recommended Funds delivered a positive return. These were mostly bond and property funds which are perceived as safe-haven assets in the risk-off environment.

The majority of the Recommended Funds managed to beat their benchmarks which demonstrates the importance of active management during tough trading conditions.

In addition to this it is important to remember why you started investing and to stay focused on maintaining the investing plan you have in place. Having a good plan will stand you in good stead to ride the peaks and troughs of the markets.

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The graph shows the Q3 performance of the TD Recommended Fund list

Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 30 September 2015. Total returns in GBP.

Long-Term Performance Summary

Year-to-date performance is positive for 27 funds, even after two tough quarters.

Five-year returns should encourage long-term investors as 38 funds have gained compared to just 2 funds falling (10 funds do not have a 5-year track record)

The 2 funds showing slow progress continue to be BlackRock Gold & General and First State Global Resources, the latter fund being particularly hard hit by lower demand for industrial metals from a slowing global demand particularly from China


It was a tough quarter- what happened?

  • Oil and commodities were the worst performing sectors followed closely by Asia and Emerging Markets. The best performers were bonds and risk adverse industries such as Consumer Staples and Utilities.

  • Oil fell below $50 a barrel. Other commodities also fell causing the shares of oil and commodity companies to fall drastically

  • Growth is slowing in China and recently the Chinese Government rumbled the international community by letting the Renminbi devalue,

  • There were re-elections in Greece at the end of September –Tsipras was re-elected and this market has settled down.

  • US Interest rates were expected to rise in September because the Federal Reserve indicated that it may be ready to start increasing rates. However the Fed decided against doing so outlining their concern with global growth, causing more uncertainly for investors.


  • In the short term the comments from the Federal Reserve in the US has added uncertainty to markets because now everyone is wondering if the Fed is right or not. Markets do not like uncertainty and are wondering just how much growth does the Fed need to feel confident

  • So we expect that there may be increased reaction around economic data announcements and we may see more volatility around good and bad news alike

  • We are cautiously optimistic about equities especially in the UK as we are starting to see improved economic data and companies appear to be more optimistic about their future outlook. Operating margins and productivity are improving now that the new government is stable and pro business.

  • Growth in the UK is coming from strong exports to the US and other US dollar based countries due to the strong dollar. Wages are starting to increase so there is an expectation that British consumers will start spending again.

  • We believe that the recent turbulence In markets has provided an equity investment opportunity

  • We are not bearish and are not expecting a bear market because there are no signs of recession, hyperinflation or excessive interest rates. Indeed company valuations are reasonable by historic standards and economic growth globally is positive albeit slower than the past.

  • For those who are opportunistic, emerging markets look interesting. Investors have largely pulled out and therefore these markets are cheap

  • Bond markets remain at the mercy of central bank decisions on interest rates and it is difficult to predict how bonds will perform. For investors who have traditionally invested in bonds for stability and income but could accept more risk, it may be worth considering equity income funds which pay out annual incomes of around 3% pa and/ or look at absolute return funds. These funds look to provide growth but are focused on capital preservation

So more than ever, having a sensible diversified investment strategy that suits your particular return and risk objective is of upmost importance.

Keep looking at our News & Views site where we are posting information and ideas to help you decide how and where to invest.


This graph shows how the major countries, regions and sectors have performed throughout Q3 2015

Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 30 September 2015. Total returns in GBP. Indices used: FTSE All World Ex UK TR GBP, FTSE AllSh TR GBP, S&P 500 TR USD, FTSE Europe All Cap Ex UK TR USD, MSCI EM IMI GR USD, Topix TR JPY, MSCI AC Asia Pac Ex JPN GR USD, Barclays Global Agg Float Adj TR Hdg GBP, FTSE Gilts All Stocks TR GBP, BofAML GBP NonGilts TR GBP, Barclays Gbl Infl Linked UK TR GBP, JPM GBI US Traded TR USD, BofAML US Corporate All Cap Sec TR USD, JPM GBI Global European TR EUR, Markit iBoxx EUR Corp TR, BofAML Global HY Hdg GBP, FTSE EPRA/NAREIT Developed TR GBP, Oil Price Brent Crude PR, Gold London AM Fixing PR USD.


Highest Returning Funds Last Quarter

H2O Multireturns gain of 10.4% was comfortably the best performance from the Recommended Funds range. The fund’s high-risk holding of Greek government debt paid off as the bonds rallied following the resolution of the Greek debt crisis over the summer.

Bonds fared well across the board during the market turmoil and five fixed income funds finished in our top-10 including M&G European Corporate Bond (3.0%) and Invesco Perpetual Global Bond (2.6%), the latter fund benefiting from its sturdy government bonds including UK gilts, US treasuries and German bunds.

Property’s steadfast features came to the fore as all three real estate funds posted positive returns, the best of the bunch being L&G UK Property Feeder (3.0%), its 17th successive quarter of positive returns. The fund holds prime property in London, science parks in Cambridge and a shopping centre in Glasgow.

River & Mercantile UK Equity Smaller Companies held up well during the global rout as small-cap stocks were viewed as being largely insulated from faltering growth abroad and more reliant on the still-resilient UK economy.

Lowest Returning Funds Last Quarter

Commodity funds were hit hard by waning demand from China, a big consumer of industrial metals. First State Global Resources felt the brunt of this phenomenon by virtue of its portfolio of copper miners and oil-and-gas operators culminating in a heavy 24% loss, its worst quarter since the credit crunch in 2008.

Gold traditionally holds appeal during market turmoil but the shiny rock lost its sparkle with investors amidst low inflation and a looming rate rise by the Bank of England and US Federal Reserve, moves that would likely make gold less attractive to hold versus cash. BlackRock Gold & General fell 16% as a result.

Emerging market funds endured another difficult quarter as investors fretted over the impact of a strengthening dollar on developing world currencies. Worst affected were JPM Emerging Markets Income (–14.1%) and Fidelity Emerging Markets (–10.8%).

International equity funds suffered across the board, usually by their proximity to the two big news stories from China or the US. All US and Asia funds lost ground with the wooden spoon in this trans-pacific group being Legg Mason Royce US Smaller Companies (–11.3%), hit more than most due to earnings downgrades on a number of US stocks.


This graph shows the top 5 best and worse performing funds from our recommended funds list

Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 30 September 2015. Total returns in GBP.


Top-10 Most Bought Funds by TD Customers in Q3

1 CF Woodford Equity Income View fund
2 HSBC American Index View fund
3 Franklin UK Mid Cap View fund
4 River and Mercantile UK Equity Smaller View fund
5 Standard Life Investments Global Absolute Return View fund
6 Artemis UK Growth View fund
7 Baring Europe Select Trust View fund
8 Schroder Tokyo View fund
9 Baillie Gifford American View fund
10 Schroder US Mid Cap View fund
The Top Ten Buys should not be taken as a recommendation to buy or sell a particular fund, and it is not intended to offer any form of advice. Instead it is simply an indication of the general buying trends amongst some TD Direct Investing customers, observed during the period stated.

Brave Buying by TD Customers

Six times more funds were bought relative to sales last quarter. Buying funds at a time when markets are see-sawing up and down from one day to the next is mentally difficult but we think the discipline will pay off as many equity funds have become good value for investors with long-term horizons beyond the end of this year. Most new investments are flowing into core equity funds, namely UK and International.

Most Bought Funds

CF Woodford Equity Income is still the most popular fund as it was last quarter and indeed so far this year. Thankfully investors’ faith in the fund continues to be rewarded in terms of performance as it was one of only two long-only equity funds gaining ground last quarter. The fund’s modest yet positive 0.66% gain came from big positions in sturdy tobacco and pharma stocks, whilst avoiding the freefalling energy and material sectors.

Two new funds entered the top-10: Schroder Tokyo and Baillie Gifford American. Both funds are good means to broaden exposure away from a UK-centric portfolio. HSBC American Index is another popular fund for US exposure, ranking second in flows for the second successive quarter.

UK equity funds are always popular with TD customers and last quarter was no exception with Artemis UK Growth, Franklin UK Mid Cap and River & Mercantile UK Equity Smaller Companies all represented.

Volatile equity markets saw continued buying of Standard Life Global Absolute Return, a fund designed to provide a positive return even in falling markets. The fund holds short positions in BMW and a raft of retail stocks. These positions pay off if the share price falls. The fund is a viable option for investors looking to reduce the volatility in their portfolio for the rest of the year.

Contrarian buying is in evidence just outside the top-10 with names like Fidelity Emerging Markets and BlackRock Gold & General seeing strong flows. The funds are directly affected by the slowdown in China and possible rate rise in the US, but both are trading cheaply and could be astute buys for long-term investors.


New TD Recommended Funds

We regularly monitor and review the TD Recommended Funds list to ensure it meets the needs of our customers and as a result of this monitoring we have introduced a number of new funds to our list. The new funds are intended to offer you more variety in popular areas such as UK equity in addition to international funds delivering diversification benefits and specialist thematic funds too.

Morningstar Rated

All the new funds passed a rigorous selection criteria conducted by Morningstar whose analysts met with each fund manager and scrutinized the funds’ holdings and performances. Each new fund has been awarded a high Morningstar Analyst Rating of either Gold, Silver or Bronze. These ratings indicate that a fund is likely to outperform its peers over a full market cycle according to Morningstar. The funds have also been approved by TD’s Investment Committee following extensive due diligence by the TD Investment Team.

UK Equity Funds

Five UK equity funds have become TD Recommended Funds. Majedie UK Equity is a worthy option for investors seeking a one-stop-shop UK equity fund as the portfolio invests from large- to small caps. Here there is a team approach and the team has worked together since the good old days of Mercury Asset Management (now part of Blackrock). Additionally, JO Hambro UK Dynamic and Man GLG Undervalued Assets focus on so-termed value companies which are stocks trading at discounts to their true worth. For income investors, we’ve introduced Royal London UK Equity Income, a fund generating a high yield and total return through its investments in dividend-paying stocks. Liontrust UK Smaller Companies could be of interest to AIM traders as the fund contains a number of small-cap names, making it a means to broaden-out AIM exposure across a diversified pool of small-cap stocks.

International and Specialist

Baillie Gifford International is a global growth fund with a portfolio that excludes UK stocks so it could be a useful complement for investors holding only UK equity funds. The Edinburgh-based fund managers seek growth companies resulting in a bias to growth sectors such as biotech and information technology. Guinness Global Energy is a specialist fund focusing on a small segment of the stock market, namely oil-and-gas stocks. Although low oil prices have pulled down the fund’s returns in recent months, we think the fund remains a good way to access the growth potential of the sector in the coming years and it has experienced fund managers at the helm.


Allianz Gilt Yield

Bronze Under Review

The fund moved to Under Review following the news that the fund manager will change from Michael Amey to Mike Riddell in November. Amey had been managing the fund on a sub-advised basis at Pimco since 2003. However Allianz plans on bringing the management of the fund in-house following the firm’s recruitment of Riddell from M&G, where he spent 12 years running gilt funds. Given Riddel’s experience of bond investing we have retained the TD Recommended Fund status until Morningstar completes its review.

Newton Asian Income

Under review Neutral

The fund’s rating has transitioned from Under Review to Neutral following a change in fund manager. Jason Pidcock relinquished his fund manager role last summer following 10 years running the fund. The new fund manager is the experienced Rob Marshall-Lee who has 20 years’ investment experience and heads Newton’s Emerging and Asian equity team. We feel that Marshall-Lee has sufficient experience and support for the fund to remain a TD Recommended Fund.

River & Mercantile UK Small Companies

Soft Closed.

Soft closing a fund is a means by which the size of the Fund is controlled by managing inflows. Whilst existing investors in the Fund will remain unaffected, new investors will be charged to invest in the fund.

River & Mercantile have decided to soft close the fund so as they can manage capacity. They are rightly mindful that capacity needs to be controlled to ensure that they can continue to deliver the best possible risk-adjusted returns over the long term.

If you currently hold the R&M fund, we recommend that you stay with the fund as we still highly rate it. However, the manager wants to limit the size of the fund and we believe it is prudent to remove it from the Recommended List and we have found an alternative for new investors.

We have chosen Liontrust UK Smaller Companies Fund as a replacement

Fidelity Cash Fund

The Investment Committee has removed this fund from the recommended list because the committee believes that we cannot accept such poor returns for cash and investors are better off keeping their cash in the bank. We do not question the quality of the fund manager who we think is doing an excellent job aiming to squeeze out every last drop of return from its investments. But with interest rates looking like staying lower for longer, this asset class will struggle to provide satisfactory returns.



We've added 5 UK funds to the Recommended List because we have seen from our customers that there is demand for more UK based funds and because we believe there is a real need to invest in active fund managers in the UK.

There is evidence to support this because over the last one, three and five year periods, over 70% of British fund managers have outperformed the FTSE All Share Index. This has materialised because the dominant industries such as oils & gas, mining, some heavy industrials, have been battered and are masking the good performances we are seeing from other companies; such as consumer products like food and leisure, healthcare and house builders.

It is interesting to note that the top 10 companies dominated by HSBC, BAT, Glaxo, BP, and Shell, represents 30% of the FTSE All Share; which is comprised of 647 companies. So you can see how their fortunes/misfortunes dominate the returns of the index.

Active fund managers are free to choose to invest in companies where they see potential and they can avoid troubled companies and sectors. They are well positioned to react and buy into companies when their research indicates that the company’s fortunes are recovering.

Among all the UK equity funds (with a 5 year track record) 58% of funds have outperformed the FTSE All Share index in Q3, 75% over one year, 78% over 5 years (source: Morningstar)


This graph shows the FTSE ALL SHARE sector performance Q3, 2015

Past performance is not a reliable indicator of future results
Source: BloombergThe chart shows the best and worst performing sectors in the FTSE All Share Index for the 3rd quarter of 2015 up to and including 30th September 2015

The list of UK funds now looks like the following:

Fund Defining feature
Artemis UK Growth* Growth
Franklin UK Mid Cap Mid-sized Companies
Henderson UK Absolute Return Absolute returns
Investec UK Special Situations Unloved Companies
JO Hambro UK Dynamic Undervalued & income
Liontrust UK Smaller Cos** AIM focussed
Kames UK Absolute Return Absolute returns
Majedie UK Equity Core
Man GLG UK Undervalued Assets Deep Value
Old Mutual UK Alpha Large companies
Royal London Sustainable Leaders Ethical
Royal London UK Income Income
Woodford Equity Income Income & Growth
*Artemis UK growth: the manager is due to retire in December 2015. The replacement manager is Edward Legget from Standard Life. We will provide a review closer to December. For now we are retaininga positive view.
**Liontrust UK Smaller Cos is replacing River & Mercantile UK Smaller Companies.

Earlier in October we added more funds to our Recommended Funds list to give you more choice. Here is a mix of funds managed by veterans, who have strong, long-term track records and have seen many different market conditions, and up and coming managers with shorter track records who we think are hungry and determined:

The newly added veteran funds are Liontrust UK Smaller Companies, Majedie UK Equity and Royal London UK Income. The funds complement the veterans already on the list such as Artemis UK growth, Investec UK Special Situations, Old Mutual UK Alpha and of course Woodford Income fund. We identified these managers through our Best of British manager research where we identified 25 top managers who have lead the industry over the last 10 years

The up and coming managers we have added are JO Hambro UK Dynamic and Man GLG UK Undervalued Assets.


Income funds provide strong annual yields. For those looking to invest over the long term and who don’t spend the annual income, then Dividend Reinvestment is a sensible way to help accumulate wealth.

How does Dividend Reinvestment work?

Dividends should be reinvested back into the market if higher returns is your goal. Re-investing dividends back into a stock or fund delivers a better performance compared to allowing dividends to lay idle in your account. The graph on the following page highlights the return premium from re- investing dividends, where the higher green line shows when dividends are reinvested versus the lower blue line.

  • FTSE UK Dividend Plus index (green) returned 80%. This highest-returning index underlines the advantage of dividends as the whole index is made up of dividend-paying stocks.

  • FTSE All Share Price Return (blue) returned 35%. This return represents the performance when dividends are not reinvested back into the market. In other words, this index is representative of someone receiving their dividend and leaving it idle in their account.

How to invest in dividend payers

If you’re looking for a fund that could help you benefit from Dividend Reinvestment The Royal London UK Equity Income Fund is a safer dividend strategy than investing in merely one or two income-paying stocks. The fund invests in approximately 50 stocks comprising of traditional dividend payers such as BP and Rio Tinto alongside smaller listed companies like Stobart Group, the well-known freight logistics firm. The wide range of stocks reduces risk due to the fund being powered by different parts of the British economy from oil-and-gas to banking to lorries driving up and down Britain’s motorway network. Royal London has not only beaten the FTSE All Share index but also the dividend index too, demonstrating the benefits of active management.

Dividend changes following the budget

In the second budget of the year Chancellor George Osborne made changes to the amount of tax paid by people who receive a dividend income. Regardless of these changes, reinvestment still remains a powerful way to improve investment performance over the longer term.

We want to help you understand the impact of these changes and have pulled together the key points below.

How will the new dividend tax rates affect me?

  • From April 2016 all investors will have a £5,000 dividend tax free allowance, which makes life better for most investors seeking an income from their shareholding.

  • This move by the Chancellor is expected to encourage more people to invest. However, the new tax rate will hit wealthier investors, large scale investors and chief executives with share options.

The dividend rates* will also be amended to:

  • 7.5% for basic rate payers (up from an effective rate of 0%)

  • 32.5% for higher rate tax payers (up from an effective rate of 25%)

  • 38.1% for additional tax rate payers (up from an effective rate of 30.56%)

* This only relates to dividends outside of an ISA or qualifying pension scheme. Income payments within these account types still don’t need to be considered in self-assessment.

If you’re a basic rate tax payer:

  • You could be potentially worse-off after you’ve exhausted your full £5,000 dividend tax allowance.

If you’re a higher rate tax payer:

  • As an additional or higher rate tax rate payer you may actually be better off, as you now have an extra £5,000 of dividends that won’t be subject to tax.

  • However, this move could prove detrimental for those with large positions generating high levels of dividend income.

The tax treatment of these products depends on individual circumstances and may change in the future.


This graph illustrates the impact of reinvesting dividends v's not against the FTSE ALL SHARE

Past performance is not a reliable indicator of future results
Source: Morningstar Direct from as at 31 July 2010 to 31 July 2015. All returns in GBP.


The past quarter has been a difficult time for investors as bouts of volatility have left the markets uncertain of what to do next.

As a result we have closely watched what our customers are demanding from us, and we have made the following changes to our Recommended List:

  • Added more UK based funds;

  • Increased our ‘Specialist sector’ by adding luxury goods and oil specific funds; and

  • Included funds with a high risk tolerance.

All of these changes are made to help you feel confident that you can continue to make the right investment decisions.

Although we cannot predict what will happen over the next quarter we hope to see investor confidence return and the Federal Reserve making a decision on raising interest rates.

Keep up to date with all the latest market news by reading our News & Views.

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