Three funds targeting fast-growing markets

Deciding whether to invest for growth or income is a dilemma that investors may face at some stage of their journey. Those who opt for growth generally find themselves in funds – or companies – that favour faster-developing companies at early stages in their development. However, when it comes to spotting the next big growth market, it can be like looking for a needle in a haystack. These markets often emerge from innovative trends or pressing global challenges, offering companies the potential to expand far beyond the pace of economic growth.

The most obvious growth market at the moment is artificial intelligence (AI), where companies have a vast new market to address. This means they can make many times the rate of economic growth. In the case of AI, the annual growth rate is expected to be almost 30% per year*.

If you can find these growth markets, you have a fair chance of finding fast-growing companies and increasing the value of your investments. The risk is always that everyone else has discovered the same theme, and share prices are already enormously high. This, to some extent, is true for AI, though many of the technology giants continue to grow at an extraordinary pace.

Three high octane funds for your portfolio

There are plenty of funds that aim to harness these fast-moving themes before they are discovered by the wider market. The IFSL Marlborough Global Innovation fund, for example, aims to identify companies at the early stage in their growth, with around half the fund invested in smaller companies.

Its top holdings include MercardoLibre**, the South American e-commerce platform, which is a key beneficiary of the spread of online shopping across the region. South America now has around 300 million digital shoppers, and this is forecast to soar 44% by 2029. In 2023, online retail sales in Latin America were worth an estimated US$ 272bn***.

Another holding is Xylem**, which works with utilities, industrial manufacturers, buildings operators, and communities, to protect and optimise water usage. Water scarcity is becoming an increasing problem – about 4 billion people, representing nearly two-thirds of the global population, experience severe water scarcity during at least one month of the year. Companies with solutions to water crises are likely to have a strong pipeline of growth some way into the future.

Read more: investing for cleaner water solutions

The WS Montanaro Global Select fund takes a similar approach, looking for companies “occupying niches in growing markets”. In its current portfolio, it has a lot in payments businesses, for example. The sector is seeing real disruption, as technology brings new innovation in the sector. It has holdings such as Adyen, the Dutch payments platform^. However, it’s not all technology. One of its largest holdings is investment banking group Houlihan Lokey^.

For some fund groups, it’s not just a single fund, but the whole organisation looking for long-term growth themes. Baillie Gifford would fit this category. This can mean that its funds are volatile, but the group’s reasoning is that if they can find companies with huge potential markets, they can grow at multiple times the pace of ‘ordinary’ companies. If a few fail, so be it; a bad company can only go to zero, but a good company can deliver many multiples of its original investment. Hamish Maxwell, investment specialist on Scottish Mortgage Investment Trust, told us more about this philosophy on the Investing on the go podcast.

Though the majority of the Baillie Gifford funds follow this approach to a greater or lesser extent, Scottish Mortgage is one of the highest octane versions among those Rated by FundCalibre, with holdings including SpaceX, a private company run by Tesla’s Elon Musk**. Space travel may not sound like a growth industry, but SpaceX also controls Starlink, a satellite communication network, which provides high-speed internet to remote or underserved areas.

It is easy to assume that investors are restricted to the growth of the FTSE 100 or other benchmark indices, and that if the economy is weak, there is no point in investing. In reality, there are always companies that are finding new and exciting areas of growth.

Did you know that you can research our Elite Rated funds by investment style? Start your search for a growth fund here.

*Source: statista, artificial intelligence worldwide
**Source: fund factsheet, October 2024
***Source: statista, e-commerce in Latin America
^Source: fund factsheet, 30 September 2024