Balanced risk portfolio assessment

munk · 18 August 2007 at 2:33AM

Hi,

The details:
I have £100,000 to invest on behalf of my Mum after a bad 2 years with Scottish Widows - see this thread for info on that.

I have the details in a spreadsheet - I'll cut/paste the bulk of the info and try and make it as readable as possible

:

Investment Objectives:
To provide medium term (5-10 years) growth for £110,000 currently invested with Scottish Widows Unit Trust Management Ltd.

A total of £30,000 cash is currently held in instant access bank/building society accounts which is available for use in unforeseen circumstances. As such the full £110,000 can be (re-)invested directly into funds for at least the medium term.

Investment approach required is cautious to balanced – some growth is required in excess of that available in a savings account, but without excessive exposure to risk. Downside risk tolerance of 10% roughly?

A regular income is required from the investment at a maximum of 4% pa, although income is not a major issue given the liquid assets provided for above.

Investment Plan:
Invest in a selection of funds which provide balanced exposure to equities, bonds, cash and other asset types roughly in the following ratio: 50:30:10:10.

Funds Researched/Earmarked as suitable for inclusion in portfolio:
The following funds are the result of detailed research aimed at satisfying the objective of the portfolio, along with a strict set of screening criteria (basically screened funds with manager tenure over 5yrs, at least above average performance, at most average risk, although I also checked over citywire 1/3/5yr sector rankings as well, looked at volatility and various other bits!).

The funds I've chosen so far are:

CF Midas Balanced Income Fund Inc
Jupiter Merlin Balanced Portfolio Inc
INVESCO Perpetual High Income Inc
Invesco Perpetual Monthly Income Plus
New Star European Gr Acc

Note there was also 'CIS Sustainable Leaders Trust', but not sure about that now since H-L don't provide CIS funds without a .5%pa charge and additional %age on top of the IC and was considering H-L because of their good discounts. I might add a decent bond fund in place of it, perhaps Old Mutual.

Is this a reasonable spread for my mum's investment objective/risk profile?

Also are there any portfolio creation tools that allow you to build up a portfolio automatically based on investment risk profile? I came across the portfolio healthcheck tool at bestinvest (would link to it but it seems down right now at time of writing!) which seems pretty decent, are there any others out there similar?

Finally I'm stumped as to which provider to go with. So far found h-l and bestinvest seem to be about the best and it's tough choosing between them. I like the look of Bestinvest's client account interface from what little I've seen of it in demo/help screens (ie like the portfolio planning tool) and their customer service was on the ball, but I also like h-l's good discounting on IC's and AMC's a lot!

Are there any other providers worth considering given my situation?

Anyway, any help would be much appreciated, thanks for reading!

jon3001 · 18 August 2007 at 6:57PM

munk wrote: »

Investment approach required is cautious to balanced – some growth is required in excess of that available in a savings account, but without excessive exposure to risk. Downside risk tolerance of 10% roughly?

William Bernstein's book say that controlling downside is about the stocks:bonds ratio.

Loss *a Recommend Stocks *b
35%     80%
30%     70%
25%     60%
20%     50%
15%     40%
10%     30%
5%      20%
0%      10%

*a - I can tolerate losing X% of my portfolio in the course of earning higher returns
*b - Recommended % of portfolio invested in stocks.

Some of the funds you identified have significant bond holdings so you'd have to take that into account.

Aegis · 18 August 2007 at 8:43PM

Have you considered going to an IFA for portfolio advice? Doing it all for yourself is great, but if you're stuck on only 5 funds so far you might need a bit of inspiration from an impartial investment expert that you just won't get from the internet or yourself (unless of course you happen to be an investment expert!)

£110,000 is certainly the sort of amount I'd be looking for advice on!

munk · 18 August 2007 at 8:49PM

jon3001 wrote: »

William Bernstein's book say that controlling downside is about the stocks:bonds ratio.

Cheers for the reply, that's interesting reading. The ratios for bonds/equities in the minimal portfolio above is roughly 50% equities, 30% bonds (actually I think it's a little less on the bonds side maybe 25%) so that would suggest a downside risk tolerance (hope that's the right term!) of 20% given what you pasted.

I was thinking of upping the bonds weighting a bit anyway especially given the current market 'jitters'. What you've pasted makes me think that's probably the way to go then. Just a matter of finding a decent bonds fund now!

In assessing the fund's risk rating I generally looked at the risk ratings provided by Morningstar, Lipper, S&P, etc - part of the screening process really. I tried to screen funds that had achieved above average returns for the category with at most average risk for the category over 5 years.

I also used the standard deviation and mean return figures as a very rough guide to how far the fund's returns had swung - what I did was look at the standard deviation (SD) and mean return for the 3yr periods for each fund. If a fund had a lower SD than another I would favour that fund over a similarly performing fund in the category because statistically in the past it'd got the same rewards with less volatility. Of course I only used this as a very rough guide and only if the fund's performance had a high correlation to it's underlying benchmark.

Quite depressing though that the Bestinvest portfolio planning tool does all of this in about 10 seconds flat when it took me the best part of 2-3 weeks

munk · 18 August 2007 at 8:58PM

Aegis wrote: »

Have you considered going to an IFA for portfolio advice? Doing it all for yourself is great, but if you're stuck on only 5 funds so far you might need a bit of inspiration from an impartial investment expert that you just won't get from the internet or yourself (unless of course you happen to be an investment expert!)

£110,000 is certainly the sort of amount I'd be looking for advice on!

I know what you mean, I'm stressing about it quite a bit to be honest. The main reason for not going for advice is the fact we already lost 3.5% in initial charges plus the rest (down by about £10k now) and so I'm on a kind of self imposed budget. Although of course if I pick the wrong funds then 1.8% an IFA would charge could be a drop in the ocean...!

I've spoken to Bestinvest and did send off some details about objectives etc for the investment. Just waiting for a reply with some advice about a recommended portfolio for the situation. They offer free advice for portfolios over £50k - kind of feel guilty considering hargreaves lansdown now especially if the bestinvest comes back with a recommendation and I end up going with h-l because of their better discounted rates!

And no I'm not an investment expert of course very far from it :rotfl:

I only came into this about a month back and since then have spent a lot (huge chunks!) of time researching financial analysis and what feels like every single fund that's out there. Of course this is absolutely no substitute for an IFA's qualifications and years of experience though...

Another option is just to turn over control of the portfolio to someone like Bestinvest - I think they do a portfolio management service for 0.5% pa. The more I think about this the more it makes sense. Maybe leave the playing/DIY investment for my own money

dunstonh · 18 August 2007 at 9:14PM

I think they do a portfolio management service for 0.5% pa. The more I think about this the more it makes sense. Maybe leave the playing/DIY investment for my own money

Why pay an extra 0.5% p.a? An NMA IFA would be between 1-2% initial plus 0.5% p.a. but that 0.5% comes from the natural fund based and not incremental.

Discretionary fund management can range from similar charges to absolutely massive charges. You just have to look at the banks or HLs charges on this to see how high they can be.

munk · 18 August 2007 at 9:48PM

dunstonh wrote: »

Why pay an extra 0.5% p.a? An NMA IFA would be between 1-2% initial plus 0.5% p.a. but that 0.5% comes from the natural fund based and not incremental.

Discretionary fund management can range from similar charges to absolutely massive charges. You just have to look at the banks or HLs charges on this to see how high they can be.

What does NMA stand for in this context? A search for 'nma ifa' turns up blanks (though the first result is a thread on here with a reply from you

).

When you say above:

An NMA IFA would be between 1-2% initial plus 0.5% p.a. but that 0.5% comes from the natural fund based and not incremental.

do you mean that the 0.5% pa charge would come from the fund's initial charges or from the fund's AMC or both? I was hoping to get the ICs discounted as much as possible really given that we've lost so much on the investment already.

PS I've read over quite a few posts you made on this forum and found them very useful especially to do with commission charges and warnings of how expensive h-l are for initial advice/being better for exec only services. Cheers

dunstonh · 18 August 2007 at 10:57PM

NMA = New model adviser. It is a business model for IFAs. It isn't a regulatory term. However, the FSA's proposals for retail distribution (which sees the end of tied agent, multi-tied and IFA and replaces it with new standards) has the top level "Professional adviser" based on the NMA model.

NMA is a minority business model, although numbers are increasing all the time and we now even have our own weekly publication targeting NMA IFAs published by citywire. So, there must be enough of us.

Generally, it works to customer agreed remuneration (CAR - you will hear more of this in future as that is also part of the FSA proposals). So, you agree an initial charge up front ranging from zero to 3%. Typically it is closer to 1%. Fund based commission of 0.5% is payable and that comes from the natural commission that is paid. It shouldn't be incremental unless there is discretionary fund management involved. For larger portfolios, the initial is often waived or reduced to a token amount to cover initial costs only and not to profit from as is the 0.5% that matters.

Old model IFAs are transactional. Up front commissions with no ongoing servicing. New model is based on ongoing remuneration linked to performance and the ongoing remuneration provides a reliable income stream to pay for servicing. That servicing is typically risk annual risk assessment, rebalancing and tweaking. Larger portfolios can get more frequent reviews. Because the NMA model is more investment focused, the quality of the investment advice tends to be better as well with defined investment strategies.

Many feel that the old transactional model cannot survive. Particularly when the FSAs RDR proposals come in.

do you mean that the 0.5% pa charge would come from the fund's initial charges or from the fund's AMC or both?

It comes from the AMC. The initial is largely negotiable because it isnt the intial that really matters. Particulary with large portfolios.

munk · 19 August 2007 at 4:54PM

Very informative thanks.

The NMA model certainly sounds better than the current transactional system. Personally I've been put off in the past by the stories of 'independent' financial advisers being swayed by higher commissions offered by certain products which then go on to underperform.

When will clients start getting money from advisors when they make a loss?

Joking aside, I almost feel like we should be due some compensation for the way our investment was handled by Lloyds/Scottish Widows.

My mum had a cautious risk profile but the available fund options via Scot Widows for cautious investors had absolutely no track record yet still they were invested in. What makes it more galling is my mum really didn't know any better and just trusted the Lloyds adviser without looking into the investment she was getting into.

Reading up on compensation for bad investments it sounds as though it'd be hard to get anything back because it hinges on proving that client instructions to invest cautiously weren't carried out. The funds my mum was invested in were indeed labeled by Scottish Widows as suitable for 'cautious' investors so they'd probably argue they did follow her instructions properly or at least made the effort to invest her in something that was supposed to follow a cautious investment strategy.

Ok well at the moment now I'm looking at Bestinvest's 'advice only' service for portfolios of >=£50,000 - as opposed to their discretionary/active portfolio management service which is aimed at >=£250,000 portfolios.

According to Bestinvest's investment services page:

Under (the advice only service offered for portfolios >=£50,000) we do not usually charge a fee but rely on the trail commissions paid to us by most fund managers. With this service you remain the manager of your portfolio but we provide you with advice on request, online valuations and portfolios tools plus four valuation reports per annum.

This is with up to 2 free reviews per year according to the charges page which sounds reasonable.

Out of curiousity for a cautious-balanced fund portfolio of £100k, how many funds very (very!) roughly would be required to provide enough diversity and risk mitigation (10% tolerance)? The Bestinvest portfolio 'auto balancing' tool suggested 12 funds, presumably this is in the right ballpark?

Cheers.

dunstonh · 19 August 2007 at 6:20PM

I almost feel like we should be due some compensation for the way our investment was handled by Lloyds/Scottish Widows.

You wont though as the Lloyds tied agents arent allowed to portfolio plan. Their sales process is the typical tied agent one where they put you in one or two funds that match your risk. Not a spread. That is their advice remit.

Under the FSAs RDR proposals I mentioned that the standards for IFA are going up. Well under the same proposals the standards for salesforces will be going down. At present, IFAs have to give best advice and tied agents have to offer the closest match from their product range. Under the new proposals, the salesforces will have to offer "better than doing nothing". There will be no FOS comeback on the advice either.

It's one way to reduce the FOS complaints rate down I suppose!

Out of curiousity for a cautious-balanced fund portfolio of £100k, how many funds very (very!) roughly would be required to provide enough diversity and risk mitigation (10% tolerance)? The Bestinvest portfolio 'auto balancing' tool suggested 12 funds, presumably this is in the right ballpark?

8-15 on a cautious spread depending on how cautious.

munk · 19 August 2007 at 6:58PM

Seem to be clicking that 'Thanks' button a lot - again much appreciated info!

Under the FSAs RDR proposals I mentioned that the standards for IFA are going up. Well under the same proposals the standards for salesforces will be going down. At present, IFAs have to give best advice and tied agents have to offer the closest match from their product range. Under the new proposals, the salesforces will have to offer "better than doing nothing". There will be no FOS comeback on the advice either.

I'm surprised the fact that the Lloyds tied agent made his best effort to invest in the most suitable product available to him is enough to get them off the hook in terms of compensation claims.

What's to stop a financial provider from labeling a fund as suitable for cautious (cynically read 'unwitting') investors, creaming 3.5% off the principal and then saving money by under-managing the fund at the same time as taking 1.5%pa in AMCs - all in the hope that no-one cottons on or complains?

By that reasoning if someone does complain they can just say 'well we followed the rules and invested them in the most suitable product'. Sounds quite, well, criminal

Generally though what you say about salesforce standards going down sounds very bad and all the more reason to welcome the changes to IFA rules and stick with an IFA. Will bear in mind.

There's also the issue with my mum's situation that it's only been 2yrs so arguably it's too early to tell if the investment will 'work out'. I really don't feel like sticking with it though given that the funds have only a total of 2yrs (poor) history (they were only incepted in 2005, same yr my mum invested) and that even now they're still uncategorized by the IMA (making it hard to compare like for like).

Thanks again anyway, much appreciated.

Balanced risk portfolio assessment

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