Did I choose too many funds?

jon3001

I just started a new job last week. The booklets from Standard Life stated that up to 12 pension funds could be chosen. However the company's form stated only up 6. I queried this and after some curfuffle it was determined that the form was a streamlined option but they did forward me the following message from their IFA who handles the group pension.

I have been on holiday but understand you had some queries re fund choices. It is possible for employees to select up to 12 funds but that would be highly unusual. Frankly most employees go for the Managed fund which gives a very good investment spread in any event including shares ( both UK and overseas ), fixed interest, property and cash. If employees do take an active interest however then they could select their own funds but for new joiners 3 or 4 funds is about the maximum I would recommend since there will only be a very small amount in the fund to start with in any event.


Many of our clients have significant amounts invested with us and I would suggest that even with funds of £100,000 or so typically we will invest in a range of 5 or 6 funds.

I actually chose the following eight funds from Standard Life's selection: [I've considered input from posters here that maybe the FTSE is a poor index to track but I still think some of the international ones do well vs managed alternatives]

51% UK Stocks

• 17% SLP UK Equitiy Select One
• 17% Invesco Perpertual High Income
• 17% SLI UK Smaller Companies

49% International Stocks

• 13% SLP European Equity Tracker One
• 13% SLP US Equity Tracker One
• 6% BGI Japanese Equity Index
• 5% BGI Pacific Rim Equity Index
• 12% Schroder Global Emerging Market

Under the right conditions I'd also consider adding the following property funds:

• SLI Select Property (Global REIT)
• New Star International Property (Global B&M)
• SLP Property One (UK B&M)

I'm not yet quite at £100K of investments but I have aspirations of going well beyond that over the next 25-30 years and want a diversified, multi-asset class investment strategy in place. After consolidating my strategy over existing ISAs, pensions and taxable accounts I'd expect to have an allocation resembling the below. The Standard Life funds will plug into this.

• 20% Cash/Bonds
• 80% Equties/Higher Risk

And the higher risk allocation would look something like this:

30% UK Stocks

• 10% Blend
• 10% Value
• 10% Small Companies

30% International Stocks

• 4% USA Blend
• 4% USA Small Companies
• 4% Euro Blend
• 4% Euro Small Companies
• 2% Japanese Blend
• 2% Japanese Small Companies
• 3% Pacific Blend
• 7% Emerging Markets

20% Property

• 5% UK REITs
• 5% UK B&M
• 10% Global REITs

20% Commodities

• 10% Commodity Futures
• 5% Resource Stocks
• 5% Precious Metals

I'm probably going to end up with a good couple of dozen funds or more once everything is in place. Is the IFA right and do I need a reality check?

I've read over 10 books and many Internet articles/forum posts over the past 18 months with an emphasis on asset allocation and commodities.

EdInvestor

jon3001 wrote: »

Is the IFA right and do I need a reality check?

I've read over 10 books and many Internet articles/forum posts over the past 18 months with an emphasis on asset allocation and commodities.

He's probably right in describing what's typical.His mistake is failing to note that you're not typical. Indeed, you probably know more than he does.

Just tell him you have other investments, so the pension is just part of a package and thus you'd like the bigger fund spread.

Well done for taking an interest and DYOR.You seem to have a good grasp on the basics already. I am sure you will never regret spending the time.

dunstonh

Personally, I aim for at least one in each main sector so that sees 8 straight away. Even with internal funds you get 5 or 6. Typically you end up with around 10-13 on portfolios of 100k. With investments starting at zero and being paid in monthly then the diversification doesnt need to be strong as it typically needs around 20k before you can start to really see the impacts of diversification.

However, the IFA is correct that it is better for someone to pick a balanced managed fund if they dont know what they are doing rather than try and stock pick and fashion invest. The spread you have chosen as your ideal one is rather heavy in property and commodities with little or no downside protection making it very high risk.

The IFA has acted responsibly in pointing out that your selection isnt what you would typically expect. Under FSA rules, the IFA has a responsbility to ensure that the investment selection is in line with their understanding and their ability to understand. Unless you have done a full factfind and risk profile then the IFA is going to have to work on generalisations and that would mean using some assumptions. One of which is that you are a typical UK consumer with limited knowledge and a cautious risk profile. Unfortunatly, Ed damns the IFA if they dont point out the negatives and damns them when they do. Whilst I may not agree fully on the diversification levels I think the IFA has acted responsibly.

jon3001

dunstonh wrote: »

The spread you have chosen as your ideal one is rather heavy in property and commodities with little or no downside protection making it very high risk.

The portfolio is based on research of annually rebalanced multi asset class portfolios having better risk-adjusted returns compared to stock-heavy portfolios. The literature I've read compares returns since 1971, rather than current fashion. Having uncorrelated assets is supposed provide some downside protection in that it would be unusual to see simultaneous declines in all markets - although maybe that has been the situation of late.

I'm also going 80/20 to give some downside protection.

Here are a couple of books that played a part:

"Asset Allocation, 4th Ed: Balancing Financial Risk", Roger C. Gibson
http://www.amazon.co.uk/Asset-Allocation-4th-Balancing-Financial/dp/0071478094
"Multi-Asset Class Investment Strategy", Guy Fraser-Sampson
http://www.amazon.co.uk/Multi-Asset-Class-Investment-Strategy-Fraser-Sampson/dp/0470027991/

The Gibson book particularly influenced the broad portfolio make-up in terms of domestic stocks, international stocks, commodities and property. Based on statistics since 1971 he thinks this is much lower risk (measured by portfolio volatility) than all stocks for the non-bonds portion and can actually increase returns.

dunstonh wrote: »

The IFA has acted responsibly in pointing out that your selection isnt what you would typically expect.

He was responding to a query from HR about investing in more than six funds. He hasn't actually seen my selection and doesn't have any knowledge of my investment strategies.

EdInvestor

jon3001 wrote: »

I actually chose the following eight funds from Standard Life's selection:
51% UK Stocks

• 17% SLP UK Equitiy Select One
• 17% Invesco Perpertual High Income
• 17% SLI UK Smaller Companies

49% International Stocks

• 13% SLP European Equity Tracker One
• 13% SLP US Equity Tracker One
• 6% BGI Japanese Equity Index
• 5% BGI Pacific Rim Equity Index
• 12% Schroder Global Emerging Market

My comments referred to this set of choices.I would not have thought this either out of line or unusual for a GPP these days.

IFAs (and the FSA) need to wake up: there are a lot more savvy people around now.Why do they think the lifecos offer these vast lists of external fund choices, are they just for decoration? :rolleyes:

dunstonh

IFAs (and the FSA) need to wake up: there are a lot more savvy people around now.

There are vastly more that are not and there are plenty that think they are when they are not.

Why do they think the lifecos offer these vast lists of external fund choices, are they just for decoration?

Because they are used in quality recommendations. However, picking a random selection based on what is fashionable is not a good idea.

jon3001

dunstonh wrote: »

. Typically you end up with around 10-13 on portfolios of 100k.

Ok - so if 13 is fairly typical then more than 6 shouldn't be a big deal.

I identified 17 sub-sectors on the 'high risk' 80% portion of my portfolio all which would require at least one fund.

Part of the low risk 20% will contain my emergency cash funds (currently in ISAs) although this won't be part of any rebalancing. I expect to add at least UK corporate bonds, Inflation-linked gilts and international bonds.

That's already 21 sub-sectors. These sectors will also be duplicated and spread over ISAs, pension funds and taxable accounts. Where appropriate (e.g. not using a tracker) I expect to diversify away 'management-risk' by using different funds within each sector (e.g. 'SLI UK Smaller Companies' with my employer's pension, maybe 'Artemis UK Smaller Cos' in my other pension holdings and maybe 'Blackrock UK Smaller Cos' in my ISA).

So - you can see I'll potentially be holding many funds! Is any part of this misguided?

I work as a software developer and have already written my own program to help me manage the complexity of owning a vast array of funds.

jon3001

dunstonh wrote: »

IFAs (and the FSA) need to wake up: there are a lot more savvy people around now.

There are vastly more that are not and there are plenty that think they are when they are not.

Any of that aimed at me?

dunstonh wrote: »

However, picking a random selection based on what is fashionable is not a good idea.

Is this what you think I did?

dunstonh

Any of that aimed at me?

Not at all. Its a bit of a long running thing on here that I feel Ed tells people that are not up to it to do things which require knowledge they dont have. We have often seen people buy in to that and come back and say what they have done only to find they have picked more expensive Multi-manager funds in a SIPP when what they had in the first place and the historic performance was worse. Or they have gone on to pick high risk, past performance led fashion investment choices.

I like to build proper portfolios but there are plenty of times I compromise that and go with a stakeholder built portfolio using just 5 or 6 funds or even on occassion the balanced managed fund (which I dislike a lot). Its all very well building a portfolio at the start but if the person isnt going to monitor and review it and doesnt have a clue what it all means then you do have to compromise the advice to suit that individual. That doesnt mean they get an awful product. It just gets dumbed down a bit on the investment side. A built portfolio left unmonitored will go out of sync with the sector/asset allocation and move away from their risk profile (typically it moves higher over time).

Is this what you think I did?

erm, a little. Not with your current choice but the second lot with your ideal. You have property share at 20% and commodities at 20%. Both of those fall under specialist investments giving you an exposure of 40% to specialist investments. The highest risk portfolio I build has 13% allocated to specialist. Specialist is also the area you tend to diversify the most as it contains all the "different funds" such as property, country specific, niche funds focusing on certain areas like tech, media, bio, commodities etc.

Of course, you have looked at asset allocation more than sector allocation (the latter is far easier with funds. The former is easier with shares). So, its not going to be an exact like for like but I just feel you are looking at being too heavy in property and commodities. You should also build your fixed interest sector into the portfolio because that is important when it comes to rebalancing and making sure your risk is consistent.

Up_the_Creek_4

Hello All,

I am finding this thread really interesting and informative. Just as a general question from someone just starting to learn about pensions, what would your fantasy portfolio look like? i.e. it seems that the feeling is:

13% specialist (property, commodities)
30% UK Stocks
30% Int stocks
27% balancing the risk with corp bonds, inflat linked gilts, cash, int bonds).

At what age would you start to increase the balanced portion to secure your pension amount?

How do you manage to control such a large group of funds, are there providers that have such a range you can choose from or do you have to independantly monitor funds and performance?

Thanking you for posting something that has opened my eyes

dunstonh

what would your fantasy portfolio look like? i

Here is mine (at least its what it should be as it needs a rebalance). It is based on my risk profile for my retirement pot which is medium/high risk.

Europe 12%
Far East 5%
Emerging markets 5%
Specialist 7%
Japan 7%
N America 12%
UK Equity 26%
Fixed Interest 26%

At what age would you start to increase the balanced portion to secure your pension amount?

Again, depends on risk but I would start phasing down around 7 years to go but then I will go income drawdown and that remains invested so it would be a gradual move to lower risk yielding investments. It would also depend on market conditions at the time.

How do you manage to control such a large group of funds, are there providers that have such a range you can choose from or do you have to independantly monitor funds and performance?

Providers will provide investment funds but they will not make the investment decisions for you. You or your IFA picks the funds (very few tied agents are allowed to do it). The review and management ongoing is with you or your IFA. The provider just does what you or the IFA tells them to do.

Depending on the pension provider you can have 1 fund with the very worst examples through to 20-30 with stakeholder pensions increasing to 300-1000 with personal pensions and almost unlimited options with SIPPs.