Investment Trust ISA?

dunstonh

There is no need for investors to have money in every single category of fund - this would mean that there are simply too many investments to be monitored. Useful for the advisor who wants a bit of back protection, as are 'fund of funds', but not appropriate for someone who is doing it themselves unless they have a great deal of time to devote to investment matters.

So, what you are saying is that if you want to DIY, then you should cut corners and not do a proper portfolio investment?

If you do that, you are not going to get an optimal sector allocation and returns would be lower over the long term. If you are going to do it, you may as well do it well or get someone to do it for you.

dunstonh

Here is a good example why sticking to UK only is not a good idea

1 year to 30th June - sector averages using IMA figures supplied by Lipper.

34.75% Euro Small Cos
32.42% Global Emerg Markets
26.65% Japan
25.98% Specialist
24.23% Europe Exc UK
23.46% Asia Pacific Inc Japan
21.14% Europe Inc UK
20.30% Asia Pacific Exc Japan
19.11% UK Smaller Cos
18.80% UK All Companies

Limit yourself to UK only and just look what you are missing out on. A spread across the sectors with annual rebalancing should outperform a UK only sector investment over the medium to long term.

EdInvestor

Yes but most people on this site are looking for low-medium risk investments with only a small amount of higher risk. They are welcome to choose foreign stuff for that higher risk component - as it happens, fish10 went for Commodity funds and UK small caps.

Advisors are always worried that they will get criticised by clients if they choose funds which don't perform as well as other funds. This is understandable but it is not the point here IMHO. DIY investors, especially those just starting out, have a hard enough time grasping the basis for UK investment without plunging immediately into overseas markets, which are difficult to monitor.

Plus they have high charges and are subject to currency risk.You don't mention US funds, for instance.Note the movement of sterling against the US$ in recent months.What has that done to returns?

cheerfulcat

I am actually tempted to suggest that the original thread heading contained the answer to the question! A big generalist investment trust might be just the thing to provide both relative safety and asset/sector spreads. A number of them are run by the big fund managers and some even mirror the manager's unit trust, getting a similar result with lower charges. Well worth a look IMO.

AITC

dunstonh

Yes but most people on this site are looking for low-medium risk investments with only a small amount of higher risk. They are welcome to choose foreign stuff for that higher risk component - as it happens, fish10 went for Commodity funds and UK small caps.

Even low risk investments have some invested in those areas, albeit to smaller amounts.

DIY investors, especially those just starting out, have a hard enough time grasping the basis for UK investment without plunging immediately into overseas markets, which are difficult to monitor.

No more difficult than UK funds. Its the same principle except you are spreading your risk over a wider field. Someone doing DIY should not be told to invest only in UK funds as its easier. If that was the case, we would all be saying stick it in GEBs. Easy does not equal best. If you dont want to do the job properly on a DIY investment then you only have yourself to blame and it is your choice.

Plus they have high charges and are subject to currency risk.You don't mention US funds, for instance.Note the movement of sterling against the US$ in recent months.What has that done to returns?

What high charges would they be? I didnt mention US as that wasnt in the list that I was reading. However, you dont invest on past performance, you invest on future potential and you would include the US.

Advisors are always worried that they will get criticised by clients if they choose funds which don't perform as well as other funds.

Over 90% of investment return is due to sector allocation. 5% due to fund choice and 5% due to charges and luck. You need to get sector allocation right.

EdInvestor

Its the same principle except you are spreading your risk over a wider field

Investing in foreign markets increases risk, it doesn't reduce it.Asset allocation is the key factor in getting good returns at reduced risk IMHO.

Conventional investment theory as used with mug punters tends to increase their risk ( without them realising it). Look at your typical balanced managed fund - 75% or more in equities, much of it often overseas. Most UK inexperienced investors want lower risk than that.

My suggestions are aimed at getting higher returns at lower risk.

BTW, if you add the higher yield of the UK market onto the returns on your list above, the UK will end up around halfway up the chart, particularly if you're using equity income funds.

hobbesandco

I agree with EdInvestor about not forgetting to include dividends in the calculations.

A lot of my money has been tied up in UK stocks since 2003 and I have to say even though the UK has been 'underperforming' (compared to international markets) I've still managed to have 20% annual returns and that's just with my index-trackers! A large part of this is because I reinvest my dividends and because of pound-cost averaging (investing on a regular basis).

Secondly, I have bought individual UK and US shares and even though the retail market has been tough in the past year I have still managed to get 20%+ returns; considering the US dollar has weakened I think this is still pretty good going.

Lastly, I decided to branch out into Emerging Markets and ironically it's been my worst performing investment so far with huge losses! Am I panicking? No because I know regular investing will balance the highs and lows.

My point is don't dwell on past statistics too much and don't think short-term. Just because investment x has done well in the past 6 months doesn't mean it's going to continue doing well etc.

dunstonh

Investing in foreign markets increases risk, it doesn't reduce it.Asset allocation is the key factor in getting good returns at reduced risk IMHO.

Do not twist what I am saying. You know full well that asset allocation includes investing in sectors below your risk profile as well as above but in ratios appropriate to the individual risk profile of the person concerned.

Conventional investment theory as used with mug punters tends to increase their risk ( without them realising it). Look at your typical balanced managed fund - 75% or more in equities, much of it often overseas. Most UK inexperienced investors want lower risk than that.

And many DIY investors go with a FTSE tracker which is higher risk than a balanced managed fund without realising that they are investing with such high risk. Indeed, read some foolish sites and they promote the fact that inexperienced investors should invest in those trackers without any mention of the comparative risk they are taking.

My suggestions are aimed at getting higher returns at lower risk.

But they are not. They are a half way suggestion leaving out key sectors.

BTW, if you add the higher yield of the UK market onto the returns on your list above, the UK will end up around halfway up the chart, particularly if you're using equity income funds.

The list was done on accumulation units which includes re-investment of income. So there would be no movement. Also UK Growth outperformed UK Income over the last 3 years (although the other way round over 5 years).

My point is don't dwell on past statistics too much and don't think short-term. Just because investment x has done well in the past 6 months doesn't mean it's going to continue doing well etc.

Past performance means nothing for the future. I was just pointing out that if you invest solely in the UK you are limiting your options and are destined for a portfolio of underperformance when compared to a sector allocated portfolio.

Lastly, I decided to branch out into Emerging Markets and ironically it's been my worst performing investment so far with huge losses! Am I panicking? No because I know regular investing will balance the highs and lows.

Good attitude but 1 year is nothing in the scheme of things and with portfolio rebalancing that drop over 1 year could be beneficial in the long term.

EdInvestor

Do not twist what I am saying. You know full well that asset allocation includes investing in sectors below your risk profile as well as above but in ratios appropriate to the individual risk profile of the person concerned.

Since when is it a requirement to invest in all sectors?It isn't.Never has been.Do not confuse not putting all your eggs in one basket with putting your eggs in as many baskets as possible.

And many DIY investors go with a FTSE tracker which is higher risk than a balanced managed fund without realising that they are investing with such high risk.

I quite agree and often say so.

I was just pointing out that if you invest solely in the UK you are limiting your options and are destined for a portfolio of underperformance.

There you go again.

We are not looking for outperformance because it involves taking TOO MANY RISKS. We are looking for good quality performance on a steady basis, year in, year out, minimising risk of loss during a downturn.

Which is precisely what the industry did NOT deliver to most people over the last 5 years.

dunstonh

Since when is it a requirement to invest in all sectors?It isn't.Never has been.Do not confuse not putting all your eggs in one basket with putting your eggs in as many baskets as possible.

Who said anything about all?

I tend to use 10 main sectors and depending on the size of the investment would filter it more from there if required. i.e. UK fixed interest being main sector but could use UK Zeros, Corp Bonds, Gilts, Other bonds etc. I usually end up with around 13 funds (although as mentioned, it does depend on investment size)

When you look at the various software tools available to IFAs today, then 6-10 main sectors does to be the norm.

We are not looking for outperformance because it involves taking TOO MANY RISKS. We are looking for good quality performance on a steady basis, year in, year out, minimising risk of loss during a downturn.

You are looking at hit and hope investing. Sticking it into a small number of areas in the hope that they are going to be there more often than not. That is riskier than sector allocation. A low risk sector allocated portfolio would have outperformed a HYP with less risk taken. A HYP could easily suffer a 30% loss in a given year. That isnt steady performance on a year in year out basis. For that you need to go more defensive and lower the risk and a sector allocated portfolio on lower risk basis would have returned just over 10% p.a. if you invested just before the crash in June 2001 and would have suffered a loss of 0.9% in the worst year.

A portfolio is best measured when things are bad, not when things are good. Looking at just the last 3 years alone where equity income (HYP etc) has been steady is not a good guide at all.