Asset Allocation-comments please

Mortgage_&_debt_free

Hi all

I have put this in another thread but would be interested in more opinions so thought I'd post it here.

I actually have an enviable "problem". I am a member of the LGPS FS Pension scheme & have been looking over the past few years to build up an AVC fund. I have recently adjusted this to;

Standard Life Balanced Managed (Lifestyle) 75%
CM Adventurous Managed 15%
CM European 10%

However, I am wary about eggs in the one basket, particularly considering the climate over public sector pensions, etc. To mitigate some of this I started an equity ISA to build up a fund I can use if I want to retire a couple of years before they want me to! I have allocated;

Fid SS - 25%
Fid Global SS - 25%
Artemis European Growth - 25%
Invesco Perpetual Income - 25%

What has suprised me is the difference in charges between the two vehicles; LGPS AVCs - SL=0.6%, CM 0.5%
S&S ISAs (Via Hargreaves) - between 1.14%-1.69%

I realise it's 'cos of the discount LGPS gets through volume. I think it's worth paying the extra charges on the ISA to have access to funds when I want them, but I don't know whether to stick with the CM funds in the AVC as they don't seem to be particularly good performers, although when you factor in the extra charges I would pay outside the AVC this may make the actual net gain more attractive.

I also have £16k in cash ISAs & a SL endowment, min payout £24500

Any comments?

EdInvestor

It's down to performance isn;t it?

You've chosen top levelperformers for your ISA, where you could easily get annual returns around the 20% mark. More ordinary funds, as in the AVC might be in single digit territory. The difference in charges with thus be barely noticeable.

Where high charges are a real problem is when performace is duff.This tends to apply to With-profits, Balanced managed and other insurance company type rubbish.

DavidLaGuardia

Mortgage_&_debt_free wrote:

Hi all


Standard Life Balanced Managed (Lifestyle) 75%
CM Adventurous Managed 15%
CM European 10%

However, I am wary about eggs in the one basket, particularly considering the climate over public sector pensions, etc. To mitigate some of this I started an equity ISA to build up a fund I can use if I want to retire a couple of years before they want me to! I have allocated;

Fid SS - 25%
Fid Global SS - 25%
Artemis European Growth - 25%
Invesco Perpetual Income - 25%

Any comments?

The first observation is that IF you do not want all your eggs in one basket you should look first not at the funds but the asset type. Investing in funds that invest in similar asset classes is not diversifying. As their performance, while different will be very similar (what investment anoraks refer to as highly correlated). As well as choosing equity based funds, there are other option, most common are property and bonds (of varying return and risk). When one area does badly, the hope is that another will behave positively. Not dwelling on the pros and cons of different asset classes my personal pension is invested in 60% equity based funds (therein divided geographically) and the other is divided between property and high income (junk bond) funds. The property certainly helped when the share markets took a pummelling in the early 2000s.

Mortgage_&_debt_free

DavidLaGuardia wrote:

The first observation is that IF you do not want all your eggs in one basket you should look first not at the funds but the asset type. Investing in funds that invest in similar asset classes is not diversifying. As their performance, while different will be very similar (what investment anoraks refer to as highly correlated). As well as choosing equity based funds, there are other option, most common are property and bonds (of varying return and risk). When one area does badly, the hope is that another will behave positively. Not dwelling on the pros and cons of different asset classes my personal pension is invested in 60% equity based funds (therein divided geographically) and the other is divided between property and high income (junk bond) funds. The property certainly helped when the share markets took a pummelling in the early 2000s.

Thanks for the response, very interesting. It may be worth clarifying that overall my asset allocation is 66.5% equities (split UK/Europe/Global at various risk profiles) and 33.5% cash/bonds/other. This is because the SL Balanced Managed Fund invests 18.80% in bonds/cash/other (inc the SL Pension Property fund) and I also max out a cash mini ISA every month, which makes up the rest.

I have to admit I didn't realise the % until I worked it out following your post, so thanks for the tip.

Any other comments gratefully received.

Cheers

DavidLaGuardia

I would add that I choose the funds for different asset classes individually as I personally think that you get a better crop of individually managed funds that you can change on an individual basis if needed. Usually the best managers have a particular field of expetrise which they concentrate on and lumping everything together in a balanced managed fund can lead to mediocrity or underperformance. Admittedly it means committing yourself to regular reviews to keep up with changes or giviing it to a professional to do this for you.

dunstonh

I agree with David. Better to pick individual funds than a jack of all trades, master of none balanced managed fund.

Mortgage_&_debt_free

As you rightly say I have a balanced managed fund, which has low costs. I agree that individual funds, if you pick the right ones, may perform better. To try & hedge my bets I have gone down this route with the S&S ISA, with the balanced manged fund as an AVC, as over time one may be better than the other but, as ever, there are no guarantees.

Also, unless there is a huge difference in performance, the difference may be plugged by the difference in charges between the AVC fund (0.5%) and the ISA (up to 1.76%). The balanced managed fund itself is one of the better ones and the profile will change automatically as I near retirement unless I choose not to, which, all being well, will save some work at the time.

I suppose I'm trying to mitigate the risk of picking the wrong option by going for both of them!

jonathon_hart

Have a look at the funds as well. You will often find that low charging funds are Passive or Index tracking funds, whereas higher charging ones are Active, i.e a fund manager is actively trying to beat the market.

Thanks

Jonathon