My first portfolio strategy

Noktok

As a newcomer to investing in the stock market I've been determined to research it to ensure that I develop a strategy and understand the underlying reasons rather than just select a random bunch of glossy funds. This post describes my thought processes and I'd like to have a sanity check to make sure that it sounds sensible so far.

My situation
- I'm mid-thirties, married with young children
- £90,000 outstanding on a mortgage currently at 1.25% interest and 12 years remaining term.
- In excess of £130,000 cash assets including £21k in Lloyds Vantage accounts at 4%, £40k in cash ISAs between us and £70k in savings accounts at around 2.5% interest.

Investment objective
To provide a nest-egg for the family in 15 year's time to pay for the children's university fees etc

Investment expectations and risk assessment
Capital growth to at least beat inflation, expected around 5% annual real return over 15 years using a diversified Stocks & Shares portfolio with maximum ISA tax wrappers. Initially adventurous and gradually lifestyling to a more cautious approach over the 15 year span. Guide for defensive assets roughly 10-20% of portfolio increasing by 10-20% every 5 years.

General fund selection strategy

• To keep management fees to a minimum by using trackers and ETFs wherever possible
• To invest in broad rather than specialist sectors or narrow regions since I'm no expert in markets trends and won't try to pretend I am
• To diversify the portfolio using global equities and any other vehicles such as property and commodities
• As a guideline, to maintain a roughly 1:2 ratio between UK and global equities
• To drip-feed regular payments into each fund where possible to smooth out market fluctuations
• Dividends reinvested

Current market strategies
I believe I've most likely missed the boat with the current bull market and recovery from the 2008 crash and my gut feeling is that market growth is likely to slow and perhaps stagnate rather than bubble again. Therefore I will initially include income and value funds over growth opportunities. I'm deliberately avoiding over-exposure to small caps as I'm not sure how they will fare in the current economic climate. Also I will initially ignore emerging markets and look to invest in them as soon as conditions appear more favourable. With gilts and bonds currently overvalued, my defensive assets will initially lie with Absolute Return funds with a view to adding gilt trackers when the time comes for lifestyling.

Provider selection
A varied mix of trackers, ETFs and high yield/contrarian managed funds does not point well to any one particular provider so I'm leaning towards two different companies to open ISA accounts for myself and spouse:

• Hargreaves Lansdown - Reasons: cheap for managed funds with 0% initial charges on many funds as well as a partial commission rebate, also they do not charge for switching funds and there are good reports on usability of online tools.
• Interactive Investor - Reasons: no annual charge, no extra charge for including ETFs, trackers or shares plus cheap trading prices of just £1.50 on preset dates.

In this way I hope to get the best of both worlds, with HL being good for managed funds (but expensive for ETFs and shares) and iii the reverse. However since I have a set amount of money to invest in the ISA each year, it does restrict me to a roughly 50/50 split between managed funds and passive funds to get the best value.

Portfolio allocation
Currently I'm more interested in portfolio allocation strategy than specific funds, so any listed funds are more for illustration purposes and may be replaced with a similar alternative.

HL Account:
Newton Real Return [Absolute Return] - 20% (for capital preservation) TER 1.62%
Invesco Perp High Income [UK Income] - 10% (for UK dividend yield) TER 1.69%
Blackrock UK Special Situations [UK All Companies] - 5% (for UK value) TER 1.67%
Newton Global Higher Income [Global Income] - 10% (for Global dividend yield) TER 1.63%
Investec Global Special Situations [Global] - 5% (for Global value) TER 1.61%
Total 50%

iii Account:
Lyxor MSCI World Real Estate [ETF-Property] - 5% (for exposure to global real estate) TER 0.35%
ETFS All Commodities DJ-AIGCI $ [ETF-Commodities] - 5% (for exposure to commodities) TER 0.49%
HSBC FTSE All-Share Index [UK All Companies] - 10% (UK growth tracker) TER 0.27%
HSBC American [North America] - 10% (America growth tracker) TER 0.28%
HSBC European [Europe ex UK] - 10% (Europe growth tracker) TER 0.31%
HSBC Pacific [Asia Pacific ex Japan] - 5% (Asia growth tracker) TER 0.37%
TBD: Emerging Markets tracker - 5% (at a later date)
Total 50%

Total Allocation : UK 25%, Global 45%, Defensive 20%, Other diversification 10%
(I'm aware the Absolute Return is a UK fund but am counting it seperately as its primary purpose is defensive rather than regional)

Cash allocation
I can deposit £5100 into each account for this year's remaining ISA allocation, which will be split £4000 into Absolute Return, £1000 each into property and commodities ETFs and UK Income, and £500 each into the iii trackers, the remainder being reserved temporarily in cash for top-ups. All funds except ETFs will then receive regular monthly deposits throughout next year's full ISA allowance of £10680 for both accounts, with rebalancing every 6-12 months to maintain the rough percentages I've laid out. I'll continue to use our full ISA allocation each year until I've invested most of the savings that aren't already in cash ISAs. This should take about 3-4 years and I'm also considering non-ISA investments in the meantime until the money can be ISA'd.


Well, that's where I'm currently at. Although I've done my best to research I'm aware that it's no substitute for experience, so your criticisms and comments are welcome!

saverjustice

Do you have a share dealing account? If not why not try that? Cheaper and more fun, it is what the fund 'managers' do.

jimjames

That sounds like a well thought out plan. You could also consider transferring this year's cash ISA into S&S portion which would give you more to increase the portfolio. Investing monthly is a good plan to even out dips and peaks although if there are dips you may do well to invest more those months to get more units/shares for your money.

With the amount of cash you have along with your age I wouldn't see you necessarily needed to move to cautious assets near the end of the 15 year period unless you have other commitments not mentioned.

psychic_teabag

Are you aware that H-L don't currently penalise the HSBC index funds with the extra 0.5% annual fee that they do on some other index funds ? So if you are 50% in managed funds just because you are 50% in H-L, you could move a bit more towards trackers.

Also, not relevant to investments, but you "only" have £21k in Lloyds vantage - you and your wife should be able to have 3 accounts each.

bobbyj_2

saverjustice well said.

Teach yourself cheaper and will make more money than so called 'experts'

Noktok

saverjustice/bobbyj: Share dealing to me is a way of trying to make lots of money with high risk and involves a certain level of knowledge, without any such knowledge I would simply be gambling. I can achieve much greater diversification for less effort by simply investing in a cheap tracker fund. However one of the reasons I have chosen iii is so that I have the option of share dealing should I wish to dabble in future.

jimjames: Thanks. Good advice there.

psychic teabag: Yes, I realise that the HSBC trackers are a good choice for the HL account too. Actually I initially thought I would be able to find better trackers with a different platform but was surprised that I couldn't. I'm happy with a 50% active / 50% passive split and have put the trackers in the iii account simply because I wouldn't otherwise have enough investments in there to spread my money. However I consider it a plus point that I could open HSBC trackers with either account as a rebalancing option.
Re only £21k in Vantage - you are absolutely right and I am working on that


I am wondering if I am overweight in UK large caps, considering that the Income and Value funds will tend to be weighted towards large caps, should I change the FTSE All-share to a FTSE 250 instead?

Also does anyone have any comment on my regional weightings in the global sector?

saverjustice

You are evidently more knowledgeable than the rest of us which begs the question why you posed the question in the first place.

All trading in equities could be considered to be a gamble, no, is gamble. There are a limited number of shares which would be suitable for the average person, all you need to do is look at the funds you mention, which shares do they hold? Is buying the same shares through a cheap online account more of a gamble than 'pooling' with others?

This isn't rocket science, or as one really clever fund 'manager' said when correcting me - "Rocketry".

mike88

Small and Medium Caps are unlikely to perform better than large caps in the immediate future. Smaller companies rely on raising capital to grow and that has become more difficult and expensive in recent times. Small and Medium Caps have done well of late due to investments made prior to the financial crisis now bearing fruit. I believe equity income funds will do well this year as large caps are holding substantial amounts of cash and will improve distributions to shareholders during the course of the next year.

You probably have access to small and medium caps through your Special Situations Funds so would not be too concerned about under representation.

Given your long term strategy I would consider investing in Natural Resources such as the JPM fund on the dips. I believe your Newton Real Return choice is excellent for balancing risk. Have you considered Artemis Strategic Assets as this fund has an interesting remit giving the manager freedom and flexibility to invest in any market, product or financial instrument dependent on market conditions? Its designed to grow in rising markets and not lose when markets fall.

saverjustice

mike88 wrote: »

Small and Medium Caps are unlikely to perform better than large caps in the immediate future. Smaller companies rely on raising capital to grow and that has become more difficult and expensive in recent times. Small and Medium Caps have done well of late due to investments made prior to the financial crisis now bearing fruit. I believe equity income funds will do well this year as large caps are holding substantial amounts of cash and will improve distributions to shareholders during the course of the next year.

You probably have access to small and medium caps through your Special Situations Funds so would not be too concerned about under representation.

Given your long term strategy I would consider investing in Natural Resources such as the JPM fund on the dips. I believe your Newton Real Return choice is excellent for balancing risk. Have you considered Artemis Strategic Assets as this fund has an interesting remit giving the manager freedom and flexibility to invest in any market, product or financial instrument dependent on market conditions? Its designed to grow in rising markets and not lose when markets fall.

Signature says: "Take my advice at your peril"

Sound advice!

mike88

saverjustice wrote: »

Signature says: "Take my advice at your peril"

Sound advice!

The depth of your analysis and considered opinions are very much appreciated.

Noktok

Thanks mike88 for your considered answer, what you say makes good sense and I will stick with the FTSE all-share. The funds you mention are also very interesting (I came across JPM Natural Resources while searching for commodity funds and was tempted, but thought that an ETF with direct exposure to commodity prices might be cheaper and fit my strategy better). Artemis Strategic Assets is very intriguing but I'm a bit confused, is it an Absolute Return fund or not?