Confused on low risk end of share/fund portfolio

12tonelizzie

Confused on low risk end of share/fund portfolio

cepheus

According to theory and past experience to lower the risk of the portfolio you need to diversify, this doesn't necessarily mean that any of those individual investments are safe, but merely they are not closely correlated to other mainstream investments.

To diversify away from say the FTSE All share you need exposure to foreign markets particularly Japan and emerging, precious metals, commodities, utilities, tobacco, alcohol and aerospace if you don't care about the morals, high yield bonds and in particular high quality government backed bonds.

Problem is you can only put a small proportion of this into foreign denominated currencies or companies with foreign exposure or else you will get significant currency risk, so it isn't easy.

Other sources of diversity include 'Absolute return' funds, Peer to Peer lending (eg. Zopa), fixed rate bank 'bonds', and inflation indexed investments. The latter poses less risk than bank deposits in my opinion since your real return should be measured in relation to inflation and are difficult to beat on a risk to reward basis.

With regard to funds you will have to find the appropriate ones, but it might be cheaper to invest direct. Personally, I don't believe that 'experts' managing large portfolios can obtain better returns than average over the long run, unless they also effectively run the companies and move the market directly as Buffet seems to do. Also if the world economy is severely affected, most of the non-government backed instruments will suffer together due to the extent of globalisation.

jimjames

12tonelizzie wrote: »

1. I have a Hargreaves Lansdown account.
a. What sort of funds should I be looking for? Property funds? Cautious Managed? Pension Funds? High Yield? Corporate/Strategic/Global Bonds?
b. Is it just a matter of comparing Yield figures?
c. Are these Yield figures what you (will/should/may) get after the TER and other charges have been paid?

2. I would have thought that ‘lower risk’ funds would have low TERs, but on H-L’s funds they still seem quite high to me.
a. Should I be looking outside H-L type funds? I see there are such things as Vanguard Global Bond Index Fund and the Vanguard U.K. Investment Grade Bond Index Fund which presumably have Vanguard's low TERs.
b. Are there ETFs which offer what I’m asking about? (For that matter, I’m not sure whether the Vanguard products are UTs, OIECs or ETFs.)
c. Are there things other than funds or high street accounts which I should be considering?

All help very gratefully received.

I''l try to cover the bits I can - choice of funds is really down to your preferences and others may be able to suggest ones that meet those.

1b Yield is only really relevant for bonds and some high income funds. For most investments the income and capital growth are what you are looking for and growth isn't guaranteed although you can see what it has done in the past.

1c Yes but it isn't guaranteed and can go down as well as up.

2a Lower risk funds may involve a lot more management than a tracker or standard managed fund as they have to trade between different asset classes and make those calls.

Really the overall risk of your portfolio is what you should consider. Others on here have posted in the past about balance between having S&S funds and cash ISA funds and using that balance to reduce risk and volatility rather than paying for "balanced" or "cautious" funds.

If you have 95% cash and 5% shares then the maximum you can ever lose is 5% which may be less than a cautious fund would do.

Totton

12tonelizzie wrote: »

(Incidentally, I’m not intending to withdraw income, I ‘just’ want to have a low-risk part of my portfolio which grows enough to be worth the trouble of taking it out savings.)

1. I have a Hargreaves Lansdown account.
a. What sort of funds should I be looking for? Property funds? Cautious Managed? Pension Funds? High Yield? Corporate/Strategic/Global Bonds?
b. Is it just a matter of comparing Yield figures?
c. Are these Yield figures what you (will/should/may) get after the TER and other charges have been paid?

2. I would have thought that ‘lower risk’ funds would have low TERs, but on H-L’s funds they still seem quite high to me.
a. Should I be looking outside H-L type funds? I see there are such things as Vanguard Global Bond Index Fund and the Vanguard U.K. Investment Grade Bond Index Fund which presumably have Vanguard's low TERs.
b. Are there ETFs which offer what I’m asking about? (For that matter, I’m not sure whether the Vanguard products are UTs, OIECs or ETFs.)
c. Are there things other than funds or high street accounts which I should be considering?

All help very gratefully received.

Hi there,
You should get lots of replies with plenty of variety!

1.
I use H-L also, excellent website and personal service but comes at a cost which I feel is worthwhile. The cost is that you can get a lot of marketing dressed as advice so imho and experience it is best to be careful when viewing their Wealth 150. There are also higher fees if you want to hold shares or Investment trusts in an ISA plus sometimes they only offer the 'I' class of fund which is typically more expensive than the corresponding 'O' class or similar.

The type of funds to go for is a huge debate but for simple growth then I would look at more general funds and stay away from sector specific unless I held a strong view. For example rather than Neptune Russia look at Neptune Global Growth which covers Russia and other growth areas. Instead of First State China take a look at First State Asia Pacific or FS State Emerging Mkts etc.

To make things interesting you can always allow yourself small holdings in spicy stuff, say 3% in Jupiter India with perhaps 15% of your portfolio exposed to the higher risk areas. It all depends on your own attitude to risk of course.

Yield is something you don't need to worry about at this point. Yield is a marker though for a fund style, higher yielding equity funds may be into banks and ftse 100 companies whilst lower yielding funds would be looking at FTSE 350 or lower, that sort of thing. Higher yield may often mean lower growth of course but if you go for the yielding funds then simple reinvestment or Accumulated options will add to your growth.

2.
TER doesn't include portfolio turnover and other costs. When I look at the TER I also try to find out the turnover rate to get a more informed idea of costs. Don't get too hung up on costs though, the performance is what matters, a 10% gain with a TER of 2.5% is better than a 3% gain with a TER of 1.5%. The problem with high TER's is their compound effect on a fund that isn't performing better than a similar fund with lower costs.

There are definitely ETF's for you but be sure to go for ones that are not leveraged or do not hold physical assets. Even then some of the ETF's sell on their holdings which again introduces risk. Google for 'Lazy ETF portfolios' and you will find plenty of ideas. An example would be these with the No.2 offering looking good to me.

15% FTSE 100 (ISF)
15% FTSE 250 (MIDD)
5%: MSCI Emerging Market Equity (IEEM)
15%: FTSE Developed World ex-UK (IWXU)
20%: FTSE EPRA/NAREIT UK Property (IUKP)
15%: FTSE UK All Stocks Gilt (IGLT)
15%: £ Index-Linked Gilts (INXG)

A discussion at Motley Fool

Stay away from the high street banks for funds, these institutions do not have a good history afaik.

You say that you want a low-risk part of your portfolio, personally I prefer to include all of my holdings into a portfolio view, that ensures that I keep a view on my risk. For example, if I have £5,000 in cash deposit and £5,000 in global growth funds, then I think of it as 50% Cash 50% Equities rather than 100% in Global Growth. I think that it is important to maintain a perspective of how your investment portfolio fits into your overall portfolio.

Funds to consider for low-risk are not necessarily in the cautious managed sector, previous studies have shown that 'cautious' is a mis-used word here and often just means low-growth. Cautious funds have a higher weighting in bonds but many observers reckon you should have little or no bond coverage at a time when inflation could seriously damage your wealth. It is all about your attitude to risk rather than the sector a fund is listed in.

if you can take the higher fees then could take a look at Jupiter Merlin fund of funds or a similar offering such as M&G Managed Growth. These are pricey but save you a lot of time and could represent core holdings for you alongside funds to which you give a lower weighting. Typical core & satellite gives 65% to low cost trackers and 35% to growth so if you want something safer that may be an option.

A book worth reading if a little heavy, is 'Smarter Investing' by Tim Hale. He offers sample portfolios based on trackers, ETF's and Investment Trusts etc but the book is all about preserving wealth whilst obtaining growth.

Good luck,
Mickey

jamesd

12tonelizzie wrote: »

I realise I should diversify my portfolio, and it’s the safer end that I’m less clear on. I assume there are funds which are pretty likely to do a bit better than savings or high street corp bonds, ‘in exchange for’ not offering the cast-iron money-back guarantee of savings?

Strategic bond funds and global bond funds are two categories that are interesting. So are commercial property funds that directly own property.

Normally gilts and high quality corporate bond funds would also be low risk but there's reason to believe that there may be a bubble in this area at the moment, so it's perhaps not the best time to be buying into it. Commercial property is a non-bubble alternative.

Some of the absolute return funds can be interesting but it depends on how they make their money. Many different ways, some are just bond funds with a new name.

You can also benefit from watching the economic cycle. We're now getting to the point where natural resources funds do less well and basic production types can do better. A few years from the ideal time for corporate bonds and gilts, that's just before the next recession.

Cash also matters. Savings accounts do have a place, though at this point in the cycle it's not as high as it would have been in 2008.

If you can play the cycles well you can do quite nicely. But it takes some market timing, a notoriously hard thing to get perfect. Close is still good enough. Getting out a bit too early and buying a bit before or after the bottom are still enough to substantially improve your results.

Agreed about the Jupiter Merlin range if you want nice core holdings. Better those than the HL own brand versions. It's their job in part to pick the right funds for the appropriate point in the economic cycle and the Jupiter team does do this.

Watch out for peer to peer lending where the place managing it both sets the credit rating and sells you the loans. That's an inherently high risk product where you don't even have the protection that the credit rating agencies offered in the mortgage backed securities market. If you do look at these, make sure that they are accurately reporting how their bad debt rate estimates at the time the loan was made turned out. At least one, Zopa, now uses its current bad debt rates instead of the ones when the loans were made, hiding some of the effects of their bad 2008 year, where the bad debt rate approached twice the estimates they made at the time. Easy to do well if you can rewrite history.

jamesd

12tonelizzie wrote: »

Are they all evil, or just the last three?

Depends on your definition of evil:

Foreign markets: depends on the market and whether you care about what the companies in the index for the market do. A FTSE 100 tracker in the UK is going to have a lot of companies that some would consider bad for some reason.

Japan: lots of carbon miles to import and export things from a country with limited natural resources. But I doubt that most people would find most of the major Japanese companies evil. Child or cheap labour in developing countries might be a factor, as would the raw materials used.

Emerging markets: Lots of labour exploitation and corruption around, maybe you want tao void those. Many are heavily into natural resources or have very polluting industries (like coal use in China for power) that might be a concern.

Precious metals: Lots of exploitative and polluting practices in mining, getting political consent (corruption) and shipping.

Commodities: for hard commodities same issues as precious metals, for coal, oil and gas carbon issues also. For soft commodities the knowledge that profit may come at the expense of the poor worldwide paying higher prices for food.

Utilities: power production emits carbon (coal, oil, gas), radiation (nuclear, fossil fuels, particularly coal) or both (like coal). Others may charge prices for poor consumers that you might consider unfair or may harm the environment (wind, perhaps solar, perhaps tidal, power transmission lines, reservoirs burying parts of the environment and drowning people from time to time). Roads linked to lots of fatal accidents, lots of carbon emissions compared to say trains.

Tobacco: known to cause lots of disease,even among non-smokers (heart attack rate in non-smokers dropped in the UK after public premises ban).

Alcohol: some people have religions that don't like it, others might object to the social consequences of drinking and drinkers who abuse it.

Aerospace: lots of arms production, planes emit quite a lot of carbon and produce both noise and other pollution near airports.

So pick your own definitions of evil and act accordingly.

Totton

Okay, but it seems like my portfolio should include some 'value', and common sense suggests that that ought to mean a yield figure higher than the 3% which is the most you can get on a savings account. Or have I got the wrong end of the stick?

If you want yield then I would suggest taking a look at Investment Trusts and in particular the comprehensive postings of Luniversal over at Motley Fool. Luniversal aims for Income mostly and demonstrates how it may be obtained through baskets of ITs, there are B7, B10 and B15 I think. A starting link is here which gives further links to his posts, seriously worthwhile reading.

http://boards.fool.co.uk/how-safe-are-income-investment-trusts-payouts-12050077.aspx

and then in that forum type in the following thread numbers to get further great info. Luniversal does cover some growth but always alongside income, the B7 is 'growthy' and can be held as a core alongside more racey stuff such as Japan, EM, Mining etc.

• 1548
• 1556
• 1822
• 1960
• 2018

Hum, yes. I was virtually plotting the cheap HSBC Japan tracker and the pricier Schroder Japan fund. They move in parallel but depending on the starting point the latter does quite a bit better. Surely the H-L reputation can't ALL be marketing and their unfeasibly good phone help?

No, of course not. H-L are excellent and will keep you well informed on products. They are always in the press and know their stuff. I have no reason to move from their service despite having to pay higher than necessary charges for my ISA held IT's.

HTH,
Mickey