Help me rebalance my failing S&S ISAs Portfolio - Sept 2011

Ark_Welder

jabbahut40 wrote: »

I notice that none of the sample portfolios listed under this thread include an absolute return fund. Are these an alternative and viable approach to achieve portfolio balance? Would appreciate your views.

Jabba

Some articles.

http://www.trustnet.com/News/Research.aspx?id=240662
http://www.trustnet.com/News/Research.aspx?id=248977
http://www.thisismoney.co.uk/money/investing/article-1708657/Investors-suffer-absolute-return-fund-losses.html
http://www.guardian.co.uk/money/2010/jul/10/absolute-return-funds-fail
http://www.moneyobserver.com/issue/features/absolute-return-funds-absolutely-average

There are funds that have failed to provide a positive nominal return over three years. The sector also has quite a wide range of styles: some equity-focuses, some bond-focused, others may involve other asset types as well as shares and bonds. And some are fund-of-funds. Definately a case of understanding what a particular fund does, and what you are trying to achieve.

gadgetmind

dunstonh wrote: »

Flash in the pan, fashion investing.

The only fund I hold that comes close to this is Ruffer Total Return. It's got a rather sweet 10 year track record with growth that belies its 50% holding in cash, IL and gold, however, you do need to be comfortable with its high Japanese exposure.

gadgetmind

jabbahut40 wrote: »

I notice that none of the sample portfolios listed under this thread include an absolute return fund. Are these an alternative and viable approach to achieve portfolio balance? Would appreciate your views.

They don't do what it says on the tin. Avoid IMO.

Jegersmart

Rather than telling you to avoid or that it is "flash in the pan investing" and other useful comments, I would telly you to research these funds along with any other funds in the usual way to see if they suit your current strategy or approach (or part thereof of course). I have used Newton Real Return myself on a few occasions over the past few years in certain circumstances. imho, dyor.

jabbahut40

Hi All,

After taking into account the above advice and doing some of my own research I can considering the following actions to help rebalance/renew my portfolio.

1. Switch 25% of my JPM Nat resources holding to Invesco Perpetual High Income to create greater portfolio balance, reduce risk and gain exposure to a income based funds with a well established manager (Neil Woodford).

2. Switch 100% of my Neptune Global Equity into 50% First state latin america and 50% First state indian subcontinent to create greater geographical spread on my portfolio. I notice that both the first state funds have 1.98% TER and 2.01% TERs. Should I be concerned?

3. Switch 100% of my Fidelity Special Situations holding into Marlborugh Special Sits which is better significantly performing over 3 yrs both with a main focus on UK small co's.

4. Switch 50% of my Neptune European Opps into Threadneedle Eurpean Select which is significantly better performing over 3 yrs, has a lower TER% whilst focussed on similar geographical areas.

5. Leave Jupiter Financials Opps allocation untouched. Whilst this fund has performed like a dog since I bought it 18 months ago however it does add some focus on financials which is lacking in some of my other fund allocations.

I would appreciate any feedback / comments / alternatives against 1 to 5 above.

Thanks,

Jabba

jon3001

jabbahut40 wrote: »

After taking into account the above advice and doing some of my own research I can considering the following actions to help rebalance/renew my portfolio...

I think people would find it very helpful (and be much more responsive) if you summarized the end results (i.e. actual final percentage allocations to each fund) rather than have each and every reader attempt to go through the process of reallocating in the manner you describe.

jabbahut40

jon3001 wrote: »

I think people would find it very helpful (and be much more responsive) if you summarized the end results (i.e. actual final percentage allocations to each fund) rather than have each and every reader attempt to go through the process of reallocating in the manner you describe.

Hi jon3001. Agreed. Please find the following summary of my current porfoilio and revised portfolio after the proposed changes. Hope this is clearer and allows people to provide feedback.

Thanks, Jabba

Current Portfolio
JPM Natural Resources A Acc 21.2%
First State Asia Pacific Ldrs Acc 19.7%
Neptune European Opps Acc 11.3%
Henderson China Opps Fund 11.0%
Schroder US Mid Cap Acc 8.7%
Aberdeen Emerging Markets Acc 7.1%
Neptune Global Equity Fund Acc 5.5%
Fidelity Special Situations 4.7%
Jupiter Financial Opps 4.3%
M&G Global Basics Fund A Acc 3.4%
Marlborough Special Situations 2.8%
First State Greater China Growth 0.4%

Proposed Revised Portfolio
First State Asia Pacific Ldrs Acc 19.7%
JPM Natural Resources A Acc 15.9%
Henderson China Opps Fund 11.0%
Schroder US Mid Cap Acc 8.7%
Marlborough Special Situations 7.5%
Aberdeen Emerging Markets Acc 7.1%
Neptune European Opps Acc 5.7%
Threadneedle European Select 5.6%
Invesco Perp High Income Inc 5.3%
Jupiter Financial Opps 4.3%
M&G Global Basics Fund A Acc 3.4%
First State Latin America 2.2%
First State Indian Subcontinent 2.2%
First State Greater China Growth 0.4%

jamesd

jon3001 wrote: »

The 20% recommendation comes from efficient frontier modelling. This is when asset classes are combined to produce the highest target return for the least risk. If a portfolio is light on bonds then it will be overly volatile and risky for very little extra return over the efficient portfolio.

Surely you know that that is not what the efficient frontier really is? It is certainly not a combination that guarantees highest target return for least risk. It does not say that a combination that has low bonds is overly volatile or not producing much extra return.

The efficient frontier is a line that for each level of risk/volatility, gives the mixture of risky and risk-free assets that produces the best mixture of risk and return. Increasing the risky asset can produce higher returns and higher volatility, moving to a different position that is still on the efficient frontier curve.

A portfolio that is light on bonds can simply be one that is on the efficient frontier at a higher risk/volatility level.

But that's not the whole story either. The efficient frontier depends on the properties of the asset classes being considered. The available classes vary depending on the location of the investor, markets used and tax treatments available. So:

1. US based frontiers are different from non-US just because US and non-US equities, bonds and other investments perform differently from the US, often with a higher risk premium that can produce curves that are lighter on "safe" assets than US allocations.

2. Tax treatment differs with jurisdiction where the investment is located, those in the US being different from others.

3. In the investor's jurisdiction the tax wrappers available or lack of tax wrapper changes the risk-return balance for each individual asset and shifts the position of the frontier for each tax wrapper. One of the nice UK examples is interest-bearing assets favoured inside ISAs compared to pensions or outside a tax wrapper, because of the favourable treatment of interest inside an ISA. The favourable tax treatment increases the return of interest-producing investments in this wrapper.

As usual the effect is that it's necessary to use caution in applying any US recommendations for efficient mixtures to UK and global investors, because the US work is likely to be using US returns and US tax treatments. It may also have constraints that favour US over non-US investments applied.

dunstonh and other IFAs have tools that can produced suggested efficient combinations for various tax wrappers, with or without constraints like a minimum percentage in the UK.

The efficient frontier also expects that the portfolio won't change with the economic situation and tries to build one that will produce the best results across all combinations, rather than for any specific one. The tools available to IFAs don't necessarily use this assumption either, but may vary the mixtures based on economic situation. the across all situations portfolio wouldn't be efficient compared to one tuned for a specific economic situation, or to several for different situations where an investor made reasonably good decisions on when to switch between them. But that's market timing and efficient markets theory says it can't produce benefits, even though it clearly can.

jabbahut40

My thinking behind the above proposed portfolio changes is to slowly slowly catch the monkey. i.e. reduce my risk/reward profile on a month by month basis (the above representing the first move of a series) allowing me to assess the market before each move rather than moving my entire portfolio to the match % splits mentioned in the above posts to avoid me making a significant error in fund selection/timing in one fowl blow.

Make sense or madness?

Jabba

Jegersmart

jabbahut40 wrote: »

My thinking behind the above proposed portfolio changes is to slowly slowly catch the monkey. i.e. reduce my risk/reward profile on a month by month basis (the above representing the first move of a series) allowing me to assess the market before each move rather than moving my entire portfolio to the match % splits mentioned in the above posts to avoid me making a significant error in fund selection/timing in one fowl blow.

Make sense or madness?

Jabba

Hi Jabba

You certainly have diversified somewhat - and in some cases hold the same funds as I do. I tend to use M&G Optimal Income as "nucleus holding" at the moment, but whatever floats your boat and provides the exposure you want.

With regards to reducing risk, the time to do that was about a month ago but who knows how long the current uncertainty and downtrend will last. I tend to try to buy when the fear is highest so will be looking to get back in to a higher risk profile over the coming period - the point is that you may not want to reduce too much risk at the moment because the time to do that is near the top - try not to get too caught pulling out at the bottom (although I am not saying we have seen the bottom yet).

I personally would feel more comfortable with your new allocation if it was mine - so hopefully this will work out for you!

J