A single fund of funds for all investments?

EdInvestor

dunstonh wrote:

A sector allocated portfolio will typically have the largest holding in any one company at no more than 2% with most being less than 0.5%

The reduction is risk is very small indeed, not worth bothering about.

Have a polly peck and marconi in there and you lose a significant chunk.

Size does matter.That's why they can only dredge up two failed companies in 40 years, and one was due to fraud, not business failure.

competitionscafe

Andy1663 wrote:

I came across the CF Wise Income fund (which seems rather like the Midas fund) - and looked at the web-site blog - and thought that this seemed to be someone doing exactly what I'd do with time and knowledge i.e. an IFA (I think) putting together an ideal portfolio of shares and funds from any asset class, with constant review - and more adventerous than the Fidelity fund. I can see the sense in investing on two or three such funds to spread the risk - but a fund such as this seems to be doing just what I want (it actually calls itself a sort of 'one stop shop')?

Not familiar with the CF Wise fund/s although performance so far seems good.

If you are opting for the 'one stop shop' approach, both the Midas balanced fund/s and a couple of the global growth investment trusts (RIT Capital partners for example) will also provide access to a global portfolio of different asset classes: mainly equities but also fixed interest and property.

For example the Midas Balanced Growth fund asset allocation breakdown is:

UK Equities 38.5%
Overseas Equities 23.9%
Fixed Interest 12.1%
Alternative Assets 9.9%
Structured Products 6.0%
Property 7.9%
Cash 1.7%
http://www.midascapital.co.uk/main.asp?pg=mcplbgasset.asp

And for the Midas Balanced Income Fund:

UK Equities 32.1%
Overseas Equities 9.6%
Government Bonds 10.8%
Corporate Bonds 16.6%
Fixed Interest OS 7.1%
Property 8.9%
Alternative Assets 6.0%
Sructured Products 4.3%
Cash 4.6%

http://www.midascapital.co.uk/main.asp?pg=mcplbiasset.asp

dunstonh

The reduction is risk is very small indeed, not worth bothering about.

The increase in potential is much higher.

Size does matter.That's why they can only dredge up two failed companies in 40 years, and one was due to fraud, not business failure.

Are you saying that there has only been two failed companies (or other significant losses) in the last 40 years?

Chrismaths

Vodafone? Shell? Partygaming? That's just in the last 6 years.

moneyandmountains

EdInvestor wrote:

Fifteen diversified shares will get rid of most of the risk, the gains above that are pretty small and above 25 shares not worth bothering about.
.

Well, this is sort of what portfolio theory says.
15 shares will signficantly reduce the diversifiable risk.

However, this will still leave a base layer of systematic risk e.g. related to the economy / other external factors.

Lets remember that portfolio theory is based on the average of many random combinations of companies in a portfolio.
Therefore, the effect of the 'average' means that you don't see what happens if you pick 15 duff companies.

There is some merit in what Ed says, i.e. invest in a mixture of defensive stocks e.g. utilities/supermarkets etc. and more agressive stocks, as these will behave differently in different economic conditions.
c.f. mix value and growth investing

Diversifying portfolios across sectors is at a higher level than this. For best diversification, the sectors should be highly uncorrelated.

Andy1663

competitionscafe,

I think that the Midas funds are categorised as cautious and balanced, and the Wise fund says it is balanced in terms of its risk, but at the aggressive end of the range (although listed under active funds) - and so definitely on my shortlist.

What do you think would be the best active 'one stop shop' (i.e. potentially higher returns over the longer term)?

Do you know why RIT (and British Empire - which looks another attractive IT) have had such poor years - they look good in terms of asset spread, and the 5 year performance looks fantastic, but the 1 year performance is dire, and I like to know if there is any fundamental problem before diving in.

Thanks

Chrismaths

http://en.wikipedia.org/wiki/Diversification_(finance)

Actually this is not bad for wikipedia. There's a table there to back up Ed's assertion that you don't get a reet load of benefit beyond 20 stocks.

Until you actually look a bit deeper, and realise that that table only apply assuming all the stocks are statistically independent - wikilinky - That is to say there is no relationship between the stocks. So having 2 utilities, or 2 banks effectively counts as one stock.

competitionscafe

Andy1663 wrote:

Do you know why RIT (and British Empire - which looks another attractive IT) have had such poor years - they look good in terms of asset spread, and the 5 year performance looks fantastic, but the 1 year performance is dire, and I like to know if there is any fundamental problem before diving in.

I am no expert and I don't hold either of these funds at the moment - but I looked at both of them about a year ago actually and they were both trading at a premium, which is the main reason I didn't buy them (in the end I went for SVM Global instead). Could be a number of factors for their poor 1 year performance - stock selection, dollar and other exchange rate exposure (I think RIT has quite high dollar exposure), gearing, asset allocation, etc -

And of course going from a premium to a discount won't help the share price [for example RIT net asset value (NAV) is up +15.2% over 1 year but the share price is only up +2.9%, Brit Empire NAV is up around 7% over 1 year but share price is at a 0.4% loss....] I also held Foreign & Colonial and although the share price increased by 12% over the past year compared to 2.9% for RIT, the actual NAV increase was lower than RIT at 11.1 vs 15.2 because the F&C discount remained fairly constant. http://www.trustnet.com/it/funds/perf.asp?sort=36&page=0&ss=0&txtS=&txtSS=&columns=&class=conv&booAITC=1&reg=all&sec=all&aitc=glbgw

That's one of the things about Investment trusts - the discount can work in your favour or against you - in general I am wary of buying a trust at a premium though.

Both those trusts (RIT & British Empire) as well as others like Independent and Caledonia all have good management and I don't think 1 year performance should be of too much concern, however we have had around 3 years of rising markets - the true test will come when there are market falls and how well these trusts preserve your capital (or at least minimise losses) - not researched the others, but RIT did do well during the end of the last bear market in 01/02 and first half of 03: http://www.bestinvest.co.uk/funds/fmpro?-db=webprices.fp5&-lay=allfields&-format=factsheet.htm&investment_codename==RCP&-find

As for the Midas funds, my guess would be that over the long term the growth version would provide potentially higher returns due to the high fixed interest/ bond proportion of the income version....?

jamesd

EdInvestor, as Chrismaths mentioned, it is only true that the reduction in risk above 15 investments is small if their behavior is statistically independent. This obviously not true if you are sticking to only shares in UK companies.

What you can do is select a range of companies in all the overseas markets and sectors to reduce the country-based dependence. There is one problem with that: it's not very practical for a small investor to operate in the number of stock markets required.

What is practical is doing it via funds (or investment trusts) which get you the diversification across the foreign markets with things like reduced dependence on the policies of a single government as well as the sectors.

If you can't buy highly uncorrelated shares, you gain a reduced benefit form each share so you need many more investments to reach the same level of benefit as 15 that are truly independent. Funds help with that, by quickly and efficiently (compared to direct purchase on a dozen stock markets) getting you a large number of companies that can be in different market sectors or companies.

Your claim about being able to get international exposure from only UK listed companies is highly flawed, since those companies are concentrated in relatively few sectors, often banking and commodities. That in turn largely eliminates the diversification across other sectors of the market.

These are pretty obvious points so I have difficulty in seeing how you can be missing them. What is it that you don't see or don't agree with?

EdInvestor

Dividend based strategies don't really work very well in most overseas markets because companies tend to pay significantly lower divis than UK companies, sometimes because of unfavourable tax treatment.Many emerging market companies pay no divis at all.

This is one reason why American investors tend to hold more bonds than we would - they don't have much choice of equity income funds as we do, nor of lower risk property funds.Actually income investors are quite well served in the UK, and the tax treatment is helpful too, for once.

Useful Mail article on the best Equity income funds

BTW people who like ethical investing should note the F&C Stewardship Income fund - this has been far and away the best ethical fund around for years.