Portfolio sanity check, please

gadgetmind

I'm investing fresh funds and also moving some existing pensions, and I'd appreciate a sanity check of my intended investment breakdown. I'm (hopefully!) less than a decade off early retirement, but will almost certainly use drawdown.

My current pension is with Skandia and is invested (by IFA) as follows -
Property = 14%
Fixed interest = 27%
UK = 16%
Euro ex UK = 10%
Global developed = 6%
Japan = 6%
Pacific ex Japan = 6%
EM = 6%
US large cap = 8%
US small cap = 1%

I'm considering this breakdown moving forwards -
HSBC FTSE 100 = 20% (80% FTSE 100, 15% FTSE 250, 5% smaller)
HSBC FTSE 250 = 5% (overweight 250 up to 32%)
HSBC American index = 20%
HSBC European index = 10%
HSBC Japan index = 5%
HSBC Pacific index = 10%
L&G Global EM index = 10%
HSBC UK Gilt index = 5%
Royal London Index linked gilt = 5%
Blackrock Global Property Securities tracker = 10%

So, less propery and fixed interest, a bit more pacific, a bit more EM, UK significantly more but biased towards FTSE 250, loads more US, and Europe and Japan about the same. I'm aware that I have a strong home bias, perhaps too much.

I'm also tempted to reduce UK, US and Europe a little and bias more towards Pacific and EM, but I already have as much there as in the US. Thoughts?

Overall TER = 0.428% as it's pulled up by the EM and property trackers. I can switch these in future if/when cheaper alternatives appear as there are no up-front or switching costs.

I'm aware that I don't have diect commodities or any significant small cap in there, and while I have exposure to those elsewhere, I would like commodities exposure in this portfolio. Ideas?

I'm also aware that there is no such thing as the perfect portfolio as shown by the interested variety of passive portfolios one sees!

All feedback welcome.

Lokolo

What about American and European Small-Mid cap?

Currently both the trackers are large cap where, personally, I don't see much growth.

I couldn't find many though, theres this American Mid Cap and this European Mid Cap

(I thought about choosing some active funds for a laugh )

IronWolf

Personally I wouldn't touch Japan, their asset prices are still really inflated and earn poor returns on equity.

Quite heavy on the FTSE100 and US as well, but I presume you're selecting your own UK shares? so best to put a reasonable amount in that for the effort it takes.

On emerging markets, I've personally gone for a fund over a tracker, even though I'm usually very skeptical of fund managers lining their pockets. But it does appear its one of those areas were a few funds do tend to beat their indices.

gadgetmind

Lokolo wrote: »

What about American and European Small-Mid cap?

Yes, I would prefer to get more mid/small cap, but may end up using funds rather than trackers, which I know will amuse a few people here.

gadgetmind

IronWolf wrote: »

Personally I wouldn't touch Japan, their asset prices are still really inflated and earn poor returns on equity.

Yes, I might tweak that downwards, particularly as I hold Ruffer elsewhere.

Quite heavy on the FTSE100 and US as well, but I presume you're selecting your own UK shares?

Nope, trackers!

On emerging markets, I've personally gone for a fund over a tracker, even though I'm usually very skeptical of fund managers lining their pockets. But it does appear its one of those areas were a few funds do tend to beat their indices.

I looked through a load of them, and today's hot names (First State, Aberdeen, etc.) have outperformed, others have lagged behind the index. Who's to know which to pick from here onwards?

jon3001

gadgetmind wrote: »

I'm aware that I have a strong home bias, perhaps too much.

I'm also tempted to reduce UK, US and Europe a little and bias more towards Pacific and EM, but I already have as much there as in the US. Thoughts?

Many posters here will tell you that they're 'globally-focused' and will have very little in the way of UK exposure. IMHO that's a mistake. The large-caps get most of their revenue from overseas anyway and there are also some good small-cap funds. In addition you're not taking on the currency the risk.

I would split my stock allocations 50/50 between domestic and international. So, with your portfolio with an 80% allocation to stocks that would be 40/40.

I think trackers are ok for developed markets outside of the UK but I don't like UK FTSE trackers: the FTSE 100 isn't particularly diversified and is consistently beaten by some popular funds.

To get better diversification within that broad 40/40 split I'd go for something like this:

13% UK Blend (E.g. Invesco Perp Income)
13% UK Value (E.g. M&G Recovery)
14% UK Smaller Companies
5% US Tracker
5% US Small-caps
5% Euro Tracker
5% Euro small-caps
5% Far East ex Japan
2.5% Japan Tracker
2.5% Japan small-caps
10% Emerging markets

gadgetmind wrote: »

I would like commodities exposure in this portfolio. Ideas?

Skandia Marlborough ETF Commodity
http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=F4FO5&univ=P

This fund invest in ETFs that in turn either directly invest in commodities (e.g. physical bullion) or contracts on the futures market (e.g. oil). This makes it a superior diversifier compared to say investing in a mining stocks fund. Commodity futures also have similar returns and volatility to stocks so aren't an inferior investment.

I'd invest at least 10% of my portfolio in such a fund.

Lokolo

jon3001 wrote: »

Many posters here will tell you that they're 'globally-focused' and will have very little in the way of UK exposure. IMHO that's a mistake. The large-caps get most of their revenue from overseas anyway and there are also some good small-cap funds. In addition you're not taking on the currency the risk.

I would split my stock allocations 50/50 between domestic and international. So, with your portfolio with an 80% allocation to stocks that would be 40/40.

I think trackers are ok for developed markets outside of the UK but I don't like UK FTSE trackers: the FTSE 100 isn't particularly diversified and is consistently beaten by some popular funds.

To get better diversification within that broad 40/40 split I'd go for something like this:

13% UK Blend (E.g. Invesco Perp Income)
13% UK Value (E.g. M&G Recovery)
14% UK Smaller Companies
5% US Tracker
5% US Small-caps
5% Euro Tracker
5% Euro small-caps
5% Far East ex Japan
2.5% Japan Tracker
2.5% Japan small-caps
10% Emerging markets

See, I don't like that, only because of the amount of exposure to the UK. But thats because I am more of a small/mid cap growth kinda guy. So with this in mind, I prefer global small and mid cap, because these in the UK won't get that massive foreign exposure, only the large cap really do.

In my portfolio I only aim to have around 15% in large cap UK, and actually, none in fixed income. But I am a lot younger than you guys so can afford to risk it a little more. But if gadgets is over a 10 year period, well, do you really see large cap in UK going anywhere over the next 10 years? Because well I don't.

gadgetmind

Lokolo wrote: »

But if gadgets is over a 10 year period, well, do you really see large cap in UK going anywhere over the next 10 years? Because well I don't.

It's not really 10 years as I'll be tweaking rather than ditching my portfolio when I retire.

As for the FTSE 100 going places, it's currently on a good yield, and I see there being lots of investment and m&a activity when things pick up. So saying, I am inclined to weight EM and global a bit more.

jon3001

Lokolo wrote: »

In my portfolio I only aim to have around 15% in large cap UK, and actually, none in fixed income. But I am a lot younger than you guys so can afford to risk it a little more. But if gadgets is over a 10 year period, well, do you really see large cap in UK going anywhere over the next 10 years? Because well I don't.

Here's the FTSE's top 10 consitiuents:
1 BHP Billiton [Mining] (£148B)
2 Royal Dutch Shell [Oil and gas] (£135B)
3 HSBC [Financial services] (£118B)
4 Vodafone Group [Telecommunications] (£93B)
5 BP [Oil and gas] (£91B)
6 Rio Tinto Group [Mining] (£86B)
7 GlaxoSmithKline [Pharmaceuticals] (£61B)
8 Unilever [Consumer goods] (£56B)
9 British American Tobacco [Tobacco] (£49B)
10 BG Group [Oil and gas] (£49B)

You honestly don't see any potential for some of the world's largest resource companies, banks and tobacco companies, etc to produce solid dividends over the next 10 years and expands their international markets?

Lokolo wrote: »

none in fixed income. But I am a lot younger than you guys so can afford to risk it a little more

Risk for the sake if it isn't worthwhile. It has to be compensated by appropriate potential for reward. Have you examined long-term returns and volatility from balanced portfolios featuring allocation of 0%, 10% and 20%, etc to fixed interested.

gadgetmind

jon3001 wrote: »

Risk for the sake if it isn't worthwhile. It has to be compensated by appropriate potential for reward. Have you examined long-term returns and volatility from balanced portfolios featuring allocation of 0%, 10% and 20%, etc to fixed interested.

Bernstein did previously suggest that those with a very long investment window might consider 100% equities, but doesn't nowadays. Adding uncorrelated assets really does help a portfolio BUT here comes another aspect to this.

I wasn't going to buy my gilts straight away as yields are currently too low. Sitting on cash might seem silly, but it will be a few weeks before HMG deliver the other 25% anyway, so I'll wait until at least then.

Lokolo

jon3001 wrote: »

Here's the FTSE's top 10 consitiuents:
1 BHP Billiton [Mining] (£148B)
2 Royal Dutch Shell [Oil and gas] (£135B)
3 HSBC [Financial services] (£118B)
4 Vodafone Group [Telecommunications] (£93B)
5 BP [Oil and gas] (£91B)
6 Rio Tinto Group [Mining] (£86B)
7 GlaxoSmithKline [Pharmaceuticals] (£61B)
8 Unilever [Consumer goods] (£56B)
9 British American Tobacco [Tobacco] (£49B)
10 BG Group [Oil and gas] (£49B)

You honestly don't see any potential for some of the world's largest resource companies, banks and tobacco companies, etc to produce solid dividends over the next 10 years and expands their international markets?

Rising fuel prices, other non petrol transport methods, smoking ban, banking industry.... I honestly cannot see these coming good over the next 10 years. You obviously think otherwise and I guess we'll see in 10 years who was right.

These same things in international markets, yes, but in that case I'd rather invest in those geographically areas, where growth is more likely to be the case.

Risk for the sake if it isn't worthwhile. It has to be compensated by appropriate potential for reward. Have you examined long-term returns and volatility from balanced portfolios featuring allocation of 0%, 10% and 20%, etc to fixed interested.

Quite, but thats what I mean, I don't see any sort of relevant reward for investing in FTSE Large Cap, however, I do see it in global small and mid cap.