Sector Allocation

whambamboo

Currently have apprx £20k invested in unit trusts & OEICs as follows:

£3k UK Equity Income
£2k UK Small Companies
£3k UK Large Cap
£2k UK mid caps

£4k Emerging Markets

£1K Western Europe

£1k Japan

£2k Global Finance
£1k Global Small caps
£1k Global large caps

Looking to double to £40k (in April when I get my new ISA allowance - will put £7k in mine + wifes, then probably £6k in cash). I'll then have about £40k stocks, £80k cash. I have a high risk tolerance, but I'm not sure about sector allocation. Is there a standard formula for percentagres you should have in different sectors? Any thoughts?

dunstonh

Sector allocation changes on your risk profile.

The sectors you would generally look at are:

fixed interest
international fixed interest
property
UK
Europe
US
Japan
Far east Exc Japan
Emerging markets
Global Specialist.

The amounts into each sector would increase/decrease (and some sectors not used) depending on your risk profile.

whambamboo

dunstonh wrote:

Sector allocation changes on your risk profile.

The sectors you would generally look at are:

fixed interest
international fixed interest
property
UK
Europe
US
Japan
Far east Exc Japan
Emerging markets
Global Specialist.

The amounts into each sector would increase/decrease (and some sectors not used) depending on your risk profile.

Is there a website that explains how to determine allocation?

Entertainer

You've got a wide spread there to begin with. Basically there are no hard and fast rules for this, like people who will tell you that the market will definitely go up or down. You pays your money you takes your choice- if there's a sector that you like then follow your judgement and invest in it.

jamesd

whambamboo, here are Watson Wyatt asset allocations for risk level 9 out of 10, courtesy of scouser_in_exile:

ISA/PEP asset allocation (pension also):
UK Fixed Interest 6%
UK Equity 42%
North American 13%
European 13%
Japanese 8%
Far East Ex Japan 5%
Emerging Market Equity 5%
Global Specialist 8%

Collective investment asset allocation (UTs and OEICs) [outside tax wrapper] would be:

Property 7%
UK Equity 45%
North American 12%
European 12%
Japanese 7%
Far East Ex Japan 5%
Emerging Market Equity 5%
Global Specialist 7%

You might also be interested in the outside tax wrapper form which has been constrained to at least 10% in property and no more than 35% in UK equities:

Property 10%
UK Equities 18%
North American Equities 18%
European Equities 18%
Japanese Equities 11%
Other Far East (Ex Japan) Equities 7%
Emerging Markets Equities 7%
Global Specialist 11%

EdInvestor

Citywire has a simple asset allocator.

Links through to their excellent fund rating system which gets rid of all the dross and saves loads of time.

jamesd

Here's what Citywire came up with as the closest I could get to 9 out of 10 (speculative) risk level.

Under 40, with a Adventurous attitude to risk.
Cash 5%
UK Bonds 20%
Property 5%
Larger UK Shares 35%
Smaller UK Shares 10% (total 45% UK equity)
International Shares 25%

40 to 49, with a Adventurous attitude to risk.
Cash 5%
UK Bonds 30%
Property 5%
Larger UK Shares 35%
Smaller UK Shares 5% (total 40% UK Equity)
International Shares 20%

30% and 40% in cash, bonds and property?

Here's the Watson Wyatt from earlier in the same form:

ISA/PEP asset allocation (pension also):
Cash 0%
UK Bonds - UK Fixed Interest 6%
UK Equity 42%
North American 13%
European 13%
Japanese 8%
Far East Ex Japan 5%
Emerging Market Equity 5%
Global Specialist 8% (total 52% international)

That looks much more like a match.

Citywire does seem to match your preference for the UK market, though, EdInvestor.

EdInvestor

I'm not sure how long that Citywire calculator has been around, but it could be quite a while - as it has a more or less fixed allocation for property @5% across all risk and age levels.This doesn't really reflect what has happened to this important asset class over the last decade or so - it is now significantly more prominent.

Equally I would say the calculator is fairly conservative, but in an old fashioned way - back in the 20th century when we thought bonds were safe.We know better now

On the other hand, it's a less confusing calculator for a novice, in that it sticks to proper asset classes ( cash/ bonds/ property/ equities, big and small companies, UK and foreign) all of which directly relate to risk.

Other calculators confuse the issue with a plethora of foreign equity allocations and vague "specialist" sectors, which tell the investor virtually nothing about the risks they might be facing, and may really be aimed at getting a spread which suits the industry or the advisor.

dunstonh

Other calculators confuse the issue with a plethora of foreign equity allocations and vague "specialist" sectors, which tell the investor virtually nothing about the risks they might be facing, and may really be aimed at getting a spread which suits the industry or the advisor.

The specialist sector doesnt suit the industry or adviser. It covers funds which cannot fall into a defined sector. Some extremely popular funds appear in specialist such as SWIP European Real Estate, JPM Natural Resources, Threadneedle Latin America, ML Gold & General (amongst others)

Disregarding those types of funds leaves your portfolio lacking.

If the investor knows nothing about the risks they may be facing then you have to question whether they should be going DIY in the first place.

EdInvestor

The specialist sector doesnt suit the industry or adviser. It covers funds which cannot fall into a defined sector. Some extremely popular funds appear in specialist such as SWIP European Real Estate, JPM Natural Resources, Threadneedle Latin America, ML Gold & General (amongst others)

What's wrong with having a Property sector and a Commodities sector? These are proper asset classes.

The point about having funds grouped together in their sectors is so you can compare performance. That's impossible in the "Specialist" ragbag of leftover funds.How can you compare Latin Amercian equities with European property?

A similar problem arises with "marketing type sectors" such as "Ethical funds" - which can contain everything from equity growth ( small and large cap) and income funds to bond funds to a mix of the two, plus foreign funds as well . Impossible to compare performance in a meaningful way and no help on the risk front at all.

dunstonh

What's wrong with having a Property sector and a Commodities sector? These are proper asset classes.

Specialist sector also includes other areas and not just those. They were just examples. You also have Financial services, bio/medical, tech focused funds as well.

They are the Specialist funds and fall nicely into the Specialist sector.

The point about having funds grouped together in their sectors is so you can compare performance. That's impossible in the "Specialist" ragbag of leftover funds.How can you compare Latin Amercian equities with European property?

Its not about comparing performance. Its about catagorising types. A UK smaller companies fund has a different risk and aim to a UK Equity Income fund but they both fall under the UK all companies sector.