first time investor fund advice

JaredCE

I've been reading up on funds and have decided to take the plunge this tax year and open a stocks and shares isa and use it to mainly invest in funds.

Looking around it seems one of the best performing funds over the past 5 years has been Liontrust Special Situations Inc Fund which seems to be up 80% over the past 5 years. While browsing the forums and looking at various fund threads, I notice few people have invested in this fund and i'm wondering if it's because it's "doing so well" that people tend to avoid it (whats up can only come down hard).

My general thoughts were put a large percentage of my £3900 investment money into the liontrust and then have a further 2 or 3 funds in tech, asia and low risk to diversify a little. any advice on those sort of funds appreciated (I realise i need to do my own reading around any advice given)

dunstonh

Looking around it seems one of the best performing funds over the past 5 years has been Liontrust Special Situations Inc Fund which seems to be up 80% over the past 5 years.

Its a good fund and serves well as part of the UK allocation of your portfolio as long as you are aware that its not one for the whole economic cycle typically.

I notice few people have invested in this fund and i'm wondering if it's because it's "doing so well" that people tend to avoid it (whats up can only come down hard).

I was in it and used it just before it went up. Partly luck as it could have been any recovery/spec sits fund and I used a few. It's objective sat right with the point we were in the economic cycle. The next 5 years wont match the last 5.

My general thoughts were put a large percentage of my £3900 investment money into the liontrust and then have a further 2 or 3 funds in tech, asia and low risk to diversify a little.

Be wary of fashion investing. A high risk niche/speculative fund and a far east fund along with a UK spec sits would need a heavy weighting in the lower risk end unless you are particularly gung ho in your investment nature. Taking the plunge suggests you are new to this and a common error with new investors is to invest way above their risk profile, with no particular investment strategy and pick what is fashionable. All things you need to avoid.

StevieJ

dunstonh wrote: »

Be wary of fashion investing. A high risk niche/speculative fund and a far east fund along with a UK spec sits would need a heavy weighting in the lower risk end unless you are particularly gung ho in your investment nature.

I find this quite interesting, is it not possible that the risk profile of some far east and emerging market funds could have changed. I did notice during the downturn in 2007-2008 that while my UK equity and bond funds took a pasting my First State EM and Asia funds were quite resilient and my best performers. Nothing scientific there but I have had a soft spot for First State ever since

Jegersmart

Yes, I always think that people tend to misunderstand "risk". There are many types of risk, one of them is overdiverisifcation (the risk being that you ensure average performance if not wanted) and the other is for example holding equities in parts of the world where growth is low, debt sky-high and so on.

Personally, if I wanted to invest for 20+years and could only choose one equity fund it certainly would not be a a developed nation focussed fund - it would be possibly emerging markets or more likely a frontier fund.

imho
J

dunstonh

StevieJ wrote: »

I find this quite interesting, is it not possible that the risk profile of some far east and emerging market funds could have changed. I did notice during the downturn in 2007-2008 that while my UK equity and bond funds took a pasting my First State EM and Asia funds were quite resilient and my best performers. Nothing scientific there but I have had a soft spot for First State ever since

Volatility (Risk) and investment potential are two different things. UK equity took a hammering due to issues that were not hitting the Asian markets anywhere near the same level. Regional differences are partly why you diversify. Asia will take greater hits at different times. You can look back to the Asian crisis to see an example historically. Japan had the Tsunami and Nuclear issue to deal with and caused it to take a big hit on the markets. Many other localised issues will occur.

Volatility risk is greater in Asia than the UK. Not as much as it used to be and Asia certainly has better potential in most eyes (although in 2012, UK small cap was the best performing sector with Asia in 4th). However, the volatility will be higher.

The average consumer is generally cautious. Most people have come across someone who says they will never invest in the stockmarket again. Usually saying how they lost money. What the really means is that they invested above their risk profile, didnt understand it and created a loss because of that (such as a failure to diversify by fashion investing or picking higher risk funds because they are the ones that tend to go up the most in good times and didnt realise how much they will go down in bad)

JaredCE

Interesting, I didn't realise i was "fashion" investing. I'm generally willing to ride out the storms since the money I'm investing kinda was an expected gift, and I don't need it right now (in 5 to 10 years I might).

I'm not 100% sure by what you mean on:

would need a heavy weighting in the lower risk end unless you are particularly gung ho in your investment nature

Do you mean i Need more low risk funds to look at?

Jegersmart

dunstonh wrote: »

Volatility (Risk) and investment potential are two different things. UK equity took a hammering due to issues that were not hitting the Asian markets anywhere near the same level. Regional differences are partly why you diversify. Asia will take greater hits at different times. You can look back to the Asian crisis to see an example historically. Japan had the Tsunami and Nuclear issue to deal with and caused it to take a big hit on the markets. Many other localised issues will occur.

Volatility risk is greater in Asia than the UK. Not as much as it used to be and Asia certainly has better potential in most eyes (although in 2012, UK small cap was the best performing sector with Asia in 4th). However, the volatility will be higher.

The average consumer is generally cautious. Most people have come across someone who says they will never invest in the stockmarket again. Usually saying how they lost money. What the really means is that they invested above their risk profile, didnt understand it and created a loss because of that (such as a failure to diversify by fashion investing or picking higher risk funds because they are the ones that tend to go up the most in good times and didnt realise how much they will go down in bad)

As I said, there are many different opinions and levels of understanding around risk. In terms of pension investments that are clearly there for decades, the main risk in my eyes is that I only manage around 3-4% growth every year. Complete diversification for example is one way to ensure average performance. Volatility does not infer risk until one is closer to needing the funds.

J

dunstonh

JaredCE wrote: »

Interesting, I didn't realise i was "fashion" investing. I'm generally willing to ride out the storms since the money I'm investing kinda was an expected gift, and I don't need it right now (in 5 to 10 years I might).

I'm not 100% sure by what you mean on:



Do you mean i Need more low risk funds to look at?

Tech funds are niche/specialist and typically suited for up to around 5% of the portfolio. Asia is popular (with some good reason). Liontrust is popular because it has had a good run in a period that was ideally suited for it. Your comment indicated you looked at it on the basis of past performance.


5 years with a high risk spread makes the risk greater. 10 years dilutes the risk as you are looking at closer to a whole economic cycle.

When you use highly volatile funds but want to keep a reasonable level of risk, you need a higher weighting of lower risk assets. You can end up with the undesirable allocation where you have too much at one end, too much at the other and nothing in between. Especially when you are eliminating whole areas of investment (i.e. Europe, US, Emerging markets etc).

JaredCE

Ok so I've looked through the investor chronicle top 100 fund choices of last year and it splits it down into the different types of funds available (emerging markets, ethical etc etc) and I've chosen 5 funds from there. I'm not taking their word as god but this seems like a good as place as any to start out and looking through the assets owned by the funds and how they've grown over the years, they all look like they're fairly strong funds.

Legal & General Dynamic Bond I Trust Acc

AXA Framlington American Growth Z Fund Acc

Liontrust Special Situations I Fund Inc

Rathbone Ethical Bond I Fund Acc

First State Gbl Emerging Mkts Leaders B Fund Acc

the AXA seems to be on a downturn which I think is a bit odd considering it's assets, I Expect quallcomm to pull ahead over the coming years.

I'm not 100% sure about the L&G Bond one though, holding assets in Spain and Italy which aren't exactly brilliant right now.

is this a better diversification or still too high risk?

marathonic

JaredCE wrote: »

I'm not 100% sure about the L&G Bond one though, holding assets in Spain and Italy which aren't exactly brilliant right now.

To me, as a contrarian investor, this would make me more inclined to have a holding. The potential returns would be expected to be pretty good should Italy and Spain not turn out as bad as current expectations....

StevieJ

Also as a contrarian investor I notice that the resources sector is showing down over one, three and five years, may be worth a little portfolio inclusion?