Views on this portfolio?

suebfg

Our investment fund portfolio currently breaks down as follows:

UK large/mid caps - 56%
UK small companies - 9%
Asia Pac - 8%
Emerging Markets - 9%
Europe - 6%
North America - 2%
Bond - 8%
Absolute return - 2%

My current thoughts are to increase investments into Europe and North America in order to balance out the portfolio. This is a long term (20 years) investment - moderate approach to growth. Any views?

InvestInPoker

You are very domestically biased. I would increase the allocation to the USA and add some Japan if you want global spread. Perhaps include some "value" companies as well. Making the smaller companies a global allocation (like with vanguards tracker) instead of UK only would be better as well imo. A small (5-8%) allocation to frontier markets would also be of benefit in terms of diversifying.

bowlhead99

I suppose 10% in bonds/AR (i.e. non-equities) might be considered 'moderate approach' by some. Others would say being 90% in equities is quite aggressive. If the equities all halve in a crash next year, you need quite a lot of performance from them over the next 19 to recover.

Others might have more in the way of non equities so that they were able to switch some of that into equities at a cheaper time. Of course, having less in equities is a drag on returns in the years that are good for equities. You should probably start to switch out of equities as the end of the 20 years comes more into view but for now I suppose a lot of people would think 90% equities is OK for a 2 decade plus investment horizon.

There are certainly plenty of people who post on this board with almost 100% in equities although everyone has their own attitude to it - whether the ones with 90%+ in equities are foolish or taking a good gamble will be revealed in 20 years time!

From previous comments from IFAs on here, the average person in the UK that goes looking for advice does not come away with as much as 90% in equities, but obviously everyone has their own attitude to, and capacity for, risk and volatility. If you are adding new money out of your salaries or other income each year I suppose you can probably use that ongoing new addition to top up your equities if they fall.

In terms of the split between equities, you know that the UK is only about 8-10% by market capitalisation around the world, right? While the US is five or more times that size. So a 65:2 split instead of a 1:5 split (or even a 2:5 or 3:5 or 5:5 or 8:5 split) seems a bit bonkers.

Many people have a bit (or a lot) of 'home bias' in their investing - e.g. UK people investing into UK stocks. After all, you will be spending a lot of money in the UK economy in retirement. However, if you're like most people you will also be buying lots of goods and services sourced from overseas economies (like Korean smartphones and German washing machines and US movies or computer software) so it makes sense to have a lot of your assets moving in line with those other economies and currencies. It might make sense for an American to invest half his money domestically because half the value of the global stock exchanges on the planet are on his doorstep, but for a Brit, 65% seems pretty high to me.

If you dropped some of your reliance on the UK markets you could certainly afford to add more to US and Europe. AsiaPac can sometimes mean literally all AsiaPac including emerging economies there, but sometimes it just means developed Asia Ex Japan, because Japan has not historically moved in line with Australia, HongKong, Singapore and some of the others. If it doesn't include Japan, add Japan. If it does, increase the total.

A small (5-8%) allocation to frontier markets would also be of benefit in terms of diversifying.

EM at 10% of your equities is enough for most people. Some people would have it bigger and others would have it smaller and others would have a separate 'frontier' markets holding for a 20 year view. But your 20 year view will only be a 15 year view in a few years and your 90% equities is already pretty aggressive in terms of volatility and potential returns. So it is not out of character to have as much as 10% in EM, but at the same time is quite reasonable not to try and add more if you are already well-diversified.

If the frontier markets are any good, they will move over to be 'proper' emerging markets in due course and then get picked up within your existing funds. If you're well diversified already, you don't need to chase everything out there.

So really, if you're happy with the overall 90% equity total (9% of that in EM) it is just a case of splitting it between the different developed markets in proportions you feel comfortable with. If you know something we don't about Japan and US, feel free to keep them at near zero - otherwise most people would see them as glaring omissions.

Also, you seem to have dedicated small company exposure only for the UK. If your other global stuff is largecap it might be interesting to have a bit of your Europe and US and Asian exposure be dedicated smallcap too. But that can involve holding a lot of specialist funds so a lot of people would not bother and just trust active managers to get on and do their thing with multi-region or multi-asset funds.

A final thought, a 2% allocation to anything is almost not worth having, if it's a dedicated fund. It would be strange to bother going out and buying one fund for 2% of your portfolio - it could double while hardly affecting your overall return.

I suppose if you have made a conscious decision to have a fifth of your 'non equities' to be an absolute return fund, that would explain it. You might like to increase your non-equities by a bit, as I hinted in the intro, to allow you to fit other non-equities (e.g. REITs) alongside the bonds and AR and reconsider whether to add a bit more AR. If you think AR is useful for your objectives, make it a few percent so it makes a meaningful contribution (either positive return or reduced losses). If you think on balance it will not be very useful, don't have it at all.

AR funds can be quite opaque and difficult to understand so they are not for everybody. But they are not unreasonable to hold in an actively managed personally constructed portfolio if you understand why you are doing it.

suebfg

Thanks for the feedback. The bias in terms of UK equities was not planned - it was my other half's investment and we are now rebalancing the joint portfolio as it were.

I'm not convinced about investing in Japan from what I have read - it seems that it has historically been a difficult arena to invest in. So it has been a conscious decision not to invest there.

90% of the investments above is in shares, but we have a far higher amount held in cash/fixed interest savings etc as well and I am concerned about future erosion because of inflation. So for now, I am happy with the exposure to shares, as in reality it is much less than 90% when our savings/investments are taken as a whole.

bowlhead99

The good thing about investing in Japan is that it has not traditionally been well correlated with Western (or other Eastern!) markets. When you build a portfolio it is good to include assets that do not move in the same direction at the same time. Their economy is different from ours which in itself means it can have a place in a portfolio. It provides positive benefits of being diversified and having multiple markets to rebalance between.

The last few years have yielded greater gains than some entire decades although a weakening Yen has dampened returns from the Brit or US perspective.

If the unusual nature of the markets there, or their specific economic foibles surprise or alarm you, feel free not to invest. But it would be very easy to walk round a major Japanese city like Tokyo and find a bustling cityscape with plenty of things to invest in. There are some negatives such as certain demographics, high domestic debt to GDP etc. But there are some counterpoints and what countries don't have their problems..? To me, a developed economy can't be uninvestible or 'the wrong price / the wrong time .to be buying' forever. But you can probably live without a few markets and still be ok.

Ryan_Futuristics

I've got to admit I'm not sold on Japan either ... It's either very expensive or quite cheap (that doesn't appeal to me - although if you want to invest, do it a week ago - or as soon as possible - with QE coming in)

North America? I'm about 2% ... Whatever way you look at it, it's expensive ... Buying expensive has never been a particularly great idea (not always been a disaster, but cover all your bases and you might as well just have a bought a cheap world index)

Nice interactive chart here that estimates performance based on current valuations
http://www.researchaffiliates.com/AssetAllocation/Pages/Equities.aspx

Have you got the bonds in a fund? You know bond funds are likely to take a hit when rates rise - Vanguard have a new short-duration bond fund presumably designed for this environment (some hope strategic bond funds will be able to navigate choppy waters ... many say: don't hold bonds) ... P2P lending via Funding Circle is my current bond fund/ladder replacement (estimating 7% annual returns)

I think it's a good portfolio ... It might be sensible to go at least 50% foreign equities (especially with a strong sterling) - I like Lazard Emerging Markets for exposure to lots of potential high growth regions, and JPM New Europe if you're feeling adventurous

Linton

In most cases successful investment is rather more about minimising the loss if things dont go as planned rather than maximising the return if you turn out to be lucky. To achieve that you need a very broad range of investments so you arent overly dependent on one area, industry, recommendations of one guru, or one theory of investing.

In that light I agree with the others in that your UK allocation is far too high. Not only are you focused on the UK as a country, perhaps more importantly you are focused on a restricted range of industries. Several industries of global importance are not represented in the list of UK large caps, others are over emphasised.

Your North American allocation is far too low, sure some people say the USA prices are too high, but some people may turn out to be wrong. So bearing in mind that North America is more than 50% of the world share market and has a much wider range of industries than the UK just having 2% is silly - I would suggest 20% at least.

One may have doubts about Japan, but it is a major world player and it could come good. 5% there would not be unreasonable in my view.

I agree with Bowlhead on looking for a bit more interest - small caps could provide that interest and foreign small caps kill two birds with one stone.