Improving balance of VLS 40

tigerspill

Hi,
I am using the VLS40 as the core of my investments currently.
I believe however a number of people think further balancing is needed for this fund.
Examples are that it is light on Emerging Markets and that there is no explicit property elements.

Can anyone suggests funds and %ages that might balance this a little better. PS I am a cautious investor looking a minimum of five years out - probably much longer tho.

Thanks

InvestInPoker

tigerspill wrote: »

I believe however a number of people think further balancing is needed for this fund.

It is not what other people want in a portfolio balance that matters, it is what you want that counts. Just as long as you understand the varying risk vs reward that you will be taking on and how it fits with your long term goals - as well as the other important stuff like fees etc.

If you want EM or property exposure then allocate the relevant % and choose the funds. I would recommend the Vanguard MSCI emerging index tracker and the Blackrock global property tracker for these two areas. You might consider the arguments for active management or physical property funds instead but these are the two I use for those areas. They are cheap and do the job perfectly for me.

Since you are cautious and the two funds I recommended are highly volatile you might want to increase your exposure to short dated high quality bonds like gilts at the same time. Either that or some other extremely reliable low volatility investment.

ColdIron

The VLS 40 only has 9% in UK equities and adding EM seems somewhat at odds with your strategy. Any EM allocation at a sensible proportion of UK would seem so small as to be barely worth it, unless you were a convicted EM investor. The VLS 60 would have given you 4% EM and 14% UK equities.

Radiantsoul

I believe the fund is broadly balanced with market capitalisation, with a slightly higher tilt towards the UK(I guess this is partially due to currency).

Emerging markets get a small allocation because they are a small, relative to the enormous size and depth of capital markets in Western Europe, Japan and the USA.

Some people believe you should hold more EM as they represent regions that will probably grow fast and have strong demographics. The argument against this is there is poor correlation between GDP growth and investor returns drivers for this are
a. the growth will be in companies that are not listed yet,
b. that international companies listed on developed exchanges have access to that growth(ie Apple recent stellar sales in China), many developed market listed companies are exposed to emerging markets
c. that many shares are held by insiders or governments, that the benefit
d. benefits of growth have to be split between many stakeholders - government, consumers, domestic savers, local companies. It may well be the case that foreign investors are not a group people necessarily prefer.
e. poor governance, weaker banking systems,financial reporting, fraud, etc make emerging markets inheritantly riskier.

Linton

Radiantsoul wrote: »

I believe the fund is broadly balanced with market capitalisation, with a slightly higher tilt towards the UK(I guess this is partially due to currency).

Emerging markets get a small allocation because they are a small, relative to the enormous size and depth of capital markets in Western Europe, Japan and the USA.

Some people believe you should hold more EM as they represent regions that will probably grow fast and have strong demographics. The argument against this is there is poor correlation between GDP growth and investor returns drivers for this are
a. the growth will be in companies that are not listed yet,
b. that international companies listed on developed exchanges have access to that growth(ie Apple recent stellar sales in China), many developed market listed companies are exposed to emerging markets
c. that many shares are held by insiders or governments, that the benefit
d. benefits of growth have to be split between many stakeholders - government, consumers, domestic savers, local companies. It may well be the case that foreign investors are not a group people necessarily prefer.
e. poor governance, weaker banking systems,financial reporting, fraud, etc make emerging markets inheritantly riskier.

There may not be in general good correlation between GDP growth and investor returns. However is there good correlation in general between market and company size and investor returns?

If you look at the past 10 years performance on trustnet 5 of the top 6 funds are EM and Asia-Pac.

TheTracker

Radiantsoul wrote: »

Some people believe you should hold more EM as they represent regions that will probably grow fast and have strong demographics. The argument against this is there is poor correlation between GDP growth and investor returns drivers for this are
a. the growth will be in companies that are not listed yet,
b. that international companies listed on developed exchanges have access to that growth(ie Apple recent stellar sales in China), many developed market listed companies are exposed to emerging markets
c. that many shares are held by insiders or governments, that the benefit
d. benefits of growth have to be split between many stakeholders - government, consumers, domestic savers, local companies. It may well be the case that foreign investors are not a group people necessarily prefer.
e. poor governance, weaker banking systems,financial reporting, fraud, etc make emerging markets inheritantly riskier.

No, those are generally arguments for not against it. Theory would have it that at least some of these reason returns over time are higher is that the investor must be rewarded for taking on some of the risks you listed. If returns were only like the FTSE 350 why bother with these players. It's the same argument for why smaller companies tend to perform better over time.

edinburgher

Tigerspill, you profess to be a conservative investor and if this is the case, VLS40 would appear to be a decent choice for your needs.

Other statements you are making around asset allocations and 'tinkering' make me wonder a) are you sure about your risk tolerance? and b) where are you getting your information from?

There are several people on this board who like Vanguard products, but there are also a couple of noisy detractors. *You* need to choose your asset allocations for a reason and make changes to them if required. If you wish to change how you invest, it should only be because you have done the research for yourself and can explain why you need more of x or y.

'Some random online said it' isn't something to base your future prosperity on...

Otherwise, you're probably best leaving things as is.

Radiantsoul

TheTracker wrote: »

No, those are generally arguments for not against it. Theory would have it that at least some of these reason returns over time are higher is that the investor must be rewarded for taking on some of the risks you listed. If returns were only like the FTSE 350 why bother with these players. It's the same argument for why smaller companies tend to perform better over time.

I was arguing more from the fact some people assume that because developing countries might grow three times faster than developed ones you would expect to receive higher returns. Often there seems to be a simplistic argument that Emerging Markets are better because there is so much potential growth.

I agree that the additional risks should be compensated. But you cannot infer that all the benefits of greater economic growth will filter down to todays investors.

Radiantsoul

Linton wrote: »

There may not be in general good correlation between GDP growth and investor returns. However is there good correlation in general between market and company size and investor returns?

If you look at the past 10 years performance on trustnet 5 of the top 6 funds are EM and Asia-Pac.

By decade emerging markets did better in the 2000s, 1970s,1960s, 1930s, 1910s and 1900s. Developed markets did better in the 2010s(so far), 1980s, 1990s, 1950, 1940s and 1920s. In fact developed markets have returned 7.4% annualised versus 8.3%. Souce:-Credit Suisse Global Investment Returns Yearsbook 2014.

Clearly you can argue with the methology, or the idea that the emerging markets of today are very different to the 1940s, or that the key shocks of the 1940s are very unlikely to repeat. But the idea that emerging markets are always and everywhere winners over a reasonable timeframe is not obviously true.