What do you think of my asset allocation?

MrMartyn

Just wondering what people think of my intended ISA contribution mix:

1) 17% Fidelity Index US Fund P-Acc

2) 17% HSBC FTSE All Share Index Fund Acc C

3) 18% HSBC European Index Fund Acc C

4) 9% HSBC Japan Index Fund Acc C

5) 9% HSBC Pacific Index Fund Acc C

6) 20% Vanguard Emerging Markets Stock Index Acc

7) 10% Vanguard Global Small-Cap Index Acc


Thanks.

Disclaimer: I am not an expert. My comments are my opinions only and should not be taken as advice. Any information I post may or may not be correct, and should therefore not be relied upon as fact. If you act on anything I post here you do so entirely at your own risk. I do not accept any liability.

masonic

Very difficult to comment constructively without knowing your objectives, investment horizon and how you see this portfolio evolving. At the moment, you are underweight US equities and overweight EM. Perhaps you are light on the US market because you believe it is overvalued and you are planning to buy back into it later, or perhaps you have other reasons for wanting to reduce your exposure to the worlds largest market relative to what you would buy on a pure market cap weighted basis.

You have no defensive assets, which may or may not be appropriate to your appetite for risk, and your exposure to smaller companies is relatively low for someone who sees the need to add them - and 50% US, in contrast to the rest of your portfolio. In essence, you have about 22% allocated to the US, of which a quarter is made up of smaller companies, but for the UK, you have a total of about 20% and only about a tenth of that is made up of smaller companies.

InvestInPoker

If I remember correctly from your other posts MrMartyn you are in for the long haul with your portfolio?


Masonic's comments are good and I don't have much else to add but I think your portfolio is pretty solid and reasonable.


If you are in for 20 years I would probably knock the smaller companies up to 15% but that's a mild change. My portfolio looks pretty similar (I over weighted the UK to 20% and notched the USA back to compensate) - the only real difference I would make in yours if it was me is to swap the UK portion from an index tracker over to Woodford's fund. I would stay passive for the rest.

Could also add some property with the global Blackrock tracker

HarryD

Having read threads started by people determined to get rich by backing their stock-picking skills (aka luck), it's refreshing to see a portfolio like this which you can sit and hold and forget about.

The Woodford may do better than the index, who knows. But will it for the next 20 years? I like index trackers for hold and forget.

The Legal & General All Share UK tracker has slightly lower charges than the HSBC (at the moment anyway...).

Mistermeaner

Agree with all above comments. For me your emerging markets looks high, you lack smaller comps, I would add property, I also like woodford but not essential. You may want to look in more detail regards you Pacific / Japan holdings - how Japanese is it and do you have right balance of India and China in there?

Linton

Agree with ggb1979 that you may wish to review your Japan, Pacific, and EM holdings. The constituents of both Pacific and EM sectors can vary significantly between different funds and may contain (or not contain) countries that surprise you. 9% Japan compared with 18% for each of US, UK, and Europe looks rather large and 20% EM even larger.

bowlhead99

Linton wrote: »

Agree with ggb1979 that you may wish to review your Japan, Pacific, and EM holdings. The constituents of both Pacific and EM sectors can vary significantly between different funds and may contain (or not contain) countries that surprise you. 9% Japan compared with 18% for each of US, UK, and Europe looks rather large and 20% EM even larger.

If you are looking at total investible market, Japan at 9% is not 'rather large'. Japan has a greater weighting in the all-world index than UK (at 8% vs 7%), so if UK and Europe have been inflated to well over their all-world index weighting by pulling the US allocation down, then by not significantly inflating Japan too you are underweighting it compared to UK and Europe rather than overweighting it. The separate 'pacific' fund is an asiapac-ex-japan index so it has Australia, Taiwan, Korea, Singapore, HK, China etc but you're not doubled up on Japan there.

Whether Japan produce the same return relative to UK over the next 20 years as they did over the last 20 years is of course up for debate... but a tenth of your equities in that region is not a big deal if you are looking at where all the investible market cap is sitting.

I agree the 20% EM is higher than it would be for most people and to have more there than in your home country even after boosting your home country above its world market-cap weighting, implies confidence or a higher risk appetite, and yes it is worth considering implied overlap with the other indices.

Ultimately if you are going to use a 'passive' index style within countries you still need to come up with some kind of methodology of how to allocate between the countries, whether gut feel, market cap allocation, etc etc. Some of it depends how you are allocating other portfolios (e.g. this is your ISA, how is your pension allocated?), your timescale, how you intend to ultimately spend the money, etc etc. But if you want to weight one way or another compared to the global opportunity set in terms of market cap, that's a personal thing, and can't be 'wrong'.

The FTSE All-world covers $35 trillion of equities and you don't have to hold each of the 3000+ companies in the proportion that it does, or indeed hold any of the $trillions of corporate and government bonds that are out there. However, if you are using market cap within countries I wonder why that methodology is not being used to decide how much goes to US vs Europe ex-UK vs Japan for example. Do you think 'market cap' rather than 'equal weight' or 'active' is a capital allocation model that makes sense, or not?

MrMartyn

Thanks for all of the comments.

I do have some money in NS&I index-linked bonds, a savings account and premium bonds, which I consider my "defensive" assets. The funds listed in my original post above are just for the money I'm willing to invest in the stock market (hopefully long term). I'm in my early 40's so about 20 to 25 years away from retirement (hopefully I can still get work for the next 20 to 25 years!).

My aim is to get the best long-term return that I can. I've tried to diversify across geographical regions and also developed/emerging and large/smaller companies.

I realise that my US percentage is underweight relative to global market cap (and my Emerging Markets percentage is probably overweight). I suppose I'm trying to be a bit clever and use my intuition that the US market has risen so much recently that I can't see the returns being so good over the next few years. If I see a market crash then I might adjust my percentages to put more into the crashed market (assuming that I believe it will bounce back).

I already have a significant amount invested in a FTSE All-Share index tracker ISA (with dividends reinvested) that I'm not currently contributing to, so I'm likely to be quite overweight in the UK stock market relative to other regions. I wonder whether to re-balance that, but I just keep thinking that I originally intended it to be a long term investment and that I should keep it invested (apparently, being out of the market for even a few days can have a significant effect on long term returns if I miss some of the best days). However, whether or not to re-balance my existing ISA holdings is a different question that maybe best discussed in a separate thread.

The one thing I'm not sure about is whether or not the above funds (that I quoted in my original post) are hedged back to sterling? Would I have currency exchange rate risk?

The idea of having separate funds is so that I can re-balance whenever I like and have the flexibility to just sell (or re-balance) one or two regions. My plan would be to review and potentially re-balance once per year or after a major event (e.g. a stock market crash or boom in one region relative to other regions).

Thanks.

Disclaimer: I am not an expert. My comments are my opinions only and should not be taken as advice. Any information I post may or may not be correct, and should therefore not be relied upon as fact. If you act on anything I post here you do so entirely at your own risk. I do not accept any liability.

bowlhead99

MrMartyn wrote: »

The one thing I'm not sure about is whether or not the above funds (that I quoted in my original post) are hedged back to sterling? Would I have currency exchange rate risk?

They are not hedged. That's one of the whole points of investing in different countries around the world - you don't know whether the UK economy will perform better or worse than everything else.

More and more of every good and service we buy is priced based on global factors. For the next 20 years of your working life and the 40 years of retirement after that, you'll be buying washing machines from German companies and smartphones from Korean companies and cars from Japanese companies and computer software or web services designed in USA and built in China etc etc.

If you have assets that are exposed to cost and income streams in Euro and Won and Yen and USD and RMB etc., then you will do better than just huddling into your little island and wanting to keep getting pounds back which might be worth a lot less than all the other currencies that everyone else holds.

So, currency is part and parcel of the overall return you get from investing in foreign assets. It should be something you want, IMHO.

If you don't want any currency risk you should already be trying to actively hedge that FTSE UK index tracker you've got, because BP and Shell are working to a dollar oil price, Rio and BHP are making 98% of their revenues in foreign lands, SAB Miller doesn't sell much Miller Lite in the UK, AstraZeneca and Glaxo are making plenty of Big Pharma income from worldwide developed and emerging countries where the customers don't pay in sterling, and so on.

Of course, you would have done better from the rise in the Japan index in the last couple of years if you had hedged it, because there are more yen to the dollar or pound than there used to be. But that call is just like the call to overweight EM or underweight USA or any of those other judgement calls you make. If you choose not to take the currency gains and losses as they fall, you will not only incur hedging costs but you are making a big gamble on GBP being the best thing to hold.

racing_blue

HarryD wrote: »

Having read threads started by people determined to get rich by backing their stock-picking skills (aka luck), it's refreshing to see a portfolio like this which you can sit and hold and forget about.

Aaah - but does it not take the edge off your refreshment that Martyn is tilting the allocation towards certain geographies? Bringing his own decisions (or "luck", as you describe it) into play?

Ryan_Futuristics

PROS:
- Good even-weight on geographies should reduce volatility and limit downside (better to gain 10%/year than alternate between 15 and 5%)
- Good value-tilt, underweighting US equities while global valuations look unappealing
- Good allocation to Emerging Markets ... They represent over 50% of the world's GDP, and population, while developed world growth slows and population ages

CONS:
- Global equities valuations are looking high, while bond yields look very pessimistic ... It may be prudent to build your portfolio over 2-3 years - preferably buying when there are reasonable valuations (otherwise drip-feed) - rather than lump-sum
- Allocation to Europe may be a little high (there's good value in parts of Europe, but ageing populations and structural weaknesses could hamper long-term prospects)
- Consider per-region small caps rather than global small-caps (which will weight heavily towards US) - e.g. 50% FTSE 100, 25% 250; 25% Small Caps
- Consider some alternative assets (property, P2P lending, equity income to hold or grow value when equity prices tumble)
- Consider diversifying by investment style as well as region ... Growth and value stocks perform differently over lengthy periods ... As does active and passive management - this would also give you better cap-diversity, and reduce risks of being 100% invested in broad global equities when growth may be sluggish and divergent