Fund diversity

NoviceInvestor1

Hi All,

I posted a few days back looking for some advice for a first time investor, which resulted in some very helpful input (and has led to a couple of meetings set up with accountants etc my side).

In the meantime I have been looking at diversity within the funds I wish to invest in, I am looking at circa £30k p/annum into funds which will make up about 30% of my overall investment (with the rest a mix of residential buy to let, cash, high interest current accounts, peer to peer lending etc).

I was keen to gauge any opinions on whether I have "got" the diversity aspect right, my aim is to see a return in the region of 5% p/annum and all of this will be within ISA's. I have looked through all the research analysis HL provide on each fund, what sectors they're exposed to, who the fund managers are and their track records, geographical spread etc etc. Looking at minimum of 10 years, but probably longer.

I would welcome any thoughts from those more in the know than me which I should imagine is most of you

Commercial Property - 10.00%

Legal and General UK Property (75%)
EUROPEAN PROPERTY TBD (25%)

Emerging Markets - 15.00%

Aberdeen Latin America (35%)
First State Asia Pacific (65%)

Europe - 10.00%

Threadneedle European Select

Global Income - 15.00%

Newton Global Higher Income (50%)
Lindsell Train Global Equity (50%)

Balanced/Equity Income - 50.00%

AXA Framlington Managed Balance (30%)
CF Woodford Equity Income (40%)
Lindsell Train UK Equity (30%)

Thanks in advance!

kangoora

You seem very light on USA, is that by choice?

bowlhead99

There are billions of posts on 'review my portfolio allocations' here so I will try not to just regurgitate everything that always gets said but there are some themes you will have seen elsewhere if you've been lurking here a while. You can probably learn a lot by looking at some other threads.

1) how to decide what to invest in to build a portfolio that meets your needs.

Basically it looks like you have gone on HL's website, straight to their 'wealth 150' marketing list, and to the subset of that list 'wealth 150 plus' which is around 30 funds they are promoting most heavily at a point in time. You've then selected one or two from each of the main categories which you like the look of? Feel free to say it ain't so!

Also, HL is about the most expensive DIY platform you could find. Typically you are throwing away a fifth to a quarter of a percent every year by using a platform that charges 0.45% to run your account every year instead of one that charges cheaper. That is a lot to pay for some marketing copy which they make freely available to everyone, and some pretty fund charts that only cover the last 5 years bull market.

So, one general point is that if you are willing to splash out cash for an easier life within your hectic schedule, you would probably end up with a more suitable portfolio by paying an independent financial adviser to help you set the funds up in a way that is not driven by marketing reports from the most expensive DIY platform.

The IFA could also advise on tax wrappers and other planning etc. You mention setting up meetings with 'accountants'. Be aware that accountants specialising in company set-ups and corporate / personal taxation are not usually trained in asset management or portfolio construction. Using an accountant for your business or personal affairs does not preclude also using an IFA.

2) Types of assets within the portfolio.

Basically you have 10% commercial property and 90% equity funds - albeit one of the funds is a 'balanced managed' fund which is currently only 75% equity and the rest cash and bonds. These non-equities outside the commercial property section just consists of 25% of a balanced managed fund which itself is only 30% of one section of your portfolio which is itself only 50% of the portfolio. So really your portfolio is 10% commercial property, 86% equities and <4% other non-equities.

If you have lots of other non-equities elsewhere (for example this whole portfolio is only 30% of the wealth that sits outside your business and you also have BTL and p2p etc etc) then you might be happy with the mix. That is personal to you.

If the target is only 5% compound growth over the long term then a 90% equities portfolio should achieve that after inflation if left long enough. BUT if you need the money back in 10 years and are only drip feeding it out of new income each month rather than investing a lump sum today (i.e. each pound will only on average be invested 5 years) then that seems pretty high risk to me, because equities only meet their targets 'if left long enough'.

3) Are the funds investing in what you think they are investing in?

In the emerging markets area your main choice is First State Asia Pacific Leaders. That is shown in the 'Asia Pac and emerging markets' section on HL's little list but it is really an Asia Pac fund not an EM fund. First State (and others) do have dedicated EM funds but this is not one. If you look at the allocations on the factsheet, the top holdings around 60% of it is invested in Australia, South Korea, Singapore, Taiwan, Hong Kong, which are not EMs. There is a relatively large India allocation which makes it a bit more EM than some other funds that focus only on developed markets within the region but it is investing in big established companies.

Global income - only one of those funds is specifically dedicated to finding those companies paying higher income. The Lindsell Train fund only yields around 1.5%. So it is a global fund but not an income fund. That said, there's presumably no particular reason you'd want to limit yourself to income funds anyway if you are aiming for long term growth rather than actually drawing an income or looking for lower volatility.

As an aside, I note the LT Global Equity fund has a similar set of top holdings to the LT UK Equity fund; the latter's top 6 holdings (Unilever, Diageo, Reed Elsevier, LSE, Pearson, Heineken) all appear in the Global fund's top 10. They will inevitably perform differently over time of course but it is always worth being aware of overlaps. The LT funds are relatively high conviction with, for example, 60% of the Global fund's assets represented by its top 10 holdings.

Balanced / equity income - well, one of them is balanced (AXA Fram is a mix of asset classes with global holdings), one (Woodford) is equity income with an 85% focus on the UK, and the third (LT) is neither balanced nor equity income and is instead a dedicated UK equity fund.

4) Mix of 'home and away'.

A home bias to the UK is natural for most UK investors. However, you say this is only a small part of your overall wealth and the rest from what I can gather is exclusively UK. Your personal business is presumably UK. Your residential property is presumably UK rather than globally diversified. Your high interest current accounts are presumably all UK sterling and your p2p lending will be in sterling to UK individuals or corporates. So, this funds investing stuff is the only bit where you will aim to pick up global exposure.

If we look at how 'well' you are doing that:

Commercial Property: three quarters is in the UK. That is high when you are using these funds as an opportunity to get diversified exposure to international assets. The rest (tbd) you say is going to european rather than general global? What is so good about european commercial property rather than US or Asian commercial property?

Emerging markets: obviously this is 'away' rather than home which is fine. But as mentioned above, your biggest fund there is not EM it is Asian developed markets and so you have tilted your developed-world equities portfolio towards Asia before you even start. And because your second fund in that bucket is a specialist Lat Am fund (60% Brazil, 20% Mexico), your global EM will in practice be heavily focussed in that area. Certainly you will have more in Brazil than in EM China, Russia or Africa. Was that intentional?

If you aren't going to buy individual regional EM funds, better to just get one general global EM one IMHO.

Europe: Why are you buying a dedicated Europe fund when you aren't also buying a dedicated US fund or a dedicated Japan fund? Do you really like Europe compared to all the other parts of the world in which you could invest? If that is a short term gut feeling based on your view of prospects then I suppose it is fine but if you are aiming to drip feed money into this portfolio for 10 years running, such short term concerns are largely irrelevant and it seems strange to pick that sector above all others unless perhaps you have business interests or debts in those countries.

Global Income ; Balanced/Equity Income:
These other two categories have a high UK focus because the Axa Fram fund has over 33% UK equities, plus some UK bonds, and Woodford fund is 85% UK, and the the LT UK fund is almost exclusively UK; and that overall bucket of three funds is over 3x the size of the 'global income' bucket; it is bigger than the global income and europe and EM buckets altogether.

So, when considered alongside all your other UK assets, I personally feel you have too much in our economy vs the other economies out there. Again, this is a personal choice. Some would say domestic equities are inherently less risky than overseas equities, lower currency risk etc etc. However as you don't know how the UK economy or market will perform relative to rest of the global market, and you know the UK market is under 10% of the global market, it seems a bit of a leap of faith to have half your money going into funds which are heavily UK biased.
--
Long story short I don't think you have got the 'diversity' quite right because you are only using two asset classes (property and equities) and you do not really have a basis for the mix of allocations between countries other than just pulling them together haphazardly from the HL marketing list and seeing what it gives you. Someone saving/ investing £100k pa (even if not all of that is going into funds) can easily afford to see a professional rather than using their precious time to 'research' on the HL website.

Of course, there are some on here with £million+ in funds who do it all themselves. But that is after getting some experience, generally speaking. For you, I would suggest seeing an IFA even though it will cost more than using the cheapest DIY platform and reading websites. If you don't want to do that, at least try to aim for the cheapest DIY platform rather than giving HL hundreds of pounds a year more than their rivals would want. However, each to their own.

NoviceInvestor1

Hi Bowlhead,

This is incredibly helpful, thank you in the first instance for taking what must have been a fairly considerable amount of time to respond.

To address some of your observations:

1. Yes you are correct in my methodology in terms of picking and choosing based on the Wealth 150+. I guess for a novice it is easy to see that a business who knows what they're doing (HL) have done the donkey work in researching these and highlighting them as the best option - in hindsight this is probably naive and it hasn't totally passed me by that there is perhaps something in it for HL to promote certain funds! I think your assessment that my method of choosing what to invest in and how to build a portfolio is correct in that it is flawed, it is based really on hearsay, bits from forums and ad hoc advice from people so I take on board your comments that there are professionals paid to advise on these such matters that I really ought to consider investing in.

2. Interesting point on the drip feeding and that "each pound will only on average be invested 5 years", I hadn't really considered this (again perhaps naive of me!). In reality I won't need to access this money in 10 years, I am seeing the non equities outside of this portfolio as my accessible wealth and this being totally separate, but you make a good point that if for any reason I need to dip in I am taking a bit of a gamble.

3. I chose the FS Asia Pacific leaders as it gave me exposure to India without being solely an India fund which I felt perhaps gave me exposure to that market without taking too much risk, in terms of the fact it is diverse in itself, but again this wasn't based on much more than a hunch. I am sure a hunch isn't quite an adequate level of research when talking about investing reasonably large sums of money which comes back to your earlier point ref professional advice (which was also mentioned to me in my first post, particularly in relation to the structure of my Ltd Co and ensuring the maximum tax efficiencies etc). The point on the overlap of the LT funds is again very valid.

4. Again without wanting to sound like a broken record, you are right in that I own a property in the UK, p2p will be UK, accounts UK etc etc and my business is very much UK focussed so clearly I haven't got things right in terms of geographical exposure if we consider how much of my overall portfolio (i.e. within and beyond this specific investment portfolio) is going to be UK biased. We are probably only looking at a tiny % being outside the UK in fact. I think my biased toward the UK was perhaps seeing it as less volatile than some of the other markets (for example less corruption than some of the EM's, less political instability compared to Russia etc, lower currency risk as you stated).

There was some method in the madness behind some of the other decisions (for example choosing Brazil as larger EM option compared to Russia, Africa etc, that was indeed intentional as was a Europe fund ) but based on short term gut feeling rather than anything deep and meaningful.

Summary is that your conclusions have given me some really good perspective to work with and have definitely highlighted numerous flaws in what I had considered to be a job well done, so thank you. Perhaps I have been getting ahead of myself in thinking I was gaining a good understanding of what is a very new area to me (I hadn't heard of a fund 6 months ago). Thanks again for your time, I am off to find a good IFA :-)

Radiantsoul

NoviceInvestor1 wrote: »

Hi All,

I posted a few days back looking for some advice for a first time investor, which resulted in some very helpful input (and has led to a couple of meetings set up with accountants etc my side).

In the meantime I have been looking at diversity within the funds I wish to invest in, I am looking at circa £30k p/annum into funds which will make up about 30% of my overall investment (with the rest a mix of residential buy to let, cash, high interest current accounts, peer to peer lending etc).

I was keen to gauge any opinions on whether I have "got" the diversity aspect right, my aim is to see a return in the region of 5% p/annum and all of this will be within ISA's. I have looked through all the research analysis HL provide on each fund, what sectors they're exposed to, who the fund managers are and their track records, geographical spread etc etc. Looking at minimum of 10 years, but probably longer.

I would welcome any thoughts from those more in the know than me which I should imagine is most of you

Commercial Property - 10.00%

Legal and General UK Property (75%)
EUROPEAN PROPERTY TBD (25%)

Emerging Markets - 15.00%

Aberdeen Latin America (35%)
First State Asia Pacific (65%)

Europe - 10.00%

Threadneedle European Select

Global Income - 15.00%

Newton Global Higher Income (50%)
Lindsell Train Global Equity (50%)

Balanced/Equity Income - 50.00%

AXA Framlington Managed Balance (30%)
CF Woodford Equity Income (40%)
Lindsell Train UK Equity (30%)

Thanks in advance!

You have a lot of money to invest, which sort of makes it harder as if you are only investing £50 a month and you make a mistake with a high fee investment you can always sell it and perhaps only be a couple quid out of pocket. A balls up on £30k is a bit more annoying...

You will not be able to shelter more than £15k/year in an ISA, so you need to consider which assets to shelter and which not. It may also be advantageous for a company to make payments into a pension.

As to your fund choice it strikes me as quite heavily biased towards the UK. Half of the world stock market is in the USA by value, there is an argument the US stock market is too high and perhaps that is why you avoid it. But there are also some strong counterarguments!

bowlhead99

NoviceInvestor1 wrote: »

I think my biased toward the UK was perhaps seeing it as less volatile than some of the other markets (for example less corruption than some of the EM's, less political instability compared to Russia etc, lower currency risk as you stated).

I mentioned currency risk as it is sometimes something people are concerned about in categorising global funds as higher risk than UK ones. However it's a red herring really imho.

Firstly the companies you can own that are listed on the UK stockmarket have plenty of foreign assets and foreign currency income streams anyway. BP sells its oil in dollars; HSBC lends out Euros and USD and AUD and RMB; Rio Tinto and BHP Billiton are not selling much of their mined resources to people living in England; Glaxo sells plenty of drugs internationally; SAB Miller doesn't sell much Miller Lite to people in Newcastle etc etc. So, you don't avoid currency risk and international exposure by investing only in UK listed companies. However, generally speaking the percentage income which is 'overseas' in nature within the FTSE100 is very heavily concentrated in certain industries so it is not very balanced or rounded.

Secondly the idea that holding foreign currency is a 'risk' is only a risk where you think that all the currencies will devalue over time compared to the good old British Pound.

It can create volatility, sure. But over the course of your life you will buy plenty of goods and services from suppliers all over the world - from software and web services to cars and washing machines and petrol. The relative prices to you in UK of those things will be driven by global markets and global currency strengths. To think that you must hoard british pounds and only expose yourself to sterling business activities to 'avoid risk', presumes that when you line up the top 20 global economic powers, UK and Sterling are the most valuable and everything else has lost value over time. That is highly unlikely to be the case.

It is rather more likely that from time to time GBP will sit in the middle and other currencies will strengthen while some others weaken. GBP might even be at the bottom of the heap. For example if the value of AUD or RMB or YEN or USD or EUR appreciates you will need a lot of GBP to buy them. Simply holding GBP does not help you out with that. If you instead hold a whole mix of assets and currencies from Rand and Rouble to Ringitt and Renminbi you will be better placed for a fall in purchasing power of the pound.

So, you are taking currency risk if you buy assets denominated in foreign currency and later need to exclusively spend GBP and the GBP costs of what you buy are exclusively driven by UK cost factors. But you are also taking currency risk if you do not buy assets denominated in foreign currency and you later need foreign currency for a myriad of reasons because its value is baked into the cost of everything you buy from TVs to retirement healthcare, and GBP has not somehow miraculously become the most valuable currency on the planet.

lawriejones1

Some good points here. Might also be worth trying to find Neil Woodford interviewed on Hard Talk. It's a BBC show broadcast on worldwide, but should be available on catch up. I'm not suggesting you choose his fund (although I have for some investments), but he talks a bit about exposure and how a UK equity is a nonsense, as they're multinationals exposed across the world.

TypicalVillain

Remember that the world equity market is about 50% USA and 50% everyone else. Your allocation is very tilted away from that, so you're essentially making a bet on Europe (and emerging markets, for some reason).

collingbone614

DR_invest wrote: »

Right now eksisterende investor

I've always wanted to be an eksisterende investor.

Flagged SPAM.

badger09

Probably best not to quote SPAM posts in full :cool:

KrytenIceCubeHead

Eksisterende (verb) to desist your female sibling from saying 'eck'. Source : Yorkshire.