Attn IFAs: Why is the UK considered exempt from 5% single country rule

wombat42_2

The standard IFA advice is not to put more than 5% in any one country. But why is the UK exempt from this rule and why is it widely advised by IFAs to invest 100% in the UK ?

dunstonh

The standard IFA advice is not to put more than 5% in any one country.

Never heard of that before.

But why is the UK exempt from this rule

There is no rule in the first place so the UK cannot be exempt from it.

why is it widely advised by IFAs to invest 100% in the UK ?

Is it?

If you look at lazy investing or old fashioned investing then use of cautious managed, balanced managed and distribution funds were heavily used. Partly as that was all that was available to the mainstream investor. Most of these will contain overseas investment as the discretion of the fund manager.

Where unit trusts were used then you have to look at the fact that with PEPs there were greater restrictions on what could and couldnt be placed in them. Restrictions on the use of overseas funds was one of them.

Are you perhaps thinking of PEP restrictions rather than an overall portfolio rule?

wombat42_2

dunstonh wrote: »

Never heard of that before.


There is no rule in the first place so the UK cannot be exempt from it.



Is it?

If you look at lazy investing or old fashioned investing then use of cautious managed, balanced managed and distribution funds were heavily used. Partly as that was all that was available to the mainstream investor. Most of these will contain overseas investment as the discretion of the fund manager.

Where unit trusts were used then you have to look at the fact that with PEPs there were greater restrictions on what could and couldnt be placed in them. Restrictions on the use of overseas funds was one of them.

Are you perhaps thinking of PEP restrictions rather than an overall portfolio rule?

Several times quite recently in online artciles I have seen online IFA recommendations (such as Mark Dampier of H&L) saying dont put more than about 5% in any single country or sector.

To take a hypothetical case, if you had a client who wanted to invest in unit trusts for, say, 10 years and accept medium risk, what sort of percentage might you suggest to invest in international funds, 50% perhaps ?

dunstonh

Several times quite recently in online artciles I have seen online IFA recommendations (such as Mark Dampier of H&L) saying dont put more than about 5% in any single country or sector.

Thats his choice. I wouldnt say it reflects the general IFA populous.

To take a hypothetical case, if you had a client who wanted to invest in unit trusts for, say, 10 years and accept medium risk, what sort of percentage might you suggest to invest in international funds, 50% perhaps ?

Ignoring cash my medium risk spread would be: (note that this is not a static spread. It gets updated quarterly)

Europe: 9%
Far East ex Japan: 4%
Emerging Markets: 4%
Specialist: 5%
Japan: 5%
North America: 9%
Property: 20%
UK Equity: 24%
UK Fixed Interest: 20%

JDinho

wombat42 wrote: »

The standard IFA advice is not to put more than 5% in any one country. But why is the UK exempt from this rule and why is it widely advised by IFAs to invest 100% in the UK ?

As basic guide to asset allocation and sector weightings I suggest you familiarise yourself with the FTSE APCIMS Portfolios.

When you say standard IFA advice I presume you mean with regards to investments, or are you also suggesting that you diversfy your savings across numerous curriencies? I am assuming you are enquiring about diversifying overseas i.e. ex-UK?

There is no correct answer to this question! In fact many FTSE listed firms generate their profits outside of the UK, Standard Chartered, Rio Tinto, HSBC etc so it is arguable that investing solely in the UK would no doubt include an element of overseas diversification. Suggesting that you hold must have exposure to 20 different countries is also not a set rule, nor readily achievable!!!

Investing is not a hard-science, there is no right or wrong answer. What there is a number of solutions, and at any point in time there are some that are more suitable than others. You can increase you chances of success by researching the solutions and ensuring you are in the correct country/asset class/vehicle to suit your needs at that time - and then monitor it closely as time goes by!

wombat42_2

dunstonh wrote: »

Thats his choice. I wouldnt say it reflects the general IFA populous.



Ignoring cash my medium risk spread would be: (note that this is not a static spread. It gets updated quarterly)

Europe: 9%
Far East ex Japan: 4%
Emerging Markets: 4%
Specialist: 5%
Japan: 5%
North America: 9%
Property: 20%
UK Equity: 24%
UK Fixed Interest: 20%

Thanks. It isnt a million miles away from the portfolios in the global funds i have invested in:
- Jupiter Global Managed
- Gartmore Global Focus
- Neptune Global Equity

Although they have differing investment strategies they complement each other quite well and include a slice of the UK (about 10%). There is the advantage of these global funds in that the fund manager will dynamically adust the allocations as required over time.

I do have a hefty cash buffer to offset these equity investments.

wombat42_2

JDinho wrote: »

Investing is not a hard-science, there is no right or wrong answer. What there is a number of solutions, and at any point in time there are some that are more suitable than others. You can increase you chances of success by researching the solutions and ensuring you are in the correct country/asset class/vehicle to suit your needs at that time - and then monitor it closely as time goes by!

I have been doing that for the last few years. I started with 100% UK and ended up with 100% China then made a nice gain in a short time but am now getting fed up with chopping and changing so now switched to:
- Jupiter Global Managed
- Gartmore Global Focus
- Neptune Global Equity

and want leave it alone for the long term and let the fund manager do the country/sector allocation work.

JDinho

wombat42 wrote: »

I have been doing that for the last few years. I started with 100% UK and ended up with 100% China then made a nice gain in a short time but am now getting fed up with chopping and changing so now switched to:
- Jupiter Global Managed
- Gartmore Global Focus
- Neptune Global Equity

and want leave it alone for the long term and let the fund manager do the country/sector allocation work.

...are you aware of the finer details of these funds?

The manager may be prevented from having a zero weighting in a region due to the terms of the fund i.e benchmarking constraints.

Other points would be the buy & sell criteria, whether the investment process is bottom-up or top-down and many more factors. If you don't fully understand the Manager's style and what the structure of their fund allows and preculdes them from doing you may be dissappointed.

m_c_s

wombat..just hope there isn't a global recession then!:eek:
whats coming out of this is that there is no absolute answer with many variables, not least is the individual attitude to risk and timescales for investment.
I have these definitions in my spreadsheet which I use as a guide (from a number of sources mainly Fidelity, H&L etc if I remember correctly) - clearly everyone should address their individual requirements and seek appropriate advice when necessary:


Cautious
Cautious investors should be looking at 'safer' places for a large proportion of their money, such as cash and bonds, but they should also have exposure to more aggressive investments, such as growth funds. A suggested portfolio mix is:
Cash and Money Markets: 40%
UK Corporate Bonds: 23%
UK Other Bonds: 10%
UK All Companies funds: 9%
Global Growth funds: 11%
Property funds: 7%

Conservative
This type of investor is cautious, but still wants to have a little more risk in their portfolio. The emphasis is still definitely on safety so the majority of the portfolio will be invested in cash and bonds, but there is more equity exposure than the cautious investor. A suggested portfolio mix is:
Cash and money markets: 35%
UK Corporate Bonds: 10%
UK Other Bonds: 9%
UK All Companies funds: 15%
Global Growth funds: 16%
Property funds: 15%

Balanced
This type of investor should be looking at a more or less equal split between cash and shares. The equity investments should also be split, with half in the UK and the remainder in developed overseas markets. This will help spread risk and should also offer some growth potential. A suggested portfolio mix is:
Cash and money markets: 33%
UK Other Bonds: 11%
UK All Companies funds: 18%
Global Growth funds: 18%
Property funds: 20%

Adventurous
This type of investor is looking for strong growth, rather than income, and they should be prepared to take more risk by investing in more volatile, but potentially lucrative, markets. However, there is still some cash exposure for protection and a large chunk of the portfolio is invested in the UK market. A suggested portfolio mix is:
Cash and money markets: 10%
UK All Companies funds: 35%
European funds: 9%
North American funds: 9%
Japanese funds: 9%
Asia Pacific funds: 8%
Property: 20%

Speculative
This type of investor will be highly experienced and prepared to take higher levels of risk to gain greater levels of return. The portfolio holds no protective cash element, but is nearly entirely all equity based, although property investments offer some level of protection. A suggested portfolio mix is:
UK All Companies funds: 42%
European funds: 9%
North American funds: 9%
Japanese funds: 8%
Asia Pacific funds: 8%
Global Emerging Markets funds: 7%
Property: 20%

Cautious Income
A blend of cash, bonds and shares is a good way to generate a lower-risk income. Bonds have suffered in recent years but are generally viewed as a good way of securing a steady if unspectacular income, while cash offers security. On the equities side, equity income funds are best as they invest in companies that pay high levels of dividend. A suggested portfolio mix is:
Cash and money markets: 40%
UK Corporate Bonds: 17%
UK Other Bonds: 16%
UK Equity Income funds: 9%
Global Growth funds: 11%
Property funds: 7%

Adventurous Income
This portfolio is based on being able to generate enough growth to regularly sell a proportion of your income while still enjoying a capital gain. A suggested portfolio mix is:
Cash and Money Markets: 10%
UK All Companies funds: 35%
European funds: 9%
North American funds: 9%
Japanese funds: 9%
Asia Pacific funds: 8%
Property: 20%

wombat42_2

JDinho wrote: »

...are you aware of the finer details of these funds?

The manager may be prevented from having a zero weighting in a region due to the terms of the fund i.e benchmarking constraints.

Other points would be the buy & sell criteria, whether the investment process is bottom-up or top-down and many more factors. If you don't fully understand the Manager's style and what the structure of their fund allows and preculdes them from doing you may be dissappointed.

http://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx?sedol=3186060&user=MINV&type=packet_fund_class_doc_factsheet

http://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx?sedol=244024&user=MINV&type=packet_fund_class_doc_factsheet

http://www.fundtoolkit.com/neptune/factsheets/neptune_GlobalEq_FS.pdf

EdInvestor

wombat42 wrote: »

Several times quite recently in online artciles I have seen online IFA recommendations (such as Mark Dampier of H&L) saying dont put more than about 5% in any single country or sector.

He probably means "single country" fund eg the Korea fund or the Peru fund as these are a lot riskier than say an Asia-Pacific or broad Latin America fund which will have some money in Korea or Peru, but the rest spread around other countries. That way, if Korea or Peru go down the tubes, the money can be switched out to the neighbours.

Whereas in a single country fund it will have to stay in those countries and lose value (switching to cash is not allowed.)Similar risks arise with sector funds with a remit that is too narrow, tech funds being the prime example.

Single country fund guidelines don't apply to developed markets.