How to decide on what Funds, IT, EFT

bostonerimus

you could stick to a low cost multi-asset fund. Of course you'll have to choose a fund with an asset mix that you like, but this will be a good exercise. First decide what ratio of equities to fixed income you want; equities are risky, but offer the chance of significant gains (or losses) and the fixed income is stuff like bonds that are a lot less volatile. Then you need to look at where the fund invests. For example the popular Vanguard Life Strategy funds over weight UK equities which has caused them to lag other multi-asset trackers that invest more in the US. Personally I'd probably buy a global market capitalization weighted equity index tracker and a global bond index tracker and periodically rebalance between the two. Those two funds will get you diversification at a low cost and give you a simple way to rebalance through market cycles.

dunstonh

but how do people decide to invest in a fund that invests in the more unknown sectors or markets.

Generally, specialist investment funds form a very small part of an overall portfolio. Some models will reduce the asia and emerging markets holdings to allow a specialist sector holding of 2-5%. Other models have no place for specialist funds as the traditional sectors will automatically have some exposure to those areas anyway.

s it based on reading the FT or Moneyweek etc?

Moneyweek is a joke publication. You should stop reading it.

And related to this, why do some people have a preference for IT and EFT over unit trusts?

UT/OEICs are regulated investments that get FSCS protection. ETFs and ITs are direct investments that have no FSCS protection. There are greater risks (and potential) with ETFs and ITs when put alongside a comparable UT/OEIC.

Historically, UT/OEICs are favoured in distribution as the average UK consumer does not have the knowledge and understanding to invest in ITs/ETFs. They are positioned as being more suitable for someone with a higher level of investment understanding. it is worth noting that the FOS upheld a complaint last year about a company director (who had property investments) on the basis that he did not have the knowledge and understanding to invest in a portfolio of UT/OEIC funds (all of which were mainstream single sector funds). And that was with UT/OEICs. Let alone ITs/ETFs.

Knowlege and understanding is important. I think that particular FOS decision was daft and that they were looking for any reason to uphold the complaint because they couldnt fail it on the complaint reason used. However, we should not dismiss knowledge and understanding.

If you are going to invest in ultra high risk specialist funds which can double in months or lose 90% in another 12 months, then you really have to understand what you are doing and why.

Equally, if you choose ITs over OEICs, do you understand gearing and the pricing influences which can see funds trading at a premium or discount. Is an ETF using synthetic or physical replication etc. These instruments need more understanding and knowledge than UT/OEICs.

There is no mention of the potential amount you are considering investing. If this is say 10 or 20k then you are looking at massive overkill in your research. You would be making it far more complicated than needed. If you are getting into 6 digits then using a bespoke/model portfolio is more common but are you at a stage where you are ready for the work that goes with that?

If its a small amount, then sticking with multi-asset funds is usually the best.

Audaxer

dunstonh wrote: »

UT/OEICs are regulated investments that get FSCS protection. ETFs and ITs are direct investments that have no FSCS protection. There are greater risks (and potential) with ETFs and ITs when put alongside a comparable UT/OEIC.

The model income portfolios from IFAs which I have seen don't seem to include ITs. Do IFAs generally avoid including ITs in portfolios for the reasons you have outlined?

dunstonh

Audaxer wrote: »

The model income portfolios from IFAs which I have seen don't seem to include ITs. Do IFAs generally avoid including ITs in portfolios for the reasons you have outlined?

Several reasons.

1 - prior to 2013, IFAs were not required to consider them as they were not classed as a packaged retail financial product. As most IFAs fell under a network or third party compliance back then, they would eliminate them apart from a small number of regular premium ITs that were packaged as a product. Post RDR, IFAs do have to consider them. So, effectively, you have had less than 4 years of IFAs having to consider them. FAs still do not have to consider them (and usually dont)

2 - MIFID. This brought in the requirement that the investments have to be within the knowledge and understanding of the investor (on advised cases). ITs are considered more complicated than OEICs. So, the IFA would have to demonstrate understanding by the consumer on their files. And I can tell you that the average person couldnt tell you anything about their investments. (and note the FOS case I mentioned higher up and that was with OEICs). The FOS also dont appear to like IFAs using investments not covered by the FSCS with average consumers. Again, comes back to knowledge/understanding.

3 - When RDR came, the Investment Trust companies thought they were going to get a large influx of new business as they thought IFAs would switch to ITs. However, at the same time, UT/OEICs became unbundled. So, the cost difference went away.

4 - dealing costs. I generally find most of my servicing clients do regular transactions (top ups, regular premiums, bed & ISA, withdrawals etc). So, to suffer dealing costs each time could work out to be costly. With no difference on annual costs anymore, the use of ITs could shove the costs up significantly.

bostonerimus

I would not advise active or frequent trading in a portfolio so I see no utility for EFTs and I avoid closed end funds because I don't want to bother getting into NAV discounts etc. I like to K.I.S.S and so would stick with UTs and open ended funds.

Thrugelmir

Investors Chronicle publishes an annual list of 100 top funds and investment trusts. A useful guide when researching and selecting core funds to build a portfolio on. Whether it be fixed income, global , property, emerging markets etc.

aroominyork

dunstonh wrote: »

ITs are considered more complicated than OEICs.

Why is this? They just seem to be shares in selected companies that are packaged differently, albeit it with NAV discount/premium to consider.

bostonerimus, please would you provide a comparison between global market capitalization weighted equity index tracker (which Vanguard fund is this?) and a global bond index tracker, against LifeStrategy?

bostonerimus

aroominyork wrote: »

Why is this? They just seem to be shares in selected companies that are packaged differently, albeit it with NAV discount/premium to consider.

bostonerimus, please would you provide a comparison between global market capitalization weighted equity index tracker (which Vanguard fund is this?) and a global bond index tracker, against LifeStrategy?

Closed end funds are often a bit more cavalier in how they invest and use leverage more than I like.......so I don't bother with them

I'm not really interested in returns or comparisons, but I expect a 60/40 portfolio of Vanguard FTSE Global All Cap Index and Vanguard Global Bond Index will have done a bit better than VLS60 because of the higher US equity exposure. However, I don't like the entry charge on the Global Bond index so maybe shop around for something better there.

Audaxer

dunstonh wrote: »

Several reasons.

1 - prior to 2013, IFAs were not required to consider them as they were not classed as a packaged retail financial product. As most IFAs fell under a network or third party compliance back then, they would eliminate them apart from a small number of regular premium ITs that were packaged as a product. Post RDR, IFAs do have to consider them. So, effectively, you have had less than 4 years of IFAs having to consider them. FAs still do not have to consider them (and usually dont)

2 - MIFID. This brought in the requirement that the investments have to be within the knowledge and understanding of the investor (on advised cases). ITs are considered more complicated than OEICs. So, the IFA would have to demonstrate understanding by the consumer on their files. And I can tell you that the average person couldnt tell you anything about their investments. (and note the FOS case I mentioned higher up and that was with OEICs). The FOS also dont appear to like IFAs using investments not covered by the FSCS with average consumers. Again, comes back to knowledge/understanding.

3 - When RDR came, the Investment Trust companies thought they were going to get a large influx of new business as they thought IFAs would switch to ITs. However, at the same time, UT/OEICs became unbundled. So, the cost difference went away.

4 - dealing costs. I generally find most of my servicing clients do regular transactions (top ups, regular premiums, bed & ISA, withdrawals etc). So, to suffer dealing costs each time could work out to be costly. With no difference on annual costs anymore, the use of ITs could shove the costs up significantly.

Thanks for the detailed response dunstonh.

I think I understand them okay and have dipped my toe in the water with ITs by investing in a couple of large long-established ones. However I do have probably an irrational fear of putting a lot of money into ITs as there is the slight possibility that an IT company could go bust or be subject a major fraud, and you could therefore lose your full investment. Although the value of a fund (OEIC/UT) can drop significantly in value, they can't go bust as far as I am aware and if there was a major fraud you would be covered up to £50k by the FSCS.

Thrugelmir

bostonerimus wrote: »

Closed end funds are often a bit more cavalier in how they invest and use leverage more than I like.......so I don't bother with them

Open ended funds likewise have to react to investor redemptions and inflows of new money that dilute performance. Property and private equity are far better suited to closed funds. Where the shares trade independently to the underlying assets.

The issue of discounts has reduced as the IT's have adopted buyback policies to control same.

If you are concerned about leveraging. Then surprised that you buy shares at all. Given the amount of financial engineering that listed companies undertake to manipulate EPS. Likewise share options granted that dilute existing shareholders. A murky world. Where shareholders aren't always the managements key concern.