Wealth Preservation Funds/IT's

MPN

Instead of holding bonds to reduce risk on a portfolio, I am thinking of just holding some wealth preservation IT's or funds. I have a good cash buffer so I feel this may be a viable option to bonds with slightly better returns?

I am considering RIT Capital Partners (RCP), Personal Assets (PNL), Capital Gearing (CGT) and Ruffer Investment Company (RICA)?

If anybody has any experience with these IT's your views would be appreciated. Also, are there any other funds or IT's to consider and is this really a realistic alternative/option to bonds?

bowlhead99

They are all quite credible ITs in the 'wealth preservation' space, with some having that as an objective more explicitly than others.

For example, PNL's objective is to preserve capital first, and make it grow, in that order. They don't expect to always deliver positive returns but to have success over the longer term by not losing money as badly as others, and by growing the pot when they can. CGT would like to achieve absolute returns across the asset classes, and their portfolio is "designed to represent 100% of the portfolio of an investor with a long term investment horizon, an aversion to capital loss and a preference for capital gain over income".

Each of these are multi-asset funds designed to be able to stand alone as someone's whole portfolio, and can shift the allocations as they see fit through active management and allocation decisions. With their relatively cautious approaches to preserving and growing wealth you would expect them to be less volatile than your equities funds in a downturn ; and hopefully, give you a better result than having an arbitrary fixed percentage of x% equities and y% bonds, otherwise what is the point of paying them for active management.

It is true that people are looking for alternative to bonds as diversifiers to equities as they become more cautious about outlook not just for equities but for bonds as well, with the very accommodative monetary policy of central banks of recent years. CGT's most recent annual report noted:

Our response to this environment is to remain defensively positioned with a principle focus on capital preservation. In practical terms this means our equity exposure remains extremely constrained, our corporate bond exposure is to high quality issues and our sovereign bond exposure is the shortest duration it has ever been.

So, at the moment they are trying to position defensively, so far as is possible; though that will not always be the case. Same for PNL and others - you would not expect them to always have the same preferences for fixed interest, linkers and cash when equity markets are cheaper or different bond markets yielding more, and history shows that they haven't. And this sort of fund is not a bond fund - they balance the low returns from the safe, short-dated bonds with investments in direct equities or in other investment trusts with that underlying exposure.

Effectively - assuming you don't want them as your whole portfolio because you are a more aggressive investor than that - you can include them in the more cautious end of your portfolio, but don't make the mistake of thinking, "hmm I only want 75% equity exposure and was thinking 25% 'bonds and other', but I am not sure what I'm doing with bonds so I am just going to get these 4 ITs to fill the 25%". Because if you do that, about half the 25% would still be equities. If you are going to take that sort of approach you would need to increase the 25% to something more meaningful (e.g. drop the aggressive equities component to 50% and bring the wealth preservation side up to 50% too) so that you do get a good slug of non-equities exposure as intended.

As you take it forward however, you will likely find that these trusts add more equity exposure when they believe it's sensible to do so, and at that point your portfolio will end up holding potentially quite a bit more equities than it would with the same proportion of your assets in these trusts today. If you trust their views on the market, that may not be a bad thing - and indeed, most people using them are using them because they want the managers to make decisions for them. But if you are the sort of person who wants to micromanage their own assets and know what percentage is in different types of bonds, equities, property etc at all times, these trusts are not for you.

Also, remember that recent events can flatter portfolios of all types. For example, part of CGT's annual report says:

Given this extremely defensive portfolio positioning we were delighted, not to mention surprised, that the portfolio delivered 13.4% returns over the year. These returns were only possible due to the marked weakness of sterling after the UK referendum decision to leave the European Union.

So, thinking "ooh, 13% performance from a defensive fund, that sounds nice, sign me up" may lead to disappointment. Indeed, the conclusion to the Chairman's report says:

For the twelve months ahead it may be that merely preserving the gains of previous years will be viewed as success

I have RIT in my ISA and PNL in my pension. I view RIT as being more adventurous than PNL. I don't think there is a need to hold RICA as well as PNL, they are both trying to achieve the same thing so pick one or the other of the two unless you are the type of person who wants several overlapping funds for each objective you have. I don't currently have any CGT but that doesn't mean it's a bad fund.

Audaxer

I know people are concerned about bonds, but if there was a crash in the value of bonds, that presumably wouldn't be anywhere near the 50% fall that could happen in an equity crash, or would it?

If there was an equity crash, as these ITs include equities, even although they are wealth preservation ITs, presumably they would not preserve the 25% part of your portfolio as well as bonds would?

Malthusian

Audaxer wrote: »

I know people are concerned about bonds, but if there was a crash in the value of bonds, that presumably wouldn't be anywhere near the 50% fall that could happen in an equity crash, or would it?

In theory yes. In practice who knows. Very-long-dated gilts are up 60-75% over their par value, and what goes up might come down. If those gilts became as attractive as they were in 2010, due to some combination of interest rate rises and lack of confidence in the UK government, then you are looking at close to a 50% fall. Of course a fund would probably not invest all of its money in 30+ year gilts, but it illustrates the range of possible outcomes. High yield bonds also took an absolute hammering in the 2008 crash - I don't recall any that fell 50% but 33% was not unheard of. (*edit* Should have said high yield bond funds - obviously individual high yield bonds can fall 100% if the borrower defaults.)

bostonerimus

With these "Wealth Preservation" trusts you're just buying an actively managed closed end fund with a conservative allocation; government bonds, dividend paying stocks some commodities etc.

MPN

CGT and PNL seem lower risk than RIT with quite a bit of fixed interest/cash in their holdings so they could be 2 good alternatives to holding bonds.

JohnRo

Simplistically is it not better just to target a larger cash pool allocation as risk mitigation and crack on with the equity investments?

When the market crash comes a larger, accessible cash pool then gives you maximum flexibility and a tidy rebalancing opportunity.

grey_gym_sock

there's no real magic in "wealth preservation" funds.

generally, holding more equities gives you higher expected returns (but increases risk), and holding more bonds/cash/etc reduces risk (but also reduces expected returns). wealth preservation funds tend to hold a significant amount in equities, and a significant amount in bonds/cash/etc. hence they do indeed give you higher expected returns than putting the same money in bonds - but at the price of adding more equities, hence more risk.

as bowlhead said, you should look at wealth preservation funds as a mixture of equities and bonds, not as 100% bonds, when working out the overall allocations in a portfolio which includes them.

e.g. if you hold 40% equities, 30% wealth preservation funds, and 30% bonds, and those wealth preservation funds are about 1/3 in equities, then overall you have about 50% equities, 50% bonds.

so why use wealth preservation funds, when you could just buy 50% equities, 50% bonds, more directly (and, importantly, cheaply)? the main reason to do that is if you trust the wealth preservation funds to make good decisions about when to increase/decrease their exposure to equities. personally, i'm very sceptical about their ability to do that - there was a thread a while ago where bowlhead and i discussed this in relation to PNL specifically.

i do expect that any of these funds will do decent job of preserving wealth. but that is just because they hold a mixture of equities and bonds. any sensible mixed asset fund will do that, too (e.g. vanguard lifestrategy 40% or 60% - sorry, but i'm afraid it's a forum rule now that lifestrategy has to be mentioned on every thread ).

coyrls

[FONT=&quot]A wealth preservation IT is not a way to avoid holding bonds. As others have said, you will still be holding bonds via the IT. Now as Bowlhead has said, the IT can actively manage its bond holdings through choice of duration and quality but so can an actively managed 100% bond fund. The advantage of holding a bond fund is that you can more easily control the percentage of your investments that is held in bonds.[/FONT]

StellaN

JohnRo wrote: »

Simplistically is it not better just to target a larger cash pool allocation as risk mitigation and crack on with the equity investments?

When the market crash comes a larger, accessible cash pool then gives you maximum flexibility and a tidy rebalancing opportunity.

I tend to agree and the OP did say he/she had a good cash buffer. I myself hold 100% equities even though I am 60 on my next Birthday but I also have around £100K in cash in the usual best interest bank accounts just in case of a downturn.

bostonerimus

People might be interested in a couple of popular US funds that form an income/wealth preservation component of many US retirees portfolios. Wellesley and Wellington are actively managed Vanguard funds and have been around since the late1920. They are both bizarrely named after the Duke of Wellington. Wellesley has a 40/60 allocation and Wellington is 60/40 and they are made up of large cap dividend stocks and investment grade bonds. They are just balanced funds, but if you add a cash allocation to either you'll get a reasonable wealth preservation portfolio. You could easily create a similar allocation in the UK with some inexpensive tracker funds.

I own a bit of Wellesley in an old retirement account that I keep for sentimental reasons more than anything else. I'm ok with this active fund as I only pay 0.15% in fees.

https://personal.vanguard.com/us/funds/snapshot?FundId=0527&FundIntExt=INT#tab=0
https://personal.vanguard.com/us/funds/snapshot?FundId=0521&FundIntExt=INT#tab=0