Portfolio Allocation: Critique Welcome

bostonerimus

ianthy wrote: »

I really like the idea/simplicity of 3 funds - easy to manage and just get on with life. I am not experienced enough to comment really but do many investors in the UK have just 3 funds?

You can be well diversified without owning many funds. There is a school of thought that says overweighting things like small cap can beat a total market index (see Dimensional Fund Advisors), but I doubt that a slice and diced personal portfolio will work particularly well and it will also take a lot of looking after.

I like a 3 or 4 fund broad index portfolio (or a multi asset fund) as it keeps things simple and allows a retiree to DIY with minimal effort and do things other than managing money. You won't get the best returns, but you also won't get the worst.

k6chris

bostonerimus wrote: »

I like a 3 or 4 fund broad index portfolio (or a multi asset fund) as it keeps things simple and allows a retiree to DIY with minimal effort and do things other than managing money. You won't get the best returns, but you also won't get the worst.

I also like this approach - which 3-4 'funds' would you choose (and why)?

TheTracker

bostonerimus wrote: »

You can be well diversified without owning many funds. There is a school of thought that says overweighting things like small cap can beat a total market index (see Dimensional Fund Advisors), but I doubt that a slice and diced personal portfolio will work particularly well and it will also take a lot of looking after.

I haven’t found that a few extra funds in my passive portfolio is any extra work than a 3-4 fund portfolio would be, as long as you’re committed to the allocation long term. Just a few extra minutes to execute a couple of extra trades a year. Maybe 30 minutes a year extra work.

TheTracker

k6chris wrote: »

I also like this approach - which 3-4 'funds' would you choose (and why)?

You didn’t ask me, but I’ll put my nose in, being a UK resident.

In the US a 3 fund portfolio tends to be domestic equity, international equity, and safe bonds. Since the US is so heavy in world capitalisation and funds structured around that fact, that makes sense.

In the UK, the equivalent would be a whole world equity tracker (like VWRL) plus bonds. Forget the naysayers who say it’s not whole world, that’s semantics. Plus potentially a UK equity tracker if you want some home bias (ie give it more than the 6% or so representation it holds). And if you do, then rather than a whole world tracker you might want to buy a UK tracker, an ex-UK tracker, and bonds.

If you don’t mind a few extra minutes rebalancing each year, and your portfolio is large enough not to have expenses perturbed by extra trades, you may want to add some ‘tilts’ - over weighting’s - to certain asset classes like small cap, value stocks, and property. These have historically proven to be efficient modifiers to improve volatility/reward (risk/return). Though the past is no indication of future, solid theories exist as to why these premiums may surface. But if you do this, stick with it for the long term (10+ years) and don’t fiddle. Naysayers may needle you that making asset allocations are tantamount to active investing, but don’t let such self promoting trolls get under your skin.

Have fun!

ColdIron

DairyQueen wrote: »

I'm interested to know why you wouldn't categorise Fundsmith and RCP within the same (global defensive) category.

It was just an observation, I'm not used to see them equated. RCP is a cautious wealth preservation fund with a lot of diversification across asset classes and significant allocations to absolute return and hedge funds. Fundsmith is a very concentrated high conviction 100% quoted equity fund run with a few holdings in defensive sectors like fags and pharma. If I was looking for something to shelter my money from turbulent conditions they are not even in the same room. On the subject of fixed interest if you are looking for wealth preservation rather than income you might want to look at something like Personal Assets Trust. Plenty of short dated T-Bills, inflation protected securities and even an allocation to gold. It has 40% equities but some of the names will be familiar from Fundsmith. Just an idea that might be more useful to you than stringing together a bag of (somewhat eclectic) corporate bonds

DairyQueen

Voyager2002 wrote: »

I can see some big gaps:

Germany, including small business, is a sector that I regard as offering quality and stability. Not something that I would approach via a 'Special Situations' fund, since the bulk of the German economy is unlikely to offer many such situations;

India (I don't think that the Asia funds you include offer much exposure to India, and in any case the economy there is so opaque that I would want a specialist manager who concentrates on India rather than someone who works on Asia as a whole);

Russia: a large economy that offers exceptional value (in terms of P/E ratios, no matter how you dice them). Political risk there is beyond the comfort zone, hence the low prices, but a clued-up local manager should offer some degree of protection.

And I would be interested in hearing more about your idea of "defensive equities". Personally I pile into healthcare for protection against the next downturn, but I am sure there is a better way.

Europe/Germany:
I have some European exposure via the global trackers (Developed Europe ex UK Index) but not enough as VLS is high on UK at the expense of rest of Europe. I agree with your view of Germany but I also feel that my core global passives are light on all European (ex UK) countries. I am hoping that FP Crux will fill the European gap. The fund's largest investment region at the moment (by some distance - 23%) is Germany. It also has large %ages in Sweden, Holland, France, Finland and Switzerland. However, it pretty much ignores other European economies.

I could address this gap via a European index tracker. This would be cheaper (and would be a more diverse regional spread) but would not provide exposure to smaller caps. It would also be contrary to my overall strategy (exposure to large caps in developed markets is primarily via VLS core holdings).

I was hoping to kill two birds with one stone by choosing a 'special situations' managed fund. I could invest in more than one European fund but I am trying to control the overall number. @Bostonerimus makes a good point about simplification/complication as a factor of number of investments (reply to be posted). I have a tendency to over-think things so am in danger of making this portfolio too complicated.

I have also considered increasing the European %age and reducing the UK small caps and/or Pacific/Asia because of the regional weighting of VLS. Opinions welcome.

India:
I have selected two Pacific/Asia funds because of their different regional profiles. Fidelity currently leads with India (15%) with slightly less allocated to Taiwan (13%), China (12%), S Korea (10%). Plus reasonable chunks in Australia, Philippines, Singapore and Indonesia. I wanted a good regional spread but would have preferred a higher weighting to China. The Hermes fund has almost 50% allocated to China and 29% in Korea - plus 15% in Taiwan and 4% India.

Russia
Tbh I haven't given Russia any consideration. I guess it's outside my (novice) comfort zone to make targeted investments in markets that are politically...er.... ambiguous. It's not a market that I understand and I realise that my political prejudices are such that I am disinclined to invest there.

"Defensive equities"
I know this sounds like an oxymoron. I understand that all equity investments carry risk but some regions/markets/companies/sectors are relatively more/less risky. Fundsmith has the characteristics that I believe define it in the 'defensive equity' category.

This fund has a very specific asset selection criteria found here.

The holdings are concentrated in regions/sectors/companies that seem less likely to suffer in a market crash (USA/Healthcare/Technology/Consumer Staples), and seem likely to recover quicker. I also like the fund's aims, methods and transparent charges. IMO this is the kind of fund that a novice investor can easily assess. It does what it says on the tin.

RIT Capital Partners has a primary aim of capital preservation. This is my understanding of a typical "defensive equity" investment. It aims to provide growth but the potential is limited in order to meet that primary aim.

Thanks for your input. These (and other posters') comments are really helping me review what the 'eck I'm doing (and why).

Audaxer

DairyQueen wrote: »

RIT Capital Partners has a primary aim of capital preservation. This is my understanding of a typical "defensive equity" investment. It aims to provide growth but the potential is limited in order to meet that primary aim.

I was looking RIT Capital Partners IT the other day and was surprised at just how good the performance was despite the aim of preserving capital. The returns over the last 5 years were 88.8%. That was better than for example the VLS80 which returned 'only' 78.7% over the last 5 years. I would consider the VLS80 too volatile for me, but would seriously consider investing some funds in RIT Capital Partners, unless I'm missing some possible downside to that IT?

DairyQueen

bostonerimus wrote: »

I feel that you are massively over complicating things. You've got pensions and SP to cover expenses and 3 years in cash, so just invest what's left in a fairly aggressive portfolio that's heavy on equites. I'd use some cap weighted global equity and bond trackers or more VLS or equivalent. Let the funds slice and dice for you rather than putting little bits of money into numerous funds as you are proposing. If you want to overweight some small cap or other niche sectors then the volatility of your portfolio will increase. When you're retired there's a lot to be said for boring dividend paying large cap, utility etc companies that can also give some capital growth.

I'm in a similar situation to you with income needs covered by pensions. I have on year of spending in the bank, two in a high interest (thats's just 2% today) immediate access account and almost everything else in just 3 funds....a US equity tracker, an international equity tracker and a US bond tracker (I live in the USA). It makes management and drawdown easy.

I hear you. I have a tendency to over-complicate and over-think. I have read many of your posts on other threads and included your approach in the choice of my core investments (VLS).

My motivation for 'dabbling' with your (very sensible) strategy:

1) I have discovered that I like the process of investing. It's become a kind of hobby. The more I learn the more interested I have become. I am keen to know more. I am therefore trying to strike a balance between doing the sensible things that are likely to keep me on track in the longer-term (diversify, trackers, low charges) and feeding my growing interest in investment research and more active management.

2) I am lucky that the DB/SPs will provide sufficient income to protect against market downturns and any dumb mistakes that I make. I can therefore afford to take a little more risk with some of the fund (although that could be my justification for 'dabbling').

3) I have imposed a financial limit on my dabbling. 50% of our entire retirement fund is invested in global, managed funds (OH's funds). 70% of the other 50% (my funds) are invested simply (in VLS). The 'dabbling portfolio' detailed in my OP therefore constitutes 15% of the total retirement fund.

4) OH doesn't plan to drawdown for at least 5 years. I don't plan to drawdown for 7 years. The 'other 85%' is therefore invested with timescales of between 5 and 30+ years. However, I live in hope that OH will retire sooner. If so, we have that cash buffer (3 years income) but that is intended to provide protection against drawdown in market downturns from age 65+. It's also intended as a source of discretionary spends from age 65+. If OH retires any time in the next 5 years then we will need another source of income before the DB begins. That's one of the reasons I have allocated some of this portfolio to capital protection/fixed interest funds.

5) When OH retires then the 15% 'dabbling portfolio' will be reviewed/reduced. I agree, volatility in retirement is not recommended but we are not yet retired so I may be using this as another justification for feeding my interest.

I know that some people consider investing a chore but I have discovered that I enjoy actively managing money. It's one of the things that I would choose to do in retirement. I just need to make sure that I don't allow this interest to morph into an expensive and risky hobby.

IanSt

Audaxer wrote: »

I was looking RIT Capital Partners IT the other day and was surprised at just how good the performance was despite the aim of preserving capital. The returns over the last 5 years were 88.8%. That was better than for example the VLS80 which returned 'only' 78.7% over the last 5 years. I would consider the VLS80 too volatile for me, but would seriously consider investing some funds in RIT Capital Partners, unless I'm missing some possible downside to that IT?

I've no money in them myself as I prefer a more adventurous route, but I have heard some good things about them so I wouldn't try to dissuade someone if they had done their research and were thinking of them. However I wonder how much of the % increase is due to a discount reduction in the trust?

DairyQueen

ColdIron wrote: »

On the subject of fixed interest if you are looking for wealth preservation rather than income you might want to look at something like Personal Assets Trust. Plenty of short dated T-Bills, inflation protected securities and even an allocation to gold. It has 40% equities but some of the names will be familiar from Fundsmith. Just an idea that might be more useful to you than stringing together a bag of (somewhat eclectic) corporate bonds

Thanks for this. I'll take a look at Personal Assets Trust as this may meet an objective without recourse to several funds.

One of the problems I have with this part of the retirement fund is that I am investing with several aims/contingencies and so it's easy for me to lose the plot.

As mentioned previously, the portfolio suggested in the OP constitutes 15% of the whole retirement fund. The other 85% is invested in global, diversified funds : two managed, three passive. Each has a fixed interest allocation that corresponds to a different stage of retirement. For example, we are currently invested 100% in equities in the tranche that we plan to access in late retirement (age 80+). That investment timescale is 20+ years. We are 60/40 equities/fixed interest in the chunk that we will drawdown between ages 65 and 70-ish.

The '15% portfolio' or 'dabbling portfolio' or 'DQ's hobby portfolio' or whatever I call it, is intended to meet the aims I mention in the OP. Up to 25% may need to be drawn down in the short term (under 5 years) if OH retires early. That's the wealth preservation chunk. We don't need income now but I included some income generators as a contingency for the same reason.

The rest of this portfolio is intended to fill gaps in regions/sectors considered to be better served by active management (or so I've read). I'm open to challenges on that assumption though.