Newbie questions on Asset Allocation and Passive v Active

Filo25

To give you a bit of background on what I want to use this for, I am 45 and currently have a pension pot of about 215k,

I want to move about £90k of that from old high cost, underperforming schemes into a SIPP, for me that is obviously a significant amount so would like to do it "right".

At the same time I am looking to put about £30-40k per year into my workplace pension going forwards, and have no plans for retirement pre-60 at least, so hopefully this won't make up a massive proportion of my final pension pot.

I was looking at a very high level asset allocation for the SIPP of the following, and would appreciate people's thoughts.

US 20.0%
UK 8.0%
Europe ex UK 7.0%
Asia Pacific/EM 15.0%
Smaller companies 10.0%
Short dated investment grade bonds 20.0%
High Yield bonds 20.0%

Probably most notable here is that I am underweight US (where I am concerned about valuations), and overweight UK.

Also wondering if I did get separate funds to cover these areas what views were as to where I should definitely go Passive and for segments where there might be a case to be made for going active.

Many thanks for any thoughts people have, and sorry for the newbie questions!

Linton

I suggest the following fund sector allocations. You should find a wide range of funds in each of the active sectors.

Equity (60%):
42% Vanguard FTSE Global All Cap - Passive
9% UK Small Companies- Active
3% Euro Small Companies - Active
6% Asia/Pacific/EM - Active

Notes
1 - you cant put Small Companies as a separate sector as they will have geographic characteristics as well. So I have upped your geographic %s to cover both small and large companies.
2 - You havent included Japan so I put it in Asia/Pac.
3 - We need a large extra % UK but the FTSE100 doesnt look attractive soI have put it all in Small Companies.

Bonds 40%:
20% Short dated investment grade bonds - Passive
20% Strategic Bonds - Active

Note: I dont see 20% High Yield Bonds as a good idea for the bond component of a 60/40 portfolio, they are too risky. If you want more risk perhaps you could add a bit to the equity.

ivormonee

The 60/40 split would seem very reasonable. It's a common balance between equity and non-equity in many balanced portfolios.

Personally, I am a converted advocate of all in passive investing, having been invested in actively managed funds for years only to realise that, long term, they seem to fail to even match their index let alone beat it.

I think you're right about your under/ overweighting. In a 60/40 portfolio the US alone would account for 30% equity which is far too much exposure for essentially a single asset type (unless we start splitting between growth versus value, large cap versus small etc.). So 20% feels more comfortable (although even that could be further reduced).

Europe and UK seem good percentage allocations to me. The Asia/ EM of 15% is well positioned for the long term; also a decision is needed as to whether to split mostly into developed Asia or just go with EM which includes most of Asia anyway.

But the absense of Japan is noteworthy. I'd be allocating at least as much as Europe or UK.

The fixed income component could be further subdivided. A more mainstream corporate bond fund, for example. Although more sensitive to interest rate rises, those are anticipated to be few and far between. Personally I like to have high yield exposure because it's less sensitive to interest rates although the downside is the credit/ default risk is higher, but then you have a higher yield to compensate.

Any thoughts on how you will make the investments? It may make a difference to costs, and other factors, as to whether you choose OEICs/ unit trusts or ETFs, both of which offer an array of index tracking options but for which platform charges vary.

pip895

You might find some useful stuff in this recent thread:-

http://forums.moneysavingexpert.com/showthread.php?t=5761621

One point to consider is while passive is good for large company's Small companies exposure is generally better through actively managed funds.

I decided to use a global fund, then top up my exposure to certain markets using active Small Company Funds, as Linton suggested above.

Filo25

Many thanks for the replies, much appreciated.

Just to clarify I was including Japan within my ASPAC/EM share, I'm too used to thinking of it that way from work and keep forgetting to split out for investment purposes!

Fair comment on the Smaller Companies element needing geographic split as well, was just keeping it separate as I was thinking that if I was going passive I would need to get separate funds to address it as it wouldn't be included within my core asset market portfolios, but yes would need to decide market split as well.

As much as I am a noob when it comes to Equities, I am even more so when it comes to bonds.

I am pretty dovish on my view on rate increases as well, as is the market, but a bit of inflation in the system could change everything, and I can't rule that out, we're at a time when if I believe the official stats the Labour market is pretty tight, it just doesn't seem to be behaving like that economically yet, so I am still wary of anything particularly long dated on the bond front.

I take both points on high yield, I suppose it behaves more as a hybrid between bonds and equities, and gets hit in the same equities do when the market becomes more risk averse, so a much less effective hedge against equity price falls, but I don't want to carry huge amounts of short dated investment grade bonds at present due to the lack of return.

So do you think I would better with a split of Eq 60 High Yield 20, short dated inv grade 20, or just Eq 70 short dated inv grade 30?

I hadn't actually given any thought yet to how I would hold the investments, have a small S&S ISA at present which is basically all OEIC, but am not aware of the major advantages disadvantages of the different products, so thanks for raising as I should investigate. Also need to sort out what platform to hold on, my S&S ISA is on HL, but I know at these higher values the fee difference starts to become an issue.

Once again many thanks for all of your thoughts, they really are much appreciated, and I will read the other recommended thread now as well!

Filo25

One thing to add on this, which probably doesn't change anything but in addition to this one-off transfer there probably will be some additional investment going through from time to time.

When I say I would be putting £30-40k into my workplace pension that wouldn't be true now that I think of it, I would be putting about £30k through there and some years might put £10k into the SIPP (bonus dependant and I can't salary sacrifice bonus into the company pension)

Linton

Filo25 wrote: »

....
I take both points on high yield, I suppose it behaves more as a hybrid between bonds and equities, and gets hit in the same equities do when the market becomes more risk averse, so a much less effective hedge against equity price falls, but I don't want to carry huge amounts of short dated investment grade bonds at present due to the lack of return.

So do you think I would better with a split of Eq 60 High Yield 20, short dated inv grade 20, or just Eq 70 short dated inv grade 30?

......

I dont see High Yield as particularly useful unless you want income. If you hold bonds at all in a relatively long term portfolio I would go for Strategic Bond funds at the moment. These are actively managed bond funds where the manager makes the choice of what types of bonds best suit the economic conditions. Bond investing, unlike equity investing, is essentially a mathematical exercise as the returns from any particular bond are known in advance. I believe management of bond portfolios is best left to the experts and their software.

Filo25

Linton wrote: »

I suggest the following fund sector allocations. You should find a wide range of funds in each of the active sectors.

Equity (60%):
42% Vanguard FTSE Global All Cap - Passive
9% UK Small Companies- Active
3% Euro Small Companies - Active
6% Asia/Pacific/EM - Active

Notes
1 - you cant put Small Companies as a separate sector as they will have geographic characteristics as well. So I have upped your geographic %s to cover both small and large companies.
2 - You havent included Japan so I put it in Asia/Pac.
3 - We need a large extra % UK but the FTSE100 doesnt look attractive soI have put it all in Small Companies.

Bonds 40%:
20% Short dated investment grade bonds - Passive
20% Strategic Bonds - Active

Note: I dont see 20% High Yield Bonds as a good idea for the bond component of a 60/40 portfolio, they are too risky. If you want more risk perhaps you could add a bit to the equity.

Linton If I was looking at some funds in those areas do you think the following would be plausible candidates in the Active areas?

UK Small Companies - Lionstrust UK Smaller Companies or Marlborough Micro Cap growth or Jupiter UK Smaller Companies

Euro Small Companies - Janus Henderson European Smaller Companies

Asia Pac - Would you generally recommend separate funds for Japan and the rest of Asia Pac, there seem to be relatively few that include both.

Would you also view a Japanese smaller companies fund such as Baillie Gifford Japanese Smaller Companies worthwhile, or are we starting to get to the stage of adding too many funds at that stage!

Filo25

Linton wrote: »

I dont see High Yield as particularly useful unless you want income. If you hold bonds at all in a relatively long term portfolio I would go for Strategic Bond funds at the moment. These are actively managed bond funds where the manager makes the choice of what types of bonds best suit the economic conditions. Bond investing, unlike equity investing, is essentially a mathematical exercise as the returns from any particular bond are known in advance. I believe management of bond portfolios is best left to the experts and their software.

A fair point I am not embarrassed to admit I know little about bonds and leave it to those who do!

Linton

Filo25 wrote: »

Linton If I was looking at some funds in those areas do you think the following would be plausible candidates in the Active areas?

UK Small Companies - Lionstrust UK Smaller Companies or Marlborough Micro Cap growth or Jupiter UK Smaller Companies

The Micro Cap is rather too focussed in my view. I would see that as a possible adjunct to a majpor holding in a more broadly based SC fund. I have looked at Liontrust in the past. The other Marlborough SC funds (I hold Special Situations) are worth looking at as are the Old Mutual funds

Euro Small Companies - Janus Henderson European Smaller Companies

Never investigated it. I hold the Threadneedle Fund.

Asia Pac - Would you generally recommend separate funds for Japan and the rest of Asia Pac, there seem to be relatively few that include both.

Would you also view a Japanese smaller companies fund such as Baillie Gifford Japanese Smaller Companies worthwhile, or are we starting to get to the stage of adding too many funds at that stage!

Yes Japan and emerging SE Asia are very different and you dont seem to find many fund managers who excel at both - Baillie Gifford are an arguable exception. I hold the Baillie Gifford Japan SC fund - it has been a stunning performer in recent years. The Baillie Gifford Japan ITs look very good as well, though perhaps a bit too exciting. In my view anything less than say £5K or 3% isnt really worth the effort in holding and I am not sure that having only 60% of your portfolio allocated to equity that there is enough room to hold sufficient Janaese Small Companies to make a significant difference whilst remaining reasonably balanced. My portfolio is 100% equitywith a much higher % of Small Companies so I am happy to go for more niche funds.

Filo25

Many thanks Linton, a lot of food for thought there!

Any particular Old Mutual UK funds you would consider, I had looked at their Smaller Companies and Dynamic Equity funds as part of my S&S ISA, my only, maybe unfair, concern was that they seemed to have some quite major holdings in some companies which were maybe quite highly valued now after having experienced rapid growth