How to invest money that has been transffered to SIPP

economic

I decided on the following for the SIPP:

40% in Fidelity world index
30% fundsmith
15% scottish mortgage trust
10% Vanguard EM
5% Polar Capital Biotech

Will buy the first 3 right away and the last 2 will time it/ wait for a better opportunity as they have gone up quite a bit and are generally quite volatile.

bowlhead99

economic wrote: »

Bowlhead - thanks for your comments and certainly understand where you are coming from. Deciding on investments is more of an art then a science and as you say what looks perfect for person A will look imperfect for person B.

What i would like to ask (seeing as i take your comments very seriously as you are well respected on these boards and clearly have a lot of knowledge) is what do you suggest as a portfolio construction given my position:

[Etc]

How would YOU construct a portfolio given the above?

I wasn't ignoring you, only just saw your reply ; and thanks for the compliment

Really, the point of my comments and observations on threads like these are to give the OPs and other readers some other angles to think about and challenge what they are proposing to do - the are always several ways to consider the same point.

However, I'm not in the habit of finding people who are wealthier than me with more money than they or their family reasonably need, and who seem reasonably intelligent, and then devoting a bunch of time to research and deliver them a tailored recommendation on how I would personally deploy hundreds of thousands of pounds if I was in their position. My leisure time is worth (to me) lot of money per hour and I already give a lot of it away for free, so I'm not really into building virtual portfolios for other people to invest their money in. There are usually other people who are more in need of a steer via some more general comments.

For example, if I spend a few hours coming up with and justifying a special portfolio for you to represent how I would deploy £200k in your position today, but completely screw up one part of it with a terrible slapdash recommendation that seems superficially ok but eventually only produces 75% of the return it ought to have done... you won't care anyway because you don't even need the money. Which would demonstrate why, relatively, it was a complete waste of time for me to try to make the suggestions in the first place.

I decided on the following for the SIPP:
...
10% Vanguard EM
5% Polar Capital Biotech

Curious why, out of all the various options, you decided that an index (and specifically the MSCI EM index) was the best way to get exposure to the best companies on less-developed stock exchanges;

while by contrast in biotech - where the big popular players are generally listed in the US (the most advanced stock market in the world with massively better information flows and corporate governance than in some emerging markets) - you don't trust any of the index options and instead choose an active manager like Polar? And not other options in OEICs like AXA Framlington Bio, or in investment trusts like BIOG etc? Was it the fact that Polar didn't have a five year track record, unlike the others, that stiffened your resolve to select them above the other active managed options?

HTH

economic

bowlhead99 wrote: »

Curious why, out of all the various options, you decided that an index (and specifically the MSCI EM index) was the best way to get exposure to the best companies on less-developed stock exchanges;

while by contrast in biotech - where the big popular players are generally listed in the US (the most advanced stock market in the world with massively better information flows and corporate governance than in some emerging markets) - you don't trust any of the index options and instead choose an active manager like Polar? And not other options in OEICs like AXA Framlington Bio, or in investment trusts like BIOG etc? Was it the fact that Polar didn't have a five year track record, unlike the others, that stiffened your resolve to select them above the other active managed options?

HTH

RE: biotech - i chose Polar Capital because i see value in having a good active manager for biotech. I own BIOG already so am "diversifying" away from it too (yes i did tell my brother about this and he is happy). The other thing is Polar invests more in smaller "startup" biotech firms which i am taking the view will outperform, the larger ones "probably" have not as much growth in them given the nature of the industry. Polar cap has also outperformed AXA in every year since its launch so i am taking the view this will continue (strength begets strength usually).

RE: EM - the fidelity world idnex tracker is just developed markets so is missing the EM component. I just want a passive EM fund so that i can get global exposure including EM. Yes i know 10% is a bit too high but the managed funds i have chosen are underweight EM massively (except SMT which has a lot of china, but thats a special case as its BABA etc).

bowlhead99

I don't see 10% EM as being massively high, just wasn't sure the rationale for relying on 'market efficiency' to allocate your capital to any old rubbish in the index in under-developed markets, when in the developed world you are going with the popular big name fund managers to try to find the diamonds in the rough, and in the bio sector you are doing likewise.

If I was calling someone out for telling their family they had an investment plan for the £200k when really they were just having a punt, I'd say just as I did in an earlier post... OK, so your plan is....?

-40% developed world index because I heard you can't beat the index in an efficient market;

-45% conviction-driven global equity funds because these guys prove you can beat the index in efficient developed markets and they are popular and mentioned here a lot and they have different themes so I have to buy both;

- 10% emerging market index because hopefully you can't beat the index in an inefficient under-developed market, although I'll time my entry point to buy it because it's important to time what you buy and when;

- 5% in active fund in a specialist single-sector fund that might be a good theme for long term, selecting the active fund on the basis that you can't trust the market index even though you can trust it for generalist developed and emerging; select the fund on the basis of it getting lucky and going up the most in the last three years even though the team hasn't been going for a full five or ten or fifteen years to build a track record like other contenders in the sector. Oh and hold off on buying it yet because it seems a bit high.

This seems a bit slap dash to me, thus the flippant response

But given the objective is :
Spend the £200k - its owners definitely don't need it;
Hope for growth, don't mind if I get big drops, not the end of the world if I do badly
No access required for 25 years

Then maybe there is no need to try to be cleverer with it.

A mix of index funds and active funds with somewhat arbitrary allocation ratios between them, in broadly high growth areas, using poplar brands of fund manager, and trying to time the purchase to get a better price although it doesn't really matter if it doesn't...

is probably not going to go catastrophically badly.

economic

Whats the alternative? there are near infinite ways to come up with an allocation - different weightings and different funds/stocks. Any of them will seem to be a bit "slap dash" as you call it.

What do you mean by cleverer exactly? Are you suggesting i wait for a correction? Or should i rethink my allocation? In which case any possibility i am sure will look "slap dash" to you or anyone else for that matter.

economic

After much re-thinking i have come up with a revised allocation. Having discussed it with my brother, what is important to us most of all is growth and willing to take some risk as we have a 20year+ time horizon. At the same time we do not want to over complicate with lots of funds, dont want to be concentrated in any sector/region and want to keep rebalancing to the absolute minimum.

We also feel that going completely passive or completely active is not the best approach. The former may provide near market returns but we feel we can take some risk on active managers to try beat the market long term. The latter is dependent too much on active managers and thus too much risk plus time consuming too as i will be regularly monitoring active manager performances and want to reduce any errors in doing so. So the approach we agreed on is a mix of both.

Granted the below is somewhat arbitrary but it is what feels right for both me and my brother. I have run it through trustnet protfolio scan and we are happy with the overview of the risks/ asset allocations.

Vanguard all-cap index fund - 57%
Fundsmith equity - 15%
Scottish mortgage trust - 15%
Baillie Gifford EM growth - 9%
Legg Mason Japan Eq X hedged - 4%

SMT and fundsmith are obviously very popular and of course i am taking risk on active managers continual performance, however i am willign to take that risk and these two funds seem to compliment eachother quite well (both growth but one is more defensive, other more cyclical).

Was wondering of anyone elses thoughts on this and if i maybe missing something - maybe i am missing a trick and should be doing something cleverer.

bowlhead99

economic wrote: »

Granted the below is arbitrary but it is what feels right for both me and my brother. I have run it through trustnet protfolio scan and we are happy with the overview of the risks/ asset allocations.

Vanguard all-cap index fund - 57%
Fundsmith equity - 15%
Scottish mortgage trust - 15%
Baillie Gifford EM growth - 9%
Legg Mason Japan Eq X hedged - 4%

The obvious point to make is that if you both understand the risks and potential allocations to know what should feel right, and it feels right - albeit pretty arbitrary because you could change some of the numbers and it would still feel right - then it is probably fine, as long as you really do undestand the risks and the options available so that your collective opinions on whether something feels right actually carry weight.

There is not a lot of point us telling you / suggesting to you to do something different, especially when if the allocation you've picked or we pick ended up being very suboptimal it wouldn't matter too much anyway because you don't need the money. There are pretty much infinite combinations that would still 'feel right' and be fine, just as there are pretty much infinite combinations which would be bad investing.

With the allocation held within Fundsmith, SMT and the global all-cap tracker. you have about 6.5% allocated to the UK and 93.5% outside the UK. Given the allocation to global allcap is an arbitrary 57%, I would reduce it to accommodate a UK smallcap fund. No harm in having less than 93% of your investments be in foreign markets, to allow a bit of bias to the UK given that's where you live. You may feel brexit is a problem so you want to avoid UK but this is a multi-decade investing plan and over time there are always plusses and minuses that the market has or hasn't fully priced in, so I wouldn't be unduly negative towards the UK as an investment market.

It depends of course on your other assets. Given you have properties and cash and other UK and non-UK investments and a couple of decades of employment earnings potential, then deploying another £200k of funds is all about what overall mix you'll intend to get to in the end, which you haven't shared.

economic

Thanks Bowlhead.

You are pretty much spot on on the UK allocation - trustnet says 6.6%!!

Agree it depends on the rest of my assets, however the difficulty with the SIPP allocation is that i have to consider my brother as well, and we have both very different amounts of assets and allocations. Thus we have decided to keep the SIPP more general with a bias towards long term growth so that mine and his existing assets (not the SIPP which is my parents) can be gradually changed over time to suit our needs independently, whilst keeping in mind the SIPP. The 6.6% UK weighting is pretty much the UK market cap weighting vs global according to the vanguard all cap fund.

My brother has no investments and is just all in cash now (he is planning to buy a house soon as he is getting married). This is very different to me, i have the following (excluding my home):

- Pension - 100k, half in Baillie alpha growth, other half in 2 trackers (global and US split equally).

- ISA/trading accounts - 250k, half are in global and US trackers, half in individual shares (tech, US banks mainly) and fundsmith and BIOG.

- P2P lending - 50k, across 8 platforms

- Cash - 120k some in cash isa, NSI certificate, rest in accounts paying around 1%

My plan is to utilise my ISA and trading accounts for more specific investments like UK small caps as you say, as opposed to the general investments that i plan fo rmy parent's SIPP and that is in my pension (which i can only invest in specific funds provided by the pension provider - i am fine with this as the platform is free and the managed funds OCF are at discounted levels).

Not sure if the above would cause any concerns for the SIPP allocation decision i have outlined in my previous post?

economic

I should add that the global tracker in my ISA is the Vanguard LS100% which is overweight UK.

But i agree i probably should add more UK exposure. Do you recommend any UK small cap funds? Is managed the best way to go for this?

bowlhead99

economic wrote: »

But i agree i probably should add more UK exposure. Do you recommend any UK small cap funds? Is managed the best way to go for this?

There are lots to choose from - for UK smaller companies sector there's probably about 20 investment trusts and twice that in the OEICs world. Passive is pretty impossible due to lack of available options but from a common-sense perspective it seems that actively looking at the companies you are buying is a better way to select them than taking the index return when the constituents are smaller and less widely covered/reported. Index investing relies on the market having perfect information which is more reasonable in S&P500 than in UK smallcap/AIM/fledgling.

In investment trusts I like the approach of Strategic Equity Capital - look at the five or ten year performance rather than the 3-year where they're fourth quartile . In December their management did an MBO so they are well motivated. Currently trading on a discount of 15% which offers some upside over the long term.

Standard Life's smaller companies investment trust is one I have had in and out of my portfolio for the last 10+ years and seem to be fine.

In the OEICs world there is lots of choice. My Dad piled all his ISA allowance into Marlborough Microcap a few years ago just because it was top of the list of high performing funds within the HL marketing list when he opened his ISA and he didn't really know what he was doing but liked the idea of supporting smaller domestic companies. I made him sell a chunk of it to give more balance to his portfolio but the piece he has kept has continued to do well. Microcap is always going to be more volatile than smallcap generalist but if you are not looking to exit for 20 years it might not be a bad place to be.

Really there are lots of funds to choose from. Look at longer term track record history than just the standard 3-5 year graphs you see online, as it has not been difficult to make money in the markets in recent years. Things like the 'FE risk scores' are weighted to recent performance and volatility and so Trustnet will tell you that of the top 40 open-ended funds in the IA UK Smallcap sector, 39 of them have scores below 100 (i.e. lower than FTSE100) but in reality they are not all safe and stable opportunities.

If you want to try an outsider from a popular manager, there's always Woodford Patient Capital which people are moaning about as it has yet to make progress - but its stated strategy of investing half in smaller /microcap/unlisted UK companies with a liquidity pool of larger companies, does not sound bad on paper. Its problem IMHO is its size, as raising £800m (well over original target) to invest in the smallest things you can find, will pose a challenge to deploy all that money in the most attractive opportunities.

Good luck with your research (not that you need luck, as you've already said you and your family don't need the money )