Portfolio Advice

bowlhead99

gif1 wrote: »

With regards to the Bond allocation , 30% of the overall portfolio, would you think that the M&G Optimal Income Class I - Accumulation fund is a sensible option? The target would be to have a conservative, low-risk, fund able to mitigate any downturn in the equity market (70% of ptf)
What put me off a bit is the high cost, but I am not sure what else to consider instead.
Thank you for any suggestions.

I wouldn't be unduly concerned by the cost of Optimal Income - it isn't particularly expensive as strategic bond funds go. Obviously looks expensive as a proportion of the income you would expect to take from it in these low-interest times, but your 30% bond allocation is presumably more about defending against losses or at least not being wholly correlated with equities, than it is about literally getting the biggest amount of income you possibly can.

Having held it in the past and got good results, I have something of a soft spot for the fund (which is something you shouldn't do in the cutthroat world of investing) and it's used in both my mum and dad's ISAs which are more conservatively positioned than my own.

One thing about its strategy I like is that it isn't exclusively a bond fund and can invest in income generating equities when the mood takes it. It did particularly well versus some other strategic bond funds in the previous financial crisis, as after having not fallen too far, it had a lot of flexibility to capture the recovery through investment types which the investors in the fund were already aware it might choose to use. Perhaps you could call it 'strategic bond plus'.

Of course, the shape of any financial markets crash from here might be quite different this time out as we already have plenty of QE yet to be rewound, and historic low interest rates around much of the world. So past performance of bond funds (which have been in pretty much a 30 year bull run) is not always a guide to the future blah blah blah.

At the moment Optimal Income has some relatively cautious positioning and has a lower duration than some other strategic funds. Their recent reports or commentaries have sounded sensible.

If you had a large existing portfolio you were rebuilding from a clean slate, I might say use more than one strategic bond fund. However starting from scratch with only (say) £500-£1000 per month to be split across the whole portfolio you only have a couple of hundred quid each month going into bonds anyway. Probably below the level at which you'd look to throw money into two separate strategic funds, because if you already have one specialist manager allocating your 'fixed interest' money, you probably don't need another when -to be frank- you don't have tens of thousands of fixed interest allocation anyway. When the whole portfolio isn't even five figures you don't need to overcomplicate things.

However as I said in an earlier post there is more than one way to skin a cat. The 30% of 'not-equities' in your portfolio doesn't have to be a pure strategic bond portfolio. There are plenty of other things that aren't pure equity plays - commercial real estate, infrastructure, absolute return funds and, as mentioned by Linton, capital/wealth preservation funds or investment trusts which use a conservative mixed asset approach towards not losing too much of your hard-earned. When you have more wealth built up that you want to preserve, they can all be of use.

But while starting from a relatively low base, thinking of the options as just managed or passive equities and managed or passive bonds, is fine for most people. Take a look at what other options are out there, certainly, but you don't have to try to use every strategy and asset class in the book if your overall level of assets doesn't really justify it. To an extent, if you're drip feeding money into a portfolio each and every month you will not need to go super-duper diversified on what you hold, because there is always fresh money coming in if something falls in value/gets cheaper

gif1

Thank you all for your feedback and advice. I guess the asset allocation I am going for is
- Fundsmith Equity I Acc 30.0
- Lindsell Train Global Equity B GBP 25.0
- First State Asia Focus B Acc GBP 15.0
- Trojan O Acc 15.0
- M&G Optimal Income A Acc GBP 15.0

I am aware I am missing out some sectors/regions, this is supposed to be just a starting point, but seems to be covering the most as far as a global allocation is concerned.
Would you agree on such a statement and in general on the shape of the portfolio (even if this would not be your choice) ?

bowlhead99

gif1 wrote: »

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I am aware I am missing out some sectors/regions, this is supposed to be just a starting point, but seems to be covering the most as far as a global allocation is concerned.

It's not really covering 'the most' on a global allocation as it's missing all of north and south America outside the US together with other emerging markets outside Asia: emerging Europe, Russia, Africa. And some of it is very high conviction stuff (e.g. the Asia Focus fund is an Asia ex-Japan fund, so the only real allocation to Japan is via the LT fund; so while Japan is 10% or so of the overall portfolio, it's only about six companies to represent the second largest stockmarket in the world.

Still, as you mention, most of the main regions are covered. Using Fundsmith and LT for most of the global equities allocation is a high conviction approach, but that doesn't mean it's a bad one - those managers may make good calls. Just make sure you're comfortable with a volatile return as the 25% allocation to cash and bonds within the Trojan and Optimal Income funds will take the edge off the equity volatility but still let you have lots of ups and downs over the years.

(even if this would not be your choice) ?

Certainly wouldn't be everyone's cup of tea but I have seen worse as a long term buy and hold portfolio (I assume you will rebalance it periodically).

You mention it is 'just a starting point' but there is an argument to say you should resist the urge to fiddle with it for quite some time otherwse you will be perpetualy tweaking it to try to outthink the managers you've employed.

Good luck with it anyway, best wishes for the new tax year!

gif1

Hi bowlhead I appreciate your time and feedback. Yes I know I am missing out on some emergent markets as well as small cap. That's why I said the portfolio is a starting point; I will try to cover those sectors and regions in the near future and rebalance accordingly. Regarding the allegedly small number of holdings, isn't that the case with any actively managed fund? I have looked around and there not seem to be active funds with a far greater number of holdings, so I guess that is the disadvantage/advanced (?) of active management. Thank you.

Prism

gif1 wrote: »

Regarding the allegedly small number of holdings, isn't that the case with any actively managed fund? I have looked around and there not seem to be active funds with a far greater number of holdings, so I guess that is the disadvantage/advanced (?) of active management. Thank you.

You can get active funds with 70+ holdings but I generally prefer the higher conviction ones like those you have chosen. The reason that LT and Fundsmith only hold between 25-30 is because the criteria for a company to be included in one of those funds is a pretty high bar. The others tend to work more like expensive trackers. Whether its an advantage or disadvantage is all based on the performance.

rathernot

gif1 wrote: »

Thank you all for your feedback and advice. I guess the asset allocation I am going for is
- Fundsmith Equity I Acc 30.0
- Lindsell Train Global Equity B GBP 25.0
- First State Asia Focus B Acc GBP 15.0
- Trojan O Acc 15.0
- M&G Optimal Income A Acc GBP 15.0

I am aware I am missing out some sectors/regions, this is supposed to be just a starting point, but seems to be covering the most as far as a global allocation is concerned.
Would you agree on such a statement and in general on the shape of the portfolio (even if this would not be your choice) ?

Maybe have a think about whether there's sufficient benefit in keeping 30% in those last two options rather than keeping it available cash and using it where it makes sense to do so.

I've gone through a very similar process recently and there seems a lot of merit in using cash to buy things and when it doesn't make sense to buy, keep the cash as cash.

It's a point of view, depends on your timelines etc.