Global equities and diversification

gm0

In the context of a broadly "passive" buy the index approach to global equities holdings for a pension entering drawdown. Reviewing portfolio.

FTSE4Good Developed Tracker - I am trying to understand the downsides in practice - from mismatch to whole market or from other issues. A comparison point perhaps is a straight retail SIPP Vanguard or HSBC global equities index fund.

Current fund is an L&G (PMC) Unit linked life insurance reported in GBP. Unhedged.
The reports June 2019 suggest it holds 1031 holdings of the 1034 in the FTSE4Good Developed index.
It is a small fund (by fund value) but I don't see that it matters in this context.

Various versions of it exist in specific occupational schemes. It is implemented (I think) as a defined performance outcome on top of other actual underlying funds managed at L&G PMC (if I have understood it right). Transparent only to the extent that there is an index to look at.

It is cheap to hold but how good a proxy for global equities is it?

Fund report breakdown:

Size: 98.5% large cap.

Geographies - US 54% / Japan 7.6 / UK 7.6 / France 5 / Switz 4.6 Aus 3.6 / Germany 3.5 / Canada 3.3 / Netherlands 1.8 / Other 8.6

Top 10 as %

Microsoft Corp 3.9 Apple Inc 3.5 Alphabet 2.5 Johnson & Johnson 1.4 Nestle 1.2 Visa 1.2 Procter & Gamble 1.0 Royal Dutch Shell 1.0 Bank of America 1.0 AT&T 0.9

Financials, Tech and Healthcare are just over half.

I tend to react by thinking that I should find some smaller cap investments elsewhere if I plan to keep using this fund (I know this starts to tilt away from a simple buy the index approach - hence "broadly")

Any thoughts or experiences with these indices or similar funds ?

gm0

Given the total lack of response (and small size of the fund) I can only conclude that FTSE4Good Developed is a fairly niche item.

Meanwhile I have done a bit more reading and worked out for myself that the 1300 equities (largest cap) is a "short" list and 2000, 3000, even 6000 would be a "better" global equities play although how *material* the difference actually is would require more data and a little maths to determine the historic difference in volatility of the two scenarios

Let me rephrase the question differently in hope attracting some input:

Are there any mainstream suggestions for an "ethical" global equities play ? - a well diversified global fund minus tobacco and list of sin stocks. Passive or Active. Role of the fund is a core equities for a pension in drawdown

arwain

John Edwards of the DIY investor UK site
https://diyinvestoruk.blogspot.com/p/portfolio.html
seems to be switching some of his investments over to more green/ethical options you might get some ideas from there if you don't get much response from here.

Linton

Having 10% in 3 companies all in the same geography and sector would concern me. Both because it represents a highly correlated tranche but also because it reduces the %s that could be assigned more broadly elsewhere.

Thrugelmir

Diversification. Small companies, commodities, property, fixed interest , private equity, emerging markets, frontier markets etc etc. Within each asset class there are sub asset classes.

The art of diversification is to consistantly beat the average ( and produce a positive return) every year not neccessarily be in the top quartile by holding a highly concentrated portfolio.

gm0

Thank you for contributing to my portfolio planning education.

Targeting long term sustainable returns and a chance of a pot left over - not short term exceptional ones. Use more asset classes where practical, and plenty of diversification within a given asset class = better chance of sustained performance across the business cycle. (This argument can of course be extended all the way to the permanent portfolio and physical gold but let's not go there).

As suspected I am (a bit) overconcentrated in large cap, via that individual tech stocks and don't have a "long enough" tail of stocks for this to be viewed as reasonably diversified equities. The fact it has been an OK bet recently being irrelevant to the long term whole of market argument. So as an exercise I first went to look for similarly priced and focused alternatives in my scheme that I could switch to if it checked out.

As it goes - there is another Global Equities Indexer built as follows:

Tracking index is a composite of 45% MSCI World Adaptive Capped 2x Index, 45% FTSE Developed World Index ‑ GBP Hgd and 10% FTSE Emerging Index

Unsurprisingly it is simply split across three funds

45% MSCI-World-Adaptive-Capped-2x-Index-Fund GPCW
45% World-Developed-Equity-Index (hedged) GPBG
10% World-Emerging-Markets-Equity-Index-Fund HN

The first two do seem to spread the stock selection a bit judging by the top 10s.

I previously rejected this fund on a quick analysis as "2x" spoke to me of leverage and not of stability and I wasn't sure I fully grasped the purpose behind the some hedged, some not aspect either.
And it puts 10% emerging in the mix (which I am neutral to positive about).

I went and fetched the data: % change to unit prices calendar years. 2006- Ten years 2008-2018
137% plays 60%. I have only been in the ethical fund since 2017 but did the long look back for the purpose of the exercise. That looks like extra performance and volatility (for ??? additional risk taken ???) between two ostensibly indexing products

The large cap concentration and absence of hedging has been favourable over the period.
The theoretically a bit "safer" option of the two has lagged by half over 1/4 of a 40 year retirement period so not insignificant. I am also not particularly loving the "protection" shown in the periods of less bullish sentiment either. It needs to work sometime. I feel this is long enough that the "better approach" should be showing up. Allowing that there is >3-4% of annual noise between the two - before any signal about one under or over performing the other shows up at all.
But it rather looks like this particular fund choice could be (certainly was) "the wrong kind" of diversification. Now the next decade could be completely different and play to its strengths of course - but since I thought both were global equities indexers - I wasn't expecting lots of extra volatility from strengths and weaknesses of the approaches). RTFM clearly.

Any further suggestions on where I should try to develop the thinking next ?

The tentative conclusions I have drawn by myself are

1) Look to diversify within equities as an asset class more (as well as any other asset class holdings).
2) Choose something other than this particular composite packaged fund because of the unwanted hedging and leverage features. Find something simpler.

For options within the scheme I will look at the active equities and multi-asset funds next and try to run up some numbers against DIY Vanguard or HSBC outside the scheme

Performance Data

Period Ethical (F4G) Global (Composite)

YTD 21.79 19.7
2018 -2.88 -7.2
2017 12.01 16.32
2016 29.9 14.37
2015 4.37 1.71
2014 11.77 6.89
2013 21.91 19.73
2012 12.02 13.5
2011 -7.48 -9.74
2010 8.92 10.49
2009 18.85 26.14
2008 -19.35 -35.03
2007 5.16 7.15
2006 10.82 14

AnotherJoe

Hedging in the medium to long term is a terrible idea. Costly and counterproductive.