Portfolio review please

aroominyork

I’d appreciate a review of the equity part of my portfolio before my planned move from all invested in active funds*, to a passive core with satellite active funds. This is a combination of my and my wife’s SIPPs and ISAs totalling around £450k intended for retirement in about 10 years. We may retire before then but I will have a lump sum (currently invested in property and low risk assets) coming in beforehand so I consider these SIPPs/ISAs a medium-term investment. I have stripped out the bonds as it is only the equity allocation I am interested in at the moment.

I started DIYing in summer 2017 intending to give it a couple of years to see how I did against the index. I’ve outperformed by a few percent but this year I’ve been gradually de-risking and this move is another step in that process, the reasons being:
- It is currently too growth oriented. I have added a couple of value oriented funds but feel I have been trying to balance two ends of a see-saw and it would be better to sit closer to the middle.
- I have around 40% in Fundsmith/Lindsell Train funds/ITs (it was about 55% until recently). I remain a fan of their approach but, in case the tide turns against them, I do not want to feel over-exposed.
- With active funds there is too much temptation to meddle, especially in a bear market. I want a portfolio that discourages this.
- And overall, I want a portfolio where I am not trying to be too clever. If the markets crash and I come out worse than average, I want to feel I was sensibly positioned and it was more bad luck than bad judgement. Sounder sleep.

I plan for active funds in areas where they usually outperform the index: Emerging markets; Japan; European and UK smaller companies. I will reduce but not ditch my Fundsmith/LT holdings. Below are my current and my planned portfolios, keeping similar geographic allocations of UK 16%, Developed Europe 14%, US 39%, Japan 10%, Emerging markets 13%, Developed Asia Pacific 8%.

Current portfolio:
- Fundsmith 17%
- Artemis Global Growth 10%
- Smithson IT 10%
- S&P 500 ETF, hedged (XDPG) 18%
- Lindsell Train UK 5%
- Liontrust UK Smaller Companies 5%
- Barings Europe Select 6%
- Lindsell Train Japanese 9%
- Stewart Investors Asia Pacific Sustainability 8%
- Vanguard Global Emerging Markets 8%
- BlueStar Israel Technology ETF 4%

Proposed portfolio:
- Vanguard LifeStrategy 100 30%
- Fundsmith 12%
- Smithson IT 7%
- S&P 500 ETF, hedged (XDPG) 13%
- Liontrust UK Smaller Companies 5% (a bit more than I want but given its 3% bid-offer spread I will hold on and let it reduce when I add new money to other funds next year)
- Barings Europe Select 6%
- Lindsell Train Japanese 7%
- Stewart Investors Asia Pacific Sustainability 8%
- Vanguard Global Emerging Markets 8%
- BlueStar Israel Technology ETF 4% (geographically included in Developed Asia Pacific, and bought in Dec 2017 just before MiFID II put it out of reach – currently nicely up 35%)

Thanks in advance.

* A very late edit. It's not currently all active. XDPG is an index fund.

masonic

Your proposed geographic spread and split between larger and smaller companies looks remarkably similar to my own, I'm just a little more pessimistic on the UK. I don't see any obvious issues with the portfolio.

MPN

Is there any particular reason for using Vanguard LS 100 instead of an all world passive index fund or ETF?

aroominyork

MPN wrote: »

Is there any particular reason for using Vanguard LS 100 instead of an all world passive index fund or ETF?

To retain the UK allocation. If I later want to reduce the UK I can change it for a world index.

Thrugelmir

Doesn't appear to provide much defensive cover against a slow down in global growth. Broadly speaking you are still adopting a higher risk strategy given the exposure to equities. On a see through basis what's the exposure by industrial sector.

aroominyork

I have other assets outside equities so I recognise this is higher risk. But your point about global growth is interesting - though I've seen some opinions that growth stocks do better in downturns, others (though less often) saying that value do.

But I take your point that there is still a growth tilt in the proposed portfolio. Smaller companies are almost by definition bought by active fund managers for growth rather than value, and Fundsmith/LTs' strategies are based on growth. Those five investments (Fundsmith/Smithson/LT Japanese/Liontrust/Barings) account for 38% of the total, or 66% if excluding the VLS100/XDPG (presumably blended?) index funds. What do you read into that, and what do you suggest? Finally, I've never done industrial sector see throughs as I'm not confident in how to interpret them; I understand about loo roll being defensive and cars being cyclical, but not much beyond that.

Audaxer

aroominyork wrote: »

I’d appreciate a review of the equity part of my portfolio before my planned move from all invested in active funds, to a passive core with satellite active funds.

It seems to still have a significant percentage of active funds, if the main core of passives is the VLS100 at only 30% of the portfolio. When you said a passive core I thought it would be about 70%/80% passive.

I'm interested to know if you will be keeping this type of portfolio when you retire, or whether you will move to more income generating funds?

aroominyork

XDPG is also passive.

Re after retirement, I'm not sure I believe that income generating funds are better than better performing low income funds which can be sold in place of taking dividends. But I think that's a different discussion.

Thrugelmir

aroominyork wrote: »

I have other assets outside equities so I recognise this is higher risk. But your point about global growth is interesting - though I've seen some opinions that growth stocks do better in downturns, others (though less often) saying that value do.

As an example of the correlation between global equities. Around 33% of France's export manufacturing output is for the German automotive industry. Some 25% of global trade is automotive related.

You'd be unlikely to find value stocks amongst the global majors. Too highly researched these days. Value investing requires patience, i.e. identifying targets. Then waiting for an opportunity to purchase the stock at a fair price. Corrections often provide this opportunity. As market makers go red across the board to protect themselves. With little thought to company fundamentals.

I hold a few growth shares, though I accept that the loss could be sizable. These tend to be at early stages of development. Little interest from institutional investors. Understandable business model. Management with skin in the game. Cash generative (or at least reducing indebtedness). Again corrections may cause wild price fluctuations. Though best to sit tight and simply ride the waves out.

JohnWinder

Can you provide the (or any) basis for your view ‘…active funds in areas where they usually outperform the index: Emerging markets; Japan; European and UK smaller companies.’ please?
As I read the recent SPIVA reports comparing active and passive funds, and assuming your investing is in GBP or EU denominated funds:


‘Despite their (emerging markets funds) notable performance over the one-year period, 87% of GBP- and 95% of EUR-denominated emerging market equity funds underperformed their benchmark over the 10-year period ending June 30, 2019.
o Additionally, on an asset-weighted basis, the EUR-denominated emerging market equity fund category underperformed its benchmark by over 2% annually over the same 10-year period.’

After 5 and 10 years, most UK small cap equity funds have underperformed their benchmarks.

Prism

JohnWinder wrote: »

Can you provide the (or any) basis for your view ‘…active funds in areas where they usually outperform the index: Emerging markets; Japan; European and UK smaller companies.’ please?
As I read the recent SPIVA reports comparing active and passive funds, and assuming your investing is in GBP or EU denominated funds:


‘Despite their (emerging markets funds) notable performance over the one-year period, 87% of GBP- and 95% of EUR-denominated emerging market equity funds underperformed their benchmark over the 10-year period ending June 30, 2019.
o Additionally, on an asset-weighted basis, the EUR-denominated emerging market equity fund category underperformed its benchmark by over 2% annually over the same 10-year period.’

After 5 and 10 years, most UK small cap equity funds have underperformed their benchmarks.

Agreed, but its a bit like selecting individual shares. You don't always have to pick the good ones, just avoid some of the bad ones. UK small companies is likely a good area to try some active funds since the numbers are very close. Based upon that document both UK mid and small cap active funds have about the same return over 10 years as passive ones on average. The numbers are slightly better for the asset weighted results.

So an investor needs to pick more good funds than bad ones - not impossible to achieve and unlikely to hit returns much even if picking randomly