Views on these fund choices please

Victorwelldue

I have an L&G workplace pension 100% default fund "L&G PMC MultiAsset Fund 3" which has performed OK over recent years in common with most investments over recent years but is only 40% equities whereas I want to be closer to 60% equities. As I'm not an experienced investor ideally I would have just picked a diversified multi-asset fund with a 60% equity allocation (something similar to my current fund but with higher percentage of equities). Although L&G do have such funds they are not available for me to choose from so it was suggested in a previous thread that I could choose funds myself that would give me a similar mix and to that end I have came up with a couple of potential choices below that I would appreciate people's views on i.e do these seem like reasonable choices for a 60% equity diversified "homemade" multi-asset fund?

Hoping to retire in 10 to 12 years.

Choice 1
40% of portfolio L&G PMC Pre-Retirement Inflation Linked Fund 3 (NES3)
30% of portfolio L&G PMC North America Equity Index Fund 3 (NDX3)
30% of portfolio L&G PMC European Fund 3 (B8M3)

Choice 2
40% of portfolio L&G PMC Pre-Retirement Inflation Linked Fund 3 (NES3)
30% of portfolio L&G PMC North America Equity Index Fund 3 (NDX3)
30% of portfolio L&G PMC Global Equity Market Weights (30:70) Index Fund - GBP 75% Currency Hedged 3 (NRJ3)

Also regarding charges: I assume it doesn't really matter if you have 1 fund or 10 funds in your portfolio as all that matters is the overall percentage charge across the portfolio? For example one fund with charges of 0.15% would be same total charges as 10 funds if all 10 funds were each 0.15% - Have I understood that correctly?

dunstonh

Neither option would be suitable for you IMO.  

If you are going to build a bespoke portfolio then you should have some structure to it.  Putting 30% in US and 30% in Europe (exc UK). would be very bad investing.     No UK equity, no Japan, Asia, Emerging markets etc.   Just the whole lot in US and Continental Europe.    Plus, picking 30% in each is just random numbers with no thought put into how you got to those numbers.

The fixed interest fund you have selected is only for indexed linked gilts by the looks of it.   What about all the other areas of fixed interest securities.  Index linked gilts are not a particularly volatility reducer at this time (that will change at various points).  So, why select just them?
Option 2 is not much better as you have decided to go massively heavy in the US.    Is that because the US has been the best performer in the last cycle?     Would you have still made that decision had the US been amongst the worst performers (as it was in the previous cycle)?

If you don't have the knowledge and there isn't a multi-asset fund fund available that matches your risk level then go with a global equity fund (inc UK) and a fixed interest fund that is a catchall for the different types of fixed interest.   

JohnWinder

Sorry about the formatting.

The nail that sticks its head up gets hammered down. A bond index with linkers only! Ouch.

Your N American stock is not tracking the worst index in the world; we might have been looking at that earlier discussing tech funds. Indeed it’s a pretty good USA stock index, just missing small cap companies (not a hanging crime), and the fund is cheap. Same for the European.

The bond fund is complex, IF I found the right one. It’s half government, half corporate, lots of linkers, some nominal (not inflation linked), mostly UK, and a possibly indecent amount of low credit risk. It’s an active fund trying to keep up with inflation - a worthy cause, but is this the way? I honestly don’t know, but happy to try to unpick it.

You’ll hardly find anyone with an inflation linked bond fund as their only bonds, but don't worry, that wouldn't be you with this fund. Hence the reaction it elicited. But such a fund is not a crazy choice, just not the one most people would be prepared to go out on a limb with. As bonds go, linkers have everything you want in a bond, except they get hit by deflation and their short-ish history leaves some uncertainty about how they fare in a crisis; and they have the unique beauty of protecting against unexpected inflation. What’s not to like, since deflation is rare and prices of goods get cheaper not dearer? My concerns with that fund would be: can’t see its cost; too much in high risk bonds, and they have few constraints on how it invests, so could change substantially. But I still have an open mind on it.

The equity funds are fine, as far as it goes. But there are good reasons to think that global investing is better, not excluding parts as yours do, and as broad as you can with capitalisation of companies (some of yours exclude small cap companies - not a hanging crime).

As well, you have to make a choice about currency hedging with global spread as it includes little in GBP thus exposing you to exchange rate changes.  The general view is that it’s not important to hedge currency with equity funds, but without it you’ll suffer if the pound rises against everything (particularly $US as half a global fund will be US stocks). Cowards currency hedge (that’s me), but maybe just half of one's equities.

The other big consideration with equities is how much ‘home bias’ you have: a global fund will have ~5% as UK stocks, but a lot of people think locals should have a bit more of their own country's stocks - almost whichever country you’re in (maybe not Timor Leste).  Your choice #2 last fund does hedging and home biasing very satisfactorily, and I’d say it’s a pretty darn good fund at a quick glance. But adding a US fund to it, as you suggest, unwisely moves you well away from global cap weighting and some home bias, and it wouldn’t be my choice. The hazard has been clearly stated: it looks appealing now because US stocks have done well in recent years; it’s just unwise to bet on it continuing which you effectively do by overweighting it.

More discussion will ensue, and you’ll get a better idea of suitable options.

[Deleted User]

A few comments:
1. Your option 1 is OK but it does miss out on markets outside continental Europe and N America. You do need some allocation to UK, given its your home market.
2. Having 30/30 weighting to your equity funds is fine. It means that N America is underweight and Europe is overweight in your portfolio but these weightings always have an element of randomness. 

3. Hedging will cost you over the long term. Do not recommend. 

4. Your bond fund looks good to me. You are protecting yourself from inflation.  This protection comes at a cost. Effectively, its a bet that inflation will exceed current expectations. Its not an unreasonable strategy. 

On a side note , N America does not equal USA. Check the map if in doubt. About 5% of equities in this fund will be in Canada. 

Victorwelldue

Thanks for everyone's comments, really appreciated.
Having read through them all and having also re-read quote below from @jamesd from another thread, a few things starting to make more sense to me now. I'm now thinking Jamesd's suggestion looks decent but what is suggested for the final 5% of bonds instead of NEN3? I've listed the fixed interest/bonds options that are available to me.

jamesd said:

Global equity tracker excluding UK is L&G PMC World (Ex-UK) Equity Index 3 NED3
UK equity tracker is L&G PMC UK Equity Index 3 NBC3
Global bond tracker excluding UK is L&G PMC Overseas Bond Index 3 NBX3
UK long bonds L&G PMC Pre-Retirement 3 NEN3 but I suggest picking one of the Sterling strategic bond funds instead.
Those four will let you build the equivalent of one of the Vanguard's. Say you want a 60% equity Lifestrategy equivalent, you might mix them as 50% 10% 35% 5%. That's overweight UK still.

JohnWinder

I think you’ve understood the multiple fund cost matter correctly. I see you’ve not had this answered yet, despite separate questions.

Secondly, sorry about the geography fail; especially to all Canadians.

I’m not confident enough to make a recommendation regarding jamesd’s choice. But a couple of thoughts:

 5% of your portfolio is bordering on the ‘really, will it make any difference?’  Even if its returns are 10%/year instead of 3% for something different (good luck with achieving that), you’re only getting 7% of 5% each year, an extra 0.35%. 

Not to say one shouldn’t look carefully at the choices.

The global bond tracker you list has no UK bonds. Commonly people lean towards home country bonds, since they don't need currency hedging and they trust their government to honour their bonds. Not saying having only global bonds is wrong, just be aware of that and read up on it if you think you need to.

Lastly, in your earlier thread you were admonished for taking note of past returns, and you were right to say 'there is still some utility in considering past performance as one factor alongside other factors when comparing funds’. But be very careful what conclusions you draw from your ‘considerations’.

Yes, look at a bunch of equity funds, and a bunch of government bond funds, and then a bunch of corporate bond funds, and get a sense of how they differ in performance. But be very careful thinking you can compare two or more funds’ performance alone and get anything sensible.

Knowing how any fund performed in the past does not tell you how it will perform in the future, as tempting as the thought is, and as logical as it would seem, and as helpful as it would be. If you need convincing, choose some funds, list their yearly or 3 or 5 yearly returns covering 15 years, cover most of the data with a sheet of paper which you can move to reveal what returns eventuated, then try to guess what the funds’ future returns would have been - and slide the paper to see what the returns actually were. I’ll guess your predictions were terrible.

With past performance not predicting future performance at all well, why bother using it when it comes to choosing one fund over another?  You might use past performance and risk levels to give you some idea of how your investments would grow over some years, and how much they might drop in a crisis (2 standard deviations??), but I need to be shown how any other useful conclusions can be drawn from the information. If you risk being led astray, don't even bother looking at it.

gm0

Decide what you want to do in terms of relative priorities around inflation risk, rising interest rate risk (capital loss to bond funds), strength of correlation with equities risk (corporates), where EM and junkier B bonds fit or don't. And thus how you feel about bonds and *why* you want them alongside any cash to a %. 

Monevator is good on this this week and the comments thread is a helpful addition to the article.  Based on how you fall on the gilts, corporates spectrum and duration - short/intermediate/long - the L&G list should then be easier to filter down as some funds will naturally exclude themselves by having a majority of the "wrong kind of bonds" in them e.g. long duration bonds with more interest rate downside risk.   Or an excess of US corporate B as examples.

This is one of the harder things to get right.  Particularly on a scheme platform with a restricted list to pick through for the closest single fund or a blend.  You can also sometimes (history) go and play on trustnet to compare what you are choosing against various widely held retail benchmark choices.

jamesd

It looks as though you don't have a sterling strategic bond fund available, so going with L&G PMC Pre-Retirement 3 NEN3  would be reasonable. But of course there's nothing magical about a mix I built to try to mimick a Vanguard fund.