Index or wealth preservation for investments over unknown period of time?

aroominyork

I posted about this situation a year or two ago in case it sounds familiar to anyone.

My son has about £100k aside for a deposit on a first property (partly in LISAs). He and his partner currently live in France with little idea where they will be during the coming years. It could be two years until they buy somewhere (and I am aware that if it is abroad they will forfeit the LISA bonuses), it could easily be much longer.

To invest the funds, a couple of years ago I asked him to decide the maximum he would be prepared to lose if he had to liquidate his investment at the bottom of the market in order to buy a property. He said 15%. So I constructed a portfolio based on equities carrying a 40% downside risk, fixed interest 15% and cash 0%. We then bought a combination of VLS (40 and 60) and cash products.

His living situation has not changed but I think he can do a little better on fees and perhaps performance. None of our family are especially bullish about the UK and so do not like VLS’s high UK allocation, and I think fixed interest in a global index fund will be less volatile than the UK overweight fixed interest in VLS. So I am suggested he cashes in the VLS products and buys i) HSBC FTSE All World Index; ii) a UK All Share index fund for any UK overweight he wants; iii) Vanguard Global Bond Index.

Yesterday I was looking at Capital Gearing Trust and started wondering whether a good wealth preservation fund (and I think they come no better than CGT) would be a better option for all his equity/fixed interest investments. It might provide better downside protection, and with fixed interest being a difficult place to invest these days the experience of the manager might be better than a global index fund.

In terms of risk and performance, CGT has an FE of 38, the same as VLS40, but its five year performance matches VLS60 (FE61). In the immediate post-GFC years CGT was too cautiously positioned and suffered (underperforming VLS40) but I guess its exactly that kind of caution – which might or might not be misplaced, given CGT is generally bearish – which attracts me to it.

I would appreciate some views on this, but please avoid “ask your son to choose” – he has little financial insight and looks to me for a steer.

Linton

40% is a bit low for equity downside risk in my view - the drop during the great crash was ameliorated (IIRC) by a fall in the value of the £.  I would work on 50%. 

You should not judge CGT on its performance against VLS40.  CGT's aim is to beat inflation with an emphasis on avoiding losses.   Any higher performance can be seen as a bonus.  VLS40's aim is to hold 40% equity and 60% bonds.  Whether one fund happens to outperform the other is irrelevent.  They aren't in a competition.

CGT's objective would seem to match your's/your son's.  You will have to look at the data to assess how well CGT has met its objective, but take into account that conditions since the great crash have been unusuaully benign.

However in my view 2 years is too short a time for any sort of investment.  Inflation in 2 years is unlikely to be life changing and the loss due to inflation may be less than the possible loss in fund value.

So, what to do if your son can't be a bit more decisive?  Having done some rearch and come up with some possible numbers I think I would describe your chosen fund option to your son emphasising the possible downside and the cash alternative and let him make the choice of how he wants to split his money - it could for example be 50/50 cash and fund(s).  I think a non-professional should be very wary about taking on responsibility for another mentally competent person's money.  Money can tear families apart.

flopsy1973

portfolio based on equities carrying a 40% downside risk,

Sorry not to add to this but what do you mean by the above statement 

Albermarle

None of our family are especially bullish about the UK and so do not like VLS’s high UK allocation, 

Yesterday I was looking at Capital Gearing Trust 

Currently CGT is 45% UK , although not clear whether this is equally balanced across the different assets.
Interestingly the other WP trust often mentioned, Personal Assets,  is 67% US  ( 16% UK) 

NedS

flopsy1973 said:

portfolio based on equities carrying a 40% downside risk,

Sorry not to add to this but what do you mean by the above statement 

The portfolio could lose 40% of it's value in the period in question.

aroominyork

Albermarle said:

None of our family are especially bullish about the UK and so do not like VLS’s high UK allocation, 

Yesterday I was looking at Capital Gearing Trust 

Currently CGT is 45% UK , although not clear whether this is equally balanced across the different assets.
Interestingly the other WP trust often mentioned, Personal Assets,  is 67% US  ( 16% UK)

Good point. Well selected UK companies are less of a concern for us than an index fund.

flopsy1973 said:

portfolio based on equities carrying a 40% downside risk,

Sorry not to add to this but what do you mean by the above statement 

Equities might fall 40% from purchase to selling price.

Linton said:

40% is a bit low for equity downside risk in my view - the drop during the great crash was ameliorated (IIRC) by a fall in the value of the £.  I would work on 50%. 

You should not judge CGT on its performance against VLS40.  CGT's aim is to beat inflation with an emphasis on avoiding losses.   Any higher performance can be seen as a bonus.  VLS40's aim is to hold 40% equity and 60% bonds.  Whether one fund happens to outperform the other is irrelevent.  They aren't in a competition.

CGT's objective would seem to match your's/your son's.  You will have to look at the data to assess how well CGT has met its objective, but take into account that conditions since the great crash have been unusuaully benign.

However in my view 2 years is too short a time for any sort of investment.  Inflation in 2 years is unlikely to be life changing and the loss due to inflation may be less than the possible loss in fund value.

So, what to do if your son can't be a bit more decisive?  Having done some rearch and come up with some possible numbers I think I would describe your chosen fund option to your son emphasising the possible downside and the cash alternative and let him make the choice of how he wants to split his money - it could for example be 50/50 cash and fund(s).  I think a non-professional should be very wary about taking on responsibility for another mentally competent person's money.  Money can tear families apart.

I agree two years is too short a time period if there was a reasonable chance it would be two years. It is likely to be a fair while longer because they are early career academics which doesn't (a)bode well for a fixed address!

I like your approach, however. I have tabulated CGT and inflation year by year (although Trustnet shows CGT returning 430% 1/1/01 to 31/12/20 compared to my 378%, since I read individual years from Trustnet charting and rounding down, then added a formula).

masonic

Albermarle said:

Currently CGT is 45% UK , although not clear whether this is equally balanced across the different assets.
Interestingly the other WP trust often mentioned, Personal Assets,  is 67% US  ( 16% UK)

I hold a mixture of those two partly for this reason.

These funds look to me to be the best of a bad bunch of options for capital preservation + inflation protection in current times. I'm really not keen on passively managed bonds, which have several issues we've been discussing elsewhere. I'm a bit more optimistic about the UK, given where we are now, but CGT seems to be too UK biased for me even with that.

Linton

Albermarle said:

None of our family are especially bullish about the UK and so do not like VLS’s high UK allocation, 

Yesterday I was looking at Capital Gearing Trust 

Currently CGT is 45% UK , although not clear whether this is equally balanced across the different assets.
Interestingly the other WP trust often mentioned, Personal Assets,  is 67% US  ( 16% UK) 

Using morningstar data: 

The equity in CGT is 25% and of that equity UK equity is as you say 45% so 11% of the total.  However looking at the"style" the equity is split 55% large companies and 45% medium/small.  In terms of sectors, the largest is property at 40% with tech+ communications services (which includes netflix, facebook and similar) at around 11%.  So the equity portfolio is totally different to the FTSE100 or a global index tracker.

Personal assets trust is 47% equity of which 17% is UK, 8% of the total.  So the funds are not that different in the overall %UK equity allocation.  However Personal Assets is 100% large companies with 28% in Tech+Communications services so much more growth oriented than CGT which presumably would make it higher risk.

masonic

Linton said:

Albermarle said:

None of our family are especially bullish about the UK and so do not like VLS’s high UK allocation, 

Yesterday I was looking at Capital Gearing Trust 

Currently CGT is 45% UK , although not clear whether this is equally balanced across the different assets.
Interestingly the other WP trust often mentioned, Personal Assets,  is 67% US  ( 16% UK) 

The equity in CGT is 25% and of that equity UK equity is as you say 45% so 11% of the total.  However looking at the"style" the equity is split 55% large companies and 45% medium/small.  In terms of sectors, the largest is property at 40% with tech+ communications services (which includes netflix, facebook and similar) at around 11%.  So the equity portfolio is totally different to the FTSE100 or a global index tracker.

The current factsheet (available here) lists equities at 44%, so there is quite a discrepancy with Morningstar - unless the "Funds" in "Funds / Equities" includes bond funds (that would be quite misleading). I've taken 'funds' to be other investment trusts which CGT derives an income from buying at discount and selling at premium. However, browsing the full list of holdings, it's clear that some of the ITs are UK listed but do not have much UK exposure, such as Aberdeen Asian Smaller Companies, Aberdeen Latin American Income, and Jupiter Emerging & Frontier Income.

eskbanker

aroominyork said:
I have tabulated CGT and inflation year by year (although Trustnet shows CGT returning 430% 1/1/01 to 31/12/20 compared to my 378%, since I read individual years from Trustnet charting and rounding down, then added a formula).

Won't some or all of the variance be because you've included an extra negative year at the beginning, i.e. Trustnet will have 24% by the end of 2001 but you have 20% because you've started a year earlier?  You might also find that a policy of rounding down (rather than simply rounding) may distort a comparison, and even rounding to whole numbers at all can affect this sort of analysis when dealing with numbers of that scale....

Linton

masonic said:

Linton said:

Albermarle said:

None of our family are especially bullish about the UK and so do not like VLS’s high UK allocation, 

Yesterday I was looking at Capital Gearing Trust 

Currently CGT is 45% UK , although not clear whether this is equally balanced across the different assets.
Interestingly the other WP trust often mentioned, Personal Assets,  is 67% US  ( 16% UK) 

The equity in CGT is 25% and of that equity UK equity is as you say 45% so 11% of the total.  However looking at the"style" the equity is split 55% large companies and 45% medium/small.  In terms of sectors, the largest is property at 40% with tech+ communications services (which includes netflix, facebook and similar) at around 11%.  So the equity portfolio is totally different to the FTSE100 or a global index tracker.

The current factsheet (available here) lists equities at 44%, so there is quite a discrepancy with Morningstar - unless the "Funds" in "Funds / Equities" includes bond funds (that would be quite misleading). I've taken 'funds' to be other investment trusts which CGT derives an income from buying at discount and selling at premium. However, browsing the full list of holdings, it's clear that some of the ITs are UK listed but do not have much UK exposure, such as Aberdeen Asian Smaller Companies, Aberdeen Latin American Income, and Jupiter Emerging & Frontier Income.

If you look on the right hand side of 3rd quarter 2021 quaterly report you will see the asset split of funds/equities.  And yes the fuinds/equities category does include non equity.  The equity component is shown as an 18% part of the 45%.  Morningstar has 24% allocated to "other" which could include the property. 

https://www.capitalgearingtrust.com/sites/cgt/files/2021-02/Portfolio/CGT_Portfolio_April_2021.pdf under "investor information" is a full list of investments which does show a fair number of non equity and mixed equiity/bond funds.

So it seems CGT themselves have a very different classification system to Morningstar.  It isnt obvious to me what the true picture is.