Funds
Funds are Investments whereby you can give a Fund Manager your money and they run a Portfolio in which you have a stake. There are three main types, Unit Trusts, Investment Trusts and Exchange Traded Funds (ETFs) which I explain in detail below.
When starting off in Investing, one of the first decisions which has to be made is to decide on whether or not you will use Funds and how you intend to use them. For instance, there are probably 2 main approaches:
I use the latter approach. As an example, I feel I lack the skills required to invest safely and successfully in the Health Sector so I ‘outsource’ this activity to the Framlington Health Unit Trust. I also use Unit Trusts to get geographic exposure to Europe and the US. You can see more detail on my Unit Trust Portfolio in the ‘Trades / Current Portfolio’ page on the WheelieDealer Main Site (www.wheeliedealer.weebly.com) However, I have a very good friend who uses the first approach - she only holds Unit Trusts and nothing else. I would suggest this is an easier approach than buying individual stocks but it will probably give lower returns over time and it is pretty uninteresting from my Point of View - I strangely enjoy the Analysis of Companies and the cut and thrust of the markets. It is a personal decision as to which of these approaches you choose. |
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What is a Unit Trust (UT)?
In simple terms, a Unit Trust is a way in which you can give some money to a Fund Manager who pools your money with everyone else’s money and uses it to buy Shares in probably around 30 to 60 ish stocks. I think you need around £1000 to start with or you can do a Monthly ‘Drip Feed’ from your Bank Account via Direct Debit to the Unit Trust Management Company - I think this might start from as little as £25 per month, but I expect it varies depending upon which Unit Trust Management Company you use.
So, in effect, the Unit Trust Manager is running a Portfolio of a load of Stocks on your behalf, so that you don’t have to. He is also doing it for loads of other people alongside you.
A Unit Trust is also called an Open Ended Investment Company (OEIC). This is because when you put New Money into the Unit Trust, you effectively get issued with New ‘Units’. In other words, the number of Units in the Fund varies - it can go up as people invest more money in and it can go down as they take money out (the process of taking money out is a ‘Redemption‘). However, this is really important because Unit Trusts are priced ‘per Unit’. The Price of each Unit is usually calculated each day and my understanding is that they take the Total Value of the Portfolio of Stocks (obviously this changes everyday as the price of individual Shares goes up and down) and divide it between the number of Units in issue - and this latter number varies as more money put in and taken out by Investors.
From my experience, Unit Trusts seem to be dealt around midday on a weekday. For instance, if you want to buy some Units in a Fund, then they will be Bought for you at Noon on the trading day after you gave the instruction to proceed with the transaction. So there is a sort of delay in placing Buy or Sell instructions. However, Unit Trusts are not something you should Buy and Sell often (churn) - they are Long Term, ‘Buy and Hold’ type Investments.
All Unit Trusts come with an Annual Fee which is usually a percentage of the value of your investment - but it is not based on the initial amount invested. Therefore, if your Fund does well, then the fees rise with the rise in your Fund value. These Annual Fees are often up to about 2% a year. Most Funds advertise an Initial Fee as well, which is often as much as 5% of the Cash you put in - but in practice, no one ever seems to pay this as ‘Funds Supermarkets’ (such as Chelsea Financial Services) seem to be able to get you into Funds with Zero Initial Fee.
The Assets within a Unit Trust do not need to be Company Shares necessarily, they could be all sorts of things like Bonds, Property, Commodities, Hedge Funds, etc.
Investment Trusts (ITs)
These have another name which is Closed Ended Investment Companies - so you should straightaway sense the Key difference between Investment Trusts and Unit Trusts. In many ways Investment Trusts are similar to Unit Trusts - both have a Fund Manager who runs a Portfolio of Stocks on your behalf.
However, the Key difference is that the number of Units in an Investment Trust does not change - it is ‘Closed’. Consequently, the Units are actually called ‘Shares’ and an Investment Trust is traded just like a Normal Share on the Stockmarket and the Fund is really a ‘Company’. All Investment Trusts have an EPIC code like normal Listed Companies do. When you buy, you will be charged a Dealing Commission by your Broker (usually from £5 to maybe £15 - if your Broker charges more than this you should leave !!) and Stamp Duty will be charged. You will also pay a ‘spread’ between the Buy and Sell price just like on normal Shares. Obviously when you Sell you pay a Dealing Commission.
So, what does this mean for New Money coming into the Investment Trust and for Money coming out? Well, this is the clever bit. Because it is traded just like a normal Company, when you want to buy more Shares, you just buy them in the market, just like on normal Companies. In the case of you buying, someone else is selling to you. When you are the seller, someone else is the buyer.
This means that the ‘Price’ of the Investment Trust’s Shares goes up and down all the time during the Trading Day - just like on normal Company shares - but it means you can buy and sell at any time you like - remember this was not the case with Unit Trusts which are dealt around Noon, the day after you placed your Transaction Request.
OK, now it gets complicated - but this is what you really need to understand, so I hope I can explain it in a simple way. Just like with a Unit Trust, at any given time the Portfolio of Stocks within the Investment Trust has a Total Value - essentially it is the value of all the individual stakes in the various Companies within the Fund, added together. This is called the Net Asset Value (NAV) - it is called ‘Net’ because if there is any debt involved in the Investment Trust, then this is subtracted from the Total Value of the individual Company Stakes in the Portfolio.
This NAV is independent of the Total Value of the Investment Trust - i.e. the Market Capitalisation, which is made up of the Total Number of Shares in issue of the Investment Trust multiplied by their Price (as it is for a Normal Company).
So, this means that you could for instance have an NAV of 100p but the shares of the Investment Trust are priced at 85p. In other words, if you buy shares in the Investment Trust at 85p, you are getting 100p worth of Assets (Value). The Lingo is that the Investment Trust is trading on a ‘Discount’ to NAV of 15%.
This idea of a Discount to NAV is vital to understand - it means you can pick up some real bargains when the Discount is larger than usual. The majority of Investment Trusts tend to trade at a small Discount, but sometimes this can widen out and provide an opportunity to buy at a much better price - although of course you need to understand if there is a good reason for the larger Discount - sometimes it is just an anomaly that can be taken advantage of. At other times, there may be a problem with the Investment Trust - for instance, the Fund Manager may have just resigned.
Sometimes the shares of an Investment Trust trade at a ‘Premium’ to the NAV - this means you are paying more than the underlying value in the Portfolio. Many Investment Trusts are currently trading on a Premium - personally, I dislike this. I have never bought an Investment Trust at a Premium and I like a good Discount. You would need to have an extremely good reason to buy at a Premium in my view.
Tracker Funds
As I understand it, these are a Special Type of Unit Trust which is designed to ‘Track’ an underlying Index and if you buy a Tracker Fund, you get the Performance of the Index, less any Initial Fee and ongoing Annual Management Fees. In practice, the fees tend to be very low because these Trackers are very easy for Fund Management Companies to create and operate - they don’t need to think much, it is more of an Administration exercise. I believe that the Fund Managers tend to buy the Stocks in the Index which is being Tracked - so there is no special Analysis required. I think they are bought like a Unit Trust - sorry I am being a bit vague, I have never bought one myself so I do not really know the details. I am going on to cover ETFs in a minute - and you are probably better off buying an ETF really.
There are loads and loads of Trackers available and they track all sorts of Indexes from Geographic stuff through to Sectors and special ‘Hybrid’ Indexes which have been constructed to give certain characteristics - e.g. a Fund that tracks an Index of High Dividend Stocks.
Exchange Traded Funds (ETFs)
These are a relatively new thing in the UK but have been knocking around in the US for years and years.
They are sort of similar to a Tracker Fund as described above but the biggest difference is that they are listed like Shares on the Stockmarket and you buy and sell them like Normal Company Shares. So they have similarities to Investment Trusts in that aspect but they do not have Discounts and Premiums to NAV and stuff.
Basically, like with a Tracker Fund, you buy an ETF and it tracks an Index. You can get ETFs to cover almost anything and there are even special ones for Commodities called ETCs (Exchange Traded Commodities). You can even get ones that enable you to ‘Short’ an Index. For instance, I have often used one that has the EPIC Code XUKS - it is an ETF that enables you to Short the FTSE100 - so, if the Index falls 2%, then the value of your XUKS holding increases 2%. In practice, there are some nuances and you must always make sure you understand exactly how an ETF works before you buy it. Some are extremely complicated - and my General Rule is that Complexity is nearly always Risky and Bad.
As with Investment Trusts and like Normal Company Shares, you have the usual Dealing Fee for buying an ETF and Stamp Duty. There is also the Dealing Fee upon selling. ETFs also have a sort of built-in fee but they tend to be very low and are calculated within the Buy and Sell price you are quoted in the Market. They are a really clever innovation and could be very useful to get exposure to certain Assets and Indexes. There are loads of different types available and I am constantly reading about new ETFs that have been launched.
One thing that is worth knowing about, although in practice it is not too much of an issue, is the difference between Physical Replication and Synthetic Replication:
The only thing to be aware of is that some Synthetic ETFs got into trouble during the Credit Crunch because the Counter Parties went bankrupt and Investors in the ETF lost their money - this could happen again, so, if possible, it is probably best to stick to ETFs with Physical Replication.
There is another Risk with ETFs which came to light recently. On Monday 24th August 2015 the Markets took a battering on what has been referred to by the Media as 'Black Monday' - but I prefer to call it 'Black China Monday' as there was a previous 'Black Monday' in 1987 when Markets had the largest one day fall ever - with the Dow Jones falling 22% on the day !! In the somewhat tamer recent nasty Monday, it was discovered that some of the smaller and more specialist ETFs in the US behaved in very strange ways. The problem was all about liquidity - because some of these ETFs rarely get traded there was a lack of Buyers to match Sellers when panic set in just after Lunchtime UK time - and this meant that some ETFs fell as much as 30% even though the underlying Shares which made up the ETF were only off perhaps 5% or so. Many holders would have panicked and sold out (or had Stoplosses triggered) I am sure thus crystallising huge losses only for the ETF to spring back later in the day when Traders recognised the anomaly with the value of the underlying Stocks making up the ETF. The lesson from this is avoid overly specialised ETFs and stick to the large mainstream ones which act as proxies for simple things like the Major Indexes.
In simple terms, a Unit Trust is a way in which you can give some money to a Fund Manager who pools your money with everyone else’s money and uses it to buy Shares in probably around 30 to 60 ish stocks. I think you need around £1000 to start with or you can do a Monthly ‘Drip Feed’ from your Bank Account via Direct Debit to the Unit Trust Management Company - I think this might start from as little as £25 per month, but I expect it varies depending upon which Unit Trust Management Company you use.
So, in effect, the Unit Trust Manager is running a Portfolio of a load of Stocks on your behalf, so that you don’t have to. He is also doing it for loads of other people alongside you.
A Unit Trust is also called an Open Ended Investment Company (OEIC). This is because when you put New Money into the Unit Trust, you effectively get issued with New ‘Units’. In other words, the number of Units in the Fund varies - it can go up as people invest more money in and it can go down as they take money out (the process of taking money out is a ‘Redemption‘). However, this is really important because Unit Trusts are priced ‘per Unit’. The Price of each Unit is usually calculated each day and my understanding is that they take the Total Value of the Portfolio of Stocks (obviously this changes everyday as the price of individual Shares goes up and down) and divide it between the number of Units in issue - and this latter number varies as more money put in and taken out by Investors.
From my experience, Unit Trusts seem to be dealt around midday on a weekday. For instance, if you want to buy some Units in a Fund, then they will be Bought for you at Noon on the trading day after you gave the instruction to proceed with the transaction. So there is a sort of delay in placing Buy or Sell instructions. However, Unit Trusts are not something you should Buy and Sell often (churn) - they are Long Term, ‘Buy and Hold’ type Investments.
All Unit Trusts come with an Annual Fee which is usually a percentage of the value of your investment - but it is not based on the initial amount invested. Therefore, if your Fund does well, then the fees rise with the rise in your Fund value. These Annual Fees are often up to about 2% a year. Most Funds advertise an Initial Fee as well, which is often as much as 5% of the Cash you put in - but in practice, no one ever seems to pay this as ‘Funds Supermarkets’ (such as Chelsea Financial Services) seem to be able to get you into Funds with Zero Initial Fee.
The Assets within a Unit Trust do not need to be Company Shares necessarily, they could be all sorts of things like Bonds, Property, Commodities, Hedge Funds, etc.
Investment Trusts (ITs)
These have another name which is Closed Ended Investment Companies - so you should straightaway sense the Key difference between Investment Trusts and Unit Trusts. In many ways Investment Trusts are similar to Unit Trusts - both have a Fund Manager who runs a Portfolio of Stocks on your behalf.
However, the Key difference is that the number of Units in an Investment Trust does not change - it is ‘Closed’. Consequently, the Units are actually called ‘Shares’ and an Investment Trust is traded just like a Normal Share on the Stockmarket and the Fund is really a ‘Company’. All Investment Trusts have an EPIC code like normal Listed Companies do. When you buy, you will be charged a Dealing Commission by your Broker (usually from £5 to maybe £15 - if your Broker charges more than this you should leave !!) and Stamp Duty will be charged. You will also pay a ‘spread’ between the Buy and Sell price just like on normal Shares. Obviously when you Sell you pay a Dealing Commission.
So, what does this mean for New Money coming into the Investment Trust and for Money coming out? Well, this is the clever bit. Because it is traded just like a normal Company, when you want to buy more Shares, you just buy them in the market, just like on normal Companies. In the case of you buying, someone else is selling to you. When you are the seller, someone else is the buyer.
This means that the ‘Price’ of the Investment Trust’s Shares goes up and down all the time during the Trading Day - just like on normal Company shares - but it means you can buy and sell at any time you like - remember this was not the case with Unit Trusts which are dealt around Noon, the day after you placed your Transaction Request.
OK, now it gets complicated - but this is what you really need to understand, so I hope I can explain it in a simple way. Just like with a Unit Trust, at any given time the Portfolio of Stocks within the Investment Trust has a Total Value - essentially it is the value of all the individual stakes in the various Companies within the Fund, added together. This is called the Net Asset Value (NAV) - it is called ‘Net’ because if there is any debt involved in the Investment Trust, then this is subtracted from the Total Value of the individual Company Stakes in the Portfolio.
This NAV is independent of the Total Value of the Investment Trust - i.e. the Market Capitalisation, which is made up of the Total Number of Shares in issue of the Investment Trust multiplied by their Price (as it is for a Normal Company).
So, this means that you could for instance have an NAV of 100p but the shares of the Investment Trust are priced at 85p. In other words, if you buy shares in the Investment Trust at 85p, you are getting 100p worth of Assets (Value). The Lingo is that the Investment Trust is trading on a ‘Discount’ to NAV of 15%.
This idea of a Discount to NAV is vital to understand - it means you can pick up some real bargains when the Discount is larger than usual. The majority of Investment Trusts tend to trade at a small Discount, but sometimes this can widen out and provide an opportunity to buy at a much better price - although of course you need to understand if there is a good reason for the larger Discount - sometimes it is just an anomaly that can be taken advantage of. At other times, there may be a problem with the Investment Trust - for instance, the Fund Manager may have just resigned.
Sometimes the shares of an Investment Trust trade at a ‘Premium’ to the NAV - this means you are paying more than the underlying value in the Portfolio. Many Investment Trusts are currently trading on a Premium - personally, I dislike this. I have never bought an Investment Trust at a Premium and I like a good Discount. You would need to have an extremely good reason to buy at a Premium in my view.
Tracker Funds
As I understand it, these are a Special Type of Unit Trust which is designed to ‘Track’ an underlying Index and if you buy a Tracker Fund, you get the Performance of the Index, less any Initial Fee and ongoing Annual Management Fees. In practice, the fees tend to be very low because these Trackers are very easy for Fund Management Companies to create and operate - they don’t need to think much, it is more of an Administration exercise. I believe that the Fund Managers tend to buy the Stocks in the Index which is being Tracked - so there is no special Analysis required. I think they are bought like a Unit Trust - sorry I am being a bit vague, I have never bought one myself so I do not really know the details. I am going on to cover ETFs in a minute - and you are probably better off buying an ETF really.
There are loads and loads of Trackers available and they track all sorts of Indexes from Geographic stuff through to Sectors and special ‘Hybrid’ Indexes which have been constructed to give certain characteristics - e.g. a Fund that tracks an Index of High Dividend Stocks.
Exchange Traded Funds (ETFs)
These are a relatively new thing in the UK but have been knocking around in the US for years and years.
They are sort of similar to a Tracker Fund as described above but the biggest difference is that they are listed like Shares on the Stockmarket and you buy and sell them like Normal Company Shares. So they have similarities to Investment Trusts in that aspect but they do not have Discounts and Premiums to NAV and stuff.
Basically, like with a Tracker Fund, you buy an ETF and it tracks an Index. You can get ETFs to cover almost anything and there are even special ones for Commodities called ETCs (Exchange Traded Commodities). You can even get ones that enable you to ‘Short’ an Index. For instance, I have often used one that has the EPIC Code XUKS - it is an ETF that enables you to Short the FTSE100 - so, if the Index falls 2%, then the value of your XUKS holding increases 2%. In practice, there are some nuances and you must always make sure you understand exactly how an ETF works before you buy it. Some are extremely complicated - and my General Rule is that Complexity is nearly always Risky and Bad.
As with Investment Trusts and like Normal Company Shares, you have the usual Dealing Fee for buying an ETF and Stamp Duty. There is also the Dealing Fee upon selling. ETFs also have a sort of built-in fee but they tend to be very low and are calculated within the Buy and Sell price you are quoted in the Market. They are a really clever innovation and could be very useful to get exposure to certain Assets and Indexes. There are loads of different types available and I am constantly reading about new ETFs that have been launched.
One thing that is worth knowing about, although in practice it is not too much of an issue, is the difference between Physical Replication and Synthetic Replication:
- Physical Replication - for ETFs built this way, the operators of the ETF (usually a large Investment Bank) buy all of the Assets in the Index which is being tracked and when you buy into the ETF, you are getting a stake in those underlying Physical Assets. However, sometimes an ETF may be ‘Optimised’, whereby they do not buy all of the Assets in the Index but just the ones that really drive where the Index goes. If this is the case, there is a risk that the ETF may not ‘track’ the Index exactly and you may underperform (although of course you might outperform.)
- Synthetic Replication - this is where the ETF Provider does not actually buy the underlying assets in the Index. The way it works is that they do a deal (I believe it is called a ‘Swap’ Contract) with another Investment Bank (who are called the ‘Counter Party’), whereby the Counter Party agrees to pay the ETF Provider the performance of the Underlying Index, in return for a Fee. It is a form of Insurance Contract really. For instance, if the Index gains 10% over a year, then the Counter Party has to pay the 10% to the ETF Provider. Synthetic Replication can give access to a wider range of Assets and Indexes and sometimes can be cheaper than a Physically Replicated ETF.
The only thing to be aware of is that some Synthetic ETFs got into trouble during the Credit Crunch because the Counter Parties went bankrupt and Investors in the ETF lost their money - this could happen again, so, if possible, it is probably best to stick to ETFs with Physical Replication.
There is another Risk with ETFs which came to light recently. On Monday 24th August 2015 the Markets took a battering on what has been referred to by the Media as 'Black Monday' - but I prefer to call it 'Black China Monday' as there was a previous 'Black Monday' in 1987 when Markets had the largest one day fall ever - with the Dow Jones falling 22% on the day !! In the somewhat tamer recent nasty Monday, it was discovered that some of the smaller and more specialist ETFs in the US behaved in very strange ways. The problem was all about liquidity - because some of these ETFs rarely get traded there was a lack of Buyers to match Sellers when panic set in just after Lunchtime UK time - and this meant that some ETFs fell as much as 30% even though the underlying Shares which made up the ETF were only off perhaps 5% or so. Many holders would have panicked and sold out (or had Stoplosses triggered) I am sure thus crystallising huge losses only for the ETF to spring back later in the day when Traders recognised the anomaly with the value of the underlying Stocks making up the ETF. The lesson from this is avoid overly specialised ETFs and stick to the large mainstream ones which act as proxies for simple things like the Major Indexes.
Investors Chronicle Fund Tips of the Year 2015
This list was produced in the Magazine dated 9th to 15th January 2015. If you want more details, it might be best to subscribe to the Magazine (it really is worthwhile and costs £165 roughly for the Full Subscription per year) and you can get online access to all Articles. The ones with a 3 letter acronym in brackets behind them are Investment Trusts. The others are Unit Trusts except for the iShares one which is an ETF.
Europe
JPM Europe Dynamic (ex UK) Fund C - Net Acc (GBP Hedged)
Japan
iShares MSCI Japan GBP Hedged
Asia Ex Japan
Pacific Assets Trust (PAC)
Wealth Preservation
RIT Capital Partners (RCP)
Adviser Tips for 2015 also printed in Investors Chronicle
Defensive:
Aggressive:
Europe
JPM Europe Dynamic (ex UK) Fund C - Net Acc (GBP Hedged)
Japan
iShares MSCI Japan GBP Hedged
Asia Ex Japan
Pacific Assets Trust (PAC)
Wealth Preservation
RIT Capital Partners (RCP)
Adviser Tips for 2015 also printed in Investors Chronicle
Defensive:
- CF Lindsell Train UK Equity
- Henderson UK Absolute Return
- Troy Trojan
- Personal Assets Trust (PNL)
Aggressive:
- TB Wise Income
- Marlborough Special Situations
- AXA Framlington Global Technology
- Aberdeen Asian Smaller Companies (AAS)
Example Unit Trust Portfolios
If you want to understand more about Funds, then I have put 2 books into Wheelie’s Bookshop which you can find as a Page on this Website. The books are the FT Guide to Investment Trusts and the FT Guide to ETFs and Index Trackers.
I have been helping a friend for several years with her Portfolio of Funds. She only invests in Unit Trusts as she was introduced to these by her father and Financial Adviser many, many years ago and she is comfortable with these - despite my protestations that Investment Trusts would probably be superior in many ways. In all fairness to her, it is important that we are all ‘comfortable’ with our Investments - no point in being invested in something you do not really understand to the point where you cannot sleep at night.
I have a huge respect for her commitment to avoiding Risk and making sure she understands everything fully and is happy with it. This is a very valuable personal attribute and certainly a ‘State of Mind’ that all of us should cultivate. Investing in stuff you do not understand is for fools. I see people on Twitter sometimes who bought a stock because someone else had bought it - and that was their reason !! Seriously, I am not joking. Unbelievable……..
She holds no individual shares as she feels she does not have the time and commitment to understand and her approach is very much ‘hands-off’ and low activity - again these are great (and under-rated) skills !!!
She has been investing for probably 15 years and has done very, very well. It goes to show what a Low Risk, Low Activity, Boring, Diversified and Well Planned Portfolio can achieve.
If you are a Beginner to the Investing World, one of the first decisions you need to make is whether to invest in Individual Stocks or just Funds - although a hybrid approach is possible with just a few Funds (this is what I do - you will see this if you look at my ‘Trades / Portfolios’ Page on the WheelieDealer Main Website). It is important to be honest with yourself and realistic - will you have enough time and sufficient Focus / Interest / Skill to be bothered with the ‘work’ that is needed to manage a Portfolio of Stocks properly? Would you not be better suited to Low Activity, Low Hassle, Fund Investing?
Low, Medium & High Risk Portfolios
The Portfolio Ideas below are merely a starting point - to give an example of how a Fund could be constructed. I am not a Tipster. I am not a Fund Manager. I am not Financial Conduct Authority (FCA) Regulated. I am not recommending you to buy any of these Funds. Please read the Disclaimer on the Front Page of my Websites.
A bone of contention regarding these Portfolios will be the Bond Funds with regard to Safety. My own view is that I see little point in holding Bond Funds - you may have seen me mention this elsewhere on my Website (Please see my Blog ‘Beware the Danger in Bond Unit Trusts’ from November 2014). To my mind, the only Point of Bonds is for ‘Safety’ - and for me, that means hold more Cash. The yield on Bonds is pathetic on the whole (unless you buy High Risk, High Yield Corporate Bonds - not a good idea for a Low or Medium Risk Investor).
One alternative is to buy something like my Prudential ‘With Profits’ Bond - this is pretty Low Risk I think and has some exposure to Bonds anyway - I have about 10% of my Overall Wealth in this vehicle.
With this in mind, I have constructed the following Example Portfolios based on an ‘Ideal World’ where Bonds are worth buying and they have Validity. If however, you agree with me (after reading my Blog you might), then dumping Bond Unit Trusts and just holding Cash for Safety might be your preference. For me, Bond Unit Trusts are much more High Risk than people realise - and it could end very badly.
In these ‘Ideal World’ Examples I have assumed some Cash element and it must be noted that the Property Exposure here is very low. That is because my Friend has a lot of money in Residential Property (she owns her own house and there is a huge amount of Equity in it) and she was uncomfortable with a Unit Trust she did hold that was invested in Direct Commercial Property - the alternative is a Unit Trust that invests in Stocks that are Property Companies (REITS in the main - Real Estate Investment Trusts) - but it is worth appreciating that these can behave like ‘Stocks’ not ‘Property’ as in Bricks and Mortar - so they are highly correlated to movements in the wider Stockmarkets. The reason for holding Property Unit Trusts is to get Diversification - but if they move like Stocks anyway, are you really getting Diversification?
It’s an important General Point to think about relative Correlations.
The Funds listed in these Example Portfolios are the actual Funds that my Friend holds - the proportions may differ from her holdings - but that is a matter for each Individual Investor themselves to determine. These are just to give an idea of what kind of Fund to invest in - Readers may prefer other Funds which are in a similar sort of Sector / Theme etc. The Portfolios could also be constructed using Investment Trusts - in fact, I would suggest this might be a great approach. Equally, Exchange Traded Funds (ETFs) and / or Tracker Funds could be used to build the Portfolio - up to Readers to decide.
My Friend and I constructed this Portfolio using advice from her Financial Adviser (mainly around Risk and some Special Deals he could get her) and copious use of the Investors Chronicle’s ‘Top 100’ Funds recommendations. We also used websites such as www.citywire.co.uk, www.trustnet.com and www.morningstar.co.uk
We looked at similar Funds and selected these after looking at Long Term Performance (ShareScope enables me to compare various graphs against one another on the same view) - with a key focus on Low Volatility, the experience of the Fund Managers, a discretionary judgement with regard to Sector Exposures and an investigation of the Top 10 Holdings in order to get a ‘feel’ for the Manager’s style.
The Portfolios are monitored on a Weekly basis and are re-balanced (i.e. consider selling the big winners or top slicing and adding to the losers) with a Yearly Review. Selling decisions are rare and unhurried and New Monies are introduced appropriately across the Portfolio to maintain the overall Balance, and only after considerable, patient, thought and discussion.
This is important because the whole point of the Portfolio Percentage Weightings across the Portfolio is to spread Risk and ensure resilience in various Overall Market conditions - e.g. when Stocks are bad, the Bond / Cash elements give Safety - if Stocks get overweight, this effect is diluted.
There is a School of Thought which says that you should be Mechanical and Robotic about Portfolio Weightings and you should let the Maths automatically drive your Decisions - in other words, if the Model says 15% in Bonds then that is what you must do - stick to the ‘Rules’. However, the approach we tend to take is we sort of follow this but we do bring in an element of Discretion - but only after much debate and careful consideration. I think Discretion is the best way if you are experienced - but for Newbie Investors, it may be best to stick to the Rules and have a mechanical, robotic approach, until you have more time served and grey hairs (or Bald for you blokes !!)
The Percentage splits shown have just been knocked up very fast by me - my Friend has different actual Percentages to this - but they are probably closest to the Low Risk column. These splits are just to give an idea, a guide, a flavour of what can be done - it is something that Individuals must decide on themselves - remember, I am no expert in anything !! …although I hope I do make you think….
In addition, I recommend you refer to my Blog ‘The WheelieDealer Approach to Position Sizing Part 1’ from October 2014, which has some thoughts on Asset Allocations.
Right, time to stop waffling, where’s the poxy Portfolios? (if you click on the image below then it should grow bigger so you can see more detail).
At a high level, you will see there is a mixture of Geographic Funds and ‘Thematic Funds’ (these are funds that are specialised to certain Investment ‘Themes‘ like Energy, Technology, Health, Agriculture, etc.) We have made the following Assumptions / Decisions:
- There is no exposure to China. We do not understand it. It seems overvalued, but how could we possibly know? I like certainties - if in doubt, avoid.
- Health and Technology are included because it seems highly likely that both of these Sectoral Themes will achieve considerable Global growth in the future. Health is being driven by factors such as new Drugs, new Treatments, older population, insatiable demand, increasing Wealth and growth of Middle Classes in Developing Economies. Tech will most likely prosper as the Internet, Data Explosion, Biotech, Nanotech, Internet of Things, Big Data, etc. boom.
- Exposure to Emerging Markets is quite low - they are risky.
- There is no exposure to Frontier Markets - the risks here are deemed way too high. Frontier Markets are the next level of ‘Developing’ countries down from Emerging Markets. They tend to be small Asian economies and many African countries - it is a Very High Risk and specialist area and is really best left to Wealthy and Risk Tolerant Experienced Investors.
- No Miners or Resources Stocks exposure - there may be a miniscule amount tucked away in one of the Funds somewhere, but no dedicated Funds.
- No direct Commodity exposure - too unpredictable and volatile.
- No exposure to Japan - see my Blog ‘WheelieDealer’s Selling Triggers part 2’ for details. But you may already know of my dislike of Japan - I just don’t understand it - so I steer well clear.
- The US market is notoriously difficult for Active Fund Managers to beat the Indexes - so we have simply stuck to Tracker Funds. Tech and Health Funds have a side effect that they have huge exposures to US -so this can help with upside. We have recently been helped a lot by the Currency Effect of Dollar Strength against Sterling - although of course this can go the other way as well.
- There are a couple of ‘Strategic’ Bond Funds - these are Funds where the Fund Manager can switch at appropriate times between Corporate Bonds and Government Bonds - they have a lot more discretion and flexibility - this is probably the best way to play Bond Unit Trusts if you must. They also can take advantage of ‘Duration’ of Bonds - simplistically they can buy Bonds which expire at different times with more discretion than dedicated Gilt Funds or dedicated Corporate Bond Funds.
- There is a Bias towards Equity Income Funds (i.e. they generate Dividends) because these are seen as lower risk. These funds tend to be more ‘Defensive’ rather than being ‘Growth’ or ‘Cyclical’ type Funds. They are all ‘Acc’ Funds because the Dividends are rolled up within the Fund - my friend does not require the Income and it is being reinvested. You can buy ‘Inc’ classes of Funds if you need Income.
- There is little exposure to Small Capitalisation Stocks - we have generally gone for the larger stuff - perceived lower risk.
- I think the First State Emerging Markets Leaders Fund might be ‘soft closed’ - in other words there are restrictions on putting new Monies into it as the Fund Managers felt that the Fund had got too big and was become unwieldy to manage - and this would impact returns for existing Unit Holders.