Turn First 50 Funds into a potent portfolio
When putting together a portfolio of funds, the easiest way to think about combining these is through the ‘core and satellite’ approach. This separates a portfolio of investments into two distinct segments: the first is a core of long-term, low-cost and highly diversified investments, while the other is a selection of more specialist satellite investments.
So you first build a core of low-cost passive funds to keep your core portfolio broadly diversified and then add in a few select actively managed funds as satellites to add value and hopefully improve performance.
Get asset allocation right
No investment is a guaranteed route to riches. But while you can’t eliminate risk completely, you can manage it by having exposure to a broad range of assets. This is known as diversification.
The idea is that losses suffered in one area will be balanced out by gains elsewhere. Should your investments in equities – another name for shares – take a tumble, for example, you would hope that your other holdings, in bonds or commercial property perhaps, rise in value. Should your UK shares suffer, your overseas shares may hold up better.
Diversification helps put a floor under your holdings and limits the risk of losing all your money in difficult periods. If the global financial crisis of 2008 or the post-Brexit vote market turmoil has taught us anything, it’s not to have all our financial eggs in one basket, as it leaves us too vulnerable.
Proper asset allocation involves investing in the main asset classes: equities (shares); bonds (loans to companies or governments); commercial property (shops, offices and industrial buildings); alongside cash.
Some people add in commodities (such as crude oil, metals, natural gas and agricultural products). Further diversification can be achieved through exposure to a variety of sectors and regions of the world.
Good starting point
When setting up portfolios, look at the Wealth Management Association’s (WMA’s) private investor indices. The WMA represents the UK’s stock brokers and private client investment managers.
Its five indices are designed to be a ‘talking point’ for investors when discussing the performance of their portfolios with their advisory stockbroker or wealth manager. They won’t be perfect for everyone. In fact, they have come under some criticism for not including corporate bonds (loans to companies), as well as gilts (loans to government).
But if you don’t want to pay for advice, we think they make a good starting point and guide to the sort of asset allocation you need in a portfolio. The current asset allocation percentages for the balanced and income indices are shown in table below.
Wealth Management Association private investor indicies: balanced and income
|Asset||Balanced index* (%)||Income index** (%)||Underlying asset index|
|UK Shares||35||35||FTSE All-Share index|
|International shares||30||17.5||FTSE All-World Ex-UK index|
|Bonds||17.5||27.5||FTSE Gilts All-Stocks index|
|Cash||5||5||7-day Libor -1%|
|Commerical property||5||5||FTSE All-UK Property index|
|Hedge funds/alternatives||7.5||10||WMA custom hedge index|
Notes: *For invesotrs who want to draw income immediately, but preserve and grow capital. ** Balanced investing is for investors with at least a five-year timescale and an appetite for risk.
Every wealth manager and independent financial adviser will give you a slightly different asset allocation, depending on your individual goals and attitude to risk as well as their own view on the sweet spots in the financial markets.
If you want to pay for this expert advice, it’s a valid approach that suits many people. However, if you want to learn about investing and create a DIY port- folio from scratch, Moneywise can show you some simple ways to get started. We’ve put together starter core portfolios for beginner investors with a range of goals. It’s probably best to drip-feed your money into these rather than invest a lump sum.
Our starter portfolios incorporate a few key features. These are:
- The broadest possible coverage in terms of the number of assets held by the funds
- The cheapest possible cost, in the form of the ongoing charges figure on the funds
- The simplest structure in terms of the number of funds held in each portfolio.
Moneywise starter income booster portfolio (six funds)
This is a portfolio for someone who wants to invest to boost their income, and has a long time scale – for example, five to 10 years – and can therefore take more risk.
- 25% Artemis Global Income
- 10% Marlborough Multi-cap Income
- 10% Fidelity MoneyBuilder Income
- 5% F&C Commercial Property Trust
The two passive funds we have selected as core holdings give exposure to higher-income UK shares and global bonds. We’ve included four active funds in the satellite section to give a good spread of income sources, and added in overseas equities via the Artemis fund and a bit of active UK income and bond diversification, plus property via the F&C fund.
Adrian Lowcock, head of investing at AXA Wealth, says: “Actively managed funds tend to suit income, as the manager can concentrate on companies with good dividend track records but also avoid the traps: companies with a high yield but a poor outlook. Commercial property provides a good alternative income source, which is important for long-term income returns.”
Look out for our at-retirement and long-term growth portfolios in the September issue of Moneywise. To read more on the First 50 Funds selected for these portfolios, visit our funds homepage.
Moneywise starter growth portfolio (four funds)
This provides an excellent core from which to build your portfolio for long-term cautious growth (over at least 10 years) in just four funds. You could start with the core passive funds and then add in the active satellite funds once you feel ready.
The Fidelity fund is a good one to start a portfolio with because it tracks the share performance of companies from more than 12 developed countries.
The BlackRock fund gives you access to diversified global corporate bonds. This is a good starting point for accessing bonds, and it will help diversify from more volatile equities.
The actively managed Lindsell Train is a concentrated portfolio of between 20 and 35 companies, but the manager has a long-term focus that will be good for new investors. Jupiter Strategic Bond is a go-anywhere bond fund seeking the best fixed-income opportunities in the world.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A sophisticated absolute return fund that seeks to make money for its investors regardless of how global markets are performing. To that end, they invest in shares, bonds, currencies and commodities using a raft of investment techniques such as gearing, short selling, derivatives, futures, options and interest rate swaps. Most are based “offshore” and are not regulated by the financial authorities. Although ordinary investors can gain exposure to hedge funds through certain types of investment funds, direct investment is for the wealthy as most funds require potential investors to have liquid assets greater than £150,000m.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.