Turn First 50 Funds into a potent portfolio

Moneywise editor Moira O’Neill updated her First 50 Funds for novice investors last month. Now she reviews performance of the Moneywise starter portfolios and updates them.

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 core, often the bulk of the portfolio, is made up of long-term, low-cost and highly diversified investments. These are usually a combination of tracker funds, active funds or investment trusts.

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The satellites, often small parts of the portfolio, are more specialist investments, often higher risk than the core. These are usually active funds, investment trusts or shares in individual companies.

Many investors choose tracker funds for the core. These are designed to perform in line with their benchmark stock market indices. They won’t outperform the benchmarks, but they typically won’t underperform them either. Many investors then add in a few select actively managed funds to add value and hopefully boost performance. And this is the basis for our Moneywise starter portfolios.

Getting ‘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 different investment assets, such as shares, bonds, commercial property and gold. This is known as diversification.

The idea is that assets perform differently, so as losses are suffered in one area, they will be balanced out by gains elsewhere. Should your investments in company shares (also known as equities) take a tumble, for example, you would hope that your assets, such as bonds or commercial property, rise in value. Should your UK shares suffer, your overseas shares may hold up better.

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Diversification 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 holding some cash as an ultimate safety net and then spreading money that you can afford to lock away for at least five years in the three main asset classes:

• Equities (UK and overseas company shares)
• Bonds (loans to governments or companies)
• Commercial property (shops, offices and industrial buildings).

Some investors also add a small portion (5% of the portfolio) in commodities, such as oil, metals (gold or silver, for example), natural gas and agricultural products.

Further diversification can be achieved through exposure to a variety of sectors in the stock market, such as financials, utilities, consumer staples and healthcare, and exposure to different regions of the world.

Good starting point

When setting up your portfolio, a good starting point is to look at the private investor indices run by the Wealth Management Association (WMA), which until now represented the stock brokers and private client investment managers who help customers invest their savings and manage their finances. Note that the WMA merged with The Association of Professional Financial Advisers (APFA) to become PIMFA (Personal Investment Management & Financial Advice Association) on 1 June 2017 and information about the indices can now be found at Pimfa.co.uk.

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PIMFA’s five indices are designed to be a ‘talking point’ for investors when discussing the performance of their portfolios with their advisory stock broker or wealth manager. They won’t be perfect for everyone. 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.

Tailored approach

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 portfolio from scratch, consider Moneywise’s simple ways to get started in constructing a portfolio.

Our starter portfolios

We’ve put together two core and satellite portfolios for beginner investors with different goals. These are based on the Balanced and Income indices within the Private Investor Indices already mentioned.

Balanced investing is for investors who want to growth their money over the long term with at least a five-year timescale and have a medium appetite for risk. Income investing is for investors who want to draw income immediately, but preserve and grow capital too.

The current asset allocation percentages for the balanced and income indices are shown in the table opposite.

Private Investor Indices: Balanced and Income

Since we launched the starter portfolios in Moneywise’s August 2016 issue, the Private Investor Indices have changed slightly.

The balanced portfolio has reduced its portion in UK shares by 2.5 percentage points, while adding by the same amount to the portion held in hedge funds and alternative investments.

The income portfolio has reduced its portion in UK shares, while adding to overseas shares and hedge funds and alternative investments.

Our starter portfolios incorporate these key features:

• 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; and
• the simplest structure in terms of the number of funds held in each portfolio.

It’s probably best to drip-feed your money into these portfolios rather than invest a lump sum. It’s also important to review investment performance at least once a year and rebalance the portfolios by bringing them back in line with the indices – for more on why this is important, see "rebalancing your portfolio" below.

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 of five to 10 years and can therefore take more risk. On an investment of £5,000, it posted a return of 12.4% for the year to 17 July 2017.

In addition to rebalancing the portfolio, we’ve replaced a couple of funds.

We felt BlackRock Corporate Bond Tracker was too UK-centric. Instead, we have chosen the Vanguard Global Bond Index, which is highly diversified, giving exposure to thousands of bonds around the world. Investors can use it as a one-stop shop for developed market investment-grade-rated bond exposure. The fund is currency hedged into sterling, which takes out the currency volatility for UK investors, which we think is a good feature for a novice investor.

We’ve also replaced Marlborough Multi-Cap Income because our experts said it is really heavily biased towards smaller companies rather than a truly multi-cap income fund. We’ve added Evenlode Income instead, which aims to buy UK companies that can grow sustainably without needing to reinvest much capital back into the business each year. The fund aims to produce attractive, long-term returns, with an emphasis on income. With fewer than 40 companies in the portfolio, the managers say they believe in quality over quantity.

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. On an investment of £5,000 it posted a return of 9.7% for the year to 17 July 2017.

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Again, we’ve replaced the BlackRock Corporate Bond Tracker with the Vanguard Global Bond Index fund.

Rebalancing your portfolio could boost your investments by an extra 10%

Regularly reviewing and rebalancing your portfolio could have boosted your investment returns by almost 10% over 20 years, analysis from Fidelity International reveals. In addition to following the adage of not putting all your eggs in one basket, it’s equally important to monitor your portfolio.

‘Rebalancing’ means selling some of the assets that have grown in value to buy more of those that have fallen in value. However, particularly if you have a small portfolio, you should watch out for any dealing fees that may be incurred when buying and selling investments to make sure they don’t wipe out any potential gains from this strategy.

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Over time, an investment portfolio can become unbalanced due to the ups and downs of its constituent investments. It is critical, therefore, to periodically review the balance of your holdings to ensure they continue to meet your needs. Furthermore, by rebalancing your portfolio annually you could significantly enhance your returns. For example, if you had invested a £1,000 in each of the 13 principal asset classes* 20 years ago, your initial investment would now be worth £52,881**. However, had you been even more prudent and rebalanced your portfolio equally across the 13 different asset classes each year then your investments would have grown to £57,930 – over £5,000 more*.

*These are: Commodities, Corporate Bonds, Government Bonds, Japanese Equities, UK Equities, Asia Pacific Equities, Europe ex UK Equities, Emerging Market Equities, US Equities, Cash, Real Estate, Emerging Market Debt, Global Equities. **Source: Fidelity International, May 2017.

To read more about the First 50 Funds selected for these portfolios, turn to page 80 and visitwww.moneywise.co.uk/first-50-funds.