Short on time or confidence when it comes to investment decisions? We explain how our model portfolios work and how they can help you reach your financial goals.
What type of investor are you? Interactive investor customers who invest predominantly in collective funds rather than individual companies are typically interested in growth funds, such as Scottish Mortgage (LSE:SMT), Fundsmith Equity and others that focus on “new economy” themes and quality growth ideas.
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But if you are seeking a reliable income with the expectation of capital growth – both are proving particularly difficult to achieve this year – then you have likely already discovered the attractions of investment trusts such as City of London (LSE:CTY) and Murray International (LSE:MYI). Their capital performance may not have been anything to write home about recently, but they have at least kept their dividends growing through these lean times.
You might also be one of the large cohort of investors who prefer not to place their money and their trust in actively managed funds or investment trusts, preferring instead to seek income or growth – or a balance between the two – via index-tracking investment vehicles.
Growing numbers of interactive investor customers would also like to pursue any one of these aims while also being responsible investors, with environmental protection and other sustainable investment themes in mind.
The strong performance of funds and trusts such as Royal London Sustainable Leaders and Impax Environmental Markets (LSE:IEM) demonstrates that investors do not need to sacrifice profits for principles when they can have both.
Nevertheless, the vast choice of routes to take – via thousands of funds, around 400 investment trusts and thousands of exchange traded funds (ETFs) – can make it something of a minefield as you try to reach your investment goals.
Interactive investor’s Super 60 and ethical ACE 30 lists are designed to help you find a route through this minefield. All of the above-mentioned funds are not only members of our go-to fund lists, they also feature as constituents of the five interactive investor model portfolios.
How interactive investor’s model portfolios can help
Many investors do not have the time or the confidence to make their own investment choices, which is where interactive investor’s model portfolios can help.
Generally speaking, they can be used either as reference tools for selecting individual funds from specific asset classes and areas, or the constituents can be purchased individually as the building blocks of a relatively adventurous and diversified portfolio.
More specifically, there are a variety of financial goals they are designed to help people meet.
The three growth portfolios could be viewed as being suited to investors looking to grow their capital over 10 years or more, who can afford to lose some of their capital under a worst-case scenario.
The growth portfolios may suit investors with very young children seeking to build up capital via an Isa for their further education or to help older children build up a deposit for their first home.
Investors in their 40s or younger who want to build up a nest egg or extra capital for when they retire may also wish to consider one (or all) of the three options.
The two income portfolios may appeal to investors looking for a growing income from their capital over the long term, and the prospect of capital growth.
However, investors must be able to afford for their income to fall and to lose some of their capital under a worst-case scenario.
Before retired investors consider investing in these portfolios for long-term income and capital growth during their retirement, they would ideally have other secure sources of income to rely on. These portfolios may also appeal to investors approaching retirement who can opt to reinvest their dividends until required.
How the model portfolios invest
The active income, active growth and ethical growth portfolios are each comprised of 10 constituents, with actively managed investment funds and trusts favoured over “passive” index-tracking options.
The low-cost income and low-cost growth models are each comprised of nine index-tracking funds or exchange traded funds.
In each portfolio, whether it is passive, active or ethical, the constituents are all picked from the ACE 30 and Super 60 fund lists, except where more specialist funds are required to fit the optimal asset allocation.
What do we mean by this? As we explain in the methodology, the optimal mix of asset classes – such as bonds, emerging markets and developed markets equities – for any model portfolio constitutes its strategic benchmark. Interactive investor optimises this annually to take into account any changes to institutional long-term assumptions about the return or risk expectations for each of these asset classes. The asset allocation that is the result of this process is common to all five model portfolios.
Funds to fit the aims
Each model portfolio is comprised of constituents that interactive investor believes best fits the asset allocation for the portfolio’s aims, while seeking also to include diversifying investment styles among those choices.
So, for example, in developed market equities, the ii ethical growth model currently contains four funds to provide its desired 40% weighting. These are Fundsmith Sustainable Equity, Impax Environmental Markets (LSE:IEM), iShares Global Clean Energy ETF (LSE:INRG), and BMO Responsible Global Equity. In the low-cost growth portfolio, the 40% weighting is split between three constituents: Vanguard Global Small-Cap Index fund, iShares Core MSCI World ETF (LSE:IWDG) and L&G Global 100 Index.
UK equities have a target 25% weighting in each of the five models. In the active income portfolio, it is currently split between two constituents: City of London Investment trust (LSE:CTY) and Man GLG Income fund, while in the low-cost growth model Fidelity Index UK and Vanguard FTSE 250 UCITS ETF (LSE:VMID) are chosen.
The optimal weight for other asset classes is 15% emerging markets, 10% global bonds (with currency risk removed) and 10% to alternative investments. For the latter, the choices depend very much on the portfolio’s aims. In active growth, for example, capital preservation and private equity choices have been included.
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Performance of each of the models is measured against recognised indices that represent the asset classes that are targeted, with the exception of alternatives, for which it is difficult to find a recognised index benchmark.
Each of the model portfolios is monitored and the asset allocation is re-balanced quarterly, but the aim is to limit extra dealing costs that investors might incur, so some tolerance is built into this process.
How to invest?
Investors who want to get close to replicating the performance trajectory of the models would need to make a single, lump sum investment into each portfolio’s constituent, at the suggested percentage allocation. Target allocations for each model’s constituents can be found on the relevant model portfolio page.
However, for many investors, a regular investment option – monthly or quarterly – is a better solution. Not only does regular investing remove the thorny decision of market timing, it helps to smooth out peaks and troughs in asset prices, reducing the risk of big losses in the process.
Take the first quarter of this year as an example, a period which included some of the most severe volatility in stock and bond markets ever witnessed.
Let’s assume that at the start of this year an investor was keen to maximise their full £20,000 Isa allowance for the 2019/20 tax year and had £8,000 left to invest, choosing the constituents of the active growth model.
According to data from FE Analytics, an investment on 1 January would have turned into £8,482 by 20 August – a return of just over 5% so far this year. However, earlier in the year it had also plummeted from £8,000 to £6,200 from 1 January to 23 March, a 22% fall which would likely leave all but the most hardy and experienced investor rueing the timing of their investment.
Compare this with the experience of the regular investor who starts out with a £1,000 investment in each of the portfolio’s constituents on 1 January and sets up a further monthly £1,000 contribution. Their £8,000 investment had become £8,816 by 21 August – double the gain and with far less volatility in the process.
What does this cost?
Interactive investor has three service plans featuring a standing monthly charge and a monthly trading credit. But because interactive investor does not levy any dealing charges for regular investments, in the example above the only charges payable for the regular investor are 0.5% stamp duty on the portfolio’s investment trust holdings.
The lump sum investor would need to have paid a dealing charge of between £3.99 and £7.99 (depending on the service plan) for each of the portfolio’s 10 holdings (plus the 0.5% stamp duty on the investment trust holdings).
By and large the performance of most of the models since their launch is highly encouraging, particularly the two growth-focused models featuring actively managed constituents. We would hope that any one of the five can help you reach your financial goals.
Andrew Pitts is an independent consultant for interactive investor and was formerly editor of Money Observer magazine from 1998 until 2015.
These articles are provided for information purposes only. The information we provide in respect of the ii Model Portfolios, ii Super60 or ACE30 is an opinion provided by ii or one of its partners on whether to buy a specific investment or portfolio. Please note that none of the opinions we provide are a “personal recommendation”, which means that we have not assessed your investing knowledge and experience, your financial situation or your investment objectives. Therefore, you should ensure that any investment decisions you make are suitable for your personal circumstances. If you are unsure about the suitability of a particular investment or think that you need a personal recommendation, you should speak to a suitably qualified financial advisor.
The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
Any changes to the ii Model Portfolio constituents and the rationale behind those decisions will be communicated through the Quarterly Investment Outlook.
ii adheres to a strict code of conduct. Members of ii staff may hold shares or units in investments which make up the ii Model Portfolios, which could create a conflict of interest. Any member of staff intending to complete some research about any financial instrument in which they have an interest are required to disclose such interest to ii. We will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, staff involved in the production of the ii Model Portfolios are subject to a personal account dealing restriction. This prevents them from placing a transaction in these portfolios or the underlying specified constituents of each portfolio for five working days before and after an investment is included or amended and made public within the list. This is to avoid personal interests conflicting with the interests of the recipients of the ii Model Portfolio options.