Interactive Investor

Model Portfolios: Methodology

Summary

Model portfolios - we've done the hard work for you

Introduction

Partnered with Morningstar, we have created a range of model portfolios which are designed to illustrate how you might realise your ultimate financial goals. Comprised primarily from our Super 60 (or in the case of our ethical portfolio, from the ACE 40) they contain some of our highest conviction choices from across the whole fund universe^, with absolutely no conflict of interest in our fund selection decisions.

^ We use the term 'fund' to mean any type of collective investment vehicle, including Authorised Unit Trusts, OEICs, ETFs and Investment Trusts.

The ii Model Portfolios are designed, constructed and maintained in accordance with a robust, four-stage process – a process that has proven itself over many years:

Defining investment objectives

The objective of ii Growth Portfolios is to maximise investment returns over the long term, by investing primarily in investments that have the most potential to grow your money. such as shares, also known as equities. The risk-return profile of the ii Growth Portfolios is expected to be consistent with an asset allocation to global equities (UK and international shares) of between 80% and 100%.

The objective of the ii Income Portfolios is to focus on income generation as well as growing your money over the long term, by investing primarily in investments that generate income, such as shares that pay dividends. The risk-return profile of the ii Income Portfolios is expected to be consistent with an asset allocation to global equities of between 80% and 100%.

  • The Active Portfolios are constructed using actively managed funds and trusts, which aim to outperform the market, but at a higher annual cost.
  • The Low-Cost Portfolios are constructed using index-tracking funds, including exchange traded funds, which aim to replicate the performance of market indices and have low annual charges.

Optimising the asset classes

We look at the broad mix of asset classes (different types of investments) that should be represented in the portfolio to give it the best chance of achieving its investment goals. The mix of asset classes for any model portfolio is based on Morningstar’s Target Allocation Indexes. These are created by taking an average of the asset class exposures of all the multi-asset funds with similar equity levels (as defined by Morningstar’s Categories) after any extreme outliers have been removed. The exposure to these asset classes is then rounded and rescaled in order to meet the target equity weight for each index, which is the mid-point of the equity range for each category. The index is rebalanced monthly and refreshed annually.

Current Asset Allocation (for all portfolios) is based on Morningstar’s UK Adventurous Target Allocation Index created by taking an average of the asset class exposures of all the multi-asset funds in Morningstar’s GBP Allocation 80 + Equity Category:

Asset ClassWeight
UK Equities25.5%
Developed Market Europe ex UK Equities12%
Developed Market ex EUR Equities42.5%
Emerging Market Equities10%
Total Equity Weight90%
UK Core Bonds1%
Global ex UK Core Bonds*4%
Cash5%

* with currency risk removed for a sterling-based investor


Choosing the underlying investments

We look first to the Super 60 and ACE 40 rated investment lists of our highest conviction investment choices. These investments have been through a thorough due diligence process, comprising both quantitative analysis as well as qualitative research on the managers concerned.

However, diversification is also essential to building a robust investment portfolio, therefore we can also sometimes look outside the rated investments list where we need to introduce other high-quality funds that complement the main equity and bond allocations.

Maintaining the portfolios

Once a year we refresh the asset allocation of each portfolio, updating the strategic benchmark and reviewing the investments inside the portfolios. We then rebalance the model portfolios every quarter, to ensure that they remain true to their objectives throughout the varying fortunes of both markets and managers. This rebalancing process ensures that the underlying asset class mix remains closely aligned with that of its strategic benchmark, while at the same time minimising the potential costs of rebalancing.

If changes are required, these will be published on the website (including in our monthly updates) and in our Quarterly Investment Outlook.

Can the portfolios be used by all investors?

Yes, they can.

If you are a ‘hands-off’ investor, you might choose simply to replicate the ii Model Portfolio within your own investment account.

For those with more investment expertise and confidence, the Model Portfolios can be useful as ‘reference portfolios’. They can help you to follow a particular strategic asset allocation over time to achieve your goal, but you may wish to select your own preferred underlying investments.

First, you must decide if growth or income is best aligned to your personal financial goal. Please give careful consideration to the risk attributes of your chosen model, as described in its investment objectives.

Next, choose between active, ethical or low-cost versions, depending upon your preference for potential additional returns, aligning growth to ethical values, or a simple, ‘passive’ solution with the lowest possible explicit cost.

Please remember – we do not manage your investment portfolio. However, if you choose to use our Model Portfolios, it is important to check in regularly (at least quarterly), to keep abreast of any changes we might have made to model constituents. You will need to place instructions to buy (or sell) investments should you want to keep your portfolio in line with the Model Portfolio.

We will also publish monthly performance review for each Model Portfolio, including attribution of returns against the strategic benchmark, so that you can better understand how your own portfolio is behaving and monitor its progress towards ultimately attaining your financial goal.

Please note: these are "model" portfolios only: they are not directly managed by ii on behalf of its customers. ii customers wishing to manage their own portfolios in line with these models should follow the suggested switches and rebalancing by logging in and transacting on their own account. The model portfolios do not take into account your circumstances and do not constitute a personal recommendation. If you are in any doubt as to the action you should take, please consult an authorised investment adviser.