Lazy portfolios, UK-style

Stephen Barber, head of research at stockbrokers Selftrade has set up a series of standard portfolios built around unit trusts sold via their funds platform. Barber freely admits a big debt to the ideas of lazy investing in that the portfolios are simple to understand, built around a small number of funds, diversified and designed to reflect different investors' tolerance of risk. There's a caveat though - the Selftrade portfolios don't conform to all the principles behind lazy investing, particularly as the underlying funds used are all actively managed unit trust funds.

Another organisation that's worked hard on building simple to understand portfolios is the investment trade body APCIMS – its Private Investor Index tracks three notional portfolios: Income, Growth and Balanced.

APCIMS doesn't recommend funds for your own model, lazy portfolio but running down the list of 'representative indices' used by APCIMS, the cheapest and most popular FTSE All Share tracker fund comes from Fidelity via its UK Moneybuilder unit trust (although Lyxor runs a slightly more expensive ETF that's more accurate), while Deutsche's DBX unit runs a FTSE World index tracker that excludes all UK stocks. iShares by contrast runs both a FTSE Gilts Index fund and a UK commercial real estate fund built on the FTSE/NAREIT index series, leaving us with only one omission, namely hedge funds although it's worth mentioning that there is in fact a specialist hedge fund ETF available from New Star (EPIC – HXS) that tracks the Royal Bank of Canada 250 index of top funds.

Borrowing from the funds of funds approach

Professional fund managers often use a fund of fund approach that invests your money into a range of different funds to balance out the risk and rewards.

For example, boutique fund manager Thames River has developed a series of multi-manager portfolios built around different risk profiles, carefully allocating the overall fund to a range of funds that invest in everything from commodities to emerging markets stocks. The table below shows the list of different portfolios, with recent fund composition alongside a guide measure from analysts at Lipper which tells you the equivalent average for the wider sector.

Thames River invests in other actively managed funds but it is possible to create similar portfolio structures using passive index tracking funds.

The logic here is simple – multi-managers can often deliver above average results (at lower risk in some cases) but to do this they do incur higher expenses based on not only their charge but also the management fee of the underlying funds. The total figure – called the total expense ratio – can add up to a little under 2.5 per cent per annum in many cases, whereas every low cost alternative suggested below charges less than 1 per cent per annum, with most charging less than 0.5 per cent per annum. Our simple, lazy alternatives may not deliver you the very best boutique funds in the business – as Thames River aspires to do – but it is probably charging you a good 1.5 per cent less in fees every year giving you a valuable head start.