Looking for more equity exposure

Alexandra Davidson's Portfolio

Source: Investors Chronicle/Morningstar as at 13 February 2013

LAST THREE TRADES: BP, Rio Tinto and Tesco (all bought in Sept 2012 when prices looked very low)

WATCHLIST: Shell B stock, Associated British Foods, also maybe Vodafone but I don't really want to increase my holding size

Chris Dillow, the Investors Chronicle's economist says:

One curiosity of this portfolio is that it has no bonds in it. And in fact, one of your bigger holdings, Artemis Strategic Assets, actually has a short position in them. Many readers might think this inconsistent with your claim that you are taking only medium risk.

I suspect, though, that you are correct. In a sense, you do own a lot of bonds. To the extent that your husband's medical practice represents a secure income, you can think of that as being a bond holding; his human capital is more bond-like than equity-like. This quasi-bond position means you are freer to take on equity risk.

A caveat to this is your buy-to-let investments. If your tenants, and prospective tenants, work in finance then your buy-to-let holdings are equity-like, in the sense that they would do badly if a market slump worsens job prospects in the financial sector and hence your prospective rents. If this is the case, then you are doubly exposed to equity risk. If, however, it is not, then you are more able to bear such risk.

My bigger problem, as regular readers might guess, is, are you over diversified? I ask because I'm struggling to imagine a possible state of the world in which your portfolio would do much different from the general market. In good times, your big holdings of defensives would underperform, but this would probably be offset by good returns on your higher beta assets such as banks, small-caps, Russian and Asian funds. And vice versa in bad times.

This is a concern because of the charges on your funds. On most of these, you're paying a percentage point per year more in management fees than you would on a tracker fund. In this sense, you're paying unnecessarily for tracker-like performance.

However, looking at each individual fund, there is a rationale. Given that your direct equity holdings are almost all blue chips, there's a good case for holding smaller caps and special situation funds - not least because these, more than blue chips, would do well if investors' sentiment recovers from its current lowish levels. Similarly, there's a case for your overseas holdings. I would, though, consider trimming these: do you need three different UK special situations funds? What is one doing that the other two aren't? Do you need actively managed overseas funds rather than a cheaper tracker?

This raises another point. Given that you're so well diversified, think carefully about adding holdings. Do not simply ask is this a good stock? Also ask what would this share give me that I don't already have? For example, you have Royal Dutch Shell on your watchlist. But what would this do that BP doesn't? It would add a further defensive element to your portfolio, given its low beta. And I'm not sure it would add much to your exposure to oil prices, given its relatively low sensitivity to these, and the likelihood that a world in which oil prices rise could well be one in which global growth is picking up, to the benefit of your Russian, Asian and global equity funds. So what does it add?

I appreciate that thinking of stocks or funds as marginal contributions to your existing portfolio rather than as standalone bets is boring. It's much more fun trying to pick winners. But just as successful musicians must do boring things like practice their scales, so successful investors must also pay attention to duller matters.

Anna Sofat, founder of Addidi Wealth says:

I salute your interest and dedication to your investment programme. In my experience, some clients have a good instinct for investing but many others lose out by not having a clear system of valuing stock (when to buy and sell), not being disciplined enough to stick to plan and over trading.

The funds you are investing in are all high-profile, well publicised funds you would expect to see in actively-managed portfolios. A number are well rated but others have fallen behind in the league table. Given that that over 70 per cent of active managers do not outperform the markets this is not surprising. However what this means is that you are always chasing performance - going into funds which are doing well and coming out of ones that have fallen back.

You are beginning to focus on individual shares and I can see the attraction of this. Its easier to identify with individual companies and easier to see when there is under or overperformance - everyone knows the problems with BP.

The shares you hold are all big solid companies rather than smaller, more speculative shares. Over half have a decent dividend yield and most are either rated 'buy' or 'neutral' by analysts.

Research shows the majority of traders and managers do not outperform the markets. So you have to question yourself and ask what it is that you will do that is different. I do know of clients who have good instincts and whose risk taking has paid off, but they are very much a minority.

With this mind, I suggest that you split your portfolio between passive funds which track certain markets and individual shares which you want to buy and hold for the longer term.

The passive funds will allow you to get the diversification you need across markets and sectors. Have a look at funds from companies such as Vanguard or Blackrock with low tracking errors. You can get Vanguard through some of the fund platforms such as Alliance Trust Savings and you should be able to buy them via self trading accounts with TD Direct.

Blackrock have brought out a range of tracker funds over the past year. Some that we use and I like include Blackrock Index Link tracker fund, BlackRock UK Equity Tracker, Blackrock Emerging Markets Equity Tracker and BlackRock Global Property Securities Equity Tracker.

They also keep your costs down. For individual shares, stick to larger ones (as you seem to be doing) with decent dividends, strong cashflows and balance sheets. Over the past 10 years much of the returns from GlaxoSmithKline (GSK) and companies like that have come from the dividend distributions.

Research also shows that over the long term, small companies, value stock, emerging markets and property shares have outperformed the main markets. Consider having some exposure to these: both Vanguard and Blackrock offer smaller company and emerging markets tracker funds.

More generally, I would recommend that you have a defined strategic asset allocation which best meets your risk profile. Research shows that well over 90 per cent of returns can be attributed to asset allocation as opposed to individual stocks or managers. A third in property, third in equities and third in cash and defensives split is not a bad place to start.

Determine a suitable rebalancing strategy for yourself, though this might not be easy as the property assets are illiquid but maintain a decent balance between the equity and more defensive side. This will allow you to take profits when you are doing well and buy when values are low.

You have a long time horizon, say 15 to 20 years depending on when you want to retire. This is good for an equity-focused portfolio as it will give you time to weather the ups and downs in the markets, as well as the fortune of companies.