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Do we hold too many funds?

These investors are targeting growth, but are concerned that they have too many funds
Do we hold too many funds?
  • These investors want an average annual return of about 5 per cent a year over the next 10 years without too much volatility
  • Their long-term investment horizon means they could tolerate short-term falls in stock markets
  • They could cut costs by reducing their holdings in multi-manager funds
Reader Portfolio
Arthur and his wife 60
Description

Isas and general investment accounts invested in funds and shares, cash, art and antiques, and residential property.

Objectives

Move house in 10 years, annual average return of 5 per cent over next 10 years, minimise costs of investing, reduce number of holdings.

Portfolio type
Investing for growth

Arthur and his wife are age 60. Between them, they receive income of £100,000 a year from final salary pensions which covers their day-to-day expenses. Arthur is a higher rate tax payer and his wife is a basic rate tax payer. Their home is worth about £1.2m and mortgage-free.

“We wish to invest our portfolio for longer-term growth as we do not plan to access it for around 10 years, after which time we think we will move house," says Arthur. "We would like to make an annual average return of about 5 per cent over the next 10 years, but as we are not counting on this level of growth it is a target rather than a requirement.

"We have been investing for 15 years and would be prepared for the value of our investments to fall by up to 10 per cent in any given year.

"We hold our fund and direct share holding investments in individual savings accounts (Isas) and general investment accounts. We favour investments with low annual fees and, as we are aiming for growth, tend to invest in the accumulation share classes of funds we hold, rather than the income ones.

"Recent trades have included buying shares in Marks and Spencer (MKS), Wickes (WIX) and Rolls-Royce (RR.). But we are not thinking of adding anything more at present because we are concerned that we have too many funds."

 

Arthur and his wife's assets
HoldingValue (£)% of the portfolio
Art and antiques350,00028.87
NS&I Premium Bonds100,0008.25
HL Multi-Manager Balanced Managed (GB0005890487)89,5437.39
HL Multi-Manager Special Situations (GB0030281066)84,2116.95
Lindsell Train Global Equity (IE00BJSPMJ28)78,8916.51
HL Multi-Manager Strategic Bond (GB00B3D4SX81)52,3604.32
Invesco US Equity (GB00B8N44D57)46,3403.82
JPM Japan (GB00B235RG08)43,7373.61
Jupiter UK Mid Cap (GB00B1XG9482)35,6932.94
Royal London US Equity Tilt (GB00B5172X16)35,2822.91
Cash30,0002.47
Henderson Smaller Companies Investment Trust (HSL)29,2042.41
Jupiter European (GB00B5STJW84)24,9702.06
TM CRUX European Special Situations (GB00BTJRQ064)24,2062
Schroder Tokyo (GB00B4SZR818)23,9601.98
Invesco Managed Growth (GB00B8N46392)20,6911.71
UBS Global Emerging Markets Equity (GB00B7L34154)20,4971.69
Baillie Gifford Investment Grade Bond (GB0030816481)20,1501.66
Baillie Gifford China (GB00B39RMM81)17,8771.47
HL Multi-Manager Equity and Bond (GB00B1434Z41)16,7981.39
Royal London UK All Share Tracker (GB00B533V415)16,8391.39
BMO FTSE All-Share Tracker (GB0033138131)15,3581.27
BMO Select European Equity (GB00B4Q7SF31)13,8871.15
Marks and Spencer (MKS)9,0000.74
Rolls-Royce (RR.)8,0000.66
Wickes (WIX)5,0000.41
Total1,212,494 

 

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.

 

Chris Dillow, Investors' Chronicle's economist, says:

You don’t need to access the assets in your portfolio for 10 years, which brings into question your bond holdings via HL Multi-Manager Strategic Bond (GB00B3D4SX81) and the balanced managed funds. The virtue of bonds is that they protect investment portfolios from some short-term falls in stock markets, because bond prices rise when investors worry about economic growth or become more risk averse. With a longer time horizon, however, you shouldn’t worry about such short-term dips as you can sit through them. It is true that equities can fall so far as to become cheap but, when they do, they subsequently recover. So you can use time diversification to spread risk because good times follow bad ones, rather than tying up money in low returning bonds.

But relying solely on this is being a bit complacent. Even over a long period there is a chance that equities will do badly and bonds will do well. This could happen if there is surprisingly weak longer-term economic growth. Bonds protect against this risk, but at the expense of losing money in real terms in normal times and doing especially badly if interest rates rise more than expected. So I suspect that across the whole range of possibilities cash is better insurance against longer-term risks to equities than bonds.

Also, if you plan to tie up your money, you can afford to consider illiquid assets. In theory, investors should be compensated over the longer run for taking on illiquidity risk – as you can afford to take on a risk that others cannot, you should be rewarded for doing this.

Illiquid assets include property funds, although I think that the possibility of rising interest rates and ongoing structural changes on the high street make these risky. A more promising possibility are private equity and venture capital funds. With listed equities dominated by mature companies and ones that come to market at the peak of their fortunes, a lot of future growth might come from companies that are not yet listed on public markets. And private equity funds offer exposure to these. 

Being a long-term investor should also influence your attitude to funds. Over the longer run, few actively managed funds beat the market. Hendrik Bessembinder, professor of competitive business at Arizona State University, has found that this is because only a tiny minority of shares beat the market so funds which don't have much of an allocation to these will fail. And the chances of you spotting the successful active funds are low.

But we do know that fees compound over time. Over 10 years an extra percentage point in charges could easily cost £1,500 for every £10,000 you invest. So consider replacing most of the active funds you hold with a global equities tracker. This is, in effect, a fund of all equity funds – a multi-manager fund. Except that unlike the multi-manager funds you hold, it has low fees.

I’d also be wary of balanced managed funds. If these are doing their job they can smooth out short-term returns by diversifying across bonds, equities and cash. But as a long-term investor you do not need to worry as much as others about short-term ups and downs in equities. And you can largely replicate the performance of many balanced managed funds yourself with mixes of global equities, bonds, gold and foreign currencies. You don’t need to pay the fees of a balanced managed fund to achieve that kind of performance. 

 

Adrian Lowcock, independent investment analyst, says:

Your current financial situation looks well taken care of, so you can focus your investments on the long term without being restricted by short term goals. You are targeting a 5 per cent annual return, a fairly sensible level of growth in the current climate, which could be achieved with a well diversified portfolio. 

You also do not want the value of your investments to fall by more than 10 per cent in any given year. This is conservative, given that stock markets can easily fall 10 per cent and do so at some point during most years. But in the context of your growth objective, this is achievable.

You say that low fees have been a significant influence on your investment strategy. But you both hold multi-manager funds, which tend to have higher fees as, in effect, you pay two layers of management charges. The fees for these types of funds have, on average, come down, but still stand at around 1.3 per cent – nearly double that of many active funds which invest directly in assets. And the multi-manager funds you hold have exposure to some of the same investments as other funds you hold, so your overall investments are not as well diversified as you might expect.

It is good that you are concerned about being too diversified, as this often happens to portfolios as investors collect holdings over time and don't sell poorly performing investments. That said, you hold 20 funds between the two of you, which doesn’t suggest over diversification. But the multi-manager funds add exposure to significantly more funds.

Another reason why your overall investments are not as effectively diversified as you might think is because you have three Europe funds, two Japan funds and two UK tracker funds. You also have no direct holdings in regional Asia ex Japan funds, alternative assets such as property, gold and private equity, and absolute return funds. And the investments have little exposure to different investment styles such as value or equity income. This lack of style diversification means that your investments overall may not be well positioned to perform in all markets.

The key to a well-managed portfolio is to have a good idea of what asset allocation you need to have, and then allocate to funds and investments that will provide that exposure. This way each investment has its place in your portfolio and you know why it is there. Your investment portfolio includes a lot of funds doing multiple tasks, so it is not always easy to see why a fund is included and what its role is.

I suggest setting some simple parameters for your investments such as minimum and maximum investment sizes for holdings. Typically, I set this at 5 per cent and 10 per cent of an investment portfolio, with specialist investments accounting for no more than 2 per cent of it. 

The biggest challenge when restructuring your investments and making changes is that over half of the funds and shares, by value, are held outside Isas. So you will need to be careful not to incur capital gains tax when selling holdings.

So, first of all, tidy things up in the Isas where tax is not an issue. Consolidate all the Europe fund holdings into Jupiter European (GB00B5STJW84) and consolidate all money in US funds into Royal London US Equity Tilt (GB00B5172X16). Also dispose of Invesco Managed Growth (GB00B8N46392) and Lindsell Train Global Equity (IE00BJSPMJ28) within the Isas, and reinvest the proceeds in FSSA Asia Focus Fund (GB00BWNGXJ86). This would result in the Isas being more concentrated, and reduce duplication of holdings.

However, the core of the investments – the HL Multi-Manager funds – still needs to be addressed. Your portfolio doesn’t need to have four different funds from this range and you could consider alternative multi-manager funds. Given your attitude to risk and and concern on costs, Jupiter Merlin Conservative Portfolio (GB00B8GDLS36) might work as a core holding accounting for 10 per cent of your investments. It has delivered a similar performance over longer periods to HL Multi-Manager Balanced Managed Trust (GB0005890487), but is less volatile and has lower fees with an ongoing charge of 0.93 per cent as oppose to 1.35 per cent. However, this might be the last action to take because, for the time being, HL Multi-Manager Balanced Managed Trust does a similar job well enough. 

To reduce costs, I would swap HL Multi-Manager Strategic Bond, which has an ongoing charge of 1.19 per cent, for M&G Global Macro Bond (GB00B78PGS53) which has an ongoing charge of 0.46 per cent, if purchased from the Hargreaves Lansdown platform. Its manager, Jim Leviss, has a good technical knowledge which he combines effectively with his understanding of the world. But, ideally, hold this in an an Isa to ensure that the income received is tax free.

Reconsider investing in direct share holdings as they require ongoing monitoring and are riskier than funds. You could reinvest the proceeds of selling these in a fund which invests via a value style such as Man GLG Income (GB00B0117C28).