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We show how you can construct a mini portfolio of five funds using our recent ISA (individual savings account) recommendations.
Earlier this month we tipped 36 funds for investors to include in their tax-free stocks and shares ISAs (individual savings accounts). Anyone who diligently made their way through our seven-part series may rightly wonder what they are supposed to do next before the 5 April deadline.
Well, we promised more help and here it is. In this article we'll tell you how you can invest in five of the funds we recommended into one ISA and create your own mini portfolio. To make the sums easier we're assuming you're investing a total of £10,000. If you have less than this you will have to invest a proportion of the sums we're suggesting. The actual ISA allowance is £10,200 (rising to £10,680 in the new tax year starting 6 April).
We've deliberately chosen funds which, when combined, will spread your money sensibly across different types of investment or asset classes. The main asset classes are shares (also known as equities); bonds (issued by governments and companies when borrowing money from investors); commodities (such as oil, wheat or gold); commercial property – and plain-old cash.
Getting your asset allocation right is an important part of investment. The aim is to take some of the sting out of the market, which can swing violently up and down. When one of these asset classes does badly hopefully the others will do better. Unfortunately, it doesn't always work out that way.
The asset allocation we outline below is based on what we know of current best practice by leading professional investors. Generally speaking shares do well when the economy grows and inflation is rising. By contrast bonds do better when inflation is low and the economy is in the doldrums. This is why expert asset allocators right now favour shares as better value than bonds, but keep the latter in their porfolios just in case there is another downturn.
Adrian Lowcock, senior adviser at independent financial adviser Bestinvest, said investors use asset allocation to limit the risk they take: ‘No one knows which assets (shares, bonds, commodities) will do well at any given time or whether international shares will beat UK shares. You could always be wrong.’
The following is thought to be suitable for an individual who has a medium tolerance of risk and who can afford to invest for 10 or more years. By medium risk we mean someone who wants to protect their wealth from sudden crashes but not so much as to miss out on any chance to grow their money.
You'll notice that the asset allocation only adds up to 90%. The remaining 10% is in a mix of investments, ranging from property to complex securities used by fund managers to hedge against problems like currency movements. There are also a smattering of investment trust holdings in the mix.
The funds we selected below were put through the 'X-ray' tool on Hargreaves Lansdown to check they fitted with the asset allocation model. There are other tools like this available but we found this useful.
Please remember there are other combination of funds you could take from our ISA tips. This is just one example.
As a starting point we put £2,000, or 20% of our £10,000, into each of the five funds below. But when we used the 'X-ray' tool on Hargreaves Lansdown we found that we'd missed the mark on some of our asset allocation aims. For example our bond holdings added up to 26% of the total when we were targeting 20%. So we made some adjustments to reduce our bond holdings – it worked but had the effect of increasing our UK shares to 34% when our target was 30%.
Investec Cautious Managed : Citywire A-rated manager Alastair Mundy currently holds 48% of the fund in shares and 40% in bonds, the rest is in cash and 'other' investments. We decided to up our holding in this fund to £3,000, making it our largest holding, because it allowed us to meet our asset allocation targets more closely.
JOHCM UK Opportunities : We kept our investment in this fund at £2,000. It is a clear contributor to the UK shares allocation and we were happier to keep these than our more risky international shares when we did our portfolio re-shuffle. Manager John Wood aims to pick companies that can do well over four years and have sustainable and recurring revenues. Our analysts believe this fund is a play on winners that will emerge as we – the citizens of the UK – go through the process of paying down our corporate, personal and government debts.
Veritas Global Equity Income : More shares here, but international. We invested £1,800 into this fund which, combined with the other funds in the portfolio, kept the international share allocation at our intended 30%.
M&G Optimal Income : Given Investec was providing some bond exposure we have only allocated £1,200 to this fund, though we rate manager Richard Woolnough for his ability to move between the different kinds of bonds. Recently he has been shorting (profiting from a price fall) in UK and German government bonds, although most of his fund is invested in high yield bonds. These pay a higher level of interest because the companies behind them are perceived as higher risk borrowers.
JPM Natural Resources : The JPM fund was not in our ISA selection tips but we’ve included it here instead of the BlackRock World Mining Trust which is an investment trust and its holdings were not available to scrutinise on Hargreaves' X-ray tool. The JPM fund, which returned more than 600% over 10 years, is a good option if you believe in the long-term growth story of commodities and invests mainly in firms that are related to commodities production, is in Citywire selection.
Here are links to the galleries detailing our our ISA tips. They are split into different sectors and categories.