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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.
Comments (21)
In practice, if I wanted to take your advice, how would I make it happen?
Would I need a broker to set up the ISA?
12:45 on 08 March 2011
Open an Advantage ISA with Hargreaves Lansdown and instruct them what you wish to buy.
13:00 on 08 March 2011
If your bond fund is short govt debt, then surely you are losing the portfolio effect you are trying to achieve.
13:31 on 08 March 2011
Thank you very much Old Timer
13:47 on 08 March 2011
Mum
There are other discount brokers out there, e.g. Best Invest.
Main point is to ensure you use a discount broker. They reduce the initial charge (typically 5%, hence £500 on a £10,000 investment) drastically - sometimes to zero.
14:16 on 08 March 2011
I use Hargreaves Lansdown (http://www.h-l.co.uk/) - there are others of course but I do find their website very friendly and the tools are useful.
17:44 on 08 March 2011
I just spoke to Hargreaves Lansdown. The person I spoke to was very good and knew his stuff. I agree with you MBJ, the website is very user friendly.
I mentioned the funds suggested in this article and the Hargreaves man was happy with all of them
He said that Hargreaves do not charge the buying fee that I would pay if I bought from each fund directly and that Hargreaves earn their money from the Funds who split their annual charge with Hargreaves.
The downside was that at the point of opening an account Hargreaves would want me to give them a minimum of £3k by debit card or cheque. I am not quite clear about how safe my money would be while I decided where to invest. I like to pay my money and immediately be given what I'm buying.
Tomorrow I'll phone Best Invest and see what they offer... very exciting !
Thank you all very much for relpying to my question
18:06 on 08 March 2011
It is completely safe, you have the FSA backing up to £85,000 (now), and once invested, it is then with all the fund managers, I understand, so 10 funds Aberdeen, Marlborough, Schroders etc could give you up to £850,000. Also they do not borrow or gamble so they seem pretty safe. It is Vantage anot Advantage of course, and there have been many positive comments, I am pleased with them, excellent for Funds, and a little more expensive for Funds ETFs ITs etc.
Also I believe HL do NOT charge to transfer an ISA out, many will charge £60 incl VAT. (Please confirm)
Put max into ISA each year, and any over into a Fund account if you can.
Dont forget you can compare ALL funds (they offer which is most) by each year, and sort, and up to 7 side by side on the graph. Dont go for ones that have done best over the past few weeks the chance are they are most likely to pull back. Get long term performance, and in areas you feel will do well.
20:18 on 08 March 2011
What about Rothschilds Capital Partners Investment Trust & British Empire I.T. for low costs & top class management and pick another 3 I.T.s. Regards
20:19 on 08 March 2011
Umm, what happens the remaining 15% of this imaginary portfolio?
21:07 on 08 March 2011
Spot on David Booth.
RIT Capital
British Empire
Caledonia
Monks
Foreign & Colonial
Quality investment funds !!!
21:55 on 08 March 2011
Surely not the Caledonian Trust plc spread is shown as 85/110p and naff performance?
http://www.h-l.co.uk/shares/shares-search-results/c/caledonian-trust-plc--ordinary-20p-shares/charts
06:48 on 09 March 2011
Mum,
Have no worries whatsoever about Hargreaves Lansdown - I have used them for years and recommended them to innunerable friends and relatives -who all agree they are great.
Once you have invested spend some time exploring their webisite - it is very user friendly and you can start to learn about managing your own money it is a really useful way to spend some of your .time - no one will ever look after your money as well as you will.
PS I am another Mum!
10:11 on 09 March 2011
I’m surprised that no-one has commented on the advisability of pound-cost-averaging into the various funds suggested. Of course you may retort that there is little time left for this to take advantage of the current ISA allowance but a) If this is a first-time investor, maybe £10,000 is all they can afford this year, so better to start in April with a full year to invest bit by bit and b) Surely the broker has a mechanism which allows for most of the cash to qualify for the current ISA, allowing the investor to drip-feed into whichever funds allow monthly payments? Many believed (Libya aside) that the first half of 2011 is going to be difficult, so why start the new portfolio with a probable built-in loss?
11:29 on 09 March 2011
Thank you Mike. I'm an almost first time investor.
I could invest more than £10k, but the ISA allowance seems like a fair amount to start off with, to see if I can make a success of it. I had thought that I would eventually invest next year's ISA allowance too.
Are you suggesting that I open the ISA with all the cash and then buy the funds when they hit an advantageous price? Can I do that while the ISA cash allowance is only £5k? And then how would I be sure to buy at the best price?
I've got a busy day today in my real business life, so I may have to wait until tomorrow before I research all the great advice that's been posted here.
Thank you all again. You don't know how valuable your posts have been to me.
12:58 on 09 March 2011
Mmm, not sure if you’re quite real Mum…… but in the hopes there are some out there who actually need this info: The current cash allowance is £5100, (£5340 from 5 April). However, I have a feeling that, if you are unsure which equities/funds you wanted to invest in, most brokers will accept your additional £4,900 cash, provided you have committed to paying it into the chosen funds on a monthly basis. I stand to be corrected here but I would not be rushed into making a full-on investment in any fund just now. You can never be sure of buying at the best price, but buying monthly ensures that you get the best average price over the year. Happy investing…..
13:35 on 09 March 2011
As a 20-year customer of Hargreaves Lansdowne, I would confirm that Mum should put all her £10,000 into a 2010/11 H-L's Vantage ISA account, before 4th April, and ask them to arrange a monthly "drip-feed" into the chosen products (Unit Trusts or Investment Trusts, but remember they charge more for holding ITs) to get the undoubted benefit of pound-cost-averaging. Best Invest probably do the same monthly investments. That way you will take advantage of your current ISA allowance, and can add more after 5th April, for next years allowance.
18:46 on 09 March 2011
Is HL trusted was asked earlier. This evening they have gone up to the FTSE 100.
To avoid the confusion, you can hold cash in a Stocks & shares ISA, but it does not get any interest, and it is still a S&S ISA. Never worry about being out of the market - if in doubt stay out, just keep it as cash.
A cash ISA can be changed to S&S ISA but not back of course.
HtH
19:07 on 09 March 2011
For "an almost first time investor" £10K strikes me as a lot of money to put in the market at one time. I'd go with those who say "drip feed" it in, over a number of months you feel happy with.
20:05 on 09 March 2011
The main point is, will it make money, more likely than not, and how much will you lose if you invest and the market drops, then withdraw to cash? (although a S&S ISA, you can always hold it as cash in the ISA wrapper.
As said before, do you intend to invest and leave for 5 years, or monitor carefully? If you have dealing charges or dual priced Funds you will suffer an immediate negative return.
Of the best funds I invested in 3m ago, Investec UK Sm Co, Unicorn Sm Co, GLG Tech, Marlborough UK Micro cap growth, CF Amati, Australian Nat Res., Std Life UK Eq Unconstrained, all have shown 9.3 - 14.2% return, but others have still lost over the same period. (ie FS Indian, Investec Glob Gold, Templeton etc.
As I see it, the FTSE will go up and down. With an Actively managed fund, the best managers will switch to more defensive Investments, when Bill Goss dumps £28Bn of US bonds,
http://www.citywire.co.uk/money/bill-gross-dumps-28bn-of-us-government-bonds/a477511?ref=citywire-money-latest-news-list
Portugal, Middle East, end of QE2 etc a downturn is quiet possible.
Then when the Fund Managers have done their best, we the investor then decides whether to stay in the market, or as cash.
Just checked the FTSE gain over that period. 1.97%, the portfolio many bought then is 1.91%. So very close, but that includes the spread, and any initial charges, and some bought later.
22:56 on 09 March 2011
You still pay 0.5% commission EVERY YEAR on funds. Until next year for new funds you buy.
16:18 on 11 March 2011
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