- suitability - keep it simple
- asset allocation - buckets of funds
- fund selection - pick the winners!
Below we take you through each step before introducing our free tool that can do this for you in 20 seconds.
STEP 1 - Suitability, Asset allocation and the “Age Guide”
There are a number of approaches to the make-up of a portfolio and asset and geographical split. I know many FundExpert clients focus largely on opportunities in the UK. In contrast, the advised clients of Dennehy Weller & Co (the parent company) tend to use the "Age Guide” Portfolio as a starting point. This enables us to split investments into three “risk buckets” to ensure diversification. In a nutshell the age guide means that the lower risk part of your portfolio (the low risk bucket) matches your age e.g. a 60 year old should have 60% in the low risk bucket.
This approach has the following benefits:
- It is easy to understand
- It matches most investors’ common sense view of how their attitude to risk will unfold with age
- It ensures that the portfolio is diversified, as each of the risk buckets that make up the portfolio is spread across different asset classes, with varying degrees of risk and reward
- It creates a structure within which ongoing reviews are straightforward
Nonetheless, this is only a rule of thumb, giving a structure for consideration.
For example, it may be too cautious for some if you have a secure and more than adequate guaranteed pension. On the other hand personal circumstances and your attitude to risk may make this cautious guide just right for you. The vital component of the model portfolio is the fact of the risk buckets rather than the precise amount in each risk bucket.
STEP 2 - The risk buckets - what's in 'em?
Here is a brief outline:
Lower risk: This should be the stable core, and we would expect returns at a margin over those available on deposit returns, but not a huge margin.
Types of fund: Absolute return, UK Corporate Bond, Strategic Bond, Property
Medium risk: Here is the inflation-beating potential. This is primarily mainstream stock market funds.
Types of fund: UK All Companies, UK Equity Income, European equity, US Stock Market, Asia, Japan equities
Higher risk: Here is the potential for double digit gains, but with somewhat greater volatility being the price.
Types of fund: Global Growth, Emerging Markets, China, Specialist
STEP 3 - Choosing funds - pick the winners!
The key is to pick outstanding funds. We do this using our Dynamic Fund Selection rating system, which is based on a type of momentum investing. Momentum investing at its simplest means buying an investment (in this case a fund) which is already performing well on the likelihood that it will continue to perform well. More detailed explanation can be found here.
Dynamic Fund Selection means you are always investing in funds (tracker or otherwise) which are performing strongly in the prevailing environment. This process was never previously available to retail investors due to costs and logistics. Now is it available at low cost on FundExpert.co.uk.
Dynamic Fund Rating system has produced some staggering results. For example, we tested our Dynamic Fund Selection for the UK All Companies sector, analysing 204 five year periods since 1994. The results are impressive:
- 7.85% EXTRA growth per annum - achieved by the Dynamic Fund Selection vs the average sector fund
- £45,920 average EXTRA return after 5 years – from an £100,000 initial investment
- 92.16% likelihood of outperformance - Dynamic Fund Selection outperformed in 188/204 five year periods
We are not aware of any other fund rating system that can demonstrate added value on this scale. You can find out more information here and explore sector by sector.
Here are the current fund picks based on one particular approach, though in all cases using Dynamic Fund Ratings:
Low risk bucket: BlackRock Index Linked Gilt Tracker, Threadneedle Emerging Market Bond, Newton Long Corporate Bond, M&G Global Government Bond.
Medium risk bucket: Liontrust UK Growth, L&G Growth Trust, Baillie Gifford Japanese, JPM US Smaller Companies.
High risk bucket: Smith & Williamson Global Gold, Jupiter India
Your instinct (like mine!) will probably be to go through these funds and cherry pick – try and put a gloss of personal judgement on this process. Yet I have to keep reminding myself that even though my judgement might be pretty good on occasion, a systematic approach to selecting funds will tend to have an edge over longer periods AND is a lot less effort and stress.
THE EASY WASY TO BUILD A PORTFOLIO IN 20 SECONDS
Our portfolio builder tool applies the above process so that you can design your own portfolio (including fund suggestions) within 20 seconds. Simply click here to get started.
ACTION FOR INVESTORS
- Fund selection should be the last step in your investment process
- Make sure your selection process is suitable for you
- If you feel lost consider seeking personalised advice