How do I invest my £800k in cash?
Our reader is wondering if he should ditch ‘active’ fund managers, writes
Investors are increasingly won over by “passive” funds – which track a given index – over those run by active managers, thanks in part to their simplicity and lower cost.
Sri Moorthy, 56, from Wimbledon, is one such. He has £600,000 in a portfolio of index trackers and exchanged-traded funds (ETFS), including the Fidelity Index US, Fidelity Index World, Invesco STOXX Europe 600 ETF and SPDR Russell 2000 US Small Cap ETF. He is sceptical about active management.
“I would only go for an actively managed fund if I felt confident it was good value and they didn’t charge performance fees,” he said.
But Mr Moorthy also has £800,000 in cash. As he does not plan to retire for the next 10 years, he can afford to risk more of his money in the stock market. He also has some exposure to emerging markets, Japan and the UK but his portfolio is dominated by US investments. “I have at least 50pc of my portfolio in the US. The market seems to continually defy expectations, but I need to think where else there is value.”
Darius Mcdermott Managing director at Fundcalibre
Index investing offers a simple and cost-effective way to invest. However, it can be argued the success of passive vehicles, in terms of performance, is tied to the era of easy money with very low interest rates following the 2008 financial crisis.
Now, as we enter a more normalised economic and interest rate environment, we believe markets are shifting in favour of active investors. While Mr Moorthy’s portfolio already has broad geographic diversification, relying solely on passive index funds limits its tactical flexibility.
Asia ex-japan, for example, with its diverse composition and rapid economic evolution, is where an active approach is likely to be more fruitful than a passive one. Countries such as China, India, Korea and Taiwan display distinct characteristics, creating unique challenges and opportunities. Skilled active managers can navigate these complexities, identifying winning bets while mitigating risk. This includes the ability to avoid potential pitfalls such as companies with poor corporate governance, a critical issue in this region, which you would have no choice but to own in a passive fund.
The Fidelity Asia Pacific Opportunities Fund is a strong candidate for any investor looking for an Asian equity fund, with its high-conviction and disciplined stock selection process offering a truly active approach.
Even in the US, a purely passive approach exposes Mr Moorthy’s portfolio to concentration risk. The S&P 500 index is more concentrated than it has ever been, and investors may not be aware of how much their portfolio is influenced by the share price of technology giants like the Magnificent Seven. A good complimentary fund to an S&P 500 index tracker is one like Premier Miton US Opportunities.
Managers Hugh Grieves and Nick Ford have no exposure to any of the S&P 500’s top 10 constituents that dominate 30pc of the index. Despite not holding these leading names, the fund has delivered a total return of 273.6pc over the past decade.
Bonds currently look more attractive now than they have been in decades and, while Mr Moorthy’s current equity allocation aligns with his risk tolerance, you might want to consider adding exposure to this asset class. Corporate bond funds currently offer the opportunity to lock in historically high yields for years to come and potentially benefit from capital appreciation if rates are cut later this year. Our preferred two strategies are currently Artemis Corporate Bond and Blackrock Corporate Bond.
John Moore Investment manager at wealth manager RBC Brewin Dolphin
While there is a desire for equity exposure, given that the capital available is in deposit accounts, and not in a pension or Isa, there is a case for considering some exposure to gilts. The 0.875pc 2033 gilt offers 33pc upside without capital gains tax or income tax considerations and a gross equivalent return for a higher-rate tax payer of around 6pc. Gilts have no fees, which keep the costs in check.
Turning to the equity aspect, technology companies have been leading markets and appear to be an area that Mr Moorthy is short of. A Nasdaq 100 ETF (which has an annual charge of 0.2pc) would help. With a little more risk, there are specialist trackers like the ishares Semiconductor ETF (ongoing fee of 0.1pc). He could balance the technology exposure by reducing volatility with a theme like healthcare as it has long-term demographic drivers. The Vanguard Health Care ETF (0.1pc) balances large established players like Eli Lilly and Johnson & Johnson with exposure to the biotechnology sector.
The dominance of the S&P 500 means that a core exposure is needed.
You might want to broaden this out to help manage capital gains tax between positions by adding the UBS MSCI World tracker (ongoing fee of 0.1pc).
‘I have at least 50pc of my portfolio in the US’