Ready-made porfolios are ideal for investors wanting some help
We explain how they work and look at the features of AJ Bell’s new service
Investing needn’t be as difficult as you might imagine. Many ISA and SIPP (self-invested personal pension) providers now offer services to give you a head start with building a long-term investment portfolio. These include lists of their favourite funds if you’re happy to make some of your own selections.
One step beyond this is the provision of ready-made portfolios where a lot of thought has gone into asset allocation. This is the weighting of asset classes like stocks, bonds and property.
Getting the right balance is very important. You don’t want too much of one thing as investing doesn’t always go smoothly and there will be times when you have to lean on something else. If you don’t have that support in your portfolio, you can experience a nasty hit to your investment pot.
Asset allocation is heavily linked to risk appetite. For example, if you are relatively young, you may have time on your side and can afford to be in higher risk assets in order to chase a greater reward. You may therefore want a higher proportion of equities than bonds as they historically have produced a higher return, although it is not guaranteed they will follow the same path in the future.
If you are older, perhaps in retirement or approaching this milestone, you may not want to take on lots of risk. Instead you might look for your portfolio to have a greater weighting of fixed income assets such as bonds.
In both cases, it is important that your portfolio has the appropriate weighting of assets to match your risk profile.
EXAMPLES OF SERVICES IN THE MARKET
You may already be familiar with some ready-made portfolio services on the market. For example, Hargreaves Lansdown has six ready-made portfolios which are populated by its own multi-manager funds. Share Centre has a ready-made ISA which also contains its own funds; and Nutmeg offers portfolios stuffed with exchangetraded funds (ETFs).
Someone looking for greater flexibility and help from experts may instead wish to look at AJ Bell Youinvest’s new ready-made portfolio service where all the hard work with asset allocation
is done for you.
There are four core versions of its portfolios to match different risk appetites: cautious, balanced, adventurous; and one for investors wanting income.
Each portfolio contains a handful of funds which have been picked because AJ Bell Youinvest thinks they are best-in-class, including products from Baillie Gifford, Jupiter and Schroders.
It has picked these funds based on them being low cost, great value, having a proven track record compared to their benchmark and peers, and a quality fund management team.
The stockbroker has also made sure each combination of funds provides appropriate asset weightings.
More experienced investors may wish to play around with the fund choices or weightings as the system grants you this flexibility. You can decide to have a greater proportion of one fund, for example, and less of another. Or you can add your own selections from AJ Bell’s favourite funds list.
CHANGING THE SETTINGS
There are some issues to consider when using ready-made portfolios that let you change the pre-populated settings. Anyone who already owns stocks, funds, bonds or other assets would have to take these holdings into consideration when trying to get optimal asset allocation.
Let’s say your portfolio currently contains a £5,000 holding in a bond fund. You then invest £10,000 in a ready-made portfolio which is classified as ‘balanced’ in terms of risk appetite, where 33% of the assets are in fixed income (aka bonds), 10% in property and 57% in equities (another word for stocks and shares).
You may think you are getting optimal asset allocation thanks to the ready-made portfolio, but you actually end up with 55% of your overall portfolio in fixed income once you add in your existing bond fund.
This level of fixed income
is more suited to someone with ‘cautious’ risk appetite who wants a more stable portfolio and so the returns may be a lot lower than a more balanced portfolio. As such, it is important to bear such issues in mind should you change any settings on readymade portfolios.
YOU STILL HAVE TO DO SOME WORK
In general, investors who use ready-made portfolios will have to do the day-to-day management themselves in terms of making sure the investments are right for their own personal circumstances.
They will also have to rebalance on a semi-regular basis – whether they’ve tinkered with the original settings, invested in a ready-made portfolio exactly as it was offered by the ISA or SIPP provider, or even have other investments to consider.
For example, let’s say the equities component of a readymade portfolio has shot up in value over a two-year period and so it accounts for a much larger proportion of the overall fund.
Someone investing in Hargreaves Lansdown’s ‘Balanced Growth’ portfolio would initially have approximately 71% in equities, 23% in bonds and the rest mostly in cash. Those weightings could easily progress to 80% of the value of the portfolio in shares if the market is doing well.
Therefore an investor wanting to stick to the original asset allocation would need to sell some of the equity component and shift the proceeds into other parts of the portfolio. This is what’s known as rebalancing.
GUIDANCE NOT ADVICE
Ready-made portfolios are provided for guidance purposes and they are not constructed specifically for each individual such as you may get when paying for financial advice.
AJ Bell fund manager Simon Molica says AJ Bell Youinvest will manage its model portfolio selection on an ongoing basis. Potential amendments may be made if there is a change in fund manager for one of its favourite funds or the team has higher conviction with a different fund.
DISCLAIMER: AJ Bell referenced in this article is the owner of Shares magazine. The author of this article also holds shares in AJ Bell.
AN EXAMPLE OF AJ BELL YOUINVEST’S NEW SERVICE