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

Shares - - CONTENTS DISCLAIMER - By Daniel Coatsworth Ed­i­tor

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

Source: AJ Bell

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