24 Jul Constructing Your Investment Portfolio - Keep It Simple
“If you can’t explain it to a six year old, you don’t understand it yourself.”
― Albert Einstein
My career in financial services began as a life & pensions administrator with Hargreaves Lansdown (HL), back in June 1987, when the firm was tiny, compared with the size it is today. I absolutely loved working there for eight very happy years and still feel extremely grateful to have had the good fortune to start my career with such a great firm.
I used to get into the office quite early, and an unwritten rule was that if you were in early, you could help with opening the day’s post. Even back in 1987, Peter Hargreaves and Theresa Barry were already masters of marketing, and at that time this meant direct mail marketing. Depending on whether there was an ongoing active campaign (which there was, most of the time), ‘the post’ consisted of between two to four Royal Mail sacks, stuffed to the gunnels.
Direct mail marketing was largely newsletters sent to clients and the general mailing list, accompanied by application paperwork for funds the firm was recommending. Alongside these direct mail campaigns HL would regularly advertise these funds in the weekend press, with ‘coupons’ which could be clipped and posted back to us.
Those post sacks would be full of application forms and cheques, or coupons and cheques. In those days, the firm was small enough that regular investors became familiar names – some of them became known as ‘coupon clippers’ as they would basically invest in everything HL recommended and would dutifully complete the coupons and post them to us with their cheques.
I was reminded of this recently when a potential new client approached us. His existing portfolio consisted of – amongst other things – a portfolio held on HL’s platform consisting of over 150 separate funds, each one valued at less than £2,000 – and some valued at only a few hundred pounds.
It turned out that he was the 21st century version of those ‘coupon clippers’ in that he had invested £1,000 in every fund HL had promoted since he first joined their mailing list.
You can imagine what that portfolio looked like from an asset allocation perspective – it bore no relation to his risk profile or his goals and was spread across multiple asset classes, with a considerable amount of duplication (several UK large cap equity funds, for example).
Asset allocation seems to be something which people can struggle with and feel that ‘More is more’. Here at Bloomsbury, we like to keep things simple.
Our client portfolios are allocated as follows:
Level One
- Cash & cash equivalents (e.g. National Savings certificates).
- Defensive (i.e. bonds).
- Growth (i.e. equities and commercial property).
Level Two
- Defensive assets are split 75% short dated (i.e. term to maturity five years or less) nominal (i.e. fixed coupon), and 25% index-linked bonds.
- Growth assets are allocated to either a 50/50 UK/International or Global (market cap weighted) model portfolio depending on the client’s preference.
Level Three
- For those clients using our UK/International 50/50 models, the UK equity allocation is invested in a UK core pure asset class fund with small company and value tilts, and the International equity allocation (ex Emerging Markets) is invested in an international core pure asset class fund, with the same tilts to small and value.
- For those clients using our Global model, UK and international equity allocation (ex Emerging Markets) is invested in a market cap weighted global core pure asset class fund with small and value tilts.
- Emerging Markets equity allocation is invested in an emerging markets core pure asset class fund with small and value tilts.
- Property allocation is invested in a global commercial property securities fund.
That’s it. No commodities, no hedge funds, no ‘smart beta’, no Mongolian smaller companies.
Our UK/International 50/50 model portfolios comprise only six funds and our Global model portfolios only five funds, yet we provide exposure to thousands of individual companies. Most importantly, there is no duplication of companies being held in more than one fund.
The primary benefit for our clients? A portfolio they can understand.
To find out more about constructing your investment portfolio you can download our Guide to Investing, free of charge.
“Simplicity is the ultimate sophistication.”
Leonardo Da Vinci
Carolyn