If you follow this link (above my shiny dome), you will be able to open a chart showing a suggested portfolio for Alex Bright
This has been carefully checked for the required characteristics after construction, using Morningstar Portfolio X-Ray tools.
It was built in April 2018 and has since become quite dated looking, demonstrating conclusively the case for regular reviews, but nonetheless it illustrates the application of the guidance in the previous articles.
The original portfolio will remain on-line so that readers can learn from the process of review with reference to the history.
Compared against a benchmark of more conventionally mixed assets the portfolio is less volatile, makes less money in rising markets and is highly defensive when markets fall.
On a back tested basis, the worst loss would have been over 3 months in 2009, at about 11%. More recently, in mid 2015 and early this year when equity markets sold off, the portfolio would have outperformed global stock markets by a worthwhile margin.
The holdings can be analysed in various ways, for example:
The Asset Allocation by classification of funds (that is the general names and objectives) would be 50% global equities, 30% specialist absolute return or macro strategy funds and 20% highly defensive, near cash funds. This meets the objective of having funds that can be drawn at short notice with small losses at worst even in a market meltdown, as the near cash funds would have very low volatility. The specialist funds dampen volatility by being very little correlated or even negatively correlated with the international equity funds. The equity funds are there to supply growth over the long term, with profits to be taken as and when they arise to top up the other asset classes.
However, and this is why holding managed funds can be really worth the extra fees you pay, the actual underlying asset mix is tactically very different at the moment.
The initial (at the date of writing in Spring 2018) holdings of the various managers was such that the overall portfolio was actually net ‘short’ (see this article to understand shorting) of the UK (ie the managers are betting on UK stocks to lose money). There is a heavy bias to the USA so before adopting this portfolio, one would have had to take a view that it is correct that the US dollar will appreciate against Sterling, because economic growth in the US will be that much better. That is in fact highly likely but with Donald Trump in charge, there may be other political risks! (I left this text in, although dated, as I thought it was appropriate)
The manager styles are shown to be highly diversified but there is a bias to smaller growth companies as opposed to large defensive ones in the equity share elements. This in the longer term usually results in better returns. The fixed income or bond holdings are 100% mid quality which means there is some risk of losses from default but not much and the bonds are in the range of maturities that has the lowest sensitivity to interest rate rises (which is what we want as rate rises could be very negative for capital values from the current low baseline). The selection of a short dated bond fund was because it was noted that global interest rates were low but likely to go up.
A key point, and the main reason this portfolio is much better then Alex’s own selections, is that there is proved to be considerable diversification when the correlations of various funds are cross checked.
I am (even in the future) happy to answer questions about the individual funds and also about alternative approaches – this is a suggestion for educational purposes only, of course. I would expect many other investment advisers to find this approach a little unconventional but in my experience, it works!