Unlike most people I have access to some of the most advanced financial planning and fund analysis software on the market, yet despite this I have fallen into the trap of not paying anywhere near enough attention to my pension portfolio. Given that I spend most of my time demonstrating ways portfolio management can be done better, it is high time I put my own house in order and start to practise what I preach.
By sharing my actions, hopefully I’ll be able to inspire others to take more control over their own financial futures.
According to the log in the database I haven’t changed this portfolio since 29 April 2010.
In that time the FTSE has risen by as much as 30 per cent from peak to trough, and experienced periods of loss as great as 16.9 per cent, so it is with some relief that I find my current pension portfolio has made a touch under 15 per cent since I last looked at it.
While I don’t subscribe to the notion of a rigid asset allocation strategy, the first thing I want to see is how far the current portfolio has drifted from the one I started with. Rather surprisingly, not that much.
With the largest movement coming from Investec Enhanced Natural Resources, falling from an allocation of 10 to 8.45 per cent, I have to wonder whether my negligence has actually been a good thing.
Frequent rebalancing would have incurred a charge and yet my current portfolio appears to have rebalanced itself. Analysis suggests that if I had stuck to a disciplined quarterly rebalancing schedule I would have gained an extra 0.33 per cent.
My pension funds
| Holding Name | Original weighting | Current weighting |
| Aberdeen - Emerging Markets | 20 | 20.71 |
| Fidelity - South East Asia | 20 | 18.47 |
| JOHCM - UK Equity Income | 15 | 16.21 |
| M&G - Strategic Corporate Bond | 15 | 16.09 |
| BlackRock - European Dynamic | 10 | 10.42 |
| Fidelity - American Special Situations | 10 | 9.65 |
| Investec - Enhanced Natural Resources | 10 | 8.45 |
Secondly, I want to review my holdings and the asset allocation they provide. When constructing the portfolio first time around I went to the effort of filling in an attitude-to-risk questionnaire. The resulting profile put me in the highest risk bracket, “Risk Level 5 21+ Years”, using the tools from eValue FE.
The suggested asset mix for this profile was: 10 per cent UK equities, 60 per cent international equities, 20 per cent emerging markets and 10 per cent property.
I additionally made the tactical decision back in 2010 to reduce my exposure to developed market equities and increase my exposure to emerging markets and commodities.
Also, I’m sceptical of property as an asset class and decided an allocation to strategic fixed income offered better diversification.
Two-and-a-half years on, what I’ve ended up with is less aggressive than before: 15 per cent fixed income, 40 per cent UK equity, 35 per cent international equity and 10 per cent property.
This is a decent starting point, but I still don’t like property. I also don’t like how these models pander to home bias and boost UK equity.
Moreover, regardless of risk profile, I always want some exposure to emerging markets. My approach does not take the asset allocation too seriously; the key for me is the risk profile.
If I decide to take extra risk in emerging markets, I’ll try and offset that by choosing a more conservative fund somewhere else. This way, although I may stray a long way from my target asset mix, I never stray too far from my target volatility.
Now it’s time to assess what funds I want to get rid of. My new asset allocation, even after I’ve added my tactical overlay, leaves no room for a pure commodities fund, so that means Investec Enhanced Natural Resources is out.
Even though it has been the worst-performing fund in the portfolio, I still like it. It does an excellent diversification job and allows me to push on in other riskier asset classes. However, the idea of a performance fee has never sat very well with me in truth and I had already decided it probably wouldn’t make the cut even before I started.
Aberdeen Emerging Markets and Fidelity South East Asia together make my portfolio far too China-heavy for my liking. Aberdeen remains an excellent fund but Fidelity’s offering has lagged recently, becoming a third-quartile performer since the period I bought it.
Performance of fund vs sector since April 2010
Source: FE Analytics
This is a classic cautionary tale of “past performance doesn’t guarantee future performance”, because at the time it was added it was one of the best-performing funds.
I’d like to think I wasn’t too heavily swayed by that at the time, but although I can’t remember my exact reason for including it, I’m sure it probably played a part.
It also has high charges and, as a result, I’m also ditching this fund. No doubt next time this will be the basis of another cautionary tale of why not to sell underperforming funds, but no matter.
My main consideration is tactical, and I want my emerging market exposure to have a more even split between Asia and Latin America.
BlackRock European Dynamic and JOHCM UK Equity Income both stay, for now. When reconstructing my portfolio I may decide to swap one for some small cap exposure – as long as there is room in the risk budget, of course.
Moreover, I have some niggling doubts about the Jo Hambro fund. While I think it is fantastic, it is dangerously close to reaching its maximum sustainable size – something both fund managers are also concerned about and that JO Hambro is trying to deal with.
One of the projects I’ve had in mind for some time is to try and find “the next” JOHCM UK Equity Income fund – one with a mid cap focused income mandate with less than £250m assets under management (AUM), and with plenty of room to grow.
Unicorn UK Income is on my radar, but this matter will take a fair bit of thought and I’ll probably shelve it for now.
M&G Strategic Corporate Bond also has size issues, but for now I think it is still one of the very best fixed income funds available and it survives the initial cull.
Performance of fund vs sector since April 2009
Source: FE Analytics
Finally, Fidelity American Special Situations is cut. The fund has disappointed ever since I bought it, especially as it has a style which I thought would hold it in good stead in the early stages of an economic recovery.
While it still might have this potential, my selection process has evolved and this fund no longer makes the cut based on my updated criteria.
Now that I’ve stripped the portfolio back to its usable parts, I’m ready to find funds to fill the void. In next week’s piece I’ll go through my choices, which may mean some further culling if I find something that catches my eye.
For anyone worried I’ll be sat in cash for a week, relax – I actually intend to carry out the whole process over the weekend.