You’d think holding funds from five of the most popular IMA sectors – UK All Companies, UK Equity Income, Global, Sterling Strategic Bond and Mixed Investment 40-85% Shares – would give investors broad exposure to the main asset classes and a spread of countries.
However, if an investor were to simply copy the trends seen on sales tables and buy into the funds that have recently proved popular, they could unwittingly find themselves with too much held in some areas of the market and not enough in others.
FE Trustnet examined an equally weighted portfolio built using five of the year’s best selling funds from the above sectors to check the exposure of this hypothetical lazy investor.
The portfolios included were Richard Buxton’s £1.4bn Old Mutual UK Alpha fund, Martin Cholwill’s £1.4bn Royal London UK Equity Income fund, Stuart Rhodes' £9bn M&G Global Dividend fund, Richard Woolnough's £21.8bn M&G Optimal Income fund and Richard Peirson’s £711.6bn AXA Framlington Managed Balanced fund.
Neil Woodford’s CF Woodford Equity Income portfolio, which launched in June and attracted record inflows of £1.6bn in its offer period, was excluded from the research as it does not have at least one year of sales.
Source: FE Analytics
The resultant portfolio has 49.46 per cent in UK equities. This equity exposure mostly comes from owning two UK-focused funds, of course, but some of the other vehicles are heavily invested in the UK.
M&G Global Dividend has a 12.6 per cent overweight in the UK through holdings such as Prudential and British American Tobacco, and AXA Framlington Managed Balanced is 38.19 per cent invested in domestic companies.
FE Analytics shows that 115 of the IMA Global sector’s 262 members have more than 10 per cent of their portfolios in the UK, with 40 putting more than 20 per cent in domestic stocks.
Global funds with more than 20 per cent in the UK include Lindsell Train Global Equity, SVM Global Opportunities, Liontrust Global Income and Fidelity International.
The “diversified” portfolio has a correlation of 0.94 with the blue-chip index over five years – deemed very high by FE Analytics.
This is higher than a number of funds that sit in the IMA UK Equity Income and IMA UK All Companies sectors.
Whitechurch Securities' head of research Ben Willis said: “You’d expect global funds to only have a small amount in the UK as it’s a small part of the index. A lot of people allocate separately to the UK so if you’re looking for a diverse portfolio you want a global fund that isn’t holding much in the UK.”
Some global funds have been designed to sit alongside UK holdings.
FE Trustnet recently took a look at Jacob de Tusch-Lec’s top-performing Artemis Global Income fund, which intentionally has a low weighting to the UK.
Unsurprisingly, the best sellers portfolio’s top holdings are heavily biased towards the FTSE 100, the top positions being Royal Dutch Shell, HSBC and GlaxoSmithKline.
Both Buxton and Cholwill have Royal Dutch Shell as their top holding, accounting for 4.61 per cent and 5.6 per cent of their respective portfolios.
It is also the third largest holding in AXA Framlington Managed Balanced, at 2.2 per cent.
The Old Mutual, Royal London and AXA funds all own HSBC and GlaxoSmithKline in their top 10s.
Buxton and Cholwill overlap with Aviva as well, while Cholwill and Peirson both have large holding in BP.
Source: FE Analytics
The portfolio of popular funds has very little exposure to emerging markets at just 0.68 per cent.
Peirson’s fund has Julian Thompson’s AXA Framlington Emerging Markets as its top holding with a weighting of 3.9 per cent, but Rhodes’ global fund is heavily biased towards developed markets.
Although emerging markets have had a tough time over recent years, after being hit by fears of slowing growth in the economic powerhouse of China and concerns about the Federal Reserve’s move to reduce monetary stimulus, most experts agree that the asset class remains an important part of long-term investment portfolio.
However, the space is relatively under-owned by global and multi-asset managers.
Expectations that emerging markets are set to outperform have been rising. The MSCI Emerging Markets index has advanced 2.64 per cent over the past month, compared with a 0.29 per cent fall in the MSCI, and macroeconomic forecasting consultancy Capital Economics expects this to continue.
Capital Economics chief markets economist John Higgins said: “Equity valuations are generally lower in emerging markets than in developed markets. Granted, volatility remains low despite plenty of potentially destabilising events. But we suspect that if these began to have more of an impact, any correction would only be temporary.”
The composite portfolio also has just 5.86 per cent in European stocks and 0.90 per cent in Japanese equities, both of which are seen as being significantly better value than other developed markets.
Although both have their risks - namely continued weak growth in Europe and the failure of Abenomics in Japan - they are viewed as attractive hunting grounds away from the record highs being touched in the UK and US.
Even though European stocks have come some way over recent years, they are still regarded as better value than the UK and US owing to the hangover of the eurozone debt crisis.
Meanwhile, Japan rose rapidly in 2013 following its ambitious stimulus programme but the country is still cheap compared with historic valuations.
The best sellers portfolio also has close to one-quarter of its assets in bonds, which is to be expected from its 40 per cent allocation to M&G Optimal Income and AXA Framlington Managed Balanced.
Just over 23.02 per cent of this is in global fixed interest, with just 1.22 per cent in UK bonds.
The findings back up recent guidance from Equilibrium investment manager Mike Deverell, who stressed the need for investors to carry out their own research when building portfolios.
Willis added: “History shows that people tend to buy the funds that have performed well or proven most popular, because there is sometimes a herd mentality and a perception of safety in numbers. But this means you tend to buy at the wrong time – after they’ve had a great run.”
“It’s important to not just focus on funds that have had a great couple of years or have taken in the most money, because a lot of the time you have missed the early gains and arrived too late.”
