Over the past 10 months, a pot of my money has underperformed UK equities by more than 10 per cent and global equities by over 20 per cent – and I am very, very happy about that. 
As a stream of headlines have reminded investors, stock markets have been reaching record highs in the recent past with the FTSE All Share climbing 22 per cent since I started building a short-term portfolio in May 2016. I missed out on most of this – a point that was hammered home as I had to write about it. Constantly.
The bulk of the financial press focuses its coverage on a handful of equity indices such as the FTSE or the S&P 500, to the extent that many investors can anchor their expectations on the performance of these instruments. As a journalist, I’ve certainly based a lot of research and articles on funds’ performance relative to the likes of the FTSE All Share.
But several years ago I attended a presentation by Karl Dasher, Schroders' chief executive of North America and co-head of fixed income, on how he expects institutional-style outcome-based investing to be increasingly seen in the retail space of the market.
This approach gives more attention to what role a given asset is performing in a portfolio, rather than what it is or where it is domiciled. A pie chart from the presentation – showing how a portfolio would be split between baskets with roles such as growth, income-producing, beta exposure, inflation-protection, capital preservation, etc – stuck with me (I actually kept the chart in my drawer for about three years, even bringing it from my previous job to FE Trustnet).
Performance of portfolio vs indices over portfolio history
Source: FE Analytics
However, my attempts to implement this approach in my own portfolio never really went as I intended. I found myself paying too much attention to the performance of those closely watched equity markets and my portfolio would drift towards the growth basket and end up with very little in the other areas.
Around a year ago, however, I needed to start saving to repay the Bank of Mum & Dad for a much-needed loan (thanks guys, the cheque’s in the post). I knew that this would be a short-term thing and the exact date of repayment could really be at any time, but I wanted to take a little more risk than just saving into cash for 12 months – without being hit by any significant periods of loss.
With this in mind, I decided to build a very cautious portfolio where the outcome was to simply beat inflation by 2 per cent or so with as little volatility and as low a drawdown as possible. Easy enough to start, but in practice it meant ignoring the movements in the FTSE as time went on.
For the core, I chose Henderson UK Absolute Return and Premier Defensive Growth, which have distinct approaches and strong track records among their IA Targeted Absolute Return peers. These two five FE Crown-rated funds accounted for 60 per cent of my portfolio.
I put 10 per cent in Troy Trojan, which is a constant favourite of mine. It has produced good returns over the years but manager Sebastian Lyon prioritises capital preservation.
A 10 per cent weighting to First State Global Listed Infrastructure was added to provide inflation-protection with some growth. This is also a cautious play, as it has tended to display less risk than generalist global equity funds since its launch in 2007.
Performance of underlying funds over portfolio history
Source: FE Analytics
To add some beta exposure I opted for Vanguard LifeStrategy 60% Equity while Pictet Global Megatrend Selection was the final growth element, albeit taking a more riskier approach than the other funds in my portfolio. Each of these funds had a 5 per cent weighting.
I also kept 10 per cent in cash in case it was needed to buy in after a market correction.
The chart on the first page shows how the portfolio performed between inception and when I wound it up last week. Sure, the 8.48 per cent return is less than what I would have received from an index tracker but I’m more than happy with overall journey it provided me with and don’t feel a bit of regret.
My cautious portfolio’s annualised volatility stood at just 2.91 per cent. The FTSE All Share’s was 6.94 per cent and the MSCI AC World’s 9.58 per cent; gilts were hit hard over the period and posted annualised volatility of 10.65 per cent.
Likewise, the maximum loss encountered by my portfolio was lower than that experienced by any of the three indices (shown in the table below) at 93 basis points – in keeping with my aim of preserving capital above all else.
Source: FE Analytics
While the take-home point of this exercise – focus on what you want to achieve from your investments, not the potential gains being seen in the best areas of the market – might seem obvious to some, I think I’ve learnt some valuable lessons that will come in for long-term savings like my pension.
Firstly, make a plan then have the discipline to stick to it. Rather than piling into a series of funds that look like they will shoot the lights out, this time I took the time to think about what the portfolio needed to achieve. Growth was one part of it, but I didn’t have to cram it full of top-quartile performers to achieve my aims and finding funds that could protect capital and lower volatility were much more important here.
Secondly, I like to collect funds and I need to get a grip on that. Some might argue that I had too many holdings in this portfolio but my original plan had quite a few more and I had to whittle it down to avoid having too many. Knowing why each holding was in there was a big help with this.
Finally, and most importantly, it doesn’t really matter what the rest of the market is doing so long as the portfolio is doing what it’s supposed to.
While I was saving into this pot of money, some parts of the market – value stocks, emerging markets, etc – started to soar but as my portfolio was on track for its target there wasn’t really the need to up the risk and move into them. If everything is going to plan, don’t complicate it by chasing extra returns you never planned on making.
So, what do you think about my experiment with an ultra-cautious portfolio? Was I too cautious or was investing just for 10 months too risky? Is ignoring indices a good idea or does it offer a convienient excuse to underperformers? I’d love to hear your thoughts on this.