Portfolio construction: Choosing funds for a balanced approach

How you approach fund selection for a balanced portfolio depends in no small part on how much money you have to invest and how comfortable you are with managing it.

There are numerous funds available to private investors that offer an off-the-peg balanced portfolio, run by some of the best managers in the country, and for investors looking to use up their ISA this year these are an attractive option.

More experienced investors who enjoy managing their own money and know a little more about the market may prefer to combine a number of funds to create their own bespoke balanced portfolio of funds – but clearly for this to be a worthwhile approach you need enough money to justify the charges you will incur on each investment.

Rob Gleeson, investment product consultant at FE, chose five funds that he thinks would work well as a balanced portfolio – First State Global Listed Infrastructure, Ecclesiastical Amity UK, Newton Asian Income, CF Walker Crips Equity Income and M&G Strategic Corporate Bond.

"The Newton fund has produced very consistent returns," he said, "And allows you to gain access to equity income without going via the overcrowded UK Equity Income sector, providing access to a greater choice of income stocks and some exposure to the greater growth potential which Asia offers."

"The Walker Crips fund is lower risk than many of its peers and offers consistent returns – it’s been top-quartile or second-quartile every year for the last five years, is managed by an FE Alpha Manager and has a Five Crown-rating from FE."

"M&G Strategic Corporate Bond has the same rating from FE and is adored by the AFI panel of IFAs who work with FE to identify top funds for the AFI indices. It’s great for bond exposure."

Gary Potter, co-head of multi-manager at Thames River Capital, is a fan of the Newton fund – which is on the reserve list for the fund of funds he runs alongside Robert Burdett.

"The manager has done a great job with a lot of assets on his plate to deal with, running with a straightforward approach and solid income generation. My only question would be, with well over a billion under management at what point does he have too much on his plate to run?"

Potter thinks there are some key principles which are essential for investors looking to set up their own balanced portfolio of funds.

"First and foremost you should not be investing with your eyes on the rear-view mirror – you really shouldn’t invest with reference to the recent past."

"Secondly, diversify. Proper diversification is critical to your health and wellbeing and that means you should invest internationally as well as in the UK."

"Thirdly, consider your time horizon. If it’s 10 years then heavy exposure to equities is warranted. If your time horizon is more short-term, the outlook is more choppy so you need to take that into account."

Potter thinks a more active approach to portfolio management has become important in the wake of the credit crunch.

"You can’t just buy and hold," he said. "You need to manage a portfolio, keep rotating and take profits where it’s appropriate, keeping the portfolio fresh from a selection point of view. Keep some cash at hand, this will be useful when the market throws up opportunity, and whatever you do, keep plenty of airbags in your portfolio."

For investors who would prefer to leave the hard work to the experts, Kerry Nelson, managing director at Nexus IFA, thinks there are plenty of options available.

She said: "There’s no reason for people to make do with crummy funds or off-the-peg managed funds from insurance companies, there are a lot of good funds available if you know where to look."

Nelson is an admirer of Troy Trojan, one of the most successful funds in recent years and a darling of the industry at the moment, but it is virtually closed to new business so she points investors at the Miton Strategic and Midas Balanced funds, both of which she thinks do a similar job.

"Miton’s Martin Gray just gets it right. He’s running a fund which provides exposure to other managed funds, commodities, equities, bonds and cash, and he’s able to gain access to funds which ordinary investors wouldn’t have access to."

"Neptune Balanced and Schroders' Managed Balanced funds are also great funds."

Nelson says investors need to be wary of the dross that makes up much of the "balanced" sector, now known catchily as the IMA Mixed Investment 20-60% Shares sector.

She continued: "It’s a pretty poor sector. If you look at the majority of funds they are rubbish, so you’re paying a lot in terms of the AMC for very little, so when you’re looking for a balanced fund it’s important to do your homework and look at what they’re actually doing – don’t rely on the superficial appearance of the fund."