With fund managers and commentators giving their outlooks for 2014, there is plenty to think about in terms of positioning, but there are also some time-insensitive health checks that investors would do well not to forget.
We asked three industry experts for the main resolutions that should guide investors this year.
Diversify
There is a lot of optimism in the air this January, with the majority of commentators predicting that markets, particularly the UK, will continue to rise and the economy will continue to heal.
However, there are many differing views on where investors should put their money to benefit from this.
Adrian Lowcock (pictured right), senior investment manager at Hargreaves Lansdown, says that the best strategy is to ensure you are diversified across asset classes rather than over-exposed to any one strategy.
This may be hard to do when optimism is rife and there are plenty of voices urging you into risk assets, but it should also limit the susceptibility of your portfolio to an unexpected market set-back. “In any one given year it is difficult to predict which market will perform best,” Lowcock said.
“Spreading your investments into a range of different asset classes and funds makes sense.”
“There are four main asset classes: cash, equities, fixed interest and property, so somewhere between 10 and 20 funds should be enough.”
“Any more funds and it will reduce the impact of each fund on portfolio performance.”
Think about your exposure to bonds
Correlations between assets change over time, and last year saw an increase in correlation between bonds and equities, which spells trouble for those who hope the former will save them when the latter suffer.
Performance of bonds vs equities in 2013
Source: FE Analytics
On top of this, having seen a 30-year bull run, many commentators say bonds can only now fall in value. Chris Wise (pictured left), investment director at Gemmell Financial Services, says this makes the question of what to do with your bond exposure a critical issue.
He says that you have to decide first if you want to be in bonds and secondly whether you are holding the right funds. “Review what your managers are doing and consider looking at more equity exposure,” he said.
“Make sure you have active bond managers as opposed to traditional bond managers.”
He adds that investors who hold bonds for their protective qualities should at least consider absolute return funds, and those in search of income should look again at property.
“If I wanted an alternative to bonds, absolute return funds would be an option, and maybe property too.”
“You can look at property as an income option, or even infrastructure.”
Follow the manager, not the fund
Last year saw a number of high-profile manager departures, with many of the most well known funds seeing new men at the helm.
Some of the effects are still to be seen: FE Alpha Manager Neil Woodford will not leave Invesco Perpetual until April, while FE Alpha Manager Alex Wright replaced Sanjeev Shah as head of Fidelity Special Situations at the start of this month.
Performance of funds vs sector over 3yrs
Source: FE Analytics
Lowcock says you should make your decision on whether to invest based on the manager’s record, rather than that of the fund.
“However, it is important to review the fund when a manager leaves and decide if the incoming manager is worth investing in or whether it is time to look for another fund,” he added.
Make sure your portfolio fits your goals
Juliet Schooling-Latter (pictured), head of research at Chelsea Financial Services, says now is a good time to re-examine your objectives and circumstances.
“Remember to check your portfolio still matches your requirements,” she said. Schooling-Latter explains that you need to consider if circumstances have changed in your life that require different investments, and should also keep on top of how your funds’ performance has affected their relative size.
“You may decide you need the money sooner than you thought so you might want to de-risk,” she said.
“Or it could just be some areas of the portfolio have done really well and are a larger portion of you portfolio and you might need to trim that down.”
Think about your ISA early
Both Schooling-Latter and Wise urge investors to start thinking now about their ISA allowance rather than leaving it to the last moment, which risks rushed decisions or missed deadlines.
“Quite a lot of people love to leave it to the 11th hour – people sometimes ask us what the last minute is they can do it online, but if you send in the form with a mistake, then you could miss out,” Schooling-Latter said.
Wise said: “The tax year is only about three months away. So make sure you review all available allowances and you maximise your ISAs and pensions. Have a health check to make sure you’ve used them.”
Wise points out that there have been a number of regulatory changes over the past year that investors need to make sure they understand, particularly in the field of pensions.
Not only has the lifetime allowance been brought down from £1.5m to £1.25m for total pension contributions, but there has been a reduction in the annual amount you can save into a pension from £50,000 to £40,000.
By getting on top of allowances and the changes now, you will be better able to take full advantage by the time 5 April comes around.
