Investors aiming to build a portfolio generating long-term investment returns and minimal downside risk should probably not waste their time, according to Seven Investment Management’s Peter Sleep. 
“Some in the City will not thank me for saying it,” said Sleep. “But a steady return with downside protection is an unachievable Utopia.
“You can fritter away your time and money searching for that ideal, but if you want a steady return with downside protection you are better off sticking with cash deposits.”
However, the trade-off for holding cash deposits is accepting the risk that their value could fall considerably over time with the impact of inflation, said senior portfolio manager Sleep.
As such, Sleep said there should just be three “core building blocks” in a portfolio – equities, bonds and cash – sticking to what he believes are simple and basic holdings.
Vanguard FTSE Global All Cap Index
The first fund on Sleep’s list is the £242.9m Vanguard FTSE Global All Cap Index fund, one of two passive recommendations.
Much like Interactive Investor’s Dzmitry Lipski who also chose one of the passive giant’s index trackers, Sleep also finds long-term value among Vanguard’s fund range.
The Vanguard FTSE Global All Cap Index fund has made a total return of 34.24 per cent since launch in November 2016 and a 33.38 per cent gain for the average IA Global peer, as the below chart shows.
Performance of fund vs index over the past 5yrs
Source: FE Analytics
“The fund costs 0.24 per cent,” Sleep said, “Which is competitive given that it covers nearly 6,200 stocks from all over the world. The breadth of currencies and the sheer number of stocks will diversify your risk, but never eliminate it.”
The FTSE Global All Cap index has a significant exposure to North America – understandably so as the US is the world’s largest market – making up 56.2 per cent of the portfolio. Other significant weightings include Japan (7.5 per cent) and the UK (4.9 per cent).
iShares Core Global Aggregate Bond ETF
Sleep’s second choice is much more of a longer-term offering, given that it is currently yielding a negative return.
The $2.9bn iShares Core Global Aggregate Bond ETF is another passive product, an exchange-traded fund (ETF) that tracks the Bloomberg Barclays Global Aggregate Bond index, an index of global investment grade bonds.
Performance of fund vs index since launch in September 2019
Source: FE Analytics
Sleep said that while it may not be a particularly attractive offering at this stage of the market cycle, it should provide portfolio diversification and help should there be another serious downturn.
“The yield on this will not blow you away but should there be another financial crisis this ETF should help you sleep at night,” said Sleep.
According to iShares-parent BlackRock, the ETF is suitable for medium-to-long term investment but is also suitable for more short-term exposure to the index.
Key benefits of the ETF include direct exposure to a range of investment grade bonds and diversified exposure to the global fixed income market. The fund has an ongoing charge of 0.15 per cent.
Royal London Cash Plus Fund
The final fund on Sleep’s list is the Royal London Cash Plus fund, a £5.8bn actively managed fund overseen by Craig Inches and Tony Cole.
The Royal London fund aims to deliver a positive return in a range of market conditions without taking additional risk, investing in cash deposits, money market instruments and short-dated government securities.
It targets capital growth and income in excess of the SONIA (Sterling overnight index average), the index overseen by the Bank of England that was chosen to succeed LIBOR after the index was found to have been manipulated.
The managers only invest in straightforward, highly liquid instruments issued by a wide range of highly-rated banks.
Inches and Cole also follow a top down process in their government bond portfolio, assessing “the market drivers and behaviour in a way that allows them to define the potential sources of incremental return”, and making sure “portfolio construction and risk allocation remain consistent with the portfolio objectives”.
Sleep said: “This fund tries to give you a little bit over cash deposit rates by investing in short term bonds and alike with daily liquidity.”
As the below chart shows, Royal London Cash Plus has outperformed the SONIA benchmark over the past five years, producing a total return of 2.60 per cent compared with the benchmark’s 2.29 per cent.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.25 per cent with a yield of 0.70 per cent.
“It is up to you how you mix these three together,” Sleep said: “A classic private investor might have 40 per cent in equities, 40 per cent in bonds and 20 per cent in cash, but it is a question really of how much risk you want to take with your hard-earned cash.
“If you are a light sleeper, you might want to have less equity: a seasoned risk-taker, more equity and less bonds.”