Constructing a well-blended portfolio can be extremely challenging and is often tricky for private investors who own just a handful of funds. 
One option is to buy a multi-asset fund and be done with it but for those who enjoy investing directly it can be difficult to know when, where and how to diversify to ensure risk is spread across enough buckets without reaching overdiversification levels.
In this new series, FE Trustnet asks asset allocators and fund selectors how they would go about constructing a portfolio of five funds if they were to do it themselves from scratch.
First up is Simon Evan-Cook (pictured), co-manager of Premier Asset Management’s suite of multi-asset portfolios.
He said: “It is very tricky because very quickly when you are putting five together you think ‘I am leaving out this and that’ and it is why we have 40-odd funds in our fund because there are so many amazing ideas out there.”
The fund manager added that diversification can mean different things for different people and that the below portfolio is by no-means a catch-all for investors.
He decided that the best way to construct his new portfolio would be to take an 80:20 split between equities and bonds, which should suit a balanced investor.
“What I am not doing is giving you a portfolio based on current valuations – this is more of a portfolio to buy and leave for 10 years and never have to worry,” he said.
As such, the portfolio below has more in US equities than his own multi-asset strategies and focuses on the big three regional economic blocs: North America, Europe and Asia.
Each fund has an equal 20 per cent weighting, with a “good diversity of styles, funds and regions,” he said. They are all highly active giving the fund managers the ability to move into or out of countries depending on the opportunities.
“All of the funds I have picked are multi-cap, which means that you do have the ability to get into smaller companies and harvest the opportunities that they can offer as well,” Evan-Cook noted.
“All are so active that they are not just going to be tied to the large-caps and are not worried about what the indices are doing.”
Evan-Cook’s first choice is the five FE Crown-rated Baillie Gifford European, run by Stephen Paice, Moritz Sitte and Tom Walsh, a fund that he has owned in his portfolios for some time.
He said: “It has great fund managers and we wanted the growth style to be reflected somewhere in this portfolio which is what Baillie Gifford do.
“Baillie Gifford are like a stick of rock – growth goes all the way through them – and you know that over a 10-year period they are still going to be here and running a growth style. I wanted that consistency of style.
While he would have liked to choose a European fund that included the UK, there are fewer to choose from and he said that gaining exposure to Europe was more important for long-term returns.
Since Paice – the longest-tenured manager on the fund – took charge in 2011, Baillie Gifford European has returned 144.3 per cent, the third-best in the IA Europe Excluding UK sector, as the below chart shows.
Performance of fund vs sector and benchmark since manager start
Source: FE Analytics
Evan-Cook noted: “Within Europe this is our highest-conviction holding – the one that we have the most faith that they are the best and we like what they do which is give us exposure to fast-growing companies.”
The £478m fund has a yield of 1.15 per cent and a clean ongoing charges figure of 0.59 per cent.
In Asia, the Premier Asset Management fund manager noted said he would take on a fund that mixes a blend of styles – value, dividend and quality – to get diversification from the growth-orientated Baillie Gifford portfolio.
“We think that is a great way to get exposure to the Asian growth story and to diversify into that part of the world which is clearly going to be a very significant part of what the world does forevermore,” he said.
“Being in good quality companies in Asia I think is very important for being a long-term investor in those markets and perhaps more so than in other regions in the world.”
He chose Tom Naughton’s Prusik Asian Equity Income, an offshore fund, as this gives investors access to an active manager that is happy to move around and look different to the overall benchmark.
“Part of its analysis is whether a company is paying dividends and whether they are earning the cash to pay a dividend which helps to avoid levels of fraud maybe or corporate governance issues that have arisen in some Asian countries in the past,” he said.
Since its launch in 2010, the fund has returned 218.22 per cent in sterling terms – the highest in the FO Equity Asia Pacific ex Japan sector.
Turning to the US, Evan-Cook said this is where he has had to make some sacrifices, as he already has the growth element within the portfolio that has proven so popular in recent years.
As such, he has chosen Sanlam FOUR US Dividend, a value-focused fund where again dividends play a large role within the portfolio.
“The dividend gives you some comfort that the companies you are investing in are well-run and are operating well,” he said.
However, the main draw is manager Adour Sarkissian’s out-and-out value approach, which he said should come good for investors over time.
Since its launch in 2014 the fund has returned 73.85 per cent to investors, beating the MSCI North America benchmark and the average peer in the IA North America sector, as the below chart shows.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“He has been running this fund for a few years now and we have held it for that time. He is a good investor, highly active and quite happy to hold small-cap exposure so is getting that ability to go across the market-cap spectrum,” Evan-Cook said.
“There’s also a little bit of asset allocation timing there because we prefer value on a long-term basis than growth generally at the current time.”
However, he said the US shows the downside to attempting to create a portfolio with just five funds, as there will be somewhere he cannot get exposure to.
“You just have to hold your hands up and say that in a five-fund portfolio something has got to go missing and unfortunately in this it will be companies like Amazon.com and Google which you know will be a large part of what happens in the world over the next 10 years,” he said.
Sanlam FOUR US Dividend has a yield of 3.3 per cent and an OCF of 0.95 per cent.
Fourth on his list is Lindsell Train Global Equity, the first fund that Evan-Cook does not own in his own Premier multi-asset portfolios.
“We own Lindsell Train Japanese so we really like what they do and their style,” he said, but within the five-fund limit taking the global fund makes for a more prudent choice.
“We love having exposure to Japan and the UK so on a geographical basis it gives us that exposure without having to hold explicit Japanese and UK funds,” the fund manager added.
Indeed, the fund is run by a pair of FE Alpha Managers – Nick Train focuses more on the UK market and Michael Lindsell who runs the Japan fund.
As such, the five FE Crown-rated fund has large overweights of 21 and 27.5 per cent to Japan and the UK respectively.
“We also really like the Lindsell Train way of investing by finding the very best companies with really unique assets which they are confident will be around for the next 30 years,” Evan-Cook added.
“I think that is a very good buy-and-hold option for long-term investors and gives us that extra diversification.”
The fund has been on a fantastic run since its launch in 2011 and is the fourth-best performer in the IA Global universe as market conditions have favoured its quality growth style, although there are some concerns as to how long it can continue to outperform.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“At some point that style will have a rough two or three years but over 10 years I am confident that you will make very respectable returns from a fund like this,” Evan-Cook said.
He added that the different style biases in his portfolio would mean that other funds are likely to outperform if Lindsell Train Global Equity were to struggle. The fund has an OCF of 0.74 per cent.
The final fund makes up the bond allocation, which Evan-Cook said some may wish to replace with another equity fund depending on their reasons for investing.
“If you are not concerned about either income or short-term volatility then I don’t think you particularly need to hold bonds at the current time. Nut most people are concerned about volatility whether they realise it or not and a lot of people are concerned about income,” the multi-asset manager said.
“Under those circumstances having a well-picked bond fund is a very useful option for extra diversification.”
In this sphere he has chosen five FE Crown-rated fund Investec Multi-Asset Credit run by Garland Hansmann and Jeff Boswell, which the Premier team have backed since launch.
“It is a relatively new fund that we have backed. The managers are highly active with the ability to go between different assets in the fixed income world,” he said.
Additionally, being a young fund means that it has not yet become oversized, allowing it to be nimbler than some in the asset class.
“There are some very good fund managers out there in the bond world that are running portfolios that are potentially too large or may become too large but this is a relatively young fund that still have the flexibility to go out and find the best places in the fixed income world to be invested,” he said.
Investors would not expect it, however, to own government bonds, meaning that there may be some years where the portfolio may feel uncomfortable for investors.
“It would have been nice for the purposes of this exercise to have a fund that could have gone into government bonds because who knows what is going to happen in the next 10 years – maybe they become a screaming buy opportunity in five years’ time – but from where we are currently sat that is another sacrifice you have to make,” Evan-Cook said.