When it comes to constructing a portfolio of funds for a client, the average IFA is confronted with ...
When it comes to constructing a portfolio of funds for a client, the average IFA is confronted with an enormous choice.
Without employing an in-house investment specialist to analyse how these funds actually achieve their performance, the decision to buy for their clients is invariably based on historic performance.
If we go back to March 2000, most IFAs trying to build growth into their clients' portfolios would have picked funds that would have been chosen with a significant bias towards technology because of the sector's fast and furious growth at the time.
Within the UK Smaller Companies sector, for example, which of these two funds would you have chosen for your client?
However (and hindsight is a wonderful thing), the performance of these funds since March 2000 has been:
Edinburgh UK Smaller Companies =
Aberforth UK Smaller Companies =
However, one could hold both within a balanced portfolio to provide harmony between the two investment styles growth versus value to achieve efficient diversification rather than just diversification for its own sake.
The major problem IFAs are currently experiencing is not choice of funds for a portfolio, but active management of the portfolio, and the trend nowadays is moving more towards managed fund portfolios.
Although managed funds will not usually meet the requirements of the speculative/high risk investor, they will be more suitable for the low to medium risk investor.
That is why Premier has been managing fund of funds for IFA clients for almost six years and currently offers three different but actively managed portfolios to match the diverse needs of investors balanced, growth and enterprise.
The first two are portfolios of unit trusts and Oeics, while the Enterprise Portfolio is a portfolio of investment trusts.
When we developed c~lect, we based it on our managed funds formula and added two extra benefits: life cover and monthly cash withdrawal facility. The life cover facility is designed to protects the initial investment from market falls in the event of death. The life cover is re-valued every 12 months (on 1 July each year) to reflect the current market value of the portfolio. (see graph below right).
The life cover is triggered if a client dies when the portfolio value has fallen below the protected sum. This is very useful, particularly for trusts, as it protects against stock market volatility and safeguards investments for the families of those nearing retirement.
The other key feature of c~lect is the monthly cash withdrawal facility, allowing the clients to make optimum use of their capital gains tax (CGT) allowance to provide what seems like tax-free income.
While an investment bond represents an ideal vehicle for inheritance tax (IHT) planning and additional income via the 5% withdrawal facility that is tax deferred, it would be fair to say that it is generally oversold.
On the other hand managed unit trust, Oeic and IT investment trust portfolios, which can utilise the client's CGT allowance, are equally undervalued in financial planning situations.
Encashing units in managed portfolios to generate additional income will best utilise the CGT allowance.
This allows higher-rate taxpayers to generate additional income free of income tax, older clients on low incomes to generate additional income without affecting their age allowance, and is good news for parents subsidising their children through university, since this income does not form part of their income for means testing.
In all situations, providing the additional income is within their CGT allowance, it is tax-free.
Investors should note that withdrawals taken might lead to an erosion of the capital value of their investment should they take a higher withdrawal than the growth or income generated.
It is imperative that IFA's regularly review the level of income being taken relative to the growth achieved by the fund managers.
It would probably be in the client's best interests to have at least the first year's income in alternative deposit-based investments to allow the managers some time to generate growth.
With the potential changes to Pep rules in April 2001, fund of funds vehicles represent an ideal product for Pep transfers.
Many clients have unstructured Pep portfolios, having selected funds that were the flavour of the month at the time.
Things are made even more confusing by the volume of paperwork involved and unmanageable income streams. C~lect is also proving to be a good vehicle for Sipps and Ssass.
So if we look forward to April 2001, most IFAs will be seeking to achieve something significant for their clients' portfolios and recommending funds for their Isas. The pressure is on. If we take the smaller companies sector for example, which fund would you choose?
Mike Hammond is UK sales manager at Premier Portfolio Managers
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