Martyn Ingram of The Investors Partnership investigates the opportunities found in a core growth portfolio and dispels some of the commonly-held myths
Core investing means different things to different people, largely because we all have different ideas on what core holdings actually are.
Some take the view that core holdings should be held as long-term investments; others believe that core holdings just need to be highly secure and have characteristics that suggest performance returns will be relatively steady when compared to other products, such as so-called satellite holdings. To others, core holdings are investments that everyone wants to buy - Fidelity Special Situations fits into this category, as do other funds that are either popular, good performers or widely held.
In the past, life office managed funds were regarded as core holdings by many retail investors. Had these funds evolved in a way that enabled them to continue to meet the true requirements of retail investors, then they would still be regarded as core holdings today. But life office managed funds are trapped in the past; today's versions look very much like those of the early 1980s. Below the surface there have been some subtle changes over the years, such as higher exposure to the Far East than would have been considered inappropriate 20 years ago, but the basic concept is still the same.
For example, many of the largest holdings in life office managed funds are still the big UK stocks of the day, so at the moment the likes of BP, HSBC and GlaxoSmithKline usually appear. Today, the 10 largest holdings often represent 25% or more of a portfolio, and as these holdings are usually relatively easy to buy directly, one wonders if it is worth holding these investments indirectly via a core managed fund. If investors purchased these same stocks directly they could potentially save 25% on fund management fees.
Meeting the objectives
To me, core investing would be more effective if it focused on meeting investors' core needs. There should also be some recognition that investors' core needs usually change over time. Without doubt, core holdings should be the foundation of a portfolio, perhaps even the bulk of a portfolio, but I do not think that core holdings need to be long-term investments. I also do not see the need for all core holdings to be highly secure, relatively steady performers, or that they have to have high exposure to the largest capitalised stocks in the UK market.
Investors who have no income requirements could be offered a core portfolio with investment objectives such as a minimum level of return linked to cash deposit rates and the stock market. In order to exploit opportunities to the fullest, there would also be no maximum rate of return. Investors who have a need for income must first of all have all of their income requirements met; beyond that, they also have no need for a cap to be put on the opportunities for them to maximise their returns.
Above I provide an example core growth portfolio. It has holdings that are the same as those presented in last month's RealAdviser; if an investment can make money for one type of investor, I believe it can do so for others.
I have assumed the core investment portfolio is for an investor who requires growth but will tolerate shorter-term losses provided they are managed. I expect the portfolio to generate reasonable returns over a three-year+ time horizon, and other holdings to be added to accommodate the specific risk/return needs of the investor. If the investor requires a minimum exposure to major UK stocks they could include direct exposure if they wished. Investors who require income would need additional holdings to ensure a satisfactory income stream is generated.
For the UK exposure I have four holdings. Old Mutual UK Select Large Cap exploits opportunities in the FTSE 100 stocks arena. Schroder UK Alpha Plus provides exposure to the broader market, but doesn't venture into the small-cap arena, so I have selected two funds with specialist mandates, one of which is heavily focused on AIM. I believe retail investors should not ignore the opportunities in the AIM market, but most will not have the expertise to select stocks themselves so access to AIM via funds merits consideration. The London Stock Exchange provides a considerable amount of information about AIM on their website (www.londonstockexchange.com).
For global exposure I have selected AXA WF Talents, a fund that aims to exploit value-creation opportunities whatever the economic cycle. In the major markets outside of the UK, the portfolio's largest exposure is to the US. However, I expect the combined weighting to Japan and the rest of the Far East region to produce the best overall longer-term return. I have not selected a pure European fund, but exposure to Europe is gained via AXA WF Talents.
I have also included an investment in exchange traded funds through MFM iFunds. Once the fund is a year old, which it will be this summer, then I am sure that potential investors will more easily be able to obtain access to detailed information about the fund. Lastly, I have included a large cash weighting, and the choice of holding (or holdings) will depend upon investor requirements. I regard cash as one of the most important core holdings for retail investors, particularly for those who invest mostly in long-only funds.
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