Nicola Ellis: Prepared for all eventualities

The challenge is to enrich the fictitious David and Fiona Mackay. Picture: Thinkstock

The challenge is to enrich the fictitious David and Fiona Mackay. Picture: Thinkstock

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Contestant Nicola Ellis has faith in her ‘core and satellite’ approach.

When constructing an investment portfolio, the main starting point is to establish a client’s attitude to investment risk and capacity for loss. In this scenario, David and Fiona Mackay have very different attitudes to investment risk. David prefers a more defensive, income-orientated approach and is concerned about capital protection from inflation. Fiona is a more entrepreneurially-minded risk taker. To accommodate these two investment objectives I decided to use a “core and satellite” approach.

Roughly 50 per cent of the portfolio is held in the “core”, which is made up of cash, absolute return funds, strategic bond and UK and US tracker funds. The absolute return funds aim to produce positive returns in any market conditions and add an important degree of downside protection to the portfolio. This was beneficial during the volatility we experienced in global equity markets in October. Downside protection is necessary for clients like David who wish to take a defensive approach, as it is human nature to feel the pain of a 10 per cent loss more than the joy of a 10 per cent gain.

I have also used tracker funds within the core which represent the largest holding of the total portfolio, circa 20 per cent. Exposure to the US and UK markets through tracker funds works well and given the ongoing charge of the L&G tracker funds is only 0.1 per cent, this helps to keep the overall cost of the portfolio down.

The “satellite” element consists of global equities and property exposure through both unit trusts and investment trusts. This is the more adventurous element of the portfolio, and over the past two months the top performing investments have been Rathbone Global Opportunities, Scottish Mortgage Investment Trust and Great Portland Estates.

It is important when managing an investment portfolio to look at a client’s time horizon for investment and focus on the longer term outlook and not be caught up in short term changes.

In terms of changes to the underlying investments within the portfolio, I will review my US holding and cash holding in the New Year. The satellite element of the portfolio is the area I may reposition depending on market conditions.

However, whether we see a Santa rally towards the end of the year and the FTSE-100 breaking 7,000 points, or we experience further volatility in markets, I believe my portfolio is well positioned to deal with either scenario.

I prefer to use a multi-asset/ multi-disciplined approach and blend together passive, actively managed and investment trusts in order to access the world’s markets at a competitive cost. The fixed platform cost from Alliance Trust Savings Limited allows me to keep the total ongoing cost of this investment (including my ongoing adviser charge) to less than 1.4 per cent per annum.

Research has demonstrated that over the longer term, risk and reward are inextricably linked and that equities have delivered the best long-term returns when compared with other asset classes such as cash, fixed interest and property. However, it has not been a smooth ride, volatility is a fact of life in today’s fast-moving financial markets – it is therefore vital that a client’s risk tolerance is fully discussed, along with their investment timeframe prior to determining an appropriate strategy. It is also important to monitor investments on an ongoing basis to ensure the investments continue to meet the client’s risk profile, needs and objectives.

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