Simplify, simplify: that was the guiding principle when this year’s IFA of the Year competition was devised. And simplified it certainly looked when compared with previous years. But how appearances can deceive.
Fiona and David Mackay, our model young couple, started out on their investment journey with a clean slate. Financial planning seemed simple enough. The couple is well off by conventional standards. Both are employed. They share a property.
They have income to spare after mortgage and living costs and they have substantial financial support from parents. Setting up an investment plan hardly looked simpler.
But while David and Fiona had a clear grasp of their long-term objectives, these were markedly different – and with distinctly different ideas of how to attain them.
David wanted to invest for the long term and preferred a notably defensive approach. Fiona had quite different ideas. She is more of a risk taker, and looked for a more adventurous approach for a quick gain.
The primary aim of the competition was to enable our IFA contestants to display their portfolio-building skills across both the cautious managed and higher-risk sectors. Getting the balance appropriate to the couple’s situation – and sufficiently broad to meet their differing approaches – was a challenge indeed.
No less stretching for our IFA contestants is the issue of risk when equity markets have enjoyed a near-unbroken run for five years. Many commentators were warning at the outset that share prices were “toppy” and with interest rates poised to rise soon – or so it was thought – this would not augur well for conventional gilt-edged stock and fixed-interest holdings.
So, at the halfway stage, how are our contestants faring?
Far from a stock market sell-off, the UK market has hit record highs, climbing above the last peak established almost 15 years ago.
And the long-predicted bond market bubble has not burst. Prices have continued to rise – and yields to fall – as inflation fell to new lows. Indeed, the UK looks set for a period of negative inflation.
So the broad market movements have favoured – for now – the more adventurous: those who opted to be more fully invested.
That said, all are in positive territory and there is little to separate our contestants at this stage. Returns range from a low of 6.3 per cent to 9.58 per cent, easily beating comparable returns on cash and bank and building society accounts.
A common feature has been diversification. Portfolios have been built across a wide range of sectors and markets – smaller companies, blue- chip funds, overseas markets, property and multi-asset funds as well as bonds.
Fiona might be disappointed that none has achieved a roaring start with a high-risk adventurous portfolio, while David will be comforted that the portfolios have worked to protect capital while still being able to put in a pleasing capital gain performance.
In the lead with a 9.58 per cent gain is David Gow. A notable feature of his selection will cause active fund managers to despair. His two largest holdings are passive or index tracker funds: the BlackRock UK Equity Tracker (accumulation units) accounting for 21.2 per cent of his portfolio and the low-charge Vanguard FTSE Developed World ex UK Equity Index fund for 23.7 per cent. For good measure, the third largest holding is also a tracker fund – BlackRock Emerging Markets Equity Tracker. David has 12.5 per cent in cash.
Close behind, in second place currently, is last year’s competition winner Nicola Ellis with a gain of 8.75 per cent. Her biggest single holdings are the Legal & General US Index Trust (15 per cent) and the Great Portland Estates fund (14 per cent) which have helped to lift performance.
The rest is fairly evenly spread across a range of funds including Marlborough Multi Cap Income (4.7 per cent) and Marlborough Special Situations (4.6 per cent).
Prudently, given the situation in Greece and elsewhere, Nicola dropped two European funds earlier this year.
In third place is Catriona Smith with a gain of 7.29 per cent. Catriona is virtually fully invested, with a cash holding of less than 1 per cent, though, in a well-diversified portfolio, three bond funds are prominent: Henderson Strategic Bond fund (9.6 per cent) and Fidelity Strategic Bond and Kames Strategic Bond both accounting for just under 10 per cent each.
Finally, there is Steven Sweeney, who is showing a healthy halfway stage gain of 6.3 per cent. Steven has made some eclectic investment trust choices that would please Fiona: Primary Health Properties, accounting for 13.8 per cent of the portfolio, Templeton Emerging Markets (5.56 per cent) and Impax Environmental Markets (5.48 per cent), an investment trust that merits wider attention.
Will equity markets continue to climb new peaks? Will the bond bubble burst? Might Europe spring the biggest surprise? Watch this space.
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