AJ Bell Passive Funds - New Purchase

I have been taking things easy over the past month or so and getting into holiday mode. I enjoyed the two weeks of the tennis and had a small (£1 e/w) wager on Cilic getting to the Wimbledon final so the return from the bookies made up for a rather disappointing men's final. I was also fortunate to back Jordan Spieth to win the golf at Royal Birkdale at good odds before the start so its been a rewarding couple of weeks.

I have also been catching up on reading - just finished 'A Place Called Winter' by Patrick Gale which is based upon actual events from the author's family history and which I can thoroughly recommend.  Secondly I have just started Andrew Craig's best seller 'How to Own the World - A Plain English Guide to Thinking Globally and Investing Wisely'...I will write a review when finished.

As we are in between Test matches, I have time to update on just one new portfolio purchase. Earlier this year I flagged up the range of new passive funds from AJ Bell.

For some time now I have been looking to reinvest some of the cash which has remained on the sidelines following various sales and redemptions. In July, I decided to take advantage of the offer of no platform fees on these funds and purchased the 'moderately cautious' version for my ISA with AJ Bell.

I had been also looking at the Vanguard Lifestrategy 40 as another option but the property element of the AJ Bell fund worked in its favour.

The Fund

This version holds a mix of equities (33%), bonds (52%), property (11%) and cash (4%) via a range of ETFs and passive funds from several providers. It seems to be a mirror image of the moderately adventurous fund which holds 52% in equities and 33% in bonds. Here's a link for the latest factsheet (pdf)...

The equity element is held in :

iShares Core S&P 500 ETF

iShares UK Equity Index Fund

Vanguard Dev. Europe ex UK Fund

The bonds are held via :

SPDR Barclays Sterling Corp. Bond ETF

iShares GBP Corp. Bond ETF

iShares Global High Yield ETF

Vanguard UK Govt. Bond Fund

Vanguard Index-linked Gilt Fund

The property element is :

iShares UK Property ETF

Charges

AJ Bell will not levy their platform charges (0.25%) until 2019 and there are no transaction charges for sale/purchase. Therefore the costs of ownership are merely the ongoing charges of the fund at 0.50 % which includes the charges of the underlying funds/ETFs - these range between 0.07% for the iShares S&P ETF to 0.4% on their Property ETF.

The funds were launched in April and the purchase price was 100.3p - just a tad over the launch price so nothing lost by waiting  few months.

The only option currently on offer is the accumulation fund - I assume they will introduce an income version at some point however as there are no charges for selling units it does not make much of a difference to me.

The price of the Vanguard LS 40 (acc) at the time of this purchase was £158.50 so it will be interesting to compare progress.

Enjoy the rest of the Summer!

Half Year Personal Portfolio Review

Just time for a brief review before I settle down for my annual tennis-fest! There's not much quality live sport available on Freeview these days. I well remember the many years when life was dominated by work and earning a crust - watching the tennis was limited to the evening highlights and the finals at the weekend.

I really do appreciate now having the time to please myself. Tomorrow I will be off to explore the canals of Cheshire with a few friends.

Following on from my end of 2016 review, I have just reviewed my actual investment portfolios - sipp drawdown and ISA - for the 6m to the end of June.


The Markets

On the markets, the FTSE 100 started the year at 7,142. The index ended the 6m period at 7,312, having pulled back from a high point of 7,550 in May - a gain of  2.4% - if we factor in say 1.8% for dividends paid, this will give a figure of 4.2%  total return for the period.

Of course, the UK listed market makes up less than 10% of the global market place so focussing on just the FTSE 100 for example can give a distorted picture. The total return on world equity markets in GBP terms for the 6m to end June was 6.2%.

Shares

The portfolio of individual shares has reduced from 6 to just 2 following the sale of IMI, Berkeley Group, Amec Foster and IG Group. This leaves just Legal & General and Next which is going through a bad patch and is down 20% since the start of the year.

Fortunately I have had a good run from the other shares and the total return from this sector for the past 6 months is 11.0% which includes dividends received of 1.8% which makes it my best performing section of the portfolio so far.

Investment Trusts

With the exception of Blackrock Commodities, all trusts have provided decent gains over the half year. The better returns came from Aberforth 16%, Finsbury Growth 12%, TR Property 15% and recent addition Scottish Mortgage 16%. In recent weeks I have been gradually reducing my equity holdings and have sold Invesco Income and Dunedin Income trusts and also top-sliced others including Aberforth, Edinburgh, City of London and Finsbury. With an eye on preserving capital I added Capital Gearing to my ISA portfolio in May and have HSBC Global Strategy (cautious) on my watchlist.

Share price total return from my basket of trusts has been a very handy 8.5%.

Scottish Mortgage v Blackrock Commodities 6m to June 2017
(click to enlarge)

Index Funds

Vanguard LifeStrategy 60 is now my largest portfolio holding and, although held in check  by the rise in the value of sterling, it has risen from £164.50 to currently £169.85  - an increase of 3.2%. My UK Equity Income fund has gained 4.5% which includes a half year dividend of 2.3%

The total return for my index funds has been 4.1%.


Fixed Interest

As ever, the bonds and fixed interest sector has provided a steady and predictable income of 3.5% and a total return of 7.5% for the half-year.

My holding in Skipton BS PIBS were redeemed in April and the proceeds are currently in cash.

The Combined Portfolio

Total return for the entire portfolio of shares, investment trusts, index funds and fixed income is 7.9%  which includes income of 2.1%.  

Since the crash of 2008/09, I have had positive returns from my investments and I am hoping this will be another decent year although my expectations are not high. As I posted recently, I am expecting a downturn at some point - maybe later this year or next, I don’t really know. I have reduced my equity holding by around 25% in recent months and will hold the proceeds in cash and await developments in the market.

As ever, I would be interested to hear how others have done over the past 6 months - feel free to leave a comment if you keep track of your portfolio.

FCA Look Into Asset Managers

In its final report (pdf over 100 pages) into the UK's financial asset managers, the FCA has raised a number of concerns about the way the industry is failing investors.

Here are a few aspects from the report which may be of interest.

1 The asset management industry plays a vital role in the UK’s economy. Asset managers manage the savings and pensions of millions of people, making decisions for them that will affect their financial wellbeing. The UK’s asset management industry is the second largest in the world, managing around £6.9 trillion of assets. Over £1 trillion is managed for UK retail (individual) investors.

2 The services offered to investors involve searching for return, risk management and administration. The investor bears virtually all the investment risk. There are around 11 million savers with investment products such as stocks and shares ISAs. These investors are willing to put their money at risk to generate potentially greater returns than they can get through cash savings.

3 We find weak price competition in a number of areas of the asset management industry. We confirm our interim finding that there is considerable price clustering on the asset management charge for retail funds, and active charges have remained broadly stable over the last 10 years. We  found high levels of profitability, with average profit margins of 36% for the firms we sampled.

4 We looked at fund performance, and the relationship between price and performance. Our evidence suggests that, on average, both actively managed and passively managed funds did not outperform their own benchmarks after fees. This finding applies for both retail and institutional investors.

5 We looked at whether some investors, when choosing between active funds may choose to invest in funds with higher charges in the expectation of achieving higher future returns. However, our additional analysis suggests that there is no clear relationship between charges and the gross performance of retail active funds in the UK. There is some evidence of a negative relationship between net returns and charges. This suggests that when choosing between active funds investors paying higher prices for funds, on average, achieve worse performance. Similar academic studies of the US mutual fund industry have typically found a negative relationship between fund charges and fund performance.

6 We find that it is difficult for investors to identify outperforming funds.

7 We estimate that there is around £109bn in ‘active’ funds that closely mirror the market which are significantly more expensive than passive funds.

8 There are a significant number of retail investors who are not aware they are paying charges for their asset management services.

9  Our analysis suggests that retail investors do not appear to benefit from economies of scale when pooling their money together through direct – to – consumer platforms.

Having identified some of the problems, investors should not expect any significant changes anytime soon. The FCA are now setting up working groups and further consultations and hope to report back some time later this year. 

They have to consider what impact any changes will have on the attractiveness of the UK as a place to continue ripping off small investors doing business.

I will continue with my low cost index funds and investment trust and my low cost platforms. I would not rely too heavily on the ability of the FCA to give the best deal to the consumer but then I am a cynic!

The best way to keep fund manager on their toes is via competition from the likes of Vanguard as more and more ordinary investors switch from the expensive underperforming actively managed funds into low cost index funds. The FCA can tinker around the edges but I believe the industry will always find ways around whatever changes are brought in.

Leave a comment below if you have any views on this report.

Preserving Some Gains

The markets both here in the UK and also in the US have reached all time highs in recent months. This is obviously good for small investors but we all know that markets do not rise in a straight line - the upswings are inevitably followed by the downturns. In broad terms, the markets have been on the up since the dramatic crash of 2008.

This has accelerated over the past year or so and the US market has risen 30% since the start of 2016. The CAPE ratio is now over 30, almost double its long term average. It has only been higher on two previous occasions - 1926 and 2000, just prior to the dot-com bubble and subsequent crash.

 

(click to enlarge)

With a few blips along the road, the bull market has marched onwards and upwards for the past 9 years. This situation gives rise to much media speculation as to where the markets are heading next. Some say the boom will continue - Prof. Robert Shiller suggests a 50% rise from here - and others are more cautious. Sebastian Lyon at Personal Assets said in his recent annual report "...the valuation of asset classes are more stretched than ever, particularly after the 'Brexit boom' in UK share prices, and it all feels very 'late cycle'..."

In the UK we also have the weak level of sterling post June 2016 which gave a boost to global investment priced in USD. The pound has recovered from a low point of ~$1.20 to currently $1.27 but it remains way below its longer term mean average of ~$1.60.

Cashing In Some Chips

Until the market surge in the second half on 2016, I was more or less fully invested however in recent months I have been gradually reducing my equity holding and moving more towards defensive investments such as Capital Gearing and also cash. It seems to me sensible to reduce risk as the markets get higher.

I'm not suggesting current levels represent the top of the market bull run as I know it is impossible for anyone to predict the top (...or bottom). However, at this point in the cycle, my preference is to hang on to the some of the capital gains accumulated since 2009 rather than stay fully invested in the hope of squeezing out even further gains.

The problem with holding cash however is obviously the ultra low interest rates on offer and also the possibility of missing out on further market gains. The markets may well be over valued but that could easily continue for another year or two.

There is also the question of when to re-enter the market when they do swing down.

In the past 6 months I have moved around 25% of my portfolio from equities to cash. Some more of my individual shares have been sold - IMI, Berkeley, Amec Foster for example. Also I have sold some of my investment trusts - Dunedin Income, Murray International and Invesco Income and I have top sliced others - Aberforth Smaller, Edinburgh, City of London and Finsbury Growth.

Mean reversion suggests the markets will fall at some point and sterling will recover back to its long term average of ~$1.60 but this is unlikely to happen in an orderly manner and the markets and exchange rate may well continue to move against the tide for some time.

Investing during the prolonged bull run of the past 7 years has provided me with above-average returns of ~10% p.a. The longer term average for a 60/40 asset allocation would be nearer to 6% and at some point the tide will turn and when it does I fully expect a period of below-average returns. The average however will be well above the meagre returns from cash over the past few years. It is just over 8 years since the Bank of England reduced rates to a 300 year low of 0.5% (and currently 0.25%) during which period savers have struggled to get more than 2% on their savings.

I am probably being overly cautious with my recent sales of equity holdings but it just feels right in the current climate.