Can you help a first time Uni investor develop a funds portfolio strategy positioned for an eventual upturn?

7th Apr '20 by Dickysam

6 comments 613 reads

I am looking to build a funds portfolio in my ISA in this bear market with investment trusts, funds and ETF’s. I am at Uni studying Economics & Finance and would like to share my thought process so far and ask for all constructive critics on my thinking and elections pls - would be greatly appreciated.

I want to invest in high quality investment products that I can leave to compound in interest overtime - growth focused. Currently my thinking is picking funds/trusts/ETF’s that have had consistently strong growth (10% + over 3yrs) while picking a relatively low standard deviation within its peers and picking those showing stronger growth in the short term compared to others in its sector, while also comparing holding to ensure I am not buying funds too similar.

I have used Sector ranking to base my thinking on and currently this is equating to:

High exposure to technology in the form of Polar Capital Technology Trust, with a strong holding in tech companies such as Microsoft that are benefiting from their cloud services that more people are using as they are working at home. I believe technology will continue to lead the way and that is why I have chosen this to be my biggest portion of my portfolio.

Exposure to USA through buying ishares S&P 500 information sector UCITS ETF, I believe over time the S&P will recover over time and invested heavily in strong US tech companies it has good growth prospects.

Exposure in China through Invesco China Equity Fund (UK) Y (Acc). With China starting to go back to normal while also having very strong growth prospects, I want to position myself with exposure to China to benefit from their continued future growth model.

Furthermore exposure of UK in the form of MI Chelverton UK Equity Growth Fund B Acc. Helping to balance my portfolio, a very strong fund that has performed well over time.

Moreover the Healthcare sector Edinburgh Worldwide Investment Trust (EWI). I believe this sector will benefit from ongoing crisis and further in the long term, firms are constantly trying to create cures for cancer and other health problems.

My initially thinking of weighting is 35%, 30%, 15%,5%,5%. What do you guys think?

While leaving myself 10% to invest in stocks that have strong cash balances that will be able to weather the storm and good…

Unlock with Email

Unlock with Google

Already have an account?
Login here

ls2g08

8th Apr '20

I think the issue you have with this portfolio, is that the diversification is an illusion. EWI, PCT and the iShares ETF will have very highly correlated performances as their objectives and the underlying portfolios are quite similar which will leave you with a very concentrated portfolio.

Therefore from an allocation perspective your portfolio in reality looks like the below:

67% - Large cap US tech

15% Chinese equities (with a likely heavy weighting to US listed chinese tech companies which are also present in the other three investment trusts)

8% other

10% cash

It is an addage that you have no doubt heard before, but past performance is no guarentee to future performace. Indeed in the active fund management industry, studies have shown that good past perfromance, has at best has no strong relationship with future performance and at worst, is an indicator of poor future performance as the porfolio mean reverts. The underlying driver in these funds you have selected is also likely to be the same. This is not to say this is a poor decision, just that you could mabye achieve it in a cheaper fashion by investing 100% in the iShares ETF rather than a mix of costly active and passive funds that will cancel each other out.

As an economics and finance student you will no doubt be familar with mean variance portfolio optimisation. You should look at including some un-correlated assets in your portfolio to give you a greater return with the same level of risk. Emerging markets are currently at the largest discount to US stocks on record for example. Also consider some non equity investments, such as bonds, commodities and real estate.

I'm no believer in the efficient market hypothesis, however it is well known that these securities will have been less adversely impacted by COVID-19. So at best these now likely represent a hedge against the virus getting worse. The riskiest sectors and therefore those that will offer the highest potential for profit will be those which have been most effected by the crisis such as retail, entertainment etc.

William K

9th Apr '20

Your strategy seems to be based on the principle that everything is now cheap and you are trying to buy the best prospects for growth in the short / medium term (i.e. <5 years). You want quality and are favouring the US market and technology. (This is roughly what I am doing, my only caveat with the US market is the the GBP is relatively low against the USD and any strengthening of the GBP will reduce the value of US assets.)

Would I do anything different from you?

1. I would look at Emerging Markets as a whole rather than just China.

2. Diversification, technically, means a spread of asset classes rather than just equities, as you are probably aware. This can easily be achieved by ETFs or similar that focus on private equity, infrastructure, commodities, bonds etc - basically anything that doesn't necessarily correlate with the equity markets. Some commodities are relatively cheap too - e.g. oil, base metals - and could do well when the global economic situation recovers (as it undoubtedly will). I am looking closely at everything that's 20-30% below it's 52 week high.

Dickysam

Thanks a lot for the reply I will take it on board, I was thinking about emerging markets but I thought that it is very high risk in the current climate, but definitely something to consider during the recovery. Thanks again

That makes a lot of sense, I agree that f those US large cap tech are probably too similar, definitely something to think about regarding my current selection and portfolio for the future, thanks for replying.

pka

Hi Dickysam, you wrote:

"Moreover the Healthcare sector Edinburgh Worldwide Investment Trust (EWI). I believe this sector will benefit from ongoing crisis and further in the long term, firms are constantly trying to create cures for cancer and other health problems."

Edinburgh Worldwide is a generalist international IT. I suspect you meant to write Worldwide Healthcare Trust (WHT), as that is aninternational IT specialising in the healthcare sector.

Can you help a first time Uni investor develop a funds portfolio strategy positioned for an eventual upturn?

Unlock the rest of this article with a 14 day trial

About the Author

Dickysam

6 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...