My Asset Allocation

When I last wrote on March 15, 2003, I put my head above the parapet by saying that it was “time to look seriously at putting new money into equity markets”. The FTSE 100 reached its trough on March 12, so my timing was fortunate.

Some of the funds selected last year really made the most of the initial cyclical changes in the market, and those with a mid and small-cap bias did particularly well. This year will be different, and our performance may hinge on making the right macro calls at the right time and keeping a flexible focus on sectors where the reward for risk is attractive. We may simply hold higher weightings in the sectors we believe in. This will include holding funds that did not do as well as some of their competitors in 2003 – we have faith in the fund manager’s ability to perform well in the next phase of the market.

It seems likely that 2004 will be a better year for equities than bonds – with some exceptions – and my selections here represent my views on equity funds only. If pushed, I could trim these selections down to four or five equity funds, but at the other end of the scale I can think of 25 equity funds that I could have included. In practice, asset allocation for real clients almost always includes a spread of fixed interest and “hybrid” funds too, and the strongest “best” views on asset allocation and fund selection are often tempered by the realities of meeting each client’s individual risk profile.

I am very positive for 2004, and this is reflected in the global nature of my selections. Around 50% of this portfolio is UK-based, as I think the very diversified UK market still offers good opportunities. You can hold large-cap stocks focusing mainly on the domestic UK market, some with more or less dollar sensitivity, and others that give you exposure to the Far East. I hope that earnings upgrades will drive the large-cap sector forward and that some sectors will be rerated. Richard Moore’s Old Mutual UK Select Large Cap fund is my core fund in this sector.

I have not deserted the UK mid-cap sector, as I believe it still has much to offer. However, it may be only the best mid-cap fund managers who can make the grade in 2004. I have also included two “best ideas” UK growth funds in my selection, along with two of my favourite UK equity income funds.

I expect some stocks in the eurozone to do well, despite the strong euro. Adriaan de Mol van Otterloo has made quite an impression since taking over Schroder European. I understand the concerns about the US and the weak dollar, but I am not on the side of the bears at the moment and my US weighting reflects this.

I could not ignore Emerging Markets and Asia, and I opted for the proven skills of Angus Tulloch – but using his two new “small” First State funds. In Japan, I decided to stick with another experienced manager – Dennis Clough at Schroders. It should be an interesting year.

Model portfolio
Capital invested
Old Mutual UK Select Large Cap £18,000
Framlington UK Growth £12,000
Schroder UK Mid 250 £13,000
Old Mutual UK Select Mid Cap £13,000
Schroder UK Alpha Plus £16,000
Gartmore UK Focus £12,000
Jupiter Income £13,000
Invesco Perpetual High Income £13,000
Schroder European £15,000
New Star European Growth £15,000
Gartmore (Govett) US Opps £14,000
DWS American Growth £14,000
First State Asia Pacific Leaders £10,000
First State Global Emerging Market Leaders £11,000
Schroder Tokyo £11,000