My asset Allocation

This portfolio has been designed for a client in his mid-thirties who is a director and shareholder of a successful small business. He has substantial capital and income, and has sought our advice to invest £200,000, which is part of a bonus that he has recently received. He is risk-tolerant and is seeking capital growth over the medium to long term. At our initial meeting, we discussed the different asset classes and how the blending of assets that behave differently lowers the overall risk of an investment portfolio. He was particularly struck with the concept of hedge fund investing and was keen to have a reasonable exposure to this form of investment.

Starting with the hedge fund component, I have chosen the Matrix Ascension 2 plan. This feeds into Winton’s new Trading Strategies fund, managed in an identical manner to the Winton Futures fund. The Futures fund has been going since 1997 and has delivered annualised returns of 18.06%. Winton’s management philosophy utilises statistical models to take advantage of markets overreacting to events. The fund will use futures in a host of different markets including equities, bonds, currencies and various commodities.

While in isolation this fund would be considered high-risk, there are two aspects that reduce the risk to my client. First, we all know that the risk of a portfolio is reduced by blending assets whose behaviour is not correlated; as with most hedge funds, the Winton fund has negligible correlation with either UK equity or UK fixed interest investments. Second, the Matrix Ascension wrapper provides a guarantee from BNP Paribas to return a minimum of 96% of the original investment at the end of the seven-year term.

Turning our attention to the more conventional equity assets, for UK holdings I have sought a core of equity income on the basis that with a low-growth economic background, dividends go a long way to providing a healthy total return. The Rathbone and Invesco Perpetual funds are managed by first class stockpickers in Carl Stick and Neil Woodford – an essential characteristic in markets that are anticipated to move sideways for the next few years.

This core is complemented by two UK equity holdings that are anticipated to outperform the market. Andy Brough has done a fantastic job at Schroders over the past five years with the UK Mid 250 fund; the value that he has added is considerable and it is often reassuring when fund managers have a sell discipline imposed on them.

Artemis UK Growth also has an excellent track record, and while having a slight growth bias, it does not lose sight of traditional value-based investment disciplines.

To provide the required exposure to international equities, I have chosen two leading multi-manager funds: Jupiter’s Merlin Worldwide Portfolio and Credit Suisse’s Constellation fund. Simplicity is one driver for adopting the multi-manager approach, coupled with being comfortable allowing the multi-manager to determine the geographical allocations.

Finally, I have decided to use the relatively new Directional Bond fund from Barings. This fund is managed on a total return basis and seeks to profit from rises and falls in the major global government bond and currency markets. While not a hedge fund, some of its characteristics are similar in that the focus is on delivering an absolute rather than relative return. This is achieved by utilising the flexibility provided by the new Ucits III structure.