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Personal best

Running your own portfolio can enable you to more accurately reflect your attitude to risk and investment horizon

I have been investing in managed funds for some time now but it has been suggested that this is not necessarily the best way forward. Can you advise me? I am a moderate investor and do not anticipate needing the funds for at least 15 years.

What you may be suggesting is that instead of leaving fund selection to the managers within a managed fund, you could set up your own diversified portfolio of funds – effectively your own managed fund – to match your attitude to risk and investment term more closely.

Modern portfolio theory is based on the principle of taking the minimum amount of risk to achieve the maximum amount of return by diversifying investments across different non-correlated asset classes.

What might a portfolio for you potentially look like? There are a number of different areas you could consider for investment although a more accurate picture of your personal circumstances would have to be obtained to ensure that these matched your needs. The approximate percentage split across asset classes would be 60 per cent equities, with 30 per cent of this being overseas, 20 per cent fixed interest, 3 per cent property and 17 per cent cash.

Can diversification on a global basis within a global economy still provide reduction to risk? The answer is yes, so long as you are picking shares which have low correlation to each other, such as across different sectors.

You might also consider funds where the investment is not in multi-national or big company shares. Although these companies may be more risky individually, accessing them through a reputable fund allows you to harness the expertise of fund managers with overseas specialisation.

Emerging markets funds also provide good non-correlated diversification with the FTSE and S&P 500. Latin America, Eastern Europe including Russia, the Far East and India are all providing new and exciting opportunities.

When constructing your portfolio, it may be easier to consider investing separately in global and UK funds that invest in bigger and smaller companies. There are also specialist funds and what I like to call new idea funds which may not sit obviously within one asset class or another. A small amount could be invested within these to achieve diversification, with the amount being determined by the degree of risk required and your investment horizon.

Two of the funds that spring to mind are JP Morgan natural resources and Investec global energy, which give access to commodity markets.

Commodities do not directly correlate with equities or bonds, so by adding commodities to a portfolio you can reduce its overall risk considerably. However, it should be noted that investing in companies operating in the commodities sector rather than the commodity itself may dilute the effect on the portfolio.

Looking at lower-risk alternatives to bonds or fixed interest, Old Mutual’s Prosper 80 fund is part of a group of new funds which target a return in excess of that being achieved by cash, with a basic level of protection, in this case, 80 per cent of the highest-ever fund price. The Prosper 80 fund achieves this by investing in a diversified portfolio of segregated hedge funds and cash.

Another new idea fund which spans both UK and global equities is Skandia’s global best ideas fund, which operates on the concept of taking 10 of the world’s leading fund managers and asking them to pick their 10 best stock ideas. Although this is a global fund, it has a 50 per cent core weighting in the UK.

As you can see, there is a wealth of opportunity in establishing your own portfolio outside the traditional managed fund sector although it is important that the portfolio is properly managed and reviewed regularly.

The analysis and review tools available to monitor portfolios are vast but some of the best include the ability to X-ray your portfolio so you can check for overlaps in stocks, sectors and geographical areas and make sure you are keeping to your risk profile and broad asset allocation targets.

Lisanne Mealiing is a director of MDM Associates


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