The best core funds for your portfolio

From Scottish Mortgage (SMT) to thematic exchange traded funds (ETFs), funds of a more specialist ilk have tended to hog the limelight in recent years. But looking at more prosaic options is also important when putting together a portfolio.

Many professional fund selectors advocate holding a ‘core’ fund – in other words, a well-diversified option that can form the bulk of a portfolio. As interim AJ Bell Investments managing director Ryan Hughes notes, having a core element making up a sizeable proportion of a portfolio creates “a strong long-term base that should have exposure to the major companies around the world, leaving a small element that can be used in other particular areas. By operating such an approach, investors should be able to avoid overtrading, instead leaving the core element to compound over the long term or deliver a specific objective such as income”.

This can also bring other advantages such as reducing the amount racked up in fund fees, and cutting down on the time spent researching holdings. Even so, picking a solid option can be tricky. Understanding the best principles to stick to, as well as being fully aware of what’s on offer, is a good starting point.

Rules of thumb

Getting the right asset allocation is a fundamental part of building a portfolio, and some rough rules of thumb do apply here. Those who can invest, or stay invested, for at least 15 years without needing to crystallise any income or gains may well be happy with a 100 per cent allocation to equities. Conversely, those who do expect to rely on their portfolio’s performance during the short or medium term may wish to start with broader guidelines. One such suggestion is subtracting your age from 100 and holding the resulting proportion in equities.

For those happy to take substantial equity exposure, passive funds typically make for good core holdings. Hughes points to the HSBC FTSE All-World Index fund (GB00BMJJJF91) as a low-cost option invested in more than 3,000 companies around the world. It helps investors “quickly build up a core equity allocation without having to worry about researching dozens of different actively managed strategies”.

The FTSE index tracked by this fund differs from the likes of the MSCI World benchmark by taking some limited exposure to emerging markets (a region that the MSCI World avoids). But it does still reflect the skewed composition of the global equity market, with around 60 per cent of its assets in the US, including decent allocations to the US tech majors.

The cheapest funds available will vary by investment platform, and our feature from last year on the cheapest funds for your portfolio identifies some of the best options for investors.

Putting the benefits of risk assets to one side, bonds do look appealing now that yields are much higher (and prices lower). Charles Stanley chief analyst Rob Morgan warns against “ignoring” fixed interest, noting: “Bonds are back in play as a diversification tool and could be invaluable in a weaker economic environment than expected. Many private investors have sidestepped bonds, but balanced strategies have a good chance of working well going forward and diversification is likely to be better rewarded.”

Multi-asset funds of different stripes can cater to these needs, although they can differ notably by approach.

The options

Some well-established multi-asset ranges seek to serve investors with different risk appetites, with Vanguard’s LifeStrategy* funds having proved especially popular in recent years. The funds have a straightforward appeal: the different options (such as Vanguard LifeStrategy 80% Equity (GB00B4PQW151)) have set allocations to equities as their names imply, with the balance in fixed-income assets.

Unlike some other multi-asset funds, the LifeStrategy portfolios stick to these allocations, meaning investors have a predictable level of exposure. But they may wish to change fund if their circumstances or risk appetite change over time.

The funds, which get exposure to the underlying assets via Vanguard trackers, also tend to be fairly cheap as a source of diversified exposure, with the 80% Equity fund carrying an ongoing charges figure of 0.22 per cent. However the range does come with notable quirks, in particular a bias towards UK equities, which make up roughly a quarter of the Vanguard LifeStrategy 100% Equity fund (GB00B41XG308). This has made the fund much less reliant on US equities than a conventional global equity tracker, and served as a drag on returns given the S&P 500 has tended to pull ahead in recent years: the Vanguard fund made a 13.5 per cent return in 2023 versus nearly 17 per cent for the iShares Core MSCI World ETF (SWDA).

The iShares fund is up some 83 per cent over a five-year period versus 64.5 per cent for the Vanguard option. The Vanguard funds have tended to have a good level of duration, or sensitivity to interest rate changes, within their fixed-income allocations. That has been painful during a difficult time for the asset class, with the Vanguard LifeStrategy 20% Equity fund (GB00B4NXY349) making a loss of nearly 16 per cent in 2022, but could work well if and when bonds recover.

Beyond LifeStrategy

LifeStrategy popularity aside, plenty of alternative options do exist. The Legal & General Multi-Index range makes heavy use of equities and bonds, but also uses some alternative asset classes: Legal & General Multi-Index 3 (GB00B9751744), the lowest-risk name in the range, has a 14 per cent allocation to equities, roughly 70 per cent in different forms of fixed income and 8 per cent in alternatives such as property, commodities and forestry.

Other funds such as Premier Miton Defensive Multi Asset (GB00B010Y517) have a similar approach. Meanwhile, in the Investment Association Mixed Investment 20-60% Shares sector (where constituents must have between 20 and 60 per cent of assets in equities), names such as Schroder MM Diversity (GB00B60CZD52) look beyond fixed income to a different range of diversifying assets. Some of the best-performing funds from different multi-asset sectors over a five-year period are detailed in the table.

Investors with a limited appetite for risk should also not forget the so-called “wealth preservation” investment trusts, Personal Assets (PNL), Capital Gearing (CGT), RIT Capital (RCP) and Ruffer (RICA), a cohort that we analysed last summer. The trusts have tended to pair a moderate level of exposure to equities with defensive assets including bonds and gold. They have different approaches to risk, with specialists such as Evelyn’s Jason Hollands pointing to Personal Assets, or its open-ended equivalent Trojan (GB00BZ6CNS31), as a good choice for very risk-averse investors seeking a core holding.

Once a core position is selected, attention inevitably turns to other gaps that need filling, and Morgan argues that investors should consider small-cap exposure as one area. “Following several years of large-cap dominance and investors’ predilection for passive strategies, a valuation opportunity seems to be arising across all markets in smaller companies,” he says. “Integrating a bit more exposure could prove fruitful through such funds as Kempen Global Small-Cap (LU1833119990), Smithson (SSON) and the Vanguard Global Small-Cap Index fund (IE00B3X1NT05​​​​​​). These could be used as satellites [alongside] a core strategy.”

*The author uses one of these funds