What investors can learn from ‘ready-made’ portfolios

‘Best-buy’ fund lists have long been a prominent part of investment platforms’ offer to their customers. In recent years, these have been joined in the shop window by portfolios run by platforms’ own investment managers, aimed at less experienced or uncertain users. But the performance and structure of these funds can vary widely, and it is worth paying attention to their foibles.

While multi-asset funds themselves are nothing new, platforms’ own in-house funds are typically labelled as ‘ready made’ or ‘quick start’ routes to investment, and access to the portfolios in question is usually preceded by a basic set of questions. Users are often able to specify whether they wish to focus on growth or income, and/or asked whether they wish to keep costs particularly low (in which case they are routed to passive funds). Growth-focused investors are then presented with a small range of in-house options, the names of which typically range from cautious (featuring a higher bond component) to adventurous (where the emphasis is on equities).

Occasionally, investors can obtain discounts on their platform fees if they invest solely in these portfolios. On Bestinvest, for instance, the annual platform charge for those with less than £250,000 in assets is 0.4 per cent when investing in funds and UK shares. But that charge is lowered to 0.2 per cent for those who only use its ‘ready-made’ portfolios.

Inevitably, these model or managed portfolios, as they are also known, differ from platform to platform. Terminology can be an issue, too. At AJ Bell, choosing the ‘starter fund’ option means money will be invested in a selection of individual equity and bond funds, the management and rebalancing of which is then left to the investor. It is the more unassuming ‘AJ Bell funds’ that are akin to the in-house multi-asset propositions found on other platforms.

Going for growth

When it comes to asset allocation, there is no one ‘right’ way to construct a portfolio. But comparing and contrasting can be instructive. Portfolio breakdowns can also offer clues to how a rough-and-ready allocation might look for someone starting from scratch in 2024.

Table 1 below highlights the allocations of a selection of adventurous (ie higher-risk) and income portfolios. Where available, we have chosen portfolios constructed of index trackers, be they ETFs or index funds, for ease of comparison.

Actively managed equivalents come with higher fees but with the possibility of increased performance. But it could be argued that all of the portfolios in the table are active funds, insofar as a sizeable proportion of their returns will come from the asset allocation mix chosen by their managers. Take the returns made in 2023 as an example: differing calls on the relative attraction of the US market at the start of last year produced significant divergence in the performance of even ‘passive-only’ portfolios.

There is also the risk that these portfolios, despite their aim to be a one-stop shop for investors, overcomplicate matters for those just beginning their investment journeys. While investors will typically add different funds and shares to their portfolio over time as their wealth and expertise grow, a simple portfolio has plenty to recommend. This is particularly the case when it comes to multi-asset funds, the equity component of which can often end up simply replicating the MSCI World index. As of this month, the US equity exposure within the MSCI World has crossed the 70 per cent mark. That makes it a reasonable proxy for the US market, which should be taken into account when considering the allocations in Table 1.

The 25.6 per cent US equity weighting of Vanguard LifeStrategy 80% Equity (GB00B4PQW151), for example, rises to 39 per cent when its allocation to global index funds is factored in. The Fidelity Multi Asset Allocator Adventurous fund’s (GB00B893BN59) 56 per cent weighting to global shares means it too has 39 per cent in US equities. That puts both on a par with the likes of Hargreaves Lansdown and Charles Stanley’s offerings.

With this in mind, the table also shows the performance of a portfolio that holds 80 per cent in the iShares MSCI World ETF (SWDA) and 20 per cent in the Vanguard UK Government Bond Index fund (IE00B1S75374). It would have returned 13 per cent over one year and 19 per cent over three years, figures that compare favourably with many of the options listed in the table. The Investors’ Chronicle Alpha adventurous portfolio, one of four used to aid our Portfolio Clinic case studies, is broadly similar, given it has 68 per cent in global equities, 22 per cent in bonds and 5 per cent in gold.

Some platform portfolios do now take a more concentrated approach, at least in terms of the number of holdings: Fidelity’s adventurous fund, which held a variety of regional equity funds as of 30 April last year, now holds more than half its portfolio in just three global index funds.

In the short term, our 80/20 portfolio’s returns will have been driven by the runaway US market: the portfolio effectively holds 56 per cent in US shares, well above any other option in the table.

Funds such as those run by AJ Bell and Bestinvest have diversified away from the US to a greater degree than their rivals. An alternative approach for the private investor is to simply complement a global or US equity position with UK equities. UK shares account for less than 4 per cent of the MSCI World index and, as was seen in 2022, domestic large-cap shares are relatively defensive compared with their US peers. The relative valuations on offer in the UK market also bode well. As it stands, however, UK shares are notable in their absence from many platforms’ in-house portfolios.

The advantage of using a multi-asset fund – be it an in-house or a third-party product – is that the manager will rebalance the portfolio to ensure its level of risk remains constant, meaning less monitoring is required by investors. This can be a double-edged sword, however: a private investor may find that their fund’s allocation, while still appropriate for their risk appetite, has seen its regional or sectoral biases transform over the course of their holding period. Two years ago, the AJ Bell Adventurous (GB00BYW8VG25) fund had 32 per cent in US equities, compared with the current 24 per cent. Its relative returns may have suffered from that call, albeit its three-year performance remains ahead of most competitors.

Income options

Most platforms’ guidance routes also provide an income portfolio – indicating that hand-holding processes are not just for young investors with many decades of capital gains ahead of them. Table 2 outlines these options. Unlike growth portfolios, users are typically directed to a single income portfolio. There are two other fundamental differences, one of which is immediately apparent: all the options in the table go big on diversifiers, chiefly bonds.

This is not just a tactical call based on the fact that bond yields now look more attractive than they have done for several years. Instead, it’s partly because many of these funds, which like their adventurous brethren are typically available across a wide range of platforms rather than just on their home turf, must conform to the guidelines of externally assessed fund sectors. Two of the five funds highlighted (those run by Fidelity and Hargreaves Lansdown) sit in the Investment Association 20-60% Shares sector. As the name suggests, that sets upper and lower limits on the amount these funds can hold in equities. The Charles Stanley Monthly High Income fund (GB00B92V3267), meanwhile, sits in the 0-35% Shares sector. These ranges provide flexibility, and funds can change sector if they so wish, but in practice the latter event is rare, and the freedom of movement only extends so far.

That said, it is clear many funds have started shifting further into fixed income over the past two years. Doing so should provide a stable income stream in future, but it does come at the cost of potential capital growth and may also mean payouts will struggle to compete in real terms if inflation rises again. This may be viewed as a necessary evil for a group whose collective performance over the past three years has been, as the table shows, somewhat meagre: even the best total return is less than half that of the FTSE All-Share index over the period. Ultimately, these are designed to be lower-risk funds, complete with the resultant sacrifice of return potential that this decision entails.

Platforms’ income portfolios also stand out for a second reason: with the exception of the AJ Bell offering, each portfolio contains a sizeable number of actively managed funds. When it comes to income generation, a selective approach remains the path of choice for managers. The trade-off is that charges are higher: in the case of Charles Stanley and Hargreaves, these exceed 1 per cent, before platform custody and trading costs are included. The Hargreaves Moderately Adventurous Managed fund (GB00BNBPXT47) is also an actively managed portfolio, although it has recently launched a passive equivalent, portfolio details for which are not yet available.

A final point for investors to consider is that despite platforms’ signposting efforts, these portfolios are often relatively small in size, meaning they could be at risk of closure in the years ahead.