£40 Billion Wiped Off Share Values

Posted by siteadmin on Monday 29th of February 2016.

Recent headlines made Mike Wilson, our MD, ponder whether fund managers justify their fees. Here are his thoughts:

“Aren’t you better off just buying low-cost tracker funds?”
Perhaps the answer has to be: Only if you know exactly what you are doing. It’s a bit like asking if you should save money by fixing your car’s brakes yourself.

Asset allocation is the most important factor in designing a portfolio: that is, how much you should invest in UK and overseas equities, bonds, property and many other types of investment. The proportion you should have in each asset is dictated by how much risk you are willing to accept in chasing higher returns.

Historically, the higher the proportion of equities in a portfolio, the higher the short-term risk, but the better the long-term return. Over the past five years the reverse has been true.

The chart below shows how an average low-risk managed fund (mixed investment 0–35% shares) has returned 15.82% (after deducting fund management charges) over the past five years compared to the FTSE 100 index return of 9.31%.

Mixed investment vs. FTSE 100 sharesFeb_2016_investment_chart_2.jpg

Over the much longer term, the situation is likely to change again, so there will be times when investors will reap the benefit of taking greater risks. However, the past five years have shown that sticking to a rigid asset allocation is not the best solution. Economic conditions change, and the best investment managers respond by making suitable adjustments to their portfolios.

In conclusion, Mike suggests:
“If you are determined to fix your own brakes, make sure that you choose the right asset allocation for the current economic conditions and your appetite for risk. Read as much of the financial press as you can to understand how each asset class is likely to perform over the next few months, and adjust your portfolio accordingly. If you can do this diligently, and successfully predict market movements rather than reacting to them, you will probably be okay.”

The value of the investment and the income they produce can go down as well as up and you may not get back as much as you put in.