Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
BACK in February I decided to rejig my investments to give me exposure to a wider range of assets.
Up until then I had stuck religiously to the mantra to ‘keep things simple’, and as such was investing via a single balanced fund - 80% shares, 20% bonds - which gave exposure to the major markets around the world.
You can read about my rationale for changing things up here. In short, I felt that there were assets I was ignoring and which could, potentially, diversify my portfolio and make it a little more robust for the future.
Seven months on, I have now built the positions I had intended to build and wanted to take stock of how the whole exercise has gone. It should go without saying that this is all very personal to me - it is certainly not a recommendation for anyone else to follow what I’ve done.
The first decision was how much of my money I wanted to allocate to the new assets. I settled on 10% of my portfolio but also planned to build up this position gradually by diverting half of the regular contributions I make into them. After seven months, that 10% position is broadly in place.
The assets I chose were: a dedicated holding in emerging market shares via the Vanguard Emerging Markets Stock Index Fund; a small allocation to emerging market bonds via the Principal GIF Finisterre Unconstrained Emerging Markets Fixed Income fund; exposure to gold via the Ninety One Global Gold fund; and a position to infrastructure via the Foresight UK Infrastructure fund.
The aim of these additional holdings was not necessarily to boost returns over the next seven months - diversification is about more than that - but it would be silly to ignore performance so far completely. So how did they do?
Short answer - not so great.
But let’s start with the good news. The only new addition that is currently in positive territory is the Foresight Infrastructure fund, delivering a 4.1% return on the money I’ve invested. The fund invests in infrastructure investment trusts, which are themselves listed companies, but has a return profile that should be less volatile than stock markets generally because the projects underlying the fund should be able to produce steadier revenues than other types of businesses. That has been the experience so far and the fund has performed as I hoped.
The emerging markets segments are in the red. The Principal Finisterre bond fund is very slightly negative - down 0.06% - while money in the Vanguard Emerging Markets fund has lost 3.13%. No loss is to be welcomed but, as I wrote at the time, I knew that upping EM exposure would add risk. This year has not been easy for emerging markets and returns from that asset class tend to be very uneven at the best of times, with gains coming in bursts. My decision to add extra exposure was made with an eye on the long-term, so I’m happy to wait it out.
The performance of the Ninety One Global Gold Fund has been more straightforwardly disappointing. My money in the fund has lost 8.08% - but that’s not the disappointing part. My aim in holding gold was to add a hedge against extreme swings in markets, and the fact that this year has - up until the past week or so - been mostly good for stock markets means it’s no surprise that gold has lagged.
My concern is that one scenario in which gold could potentially gain is when inflation is rising - as it has this year. At the start of 2021 there was much talk that inflation could take off and the period since has only confirmed this. I guess I hoped that this would be reflected in gains for the gold price, and my gold fund. This has not happened (yet) and I’ll be watching gold closely as more news of rising prices comes through.
I may also reconsider the way in which I’ve gained my exposure to gold. The Ninety One fund invests in gold mining businesses, rather than physical gold. That means its performance is correlated with the gold price but not perfectly so.
Returns from gold miners tend to be more volatile and that’s proven the case this year. When I compare my fund to the performance of physical gold - via an Exchange Traded Fund (ETF) - it has lagged overall and been more volatile along the way.
The underperformance may be arbitrary - a different time period may easily have seen my fund come out on top - but I do wonder if I would be better served swapping in a physical gold ETF if my aim is simply to hedge against rising inflation. There’s just a bit less that can go wrong. I may also research other assets with the potential to hedge against inflation.
Overall, the effect of broadening my assets this year has been slightly negative on my overall return, but only marginally so. It’s not a perfect comparison of performance, but the annualised rate of return on my portfolio is now 10.99% compared to 11.93% had I remained invested solely in my 80:20 fund.
Returns aren’t the whole story because we’re talking about a very short period of time in which mainstream stock markets in particular have done well - there will be better tests of my strategy to come. For now, I will maintain my 10% position in these new assets and continue to watch closely.
My diversification plans remain a work in progress.
(%) As at 31 August
|Vanguard Emerging Markets Stock Index Fund||26.3||-1.6||1.8||3.9||17.4|
|Ninety One Global Gold fund||-4.3||-20.4||70.4||34.1||-26.7|
(%) As at 23 August
|Principal GIF Finisterre Unconstrained Emerging Markets Fixed Income Fund||N/A||-1.2||8.4||1.7||5.5|
|FP Foresight UK Infrastructure Income Fund||N/A||N/A||15.9||-1.4||9.4|
Past performance is not a reliable indicator of future returns
Source: Vanguard, total returns as at 31.8.21; Ninety One, total returns as at 31.8.21; Finisterre, total returns as at 30.4.21; FP Foresight, total returns as at 30.6.21
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. The Foresight UK Infrastructure Income Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The fund also uses currency hedging. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Foresight UK Infrastructure Income Fund investment policy means it invests mainly in units in collective investment schemes. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. The Principal GIF Finisterre Unconstrained Emerging Markets Fixed Income Fund and Vanguard Emerging Markets Stock Index Fund invest in emerging markets which can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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