5 Core Funds for Your Portfolio

Portfolio construction should start with some steady-eddy core funds that offer exposure to multiple assets that you can arrange more risky strategies around

Emma Wall 25 February, 2014 | 2:51PM
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Constructing a portfolio is like building a house - you must start with solid foundations. These are the assets that will grow at a steady pace; you're not looking for shoot-the-lights out performance as this often is accompanied by volatility.

Some investors prefer to blend passive funds at the core of their portfolio

The Investment Management Association sector formerly known as "cautious managed", now called Mixed Investment 20-60% Shares, is a good place to start looking. As the name suggests, these funds can invest between 20% and 60% of their portfolio in equities, with the remainder in bonds and cash. A minimum of 60% of the assets must be developed market listed, meaning the funds have a slow growth bias.

There are more than 4,000 open-ended funds available to UK investors, but only 390 investment trusts on the market. The extra tools at the disposal of a closed-end fund manager mean they are perfect for a core holding. Fund managers can use capital reserves acquired in profitable years to smooth returns, helping reduce volatility.

For a multi-asset approach, try Morningstar GBP Flexible Allocation category, which has an overlap with the Association of Investment Companies' Global sector.

Some investors prefer to blend passive funds at the core of their portfolio, keeping active management for more risky sectors for the "satellite holdings" which surround a portfolio's core.

A satellite holding could be an emerging or frontier market fund, a private equity investment or a trust offering exposure to high yield bonds, for example.

Below we detail a selection of five funds suitable for a core holding in your portfolio, in all cases the data source was Morningstar Direct.

Jupiter Merlin Income

This Gold-rated fund is a compelling choice for any investor looking for an actively managed fund of funds, according to Morningstar analyst Karine Nowak.

The managers believe in active fund management and are mindful of the importance of capital preservation as well as capital growth in delivering long-term returns for investors. Portfolio construction is relatively unconstrained, with the managers paying little attention to the benchmark and focusing instead on the absolute risks inherent in the portfolio. 

Personal Assets (PNL)

This Gold-rated investment trust had a disappointing 2013, but analyst Jackie Beard said that she retained conviction in the manager's process.

"The trust's board state clearly that the objective given to the investment adviser—Sebastian Lyon—is that of preservation of capital wealth," she said. "Granted, the fund lost money last year; this was primarily through holding gold—which had its worst year in 30—and cash; at the heart of both decisions was the preservation of capital."

Henderson Cautious Managed

This Silver-rated fund is suitable for investors seeking a diversified fund with exposure to UK equities, bonds, and cash. Fund manager Chris Burvill maintains his focus on his predominantly "cautious" investor base, and the emphasis on a relatively plain-vanilla portfolio remains. The equity portion is managed using a contrarian, value-based approach, including stocks across the market-cap range, and informed by top-down views on the economy. The fixed-income component is managed to complement the equity portfolio, and to offset volatility. 

Scottish Mortgage (SMT)

Although this Gold-rated trust only invests in equities, its global large cap bias means it is less volatile than other pure-equity plays. The style the managers follow epitomises long-term investing. At the heart of every investment decision are 10 questions that are intrinsic to everything the team does; the questions focus on five areas, namely industry background, competitive advantage, financial strength, attitude of management, and valuation. The team uses these not only to make an initial assessment of a company but also to ensure the investment thesis remains sound and to highlight any concerns.

HSBC FTSE 100 UCITS ETF (GBP)

This 3-star rated ETF provides broad exposure to large capitalisation UK equities and can be used as a core holding according to Morningstar analyst Hortense Bioy.

"Investing in this well-diversified fund could appeal to those looking to build a UK-centric portfolio. However, investors should carefully examine the index's composition," she said.

"With a 19-22% weighting, financials is the top sector represented in the index. Also, overall a quarter of the index is made up of resources companies which are acutely exposed to the fortunes of the broader economy and their performance is often directly linked to international commodity prices."

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
HSBC FTSE 100 ETF7,544.49 GBP0.47Rating
Janus Henderson Cautious Mgd A Acc288.11 GBP-0.52Rating
Jupiter Merlin Income Portfolio L Acc342.66 GBP-0.70Rating
Personal Assets Ord48,811.18 GBP-1.49Rating
Scottish Mortgage Ord892.92 GBP-1.16Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar