Diversification and low costs are the keys to success


  • Date: 20/11/2016

Diversification and low costs are the keys to success

If you are in your twenties you have a dilemma.  Typically you are at the time of your life where accumulating funds for investment is difficult.  You may be saving for a house, or thinking of starting a family. You may have debts from further education and you are likely to be in the early part of your career and as a result your earnings are going to be lower than you would hope to be achieving in later life.  Any money that you do accumulate, you will probably want to keep and make sure that it is secure to meet your short term needs. However, if you are able to accumulate a lump sum for longer term investment you will have time on your side. The longer you have to invest, the more investment risk you can afford to take. The more investment risk, the greater the potential return but the greater chance of losses.  You would invest over the longer term into riskier investments as you have the time to see out the peak and troughs. For example, you would hope that an investment into a diversified basket of shares would provide growth in real terms above inflation, which has historically been the case. 

When considering the investment of £10,000 it is important to consider diversification, but also costs.  At Thomas Miller, whilst we advise on larger portfolios, we tend to build portfolios for the longer term and take both of these elements into consideration.

In addition, we are particularly interested in long term economic trends; those that we believe will be the drivers of investment performance, once the fog of short-term sentiment has dissipated.

Understanding what you need the £10,000 for would be our starting point.  If this £10,000 represented a significant investment or you have a lower appetite for risk then we would initially talk to you about a strategy that is likely to be more conservative and diversified.

Diversification will help mitigate risks in this uncertain world, particularly over the longer term.  And lower costs are going to be important if we are, as we have been, in a lower return environment.

To this end consideration could be given to investment in a well-diversified multi-asset portfolio.  Where we can, we will also consider the use of passive and exchange traded funds to lower costs. 

For example, FTSE 100 and FTSE All-Share exposure can be achieved through the purchase of a passive fund. Legal and General run several funds for as little as 0.1% p.a.  ETFs and passive funds have no active fund manager so will be cheaper than active funds.

However, passive funds just track an index, on the way down as well as upward.  There is no fund manager to invest defensively, or avoid specific sectors which can harm performance. 

Those with a longer time horizon might want to consider potential longer term global trends and, by way of example, look at some of the following funds.

A word of warning though: these are more speculative and aggressive funds specifically designed to be invested for long periods of time and should not relied upon as core holdings.

India
According to PWC, ‘India has the potential to become the second largest economy in the world by 2050’, although this is dependent on implementing structural reforms – something Narendra Modi, the Prime Minister, has been focusing on since taking over back in 2014. These reforms are well under way and will prove fruitful when allied with their key advantage, the size of its working-age population - currently around 0.86 billion.

Therefore, it is not surprising that the country has overtaken China to become the fastest growing major economy. A good way to access the country’s rapid expansion is via Goldman Sachs’ India Equity Portfolio, which invests in companies that may be incorporated in India and/or listed in India. This fund is expensive though with a 1.35% annual charge.  A cheaper way to gain access to the Indian market could be to buy the ishares MSCI Indian ETF at an annual cost of 0.58% p.a. 

AXA Framlington Biotech Fund
With ageing populations becoming a significant feature of most developed countries, the biotech industry is set to grow substantially over the next 20 years. The issue of rapidly ageing populations is clear here in the UK where life expectancy is expected to reach the late 80s by just 2030, flagging the need to improve healthcare and services.

The AXA fund is an effective way to capture this rising demand by investing in companies in the biotech, genomic and medical research industry. Whilst the outcomes for companies in this space can be quite binary in nature, the global movement to better develop this sector will be a key driver of returns in the long term. The fund has charges of 0.83% p.a.

Pictet Robotics
Robotics for commercial, industrial and personal use is rapidly accelerating across the global economy. Technological advancements have allowed robots to become smaller, cheaper and more efficient, which is driving more widespread use.

With the Global Robotics market growing by 10% a year companies are experiencing the economic benefits of robotics which will improve their profitability in the long run. Pictet’s Robotics fund aims to achieve capital growth by investing in companies worldwide with a significant exposure to the robotics value chain. The fund costs 0.8% p.a.

Access to these funds can be obtained online through fund supermarkets or from the fund manager directly. However, we encourage people to seek out good, independent advice. It is vitally important to have identified your plan and your objectives before you invest.  Not to do so is putting the cart before the horse.

Matthew Phillips
Managing Director

Article first appeared (20th November 2016) in:

The Sunday Times: The young have time on their side so risk can bring growing gains

Opinions, interpretations and conclusions expressed in this document represent our judgement as of this date and are subject to change. Furthermore, the content is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or a solicitation to buy or sell any securities or to adopt any investment strategy.

Thomas Miller Investment is the trading name of the businesses in the Thomas Miller Investment Group. This note has been issued by Thomas Miller Wealth Management Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Register Number 594155) and is a company registered in England, number 08284862