I want to diversify but am unsure how best to do it. Any advice?

04 April 2021

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Question by Gill

Hi, I started investing about 6 months ago and manage various ISAs, SIPPs and JSIPPs for the family. It's exhausting :-) and I really want to get things set up so they can just run - but atm I don't think I've got the right sort of diversity in a couple of them that are more than just using Vanguard Life Strategy and BG Managed funds. I've read loads and loads and get the need for diversity...but what proportions would actually equate to a really well rounded portfolio? I've read that 35% US and 20% UK is pretty standard, but what about Europe, Asia, Japan, China and emerging markets? I'm essentially at that point of having read so much I'm not sure what the right answer is! So many global funds I look at aren't really global, but seem to have 50% at least focused on the US and UK - which I guess amounts to the numbers detailed above. I just want to get this right so that if things go array, at least I've got the theory right! Thanks a mil in advance. Gill.


Answered by Rich Ellis

Hi Gill!

Wow, it sounds like you have done a lot in just 6 months! You are right to focus on the importance of diversification. This can be achieved through a single fund solution or multiple funds. It really does depend on the objective of the fund and the underlying asset allocation. When it comes to Equity allocation it is typical to see a high level of ‘home bias’ within UK based funds to UK equities. You should consider that the UK is responsible for only around 6% of global GDP, yet many investments contain a much higher weighting than this. It is also important to understand what is meant by ‘UK Equities’ as often these are not UK companies, moreso they are non-UK companies that are listed in the UK. Of the companies which make up the FTSE 100, greater than 70% of their revenue is generated from outside the UK*.

I would suggest it depends on what type of strategy you want deployed within your portfolio. Vanguard, whilst they have active funds, are widely known for their low-cost passive range of investment solutions. Baillie Gifford on the other hand are predominantly active managers who will seek to allocate to areas of the market they believe are mispriced or are undervalued.

By choosing an active manager it would be fair to expect the asset allocation to change more than a passive fund, which is likely to stay closer to its target asset allocation. So there is a decision as far as investment style here. If you were to want a more rigid asset allocation without too much deviation, then a passive fund may be of interest. Whilst passive funds can also have a home bias to UK Equities some which might be referred to as All Stocks/All World/All Cap are likely to allocate to include growing economies rather than purely developed ones. Naturally, you should consider whether such funds are appropriate to your needs as far as their risk and I would suggest thoroughly reading through the KIID documents and factsheets prior to making any investment decisions.

*source Schroders

Answered by

Rich Ellis

Director and Co-founder

I am Director and Co-founder at Ellis Davies Financial Planning Ltd, an independent financial planning business we set up in 2017 after working 20 years in Financial Services. We currently advise approx. 100 client families predominantly in Bristol and the South West.