Best performing ready-made solutions of July – September 2024

Ready-made solutions had another good quarter, with every portfolio barring one generating a positive return in Q3. Amidst a backdrop of a few instances of pronounced volatility in equity markets, alongside interest rate cuts in many major economies, the low risk options thrived and outperformed the higher risk options over the three-month period.

Return figures are encouraging when looking over longer timeframes, as the 1-year and 2-year periods move further away from some of the challenges faced in 2022, instead incorporating more lucrative quarters of market recovery and growth.

Across the past 12 months, all the ready-made solutions have returned between 5% – 19%, beating cash rates. Extending this to cover the past 2 years, the vast majority have returned between 10-30%, with high risk solutions leading the way as expected.

Global markets continued to rise in Q3, despite bouts of severe volatility. The average high risk portfolio returned a muted 1.2% across the quarter, although this leaps up to 16.7% and 25.6% when widening the timeframe to 1 and 2 years respectively.

All top 3 performers over the quarter are in the bottom half of the performance charts over a 2-year period, reflecting some of the rotational shifts visible in the market, as value and small-cap came into the fore over the last few months.

Halifax and Charles Stanley's ready-made options both returned 2.2% after charges in Q3, 1% higher than the average high risk option. Halifax's Progressive fund has an equity allocation of roughly 90%, with UK equity holdings constituting approximately 1/4 of the overall investments. The FTSE 100 is up by 7% YTD, while the FTSE 250 is currently up 6% since the beginning of 2024 and 18% over the past 12 months.

Many analysts still feel that despite recent positive stock market performance, the UK is still an undervalued sector, with widely-used metrics like price-to-equity and price-to-book ratios supporting this idea.

Charles Stanley's Adventurous fund has a similarly high equity allocation to Halifax, however, the composition is starkly different, with only 7% in UK equities, 7% in Japan, and 11% across other countries in the Asian Pacific. China caught everyone's attention at the end of Q3, finishing the quarter extremely well after policymakers approved a significant economic package at the end of September.

Looking over a longer time period, Aviva and Nutmeg are the top 3 performers over both 1 and 2 years. Nutmeg's fully-managed Portfolio 10 has a 100% equity allocation, with roughly 55% held in US equities. Interestingly, the fund's largest 3 holdings are all S&P 500 ETFs, which combine for over 40% of the portfolio.

The ever-increasing presence of the Magnificent 7 within the S&P 500 index has contributed significantly to the S&P's strong returns in the past few years, although at present there are many question marks over how diversified the index is and whether it can continue to generate such strong returns, off the back of the performance of a select sub-set of companies.

The average medium risk portfolio returned 2.1% in Q3 2024, increasing to 13.9% over the past 12 months and 19.4% across a 2-year timespan. All providers performed strongly across the quarter, with a tight range of only 0.9% between the 10 providers. Medium risk as a category also outperformed its high risk counterparts, due to its greater allocation to bonds; highlighting the importance and benefit of diversification across asset classes.

Halifax's Balanced solution was the best performer in Q3, returning 2.8%. The fund has an equity allocation of roughly 65% and a UK asset allocation of 33% which is split pretty evenly between shares and bonds. When looking across the past 12 months, HSBC's Balanced option is the strongest performer, growing by 15.4%.

With all the attention on interest rates and risk-free returns of 5% on money held in cash over the past couple of years, it is easy to forget how significant the difference in investing and saving can be; especially when considering a diversified portfolio across a wide time period.

Wealthify, Halifax, and Vanguard took the top spot over the wider 2-year timeframe, returning 21.7%. This is 5% higher than AJ Bell, who find themselves at the tail-end of the list in all three time periods. Wealthify's Ambitious plan typically has 60-65% in equity investments and has a regional exposure of roughly 25% to the UK, double its US allocation.

Passive investments are mainly used within the plan, although Wealthify has actively opted to currency hedge a significant proportion of its foreign exposure. There are also small allocations towards alternative investments included within the plan, with roughly 6% exposure split between private equity, property, and commodity ETFs.

A currency hedge protects an investment in a foreign country from being impacted by changes in the exchange rate. Non-hedged investments can generate returns via growth in the actual investment, or appreciation in the foreign currency.

For example, imagine investing £1,000 in Apple, at an exchange rate of 2 USD per GBP (50p = $1). This buys you $2,000 worth of Apple shares. Now assuming the Apple shares stay at the same price, but the dollar gets stronger, up to the point where it is now equal to £1. At this point, if you sell your $2,000 worth of Apple shares and convert it back to pounds, you would get £2,000, which would give you £1,000 profit on your initial investment.

However, all of this growth would have come from the change in the USD/GBP exchange rate, not the actual Apple investment. This can work oppositely as well, with investors losing money if GBP gets stronger in comparison to the foreign currency that they are holding their investments in; which is what has happened recently.

12 months ago, £1 was worth $1.21, now it is worth $1.31. That means any non-hedged investment in the US stock market would have had to overcome 7.4% worth of currency movement in the past year just to break even! Wealthify's hedging avoids this issue for its customers and has been a positive contributor to returns in the past 12 months.

The average low risk portfolio returned 2.5% across Q3, 10.3% across the past 12 months, and 12% when assessing over the longer 2-year timeframe. Interestingly, Q3 was one of the anomaly quarters when low risk, bond-heavy solutions outperformed their higher risk, equity-laden counterparts.

The top 8 low risk options all posted higher returns than the top-performing high risk solution, whilst Moneybox's Cautious option, which came bottom of the low risk table in all three timeframes, still outperformed 4 high risk options this quarter, including Moneybox's Adventurous option and Vanguard LifeStrategy 100.

Why did low risk options do so well? The main reason is bond exposure and the relationship between bonds and interest rates. When a government or company issues a bond, they are effectively taking a loan from the bond-holder, promising to repay them the full amount of the bond at the end of its term, as well as a 'coupon' every year as an incentive.

So for example, a 30-year 5% £1,000 bond issued by the government means that the UK government will pay the bond-holder 5% every year (£50), for the next 30 years, at which point it will repay the £1,000.

There is a secondary market for bonds - if I buy a 30-year UK government bond and don't want to wait 30 years to get my money, I can sell this bond to someone else who will take it off my hands.

Like any other financial instrument, bond prices can vary over time. Bond prices are particularly affected by interest rates, with bonds issued during periods of higher interest rates offering higher coupons to remain an attractive investment option. Coupon rates are usually fixed, which means when interest rates drop, the coupon rate is relatively high in comparison to what you can get elsewhere in the market, leading to increased demand for these bonds and raising its price.

This theory played out in reality during the past quarter, with both the UK and US cutting interest rates, leading to the strong performance seen in the low risk category in Q3.