How to spring clean your portfolio

Rob Morgan looks at ways to ensure your investments are working as hard as possible.

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  1. Rob Morgan


A year on from the start of the Covid crisis and Central Banks’ money creation combined with government measures to prop up businesses have significantly offset the damaging economic effects of lockdowns. This has enabled markets to rebound strongly over the past year, and even to hit new highs in the case of the US where many technology-led ‘lockdown winners’ reside. From the depths of last March the US S&P 500 posted its largest ever one year return.

Yet a new threat has loomed into view: inflation. Investors have been weighing up the magnitude of financial stimulus being thrown at pandemic recovery, and many expect economic growth will soar to multi-year highs as more normal conditions emerge in the second half of the year. While this is good news for struggling sectors such as travel, leisure and traditional retail, it may not be for investors that have based their portfolio around a scenario of low inflation and low interest rates. If recovery is so vigorous that the global economy overheats and inflation rises, markets worry that interest rates will have to rise to cool it down.

This has had a big impact on bond markets previously priced for a very long period of low rates and accommodative policy. Most bonds such as UK gilts and US treasuries pay a fixed amount, so as inflation and interest rates rise their capital value must fall to provide the ‘right’ amount of return to investors.

The technology sector, along with ‘quality’ growth companies have also been affected. Higher inflation and interest rates have the effect of making the value of their anticipated future healthy profits worth less in today’s terms. All eyes are on how the US Federal Reserve manages interest rate expectations, and we believe it is likely markets remain in a state of flux over the coming months as the Fed and the markets test each other out. It seems like a good time to take stock and ensure your portfolio is positioned correctly for your objectives and working as hard as possible for you.

Check your portfolio is balanced

We believe investors should have a balanced portfolio that insulates them as far as possible from the impact of different economic scenarios. This seems particularly relevant currently as some areas have outperformed others to a significant degree – and portfolios may have become lop-sided as a result.

When sitting on large profits it is easy to forget that not having all your eggs in one basket is the foundation of long-term investing success. Yet if certain investments have grown to represent a larger proportion of your portfolio it could mean additional risk. It can be prudent to bank profits in these and use the proceeds to top up in areas that have underperformed – thereby retaining the intended balance of your portfolio and helping smooth out returns.

This doesn’t have to be complicated, a simple balanced portfolio can be as simple as having both equities and high quality bonds, though it may be that a traditional 60/40 portfolio – 60% equities, 40% bonds – won’t perform as well over the next decade as it has over the last. Bonds have grown expensive, and despite recent moves they remain so if inflation turns out to be more of a persistent worry than expected.

Take a look at our newest investment ideas

If you are looking to invest new money or to rebalance your portfolio, and are looking for some inspiration, our Foundation Fundlist offers a selection of ideas for new investment covering the major sectors. We aim to provide a variety of investment styles on the list so there should always be something with the potential to outperform.

We have recently added a number of funds outlined below. Each represents a different investment approach and level of risk, and they are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the fund’s Key Investor Information Document or Key Information Document, and Prospectus.

There is more information on different types of funds and how they work here.

A ‘balanced’ option for US equities

For those looking for diversification in the US market where tech dominance is most prevalent, one fund with a pragmatic approach to seeking out the best opportunities is Premier Miton US Opportunities. The fund can access ideas from across the size spectrum and is well spread across a variety of different industries. With a portfolio skewed towards small and medium-sized companies and no ‘FANG’ stocks it could make a good diversifier to funds more aligned with the index. Find out more about the fund here.

A ‘wealth preservation’ approach

It is a tough environment for investors aiming to balance risk and return. Ruffer Investment Trust is a a flexible multi-asset trust that aims to capture decent returns while keeping one eye firmly on the downside. The portfolio is currently positioned for an inflationary environment, driven by the team’s views. There’s more on the Trust and its approach here.

Harnessing the green energy ‘revolution’

Schroder Global Energy Transition invests across the whole sustainable energy industry from production to end-use. There has been a surge in interest in renewable energy stocks recently and consequently, valuations have become more expensive, so we believe a selective, disciplined and active approach such as the one adopted by this fund is a sensible means to access a fashionable space where in certain areas valuations look stretched. There’s more on the fund in this recent article.

Be an ISA or pension early bird

While many people leave their ISA contributions until the end of the tax year, it is often better to use the allowance early. That way your chosen investments are sheltered from tax immediately and have longer to produce income and growth – though it is also possible it could work against you should they fall in value over the course of the tax year.

For the 2021/22 tax year the ISA allowance is £20,000, but don’t worry if you don’t have this large lump sum to invest right away. With Charles Stanley Direct you can contribute smaller amounts to our Stocks and Shares ISA as and when you like, or set up regular savings from your bank account. This can also be a way of helping counter the market ups and downs, as well as take some of the stress out of investing because you are putting money in at different levels. It can even turn market volatility to your advantage as you ‘average down’ if prices fall further in the shorter term.

Pensions are also an important consideration and a powerful way to invest for retirement. When you make a contribution to your pension, the government adds money. This is called tax relief and is one of the main advantages of using a pension to save for retirement. An investor can receive up to 45% tax relief when they make a contribution to a personal pension such as a SIPP (Self Invested Personal Pension), with 20% paid by the HMRC into the pension and any higher and additional rate income tax reclaimable.

For more information on 2021/22 tax year allowances and limits see our useful roundup.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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