Filling the risk buckets
In the ‘understanding the risk attaching to your funds’ section we defined the risk and reward profile of different types of funds . Below is a recap for each risk bucket
low risk bucket
This should be the stable core, and we would expect returns at a margin over those available on deposit returns, but not a huge margin. For example, the extraordinarily high returns from corporate bond investments in 2009 were exceptional and will not repeat any time soon. However, there are still clear opportunities across the range of types of investment which fit in this category. Remember the expectation is lower reward as well as lower risk.
medium risk bucket
Here is the inflation-beating potential. We tend to emphasise high yielding equity income funds, because history makes it absolutely clear that this strategy is how you achieve long term outperformance - and all the more attractive right now, with interest rates close to zero.
In the long run we should expect returns at a margin over corporate bond funds and inflation, and total returns (that is growth and dividends) to be in high single figures.
high risk bucket
Here is the potential for double digit gains, but with somewhat greater volatility
There is no purely scientific way to select the funds which populate the risk buckets, and our approach is set out in more detail in our TopFunds guide. If you wish to receive a copy then please contact us. But in a nutshell three issues are taken into account:
1. Recent past performance; the objective analysis sector by sector
2. Value, or lack of it, inherent in certain sectors, and the macro risks; subjective analysis
3. Softer issues around certain funds and fund management groups; even more subjective
Taking account of this process, we have produced two model portfolios. Our Growth Portfolio and our Income Portfolio, the latter of which is detailed in the TopFunds guide