How the experts build an investment portfolio

Building your own investment portfolio can be a daunting task. It involves choosing the right mix of assets that align with your investment goals, risk tolerance, and time horizon. This requires a considerable amount of research, analysis, and decision-making.

One of the biggest challenges is managing risk. Diversification is key, but finding the right balance of assets can be difficult. Another challenge is keeping up with the constantly changing market conditions, while choosing a handful of funds from the thousands available can seem an overwhelmingly impossible ask.

Because creating a well-diversified portfolio is like creating a gourmet meal - you want a balanced mix of flavours and ingredients that work together to create a satisfying dish. Similarly, a diversified portfolio should have a mix of asset classes, such as stocks, bonds, and alternative investments, that work together to create a balanced investment strategy.

Taking a short-cut to the optimal investment portfolio

One way of circumnavigating these issues is to invest in a multi-asset, multi-manager product and let the experts pick the funds for you. They can pick and choose the funds that work well in a portfolio and adjust the allocation as market conditions change.

Here, we take a closer look at how five expert teams build their portfolios:

1. CT MM Navigator Distribution

The nine-strong team behind this fund is headed up by the highly experienced Rob Burdett, who was one of the early pioneers of multi-manager/fund of fund investing. The team believes it can only stay successful if it operates under a set of guiding principles and not rules, allowing it to adapt the portfolio through investment cycles.

A proprietary fund manager scoring system underpins the investment approach. This scoring system, which is driven by qualitative factors, helps the team strip emotion from investment decisions, as well as undertaking all of the necessary rigorous number crunching. The system produces an absolute weighted score on factors such as a fund manager’s working environment, leadership and the fund size. This allows the team to compare past and present scores and compare funds with each other.

Meeting managers is central to the process, and the team has developed a unique skill in finding less well-known specialist funds from boutique managers with a focus on sustainable high yield and blending them together. The team spends as much time developing or researching new ideas as it does on the maintenance research. As the managers put it, “we like to be involved in a fund when it is building its track record rather than living off it”. The portfolio generally contains between 25 and 35 individual funds, balancing diversification, and risk.

2. Jupiter Merlin Growth Portfolio

The Jupiter Independent funds six-strong team is headed by John Chatfeild-Roberts. The investment process can be summarised in four steps. Firstly, the team analyses the macroeconomic environment, using research from a variety of sources. There is a particular focus on identifying key turning points (such as a turn in the interest rate cycle) in an accurate and timely manner.

Secondly, the team identifies fund managers most likely to perform in a given macro environment, using ongoing quantitative and qualitative analysis. The team then uses this analysis to construct high conviction portfolios, based on what the members foresee in terms of macroeconomic conditions going forward. Finally, the team monitors and modifies the portfolio to ensure ongoing enhanced returns. When a change is required, the members are not afraid to make it; they believe all holdings in a portfolio should be ‘working hard’. The team strives to buy the right quantities of the right fund manager at the right time.

The team has a bias towards fund managers who are resilient in tough times and is willing to back underlying managers with conviction - the majority of the portfolio is often held in the top five fund holdings. “The most important lesson I have learnt is that people are what makes the difference in fund management,” said John. “In the final analysis, there is no substitute for seeing the whites of someone’s eyes.”

3. TB Wise Multi-Asset Growth

This fund sits in the Investment Association Flexible sector, which means the team is afforded a significant degree of discretion over asset allocation and is allowed to invest up to 100% in equities. The portfolio usually holds around 30-60 underlying funds and investment trusts, with a preference for out-of-favour areas.

The team, led by Vincent Ropers, has a straightforward process and focuses on managers with a simple, yet disciplined investment process. “We invest in talented people who benefit from both macroeconomic and valuation tailwinds, across asset classes and geographies,” Vincent says. “While talent doesn’t go away, winds can turn, so we keep our asset allocation as flexible as possible with no set parameters”. The team adopts a slight value bias which means buying a stock or fund at a low share price and waiting until it increases in value before selling. However, the fund is not exclusively value in nature.

The process starts by building a macroeconomic position and then creating an asset allocation framework from a growth, risk and value perspective. These macro views are fed by the team’s consistent meetings with managers. The team will look to meet the managers of a product on at least two occasions before adding them to a portfolio. To ensure the manager has strong conviction in his choices, any addition in the portfolio must be worth at least 1% at the outset.

4. VT Chelsea Managed Balanced Growth

This fund is part of the four-strong range of award-winning VT Chelsea Managed Funds. Its team of four investment advisors, led by Darius McDermott, believes that delivering excellent returns is not just a case of making gains when the market does well. It believes that if you can also lose less when the market falls, you increase your chances of coming out ahead over the medium to long term.

The target equity weighting of this fund is 50%-70%, but the mix of sectors, assets and investing styles will vary over time to suit different market conditions. The fund may be underweight certain asset classes or even ignore them entirely if the investment advisors feel they do not offer sufficient value to the portfolio, at that moment in time.

The process starts with a combination of the investment advisors’ view on the macroeconomic picture and the valuations of different asset classes, to determine asset allocation. Fund selection is a combination of quantitative and qualitative analysis, with the investment advisors aiming to combine their favourite funds in the most efficient manner to deliver the maximum returns for the least risk.

“We often talk about finding a work-life balance and that’s a nice way to think about this fund,” says Darius. “The balanced fund aims to grow your money over the long term. At the same time, we don’t want you to lose sleep if the stock market tumbles, so we’ll strive to build a portfolio with lower volatility than equities”.

5. VT Momentum Diversified Income

The managers of this fund have a value-focused style and will invest across all asset classes. Save for the regulatory requirements, this is a go-anywhere portfolio without any constraints. The four-strong team has a common sense investment process that focuses on value investing and income generation. It executes its ideas via a mix of funds and direct securities. Using both alternative and traditional asset classes enables the team to achieve true diversification.

Led by Richard Parfect, the other managers in the team are Mark Wright, who leads UK equity research; Tom Delic who leads emerging markets research and Gary Moglione, who leads on developed market global equities and fixed income. “We like to keep things simple and understandable with a clarity of process creating a quality of outcome,” said Richard.

The fund has a very clearly defined and well-disciplined process, which is very much team-based. The team carries out in-house research looking for value investments, with each team member responsible for specific areas. The result is a globally diversified, multi-asset income portfolio. The value style tends to result in the managers buying out-of-favour investments and they then have to bide their time for the investment to pay off. This could be quite a lengthy process, but hopefully a rewarding one.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the fund managers and investment advisors and do not constitute financial advice.

Published on 24/04/2023