- Simple risk based portfolios promoted by the large fund supermarkets have grown in popularity over recent years. However many perform poorly without consumer knowledge.
- The Hargreaves Lansdown portfolio + range of growth portfolios experienced the largest losses across all 3 risk ranges in the 3 months since the onset of the coronavirus pandemic.
- Bestinvest balanced portfolio returned 5 year growth of 12.87%, which was the lowest across the range of balanced portfolios that were analysed.
- The Yodelar range of portfolios consistently outperformed all competing portfolios across the 3 risk ranges that were analysed.
Today there is no shortage of pre-constructed investment portfolios available for consumer investors. All of which align with clients financial objectives and risk tolerance. Many investment houses and platforms such as Hargreaves and Bestinvest have launched their own funds over recent years, and offering simple easy to invest portfolios has been a very effective way of growing the cumulative value of their own funds. The downside for most investors is that many of these portfolios and many of these brand own funds are poor performing when compared to all other same sector funds.
With such a large range of portfolios available, the difference in performance can be vast, and without the relevant knowledge, many investors can receive poor to mediocre returns.
In this report we analyse the performance of the most popular portfolios available to UK investors. In comparing the performance of these portfolios we concentrated on the 3 most popular risk categories.
The 3 Main Investment Profiles
The level of investment risk suitable to investors can vary between a risk rating of 1 for the most risk averse investor to a risk rating of 10 suitable only for the most adventurous investors. However, this risk spectrum has historically been summarised in 3 main investment profiles – Cautious, Balanced and Adventurous.
Cautious Investors - follow a low risk approach to investing by prioritising security over portfolio growth.
Balanced Investors - have a ‘middle of the road’ investment philosophy and are willing to accept a moderate level of risk in the pursuit of growth.
Adventurous Investors – are willing to accept the risk of greater losses in return for the opportunity of obtaining higher investment returns.
For all investors it is vitally important to complete a detailed risk profiling analysis in order to understand what risk classification of portfolio is the most appropriate. Investor risk profiling is at the heart of investment advice, and without proper knowledge of an investor’s goals, time horizon, liquidity needs, and risk aversion, it is impossible to recommend suitable investments or build efficient long-term investment strategies for an investor.
To provide an insight into the comparative performance of a range of popular portfolios, we analysed a total of 30 portfolios that fit within the general risk category of cautious, balanced or adventurous.
Portfolio Performance Compared
To assess the spread in performance among similar risk portfolios we analysed a range of popular cautious, balanced and adventurous portfolios for performance over the recent 3 & 6 months and 1, 3 & 5 year periods.
Cautious Portfolio Performance
From the 10 cautious risk portfolios analysed for performance the Yodelar High Cautious portfolio was by some way the top performer, returning 5 year growth that was more than 3 times greater than the AJ Bell Cautious portfolio, which had the 2nd highest cumulative returns over the past 5 years.
The portfolio with the lowest returns over the past 5 years was the SJP Conservative portfolio with 7.18%. However, the portfolio with the worst returns over the past 3 months, 6 months, 1 year and 3 years was the Hargreaves Lansdown Conservative Growth portfolio.
Although the Nutmeg Fully Managed portfolio 4 lacked long term performance history, over the past 1 year it outperformed each of the other cautious risk portfolios with the exception of the Yodelar High Cautious portfolio.
Balanced Portfolio Performance
The mid risk range Yodelar Mid Balanced portfolio returned growth of 68.10% over the past 5 years which was more than 5 times greater than the low growth returned by the SJP Balanced and Bestinvest Balanced portfolios.
The average 5 year growth across the range (with the exception of the Yodelar Mid Balanced portfolio) was 20.48%. The Rowan Dartington, AJ Bell and Hargreaves Lansdown Medium Risk Master portfolio were the only portfolios to achieve 5 year returns above this average. In contrast, the SJP Balanced and Bestinvest Balanced portfolios fell well short of this average with 5 year returns of 13.07% and 12.87% respectively.
Adventurous Portfolio Performance
Similar to the cautious and balanced range of portfolios, Yodelar also had the best performing portfolio in the adventurous category with the Yodelar Low Adventurous portfolio achieving 1, 3 & 5 year returns of 5.39%, 25.77% and 60.85%.
The Hargreaves Lansdown Adventurous Master portfolio was consistently better performing than the remaining 8 portfolios with a St. James’s Place portfolio yet again ranking at the bottom for performance.
Some Portfolios Weathered The Onset Of The Coronavirus Pandemic Better Than Others
Since the onset of the coronavirus pandemic investment markets have experienced a slump not seen since the crash of 2008. Some portfolios were hit harder than others as their exposure to inefficient and consistently underperforming funds combined with falling markets contributed to them experiencing net losses that were greater than many of their competitors.
During periods of downturn lower risk portfolios are better protected against losses as they typically hold a lower proportion of their assets in equity markets. This is reflected in our analysis with the 10 cautious portfolios analysed averaging losses of -5.60% this past 3 months compared to averages of -8.30% for the balanced range of portfolios and -11.58% for the adventurous portfolios.
However, in some cases, the difference in performance was significant. The Hargreaves Lansdown Conservative Growth portfolio returned losses of -9.27% in the 3 month period up to 25th May 2020, which was considerably higher than the -5.60% averaged by the 10 cautious portfolios that we analysed.
The Balanced portfolios were more condensed with only the True Potential Balanced and Hargreaves Lansdown Balanced Growth portfolios returning losses of -9% or more, which were only marginally above the -8.30% average for the period.
There was much more of a spread in performance amongst the Adventurous portfolios. The Yodelar Low Adventurous portfolio had the best performance in the range over the past 3 months returning -8.79%. In comparison, the Hargreaves Lansdown Balanced Growth portfolio returned losses of -15.10%, which was almost two thirds greater. This analysis identifies that the portfolios with lower returns over longer 1, 3 & 5 year periods also experienced greater losses over a shorter period when exposed to market trauma, which further emphasises the benefits of having a portfolio that is compiled of high quality, efficiently managed funds.
Why Similar Risk Portfolios Have Different Returns
How a portfolio performs can vary greatly based on the asset allocation model they follow and the quality of the funds that are used to represent the asset classes within the chosen model.
Although there are many different types of asset allocation models available, they each essentially balance the weighting of assets to create a portfolio that fits the desired risk category - and the quality of funds that are used to represent these asset classes can have a significant influence on the portfolio's overall performance.
The asset allocation of a portfolio may require a percentage of its underlying holdings to be placed in UK equities. For example, approximately 18% of the Old Mutual Wealth Select Active Managed 6 portfolio is invested in UK Equities. This 18% is spread across 5 funds each of which have different levels of performance. As identified in the table below, only 2 of these funds have managed to return growth over the past 5 years that was above the sector average, with the majority of competing funds delivering better returns. This identifies that there are better performing, more consistent UK equity fund options available, which if selected, would have improved the portfolio's overall returns.
Some investment portfolios use their own range of funds to form the underlying holdings, which significantly limits the number of quality options that are available for building a portfolio.
There are approximately 3,000 investment funds available to UK investors that have received a sector classification from industry trade body the Investment Association. From these 3,000 funds, 20% have managed to consistently outperform at least half of all competing funds within their sectors over the past 1, 3 & 5 years, and have thus received a high quality 4 or 5-star performance rating from Yodelar. There is no shortage of quality funds across all asset classes and having the freedom to make informed choices can help improve portfolio efficiency and overall performance.
With access to funds across the whole market and with no allegiance to any fund manager, Yodelar Investments have an unrestrictive approach to investing that allows the freedom to make fund choices based on quality and suitability, which is key to the high level of portfolio efficiency and overall performance.
How Yodelar Investments Use The Spread Of Assets To Improve Portfolio Efficiency
The balance of investments across different asset classes is the primary driver of portfolio returns, but the funds used to create the correct balance are essential to maximising portfolio growth and efficiency. Yodelar Investments ensure that each of the funds they use to achieve this balance are consistently among the very best performers within their set asset class. Each fund selected is thoroughly evaluated by the investment committee and only the most suitable options are selected to be included in our portfolios.
All sector classified investment funds are made up of a selection of holdings in companies that fit within the funds sector classification. For example, funds classified within the UK All Companies sector are required to invest at least 80% of their assets in UK equities that have a primary objective of achieving capital growth. The remaining 20% can be spread across other asset classes that the fund manager deems appropriate to the fund’s overall objectives. The spread of this remaining amount can have numerous implications which we carefully analyse when composing our portfolios.
Formulating the appropriate blend of investment funds to fit a portfolio’s specified asset allocation model and optimise growth potential is a complex process that requires thorough analysis. It is an important part of how Yodelar portfolios are built and it reveals an attention to detail that helps to improve portfolio efficiency.
Investing Without Constraints
Many portfolio propositions have constraints due to the providers business model which limits the funds available for them to use in compiling their portfolios. For example, SJP, Old Mutual, Bestinvest and Hargreaves Lansdown’s portfolios only invest in their own brand of funds. True Potential have relationships with several fund management firms to use their funds in their portfolios and low cost online platform Nutmeg are limited to a range of low cost funds in order to maintain their low cost proposition.
In contrast, Yodelar's investment philosophy is to build efficiently balanced, top-performing portfolios by utilising funds and fund managers that have proven their quality by consistently outperforming approximately 75% of their peers. This philosophy removes any bias and emotional decision making that we believe can be detrimental to a portfolio’s objectives.
As identified in this report, the difference in performance between similar risk portfolios can be significant, and this difference can compound over time and result in costly missed opportunity growth for investors. As shown by the performance of Yodelar portfolios, having unobstructed access to the entire investment market combined with efficient processes investors can significantly benefit.