What do you think of my asset allocation?

A question about : What do you think of my asset allocation?

Just wondering what people think of my intended ISA contribution mix:

1) 17% Fidelity Index US Fund P-Acc

2) 17% HSBC FTSE All Share Index Fund Acc C

3) 18% HSBC European Index Fund Acc C

4) 9% HSBC Japan Index Fund Acc C

5) 9% HSBC Pacific Index Fund Acc C

6) 20% Vanguard Emerging Markets Stock Index Acc

7) 10% Vanguard Global Small-Cap Index Acc

Thanks.

Disclaimer: I am not an expert. My comments are my opinions only and should not be taken as advice. Any information I post may or may not be correct, and should therefore not be relied upon as fact. If you act on anything I post here you do so entirely at your own risk. I do not accept any liability.

Best answers:

• Very difficult to comment constructively without knowing your objectives, investment horizon and how you see this portfolio evolving. At the moment, you are underweight US equities and overweight EM. Perhaps you are light on the US market because you believe it is overvalued and you are planning to buy back into it later, or perhaps you have other reasons for wanting to reduce your exposure to the worlds largest market relative to what you would buy on a pure market cap weighted basis.
  You have no defensive assets, which may or may not be appropriate to your appetite for risk, and your exposure to smaller companies is relatively low for someone who sees the need to add them - and 50% US, in contrast to the rest of your portfolio. In essence, you have about 22% allocated to the US, of which a quarter is made up of smaller companies, but for the UK, you have a total of about 20% and only about a tenth of that is made up of smaller companies.
• If I remember correctly from your other posts MrMartyn you are in for the long haul with your portfolio?
  Masonic's comments are good and I don't have much else to add but I think your portfolio is pretty solid and reasonable.
  If you are in for 20 years I would probably knock the smaller companies up to 15% but that's a mild change. My portfolio looks pretty similar (I over weighted the UK to 20% and notched the USA back to compensate) - the only real difference I would make in yours if it was me is to swap the UK portion from an index tracker over to Woodford's fund. I would stay passive for the rest.
  Could also add some property with the global Blackrock tracker
• Having read threads started by people determined to get rich by backing their stock-picking skills (aka luck), it's refreshing to see a portfolio like this which you can sit and hold and forget about.
  The Woodford may do better than the index, who knows. But will it for the next 20 years? I like index trackers for hold and forget.
  The Legal & General All Share UK tracker has slightly lower charges than the HSBC (at the moment anyway...).
• Agree with all above comments. For me your emerging markets looks high, you lack smaller comps, I would add property, I also like woodford but not essential. You may want to look in more detail regards you Pacific / Japan holdings - how Japanese is it and do you have right balance of India and China in there?
• Agree with ggb1979 that you may wish to review your Japan, Pacific, and EM holdings. The constituents of both Pacific and EM sectors can vary significantly between different funds and may contain (or not contain) countries that surprise you. 9% Japan compared with 18% for each of US, UK, and Europe looks rather large and 20% EM even larger.
• Thanks for all of the comments.
  I do have some money in NS&I index-linked bonds, a savings account and premium bonds, which I consider my "defensive" assets. The funds listed in my original post above are just for the money I'm willing to invest in the stock market (hopefully long term). I'm in my early 40's so about 20 to 25 years away from retirement (hopefully I can still get work for the next 20 to 25 years!).
  My aim is to get the best long-term return that I can. I've tried to diversify across geographical regions and also developed/emerging and large/smaller companies.
  I realise that my US percentage is underweight relative to global market cap (and my Emerging Markets percentage is probably overweight). I suppose I'm trying to be a bit clever and use my intuition that the US market has risen so much recently that I can't see the returns being so good over the next few years. If I see a market crash then I might adjust my percentages to put more into the crashed market (assuming that I believe it will bounce back).
  I already have a significant amount invested in a FTSE All-Share index tracker ISA (with dividends reinvested) that I'm not currently contributing to, so I'm likely to be quite overweight in the UK stock market relative to other regions. I wonder whether to re-balance that, but I just keep thinking that I originally intended it to be a long term investment and that I should keep it invested (apparently, being out of the market for even a few days can have a significant effect on long term returns if I miss some of the best days). However, whether or not to re-balance my existing ISA holdings is a different question that maybe best discussed in a separate thread.
  The one thing I'm not sure about is whether or not the above funds (that I quoted in my original post) are hedged back to sterling? Would I have currency exchange rate risk?
  The idea of having separate funds is so that I can re-balance whenever I like and have the flexibility to just sell (or re-balance) one or two regions. My plan would be to review and potentially re-balance once per year or after a major event (e.g. a stock market crash or boom in one region relative to other regions).
  Thanks.
  Disclaimer: I am not an expert. My comments are my opinions only and should not be taken as advice. Any information I post may or may not be correct, and should therefore not be relied upon as fact. If you act on anything I post here you do so entirely at your own risk. I do not accept any liability.
• PROS:
  - Good even-weight on geographies should reduce volatility and limit downside (better to gain 10%/year than alternate between 15 and 5%)
  - Good value-tilt, underweighting US equities while global valuations look unappealing
  - Good allocation to Emerging Markets ... They represent over 50% of the world's GDP, and population, while developed world growth slows and population ages
  CONS:
  - Global equities valuations are looking high, while bond yields look very pessimistic ... It may be prudent to build your portfolio over 2-3 years - preferably buying when there are reasonable valuations (otherwise drip-feed) - rather than lump-sum
  - Allocation to Europe may be a little high (there's good value in parts of Europe, but ageing populations and structural weaknesses could hamper long-term prospects)
  - Consider per-region small caps rather than global small-caps (which will weight heavily towards US) - e.g. 50% FTSE 100, 25% 250; 25% Small Caps
  - Consider some alternative assets (property, P2P lending, equity income to hold or grow value when equity prices tumble)
  - Consider diversifying by investment style as well as region ... Growth and value stocks perform differently over lengthy periods ... As does active and passive management - this would also give you better cap-diversity, and reduce risks of being 100% invested in broad global equities when growth may be sluggish and divergent
• bowlhead99
  - thanks for your detailed comments. On the subject of currency exchange rate risk, you've given me a new perspective that I hadn't thought about.
  Ryan Futuristics
  - thanks for your comments. I'm planning to drip-feed my contributions into my ISA on a monthly basis. Your per-region small caps comment is interesting, but I'm not sure I can find suitable funds on the platform I'm using (or even on any platform). Also, the ammount I have to invest is such that if I choose much more than the 7 funds I've already mentioned then I'd be in danger of not being able to meet the minimum monthly contribution per fund. I could follow another posters advice given to me on a different thread where they suggested investing in different funds on alternate months. That would take more effort though, since I'd have to manually make regular lump sum investments rather than just setting up an automatic monthly direct debit (or I could auto direct debit into cash within my ISA and then manually transfer to funds as/when appropriate).
  Re: your comment about Europe, I had noticed that some countries within Europe have quite high CAPE whilst others not so high. As with the regional small caps thing, I'm not sure I could find separate funds or would have high enough contributions to be investing in multiple funds within Europe in addition to the other regions.
  Re: value stocks, do you have any particular funds in mind? I noticed that in my copy of "Smarter Investing, Third Edition" by Tim Hale (page 172) it lists the following fund as "Global developed equity (value)": Legal & General Global 100 Index Trust
  However, when I looked up the details for this fund, it apparently tracks "the performance of the S&P Global 100 Index, converted into Sterling". When I then looked up the S&P Global 100 Index, it appears to track 100 large cap companies. I'm not sure where the "value" comes in?
  I thought that "value stocks" were shares in companies whose share price has been excessively reduced as a result of some event (e.g. profit warning or change in business environment), such that some investors perceived a buying opportunity based around the belief that the shares were now under-priced and therefore a bargain. The top 10 holding (approx 32 percent of the fund) are made up of companies that I imagine would be included in the S&P500 tracker that I listed in my original post (Fidelity Index US Fund P-Acc).
  The "Smarter Investing" book also listed the following fund as being "UK equity (value)": iShares FTSE UK Dividend Plus
  The nearest I could find to this on my platform is: iShares UK Dividend UCITS ETF
  This looks like a "high yield" fund. I'm certainly not an expert, but whenever I've looked at high yield funds, it seemed like over the long term they don't perform any better than a broader market index fund (e.g. FTSE All-Share or S&P500). Then I remember a quote I heard somewhere:"Chasing yield is like picking up pennies in front of a steam roller!".
  With the above in mind, I'm not convinced it's worth the extra complexity of adding in "value stocks" funds. If you've got any particular fund in mind, I'd be interested to hear about it although I'm not sure it would change my mind.
  By the way, I'm not criticising the "Smarter Investing" (by Tim Hale) book. I really enjoyed reading it and I still think it's an excellent book.
  Re: Your comment: "Consider diversifying by investment style as well as region ... Growth and value stocks perform differently over lengthy periods ... As does active and passive management"
  I see your point, and I chose the "Vanguard Global Small-Cap Index Acc" fund as a step in that direction. However, I've struggled to find many funds in the areas of small cap and value stocks, and I'm very much a believer in passive tracker funds that have low charges, as opposed to the (usually) more expensive managed funds.
  Thanks.
  Disclaimer: I am not an expert. My comments are my opinions only and should not be taken as advice. Any information I post may or may not be correct, and should therefore not be relied upon as fact. If you act on anything I post here you do so entirely at your own risk. I do not accept any liability.
• Well I think the idea of keeping it to 7 funds is probably sensible
  Personally I avoid ETFs when we're talking ISA-level contributions, as dealing charges and bid-spreads can add quite a bit of friction (especially when rebalancing) ... So I think OEICs generally make a lot of sense in ISAs
  And yeah, the idea is dividends can be a reasonable assessor of value (as they tend to go up as share prices go down); but they also go up when a company's in trouble ... I've got Vanguard's UK Equity Income tracker, and it's done quite a bit better than the All Share index over the period I've held it ... But my main reason for preferring dividend stocks is that interest rates have a way to rise before we can get back to 'normality', so bonds may be out of favour for a while (especially after the Fed hikes the rates, presumably this summer) ... So that should keep demand for dividend stocks high for years
  I'm not familiar with that global value fund, but value stocks *may* merely track broader indexes at the moment - QE has meant virtually no automated strategy or approach has outperformed since 2009 - but for me, value is one area where a more flexible, active management approach may deliver
  What I often like to do to assess value is go to MorningStar, look up the fund, then in the Portfolio section, look at whether the P/E ratio is below the combined value of Forecast Growth and Dividend ... It's a crude ratio that works reasonably well (called a PEG or PEGD ratio)
  My personal preference would be to choose passive where it's more likely to deliver, and choose active where it's got a better shot (with the bonus that you should get more exposure to small and medium companies, as well as value stocks if you select carefully)
  In the US and Japan, there seem to be fewer reasons to use active funds - almost nothing's outperformed the S&P500 in years ... But in Europe, Asia and Emerging Markets (where you get wildly different valuations across regions, and a lot of possible divergence between regions and sectors) active has often been a smarter move
  Good paper analysing active vs passive in Emerging Markets
  https://www.robeco.com/images/on-the-...ging-marke.pdf
  For Europe I like Argonaut European Alpha, Neptune European Opportunities, and Sanditon European, but comparing their P/E and Growth forecasts on Morningstar vs the passive option may be wise ... Or you may just prefer to go passive ... I'd say there's a 50:50 of funds like Neptune outperforming (based on whether QE benefits central or peripheral Europe more), but if they do, there's a lot of potential scope for outperformance
  Interestingly that Vanguard Small Cap fund doesn't look great on simple valuation
  https://www.morningstar.co.uk/uk/fund...0000UDXU&tab=3
  Presumably because of the high allocation to US shares ... It's not *impossible* that US shares could just continue to rise diagonally forever though - if the central bank's going to keep pumping the money in whenever they start to drop
  But I wouldn't bet the house on it ... It's also not impossible that much of the European QE money could wind up inflating US shares further - if investors still aren't keen to invest in Europe
  But I think what most literature tells us is these kind of predictions always lead to us over or underestimating risk, and harms returns - so I always bring it back to value
  https://www.starcapital.de/research/s...tBy=Shiller_PE
  This would be personal bias, but I'd probably replace Asia, Europe and Emerging with cheap, Silver or Gold-rated actives (take care of the small and medium cap exposure too), and perhaps go 50:50 on a FTSE All Share tracker and Woodford Equity Income (which I think is almost guaranteed outperformance, if only because so many fund managers and investors copy what Woodford does now)
• @bowlhead: This is why I prefer data and strict investing rules ...
  We can speculate all day over issues like risk and corruption (bearing in mind most of you UK passive investors are holding HSBC, which is currently being fined for gross corporate corruption), and all the evidence tells us you're probably harming your returns doing so
  Our biases and perceptions are always off - we pile into growth sectors, ignoring fundamentals, while the news ensures we price in every macroeconomic risk factor as if the worst case scenario's already happened
  This is why markets are constantly over and undershooting, and needing to 'correct' periodically
  What Buffett and co. make clear is that we tend to have it backwards ... The real risk of being in the markets plays out in US stocks just as often as anywhere else; the difference is that risk is much better priced into emerging regions at the moment - we've had the corrections the US market should've been getting (if it weren't plumped up with magic money)
  And I'm not talking about buying shares in Al Quaeda; emerging markets cover companies like Samsung, Taiwanese Semiconductor Manufacturing, Baidu ... These are in my top 10 holdings; HSBC isn't