When selecting equity funds, how diverse is too diverse?
For Bevan Blair, chief investment officer of One Four Nine, spreading risk is great – up until the point when an actively-managed portfolio begins to resemble an entire index.
“If I want the market, I'll go and buy a passive to do that,” he said. “That's why we keep our own portfolios concentrated. There's no point in me having UK equity income funds and UK growth funds, and a small-cap fund and maybe a mid-cap fund. Suddenly I've got six funds. And guess what – I'm going to look like the FTSE All-Share. Well, I'll just go buy Vanguard FTSE All-Share and not pay an average of 75 basis points or 60 basis points for the fees.”
Part of Blair’s asset allocation strategy originates from his background in statistics and is based on findings from some of his previous work, which looked at how many stocks are needed before the risk of a portfolio was not statistically significantly different from the risk of the market.
He concluded that this number totalled around 25, and, as a result, says the sweet spot is finding a more concentrated product that holds between 20 and 40 stocks, all said and done.
Spin the globe
One Four Nine is a financial advice and wealth management consolidator which launched in 2021 with backing from Copper Street Capital.
One of the quirks of the One Four Nine portfolios is their decision to go predominantly through large-cap global equity funds, as opposed to taking a region-specific approach.
This means they have no exposure to European, Japanese, or emerging market funds.
In fact, One Four Nine’s 25 per cent weighting to global equities is only bettered by the folks at Downing and Wise Investment, who park 28 per cent and 50 per cent respectively in funds around the world.
Blair is of the opinion that good companies can be found anywhere in the world and that asset allocation comes as a by-product of this approach.
Within these global managers, however, Blair demands managers meet the majority of his seven ‘fund principles’.
“The first thing we're looking for in a manager is their ambition to grow wealth. That's first and foremost – it's not to beat a benchmark. It's not to beat a peer group. It's to grow wealth,” he said.
“So I don't mind a manager taking a walk away from a peer group or a benchmark for a short period of time, if I think what ultimately they're trying to do is make the clients better off.”
Alongside a desire for managers to grow their wealth slowly, he wants them to demonstrate their involvement by holding in their own products.
“Really, we want managers to hold companies for the long term because they're looking to compound growth and earnings through time. And you can only do that by holding onto funds for a long period now,” he said. “We then also like managers who have plenty of their own skin in the game. So we want them to be aligned with us, and therefore aligned with our clients by investing in their own funds.”
“That's a difficult one to ask them,” he joked.
On the beaten track
As far as allocations go, One Four Nine’s portfolios are some of the more straightforward MPS offerings on the market.
With 53 per cent in equities, 33 per cent in bonds, and the rest made up of a money market fund (Royal London Short Term Money Market, to be exact), Blair avoids alternative investments in their entirety, with the exception of Troy Trojan, which is of course a multi-asset fund.
“We think of the world as a two asset class world: equities, and other stuff. We don't particularly go down the alternative route,” he said.
