In an era of easy online access to the world of investing, it can be tempting to dive in with a DIY stocks and shares ISA, and construct your own portfolio. But with tens of thousands of funds available, not to mention other investments, finding the best ones is a daunting task.
There’s a lot more to the selection process than initially meets the eye. When it comes to investing, one-size-fits-all is not the right approach. Although often overlooked, getting to grips with your loss tolerance and risk appetite are key considerations when crafting your investment portfolio. With little experience and little time to analyse the bewildering array of options, it’s easy for a new investor to fall into a trap. Some will choose from a limited list of recommendations provided by online investment platforms, without really factoring in their personal financial needs and goals. Some opt for the top performers from last year. Some follow their instincts and are guided by emotion or “hunches”. None of these, however, are proven approaches for fund selection, and they all come with very serious drawbacks.
Someone who truly knows his funds is our Head of Fund Research, Andrew Summers. With over 20 years’ expert experience in the field across Investec and Goldman Sachs, his unique insight is highly sought-after. We asked him to share his thoughts on choosing the best funds for your ISA, and how we do it at Click & Invest.
Firstly, could you explain for new investors what we mean by funds?
“Certainly, funds are a form of collective investment, meaning that your money is pooled with the money of numerous other people, and invested into lots of assets as a group. By investing this way you have access to a significantly wider range of stocks and shares for your money, and there’s a level of in-built diversification.
“In a nutshell, buying a fund means buying a proportion of a large pool of investments – which are often grouped together into categories such as (for example) the S&P 500 or Emerging Markets.
“Rather than buying shares in a single company you can buy units of a fund that then owns shares of lots of companies. That way you are exposed to a wider range of companies and less exposed to the risks that the one company you invest in performs poorly”.
What is the approach to selecting and rejecting investment opportunities at Click & Invest?
“It begins with you, the client, without understanding your goals we cannot construct a solid investment portfolio”
“With around 10,000 funds in the UK alone to choose from, strategy, planning and being pretty hot-off-the-mark with opportunities is essential. You cannot offer a competitive service without this approach. And I would say to new or novice investors to really take your time to assess what’s important to you, and to build a long-term plan. Don’t panic about opportunity costs and leap straight in, find out what you’re comfortable with. Consider if it’s worth the hassle to make your own DIY investment choices or if you would prefer the hassle-free management approach. Everyone is different, and there are several avenues to take. DIY investing is one possibility, a fully managed investment account (like Click & Invest) is another.
“Our approach at Click & Invest is very client-focused. I can’t imagine doing business any other way. Does anybody invest for the sake of investing? Not really. People invest because they want to fulfil a goal, whether it’s a comfortable retirement or that once-in-a-lifetime world trip. Goals matter, they make us who we are and help to define our happiness in life. Our job is to help you fulfil your goals, so we need to understand them to find you the right blend of assets.”
How do you select funds? Can beginners use this approach?
“The process we adopt has several stages, and I will try to explain them in a way that beginners could also leverage if they are looking to go solo in their investment journey.
Complete a questionnaire to understand your risk tolerance
“First, we assess your risk tolerance in a rigorous way. By conducting quite a reassuringly thorough online questionnaire, we get to the bottom of what you are looking for when you invest. Even if that means that investing is not for you. I would recommend taking an investment questionnaire for this reason. Besides, it’s complimentary on our platform, so frankly, why wouldn’t you? It gives you a breakdown of what we would recommend, and in which direction we think you should be heading asset-wise.
“Carefully constructing your portfolio, means getting the foundations right – in fact, you could almost say that this is more of an investment than the actual act of investing”
Aligning your investments to your situation
“Next is identifying the most suitable asset allocation for your risk tolerance, loss appetite and time horizon. These three factors really play into the shape that your investment should take. A word of caution, without carefully considering these three factors you could end up with investments that do not meet your needs or make you anxious. Carefully constructing your portfolio, means getting the foundations right – in fact, you could almost say that this background work is more of an investment than the actual act of investing.
“People nearly always have a different risk profile to the one they thought they would”
Understand the basics of investing
“As a very rudimentary guideline for beginners, for shorter time frames (say three to five years) it’s often better to go for less risky assets such as debt instruments with higher credit ratings. For longer investment periods it’s generally advisable to increase your allocation to relatively higher risk assets such as equities. For example If you are in your twenties and already investing for a retirement (well done you!), you may wish to consider quite high equity allocations, whereas if you are looking to invest for just a few years, typically lower risk debt instruments, such as bonds may be a better option. It depends on you, but that is a very simple guideline to follow if you are starting out and feeling independent!
“For us, once we have really understood your goals and the blend of assets which we feel would best suit your needs, the next step is selecting the assets. This is where time and experience come into play (sorry beginners) and where our clients really begin to benefit. Let me make something clear: It is not a small job. For example, did you know that there are currently 400 US equity funds for sale in the UK? How can you possibly know which one or two show the most promise? Well, this is where my team and I come in. It’s our job to find out”.
Do you have any advice for fund selection?
“With nearly 80 of years of combined experience between us, my team very carefully analyse funds to see which ones have the best chance of delivering their investment objective. Essential to this is meeting – typically many times - the fund managers in person and often their wider team - which is reflective of the connections within our networks and industries.
I daresay that as a new investor, you may struggle to meet fund managers in person, as they can be quite an exclusive crowd, but if you are starting out, here are a few useful tips to help you get on the right track:
- “Don’t be tempted to rely on past performance, it really is no guarantee of the future. Instead, try to find out what the fund is trying to do and how they say they do it. Does it make sense to you? Does it resonate? You don’t have to be an investment expert to see different investment approaches and have a personal preference. By looking at a fund’s investments you may be able to gauge whether or not the fund is for you.
- “Don’t be drawn in by the funds with the biggest advertising budget, try not to judge a book by its cover – dig deeper into the fund and don’t be drawn in by artificial aspects.
- “Invest in more than a handful of funds, although you may hit a jackpot, unless you are Warren Buffet, it is usually recommended to diversify your allocations as you start out. You could help to spread your risk, with wider diversification where possible.
“Selecting the funds is only the beginning”
“We’re also constantly monitoring funds. A fund may be the best option on the day that you buy, but things can change over time. We meet fund managers regularly face-to-face and one-on-one, read the information they share, monitor the fund portfolio and look at what they’re buying and selling to make sure the fund is still the best option for your investment.
“Some investors spend lots of time picking a fund and then probably forgetting about it. Many of our competitors offer a form of this, whereby they allocate a fund which tracks the market and then maybe review it once a year. At Click & Invest, around 80% of our time is spent monitoring funds we already own, not looking for new ones. Our job is to make sure that our clients always have the best”.
What do you look for in a fund?
“At the end of the day, we’re normally looking for funds that could outperform the market and then we look to put them together in a portfolio in a sensible way. Click & Invest is different from other online stocks and shares ISA and general investment account providers in this respect. While others track the market, our strategies aim to beat it, with the best funds put together in a portfolio. That’s what a Click & Invest customer is paying their management fee for us to do. We have access to around 10,000 funds and we dedicate our time and resources to finding and maintaining the best for our clients’ needs. There many different reasons why a fund can outperform and why it can’t, and it’s our job to sift through that.
“We look for experience, the quality of the fund managers and organisation, and the investment philosophy”
“So, to delve into this a little deeper, we look for experience, the quality of the fund managers and organisation, and the investment philosophy – the approach a fund manager has to investing and what is important to them. We see whether that resonates with us and whether it’s logical and makes sense.
“We also look at their investment strategy. For example, a fund manager’s philosophy for outperforming markets in the long run may be to buy only companies that are cheaper than average, which aren’t highly leveraged or in markets that are structurally declining. This is a perfectly valid investment philosophy. Yet we need the fund manager to prove this.
“Doing this across multiple asset classes in more granular detail is a full-time job for the analysts here at Click & Invest. We’re constantly assessing and scouring 10,000 funds for fund managers whose investment strategy sounds appealing and who actually do what they say they will do.
“Click & Invest has the edge with this because we have the time, the ability and the expertise to go under the bonnet – and you won't be surprised to hear that we only invest in a very small minority”.
So you can’t just look at past performance?
“Certainly not, although it’s a well-known fact that most investors chase past performance we do not do that here. Past performance is no indication of the future. In fact, there’s a greater chance that a fund that has done well in the past will do badly in the future rather than continue outperforming.”
Are there any risks or pitfalls that DIY investors should look out for?
“Yes, there are some common traps that new investors can fall into, some of the worst offenders include:
“1. Most newbies only invest in one or a very few funds – which probably isn’t sufficiently diversified, either by asset class or by fund manager. I would suggest to avoid this, and to really take the time to get a good strong selection of diversified funds. It does take time, it does take effort – but so does your hard-earned money. You will find that you spend more time rejecting funds than selecting them, but don’t be disheartened. My team and I tend to reject hundreds of funds before we settle on one.
“My team and I tend to reject hundreds of funds before we select one.”
“2. Self-direct investors also exhibit behavioural biases when selecting funds – such as following the herd. They often pile into the same fund chasing past performance or buy the fund with the biggest advertising budget – and rarely are these the best ways to pick funds. Try to avoid following the crowd and see if you can cut through the noise. Do your own independent research and calculations. There are some great tools and research out there to help you, so try to make the most of resources available.
“3. Not taking the time to do things properly – Set yourself a realistic benchmark and allocate yourself the time and effort you need to stay on top of the market. Because investors are busy people, they tend to look for shortcuts when it comes to picking funds. But if you have the time and can dig down deeper – as we do at Click & Invest – you’d realise that probably these aren’t the best grounds for investing.
“ 4. Emotional investing seems to get a lot of new market entrants – Sometimes you need to hold your nerve and apply some cold logic to what can feel like a fiery situation. The nature of herd mentality and the fear of missing out can spark some very reactionary investing habits, which are not healthy, either for your bank account or your wellbeing. Taking the time to secure strong investments with good potential at the start of your journey should help you feel better around rocky times of volatility. My colleague and Click & Invest’s Investment Manager Alex Neilson recently wrote in his article about the need for a good captain at the helm during times of volatility, and I couldn’t agree more. Your assets are your ship and your logic is your captain –stormy seas are no place for fast and loose reactions.
“One of the key advantages of Click & Invest is keeping people invested in the market when they may otherwise be tempted to react and take their money out. Equally we are trained to stay out of markets that look over-bought long after other investors are still piling in. Markets go up and markets go down, but we make sure we’re managing the portfolio to keep you invested as this is a long-term project. To find out more about how to navigate your investment portfolio, read our investment management six golden rules for investing in volatile markets”
Andrew Summers is the Head of Fund Research for both Investec and Investec Click & Invest. Responsible for collectives research, incorporating the firm’s UK and international business, he is also involved in asset allocation and portfolio management for Investec Wealth & Investment’s business units.
With investment your capital is at risk. The tax advantages of ISAs may change in the future and also depend on your individual circumstances.
This article is not intended to constitute personal advice and no action should be taken, or not taken, on account of information provided. Opinions given within this article are the speakers’ own personal views. The views and opinions are effective from the date of publication but may be subject to change without notice.