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How to build a World Cup-winning portfolio · On The Money

• 0:03
  Kyle Caldwell: Hello, and welcome to our latest On The Money podcast episode, a weekly look how to make the most out of your savings and investments. So football fever is sweeping the nation once again with the men's World Cup taking place. Now for investors, there are a number of parallels that can be drawn with the beautiful game, particularly when it comes to team selection. Joining me to discuss the types of investments that fit into each position on the pitch is someone who, despite supporting a different team in red than myself, shares a passion for both football and investing. And that's Richard Hunter, head of markets at Interact Investor.
• 0:47
  Richard, thanks for coming on.
• 0:48
  Richard Hunter: No worries, Carl, and people will have to guess from our accent who those teams might be.
• 0:54
  Kyle Caldwell: Well well, it's fair to say we both won the league, but in the last two seasons.
• 0:57
  Richard Hunter: Yep. That's very good.
• 0:58
  Kyle Caldwell: But I think it's pretty obvious to most people listening. So, Richard, before we run through the types of investments and attributes for different positions on the pitch, what would you say are the important considerations for when you've got a blank sheet of paper and you're selecting your team of investments?
• 1:18
  Richard Hunter: Yeah. Absolutely. And and starting at the very beginning, you need to build your team depending on your attitude to risk. We'll get to the analogy later, but that if you're gonna go for all strikers, that's gonna be pretty punchy and high risk. If you're gonna go for a more defensive setup, then, obviously, that's something where you can not be exposed to those high risk kind of investments.
• 1:44
  And the chances are, as with selecting a team, you'll take an element of mixture of all the positions.
• 1:51
  Kyle Caldwell: Indeed. That's the sort of central thread to this podcast episode. The in common with football, it's important to have a mixture of different skill sets. In the investment world, doing so helps you achieve diversification, which is one of the golden rules of investing. It gives your portfolio balance, and it helps to reduce risk.
• 2:12
  So we're gonna go through the types of investments and attributes for each position on the pitch. You'll start off on each occasion, and then I'll chip in. So let's start off with goalkeeper. So in the football world, having a having a good goalkeeper is the solid foundation of a team. You're looking for a safe pair of hands.
• 2:33
  So which types of investments fit into this position?
• 2:36
  Richard Hunter: Yeah. I mean, the the obvious things are the lowest kind of risk on the scale that you can imagine. So that's cash. Although there is a caveat there that over the long term cash on its own will be eroded by inflation. So that's just always something to bear in mind.
• 2:54
  That being said, investors should have a rainy day fund, which will be CAS, often described as, let's say, being six months salary just in case the unexpected should happen. And the other kind of thing is pretty straightforward, not necessarily equity related things like life insurance products either for you or for
• 3:15
  Kyle Caldwell: your
• 3:15
  Richard Hunter: family in terms of something that is easily redeemable.
• 3:21
  Kyle Caldwell: I completely agree. And beyond the rainy day funds, I think in an investment portfolio, the lowest risk type of funds, the goalkeeper is money market funds. Yep. So these funds invest in bonds that are considered very high quality. They're typically bonds that are being lent against banks and build societies, for example, and they have short life spans.
• 3:49
  And the full managers of money market funds, they're constantly investing in these bonds and recycling the bonds and Yep. Generating a certain level of income for investors. And, typically, a money market fund will will generate a level of income that is around the level of UK interest rates. So at the moment, you can get money market funds. You will typically yield around 3.75%.
• 4:15
  But as you mentioned, Richard, it's really important to have the right balance and not have too much of a portfolio in cash. Because as as you say, history tells us and informs us that cash returns, they tend to be eroded by inflation, which is the Achilles heel for cash. So let's now move on to the defensive part of a portfolio. So like in football, you want your defenders to give your portfolio plenty of protection and limit losses as much as possible. So which types of investments fit into the defensive area?
• 4:54
  Richard Hunter: Yeah. You're absolutely right. Strong and stable. I guess because we're not really moving into the medium term or medium risk sort of profile at the moment, you'd probably put government bonds in there, UK government bonds or GILTs. GILTs are so called because they used to be GILT edged certificates, and there's never been an occasion of the UK government defaulting on its borrowing unlike some other countries.
• 5:20
  So that's one of the things which gives your portfolio a solid foundation. And I think it's fair to say these days that you're probably talking about blue chip equities as well as being low to maybe medium risk on occasion. But if you look at the blue chips within the 4,100, for example, there's a lot of stable established cash generative companies in there.
• 5:46
  Kyle Caldwell: And in the world of funds, there's lots of different types of bond funds. I think the ones that I see as being potential defenders are the ones that give you the most flexibility so they can invest in any type of bonds. And it's the full manager's job to invest in the best opportunities, but also they're looking at, you know, trying to reduce downside risk as well. So these funds are typically called strategic bond funds. Mhmm.
• 6:15
  You might find that they're called global bond funds as well. And it's the job of the full managers to take a view on where interest rates are and where inflation and interest rates are potentially heading and to invest the funds accordingly to, you know, to to to manage the risk of both inflation and interest rates because they're both key for bonds returns over different time periods. I'd also consider for the defensive area of a portfolio. They're called wealth preservation investment trusts. So three that's been to mind are capital gearing, personal assets, and buffer investment company.
• 6:54
  So the job of these portfolios is to manage downside risk. So if we have a sudden and heavy sell off for the global stock market, you'd expect these funds to limit losses as much as possible, and they will outperform potentially. Well, that's what they're hoping to achieve when markets fall. And, of course, you know, you'll see on lots of marketing literature that, you know, historic returns do not necessarily mean that that's gonna be repeated in the future. But if you do look back at how those funds have performed during sort of risk off periods, they have held up very well.
• 7:32
  And each each of those funds, they also have a decent chunk of exposure to bonds. So you could actually just think, actually, if that that you'd actually think, actually, a wealth preservation trust will be an option instead of a bond fund because you're already getting a lot of bond exposure through those funds as well. So let's now move on to the midfield of a portfolio. I actually think this is the part of a portfolio that gives you the biggest team selection headache. I think there's lots of different options for investors.
• 8:07
  Like any good midfielder, you want them to be the engine room of the portfolio, you know, someone like Steven Gerrard, ideally. So Richard Or Declan Rice. Or Declan Rice. Yeah. Of course.
• 8:17
  He was sticking to this world cup. So what what would you say the types of investments for the midfield? Are we all for You're absolutely right.
• 8:25
  Richard Hunter: This is where there really is a wide choice, and this is where things should be emanating from for the most part. And like any midfield, you're probably gonna have a holding player, and you're gonna have a creative player. And that means that the raft of options out there, as you say, far and wide. So this is where you can start to think about things like ETFs, exchange traded funds, where these days you can quite easily invest in a country, in a sector, in a theme. And we know that at II, a lot of our global kind of strategic funds are very popular.
• 9:03
  But also you can bring into that investment trusts who are also not having all of their eggs in one basket. You're gonna probably want some kind of exposure, although at the moment that comes with a slight caveat to US growth. It's obviously the world's largest economy and indeed the world's largest market. So there are any number of whilst staying slightly defensive, the holding midfielder, there's also the creative midfielder who hopefully is gonna make things happen.
• 9:37
  Kyle Caldwell: Completely agree. You know, I think, you know, a global index fund or an ETF, it's gonna give you exposure to lots of different countries, sectors, and industries, and they are potential core holdings for the long term. I'd also, you know, consider, you know, actively managed funds as well. I think it's very important with particularly with a global actively managed funds, you want it to be invested sufficiently differently away from the global stock market, and you're getting exposure to different types of companies because you you want your investments to complement each other rather than, you know, the rather rather than there being too much crossover. Because if there's too much crossover, then that could potentially sort of dilute your returns rather than add value and add diversification for your portfolio.
• 10:23
  Diversification, they call it. Yep. Exactly. And that's obviously that also happens when you own too many types of similar funds in one particular region. And I think for the midfield as well, can also consider new regional funds such as, you know, funds that are invested in The UK and Europe, but I'd stick to developed markets for this area Sure.
• 10:46
  Of the portfolio. And I also think I think it's important to think whether you're more of a hands off or hands on investor. Mhmm. I think if you're a hands off investor, then you might wanna consider a multi asset funds that does the makes the decisions for you on your behalf, and you might wanna consider products such as Vanguard, LifeStrategy, BlackRock, MyMap, Legal and General, multi index funds, and I interact investor. Of course, we have our own managed ISA, which I think if you're looking for, you know, potential hands off option or a core holding to build all their positions around Yeah.
• 11:23
  I think that's a great option. It's a it's a low it's it's 10 forms with different risk levels, and they are very low cost as well. So let's now move on to the attacking part of the pitch. So this is where you can have more adventurous types of investments. And over the long term, you know, you're hoping that these investments are gonna add the most value for you potentially.
• 11:46
  Although one thing to bear in mind, like a striker, is that they can go in and out of form. So, Richard, which types of investments would you put at the top end of the pitch?
• 11:56
  Richard Hunter: Yeah. I mean, strikers are gonna grab the headlines, aren't they? And so you do need that cutting edge in your portfolio. But in terms of numbers, it doesn't wanna be dwarfing what's going on behind it, you know, defense and midfield. So, again, you're you're looking at those higher towards the the the top of the risk spectrum.
• 12:19
  In terms of shares, these can be shares that you still think it's a good underlying story, but the price had been beaten down recently. Make sure that you know why it's been beaten down because the market's very good at uncovering reasons. One of well, just as a side issue, there's a number of companies who might have a high dividend yield, which looks very attractive, for example. But on the basis of how a dividend yield is calculated, a higher dividend yield could be because there's a lower share price. So, again, that's something that you need to, you know, basically keep an eye on.
• 12:55
  So that's that's, I think, another thing that points towards a higher level of risk is if you're investing in specific stocks rather than funds where you're spreading your risk a bit. If you're going for ABC and DEF, a separate individual direct equity holdings, then obviously that's higher risk. But if you get the call right, then obviously you'll get some decent returns, and that's what you would hope hope from your strikers.
• 13:24
  Kyle Caldwell: And in terms of funds, those that are considered to be adventurous are funds, for example, that invest in emerging markets or the Asia Pacific. You'd also consider funds that invest in smaller companies. You know, they are higher risk. But over the long term, if you look at the historical data, it does show that smaller companies have the edge over larger companies. And one of the key reasons behind that is the fact that due to their size, there's greater capacity to grow.
• 13:53
  Although, I think if you're individually stopping in that area, you gotta you gotta take a lot of care, you gotta do a lot of research because,
• 14:01
  Richard Hunter: And you know and also be willing to make a substitution if necessary.
• 14:07
  Kyle Caldwell: Exactly. And, yeah, I think we'll come on to that in a moment about all the tactics that you can employ with your portfolio. But, yeah, that's absolutely right. It's it's important to consider, you know, chopping and changing. If the story changes, for example, or your personal objectives change Yeah.
• 14:22
  Then that might be a time to put a substitution in place. But, yeah, we'll come on to that in a moment. So think we're gonna talk about the the importance of having a squad of investments and potential substitutes. And I think the last one for me on adventurous investments are it gives you the opportunity to invest in particular themes, such as technology, for example, obviously, a growing area is artificial intelligence and that theme as well at the moment. So that's that's what you potentially have in sort of attacking area of the pitch.
• 14:58
  So, yeah, just going back to the the squad of players, I had an email from a listener who actually sent in 23 investments, which forms Alright. His squad Yeah. Of investments. And he actually came up with his own formation. And it was actually it wasn't a classic four four two.
• 15:16
  Yeah. Not not that many teams play that anymore. We actually have four up front. Okay. So it's a bit which is a bit more punchy than some teams having three up front at the moment, two wingers.
• 15:27
  And but I think it should maybe think that, you know, there's no there's different ways you can go about this, and I think depending on where you are on your investment journey, what you're hoping to achieve, you know, you can change up the tactics and you can become more attacking at certain points. But then equally, there might be certain points where you're happy to be more defensive as well.
• 15:49
  Richard Hunter: Which could be age related, of course. It it so it's an old adage that the younger you are, the more risk you can afford to take because of obviously, you're in it for potentially forty or or fifty years. So on that basis, you could go for what would used to be called a four two four kind of formation that you just suggested. Or if you really wanna go back some years, the two three fives that that teams used to all use. I mean, we're talking 60 seventies now.
• 16:18
  Kyle Caldwell: Alright. It's okay. That's that's it's it's I mean, it's it wasn't too dissimilar to the Yeah. To the one that was sent in by the listener. In terms of having a squad and potential substitutes, I mean, for for individual shares, I mean, would you consider the substitutes to be shares in the same sector, for example?
• 16:37
  Richard Hunter: Possibly. The easiest way to describe this is, you know, I'm not preferring any view, but let's just say for argument's sake, you've got BT within your portfolio and the share price doubles. All of a sudden, you're now overweight in BT, but you still like the telecom sector. So one of the things you might want to consider is top slicing your holding in BT and putting some additional funds into Vodafone, for example. Equally, if BT just aren't doing it for you anymore, and then they've strayed away from the the reasons that you bought the share in the first place, then you just, you know, sell the entire holding and replace it with Vodafone, Deutsche Telekom, whatever, and there's your substitution.
• 17:23
  Kyle Caldwell: I think you can adopt a similar approach for funds as well. I think it's just a case of doing your research and identifying which types of funds are quite similar, which which funds have the same investment style, investing in the same region. And, you know, I think I think that's key because I think there's a danger with funds that, you know, you're not compared in like for like performance. I mean, like football, you know, funds are in a sector, which is essentially like a league table. Uh-huh.
• 17:52
  So at a glance, you you can have an idea of how that fund is performing over different time periods. However, it doesn't tell the full story because there's different types of funds that that are adopting different investment strategies, styles, and approaches. So the best thing to do is to get, like, you know, three or four other funds that invest in a similar way, compare performance. And if the performance looks out of kilter for that funds, then potentially consider making changes. Because if it's out of kilter, the chances are it'll be down to, you know, to stop picking, not being successful Yeah.
• 18:29
  Over whatever time periods it is where it's underperformed or the similar types of funds.
• 18:35
  Richard Hunter: You mentioned diversification, and I think we've covered this off already, but it is worth saying as a standalone. In terms of the football analogy, what we are discussing is much more like a Premier League team. In as much as you are not restrained by picking people or investments of the same nationality, you can take a much broader approach. Obviously, if we were to stick just with the World Cup analogy, you've got your individual countries, and that is not the sort of approach you would take to a balanced portfolio.
• 19:08
  Kyle Caldwell: And, of course, you know, there's 48 countries in this World Cup. A record number of countries are participating. Yep. And nowadays, it's never been easier to invest internationally as well. And and and think if you do invest internationally, that gives you greater scope to have greater levels of diversification.
• 19:27
  Because for instance, if you just stick with The UK market, you're not gonna get that much exposure to technology Yeah. For example.
• 19:34
  Richard Hunter: Yeah. Absolutely right. And, also, your circumstances might change, so you do need to be willing to tinker with your portfolio, you know, not every six months, but you should be reviewing it at least six monthly. But there will come there will come changes in your circumstances where the the kind of balance of your portfolio is starting to look slightly out of kilter with your objectives.
• 20:00
  Kyle Caldwell: And I think it'd be remiss of me not to give a mention of the fact that at Interactive Investor, you have access to 17 global exchanges, which is one of the widest choice of international investments on the market. I mean, of the 48 countries that qualify for the World Cup, two major economies that are not competing are China and India. Yep. And and they're two areas that you would consider having as part of your global portfolio? Yeah, very much.
• 20:32
  Richard Hunter: Think the two biggest, in terms of population, the two biggest countries in the world by far. They've both got an emerging middle class, which can have all sorts of ramifications. And by most projections, it's likely that China, if not India as well in due course, but certainly China, by most projections, is likely to overtake The US as the world's largest economy within the next ten years or so. So very much so. Yes.
• 20:58
  Kyle Caldwell: And the way to gain exposure to those countries is through funds. So for example, if you invest in an emerging market or an Asia Pacific funds, the chances are they're gonna have a decent chunk of exposure to both of those countries. And there also are regional funds that specialize just investing in China or India as well. And those types of investments, again, they're more adventurous, so they'd be more potential attacking options for a portfolio. And, also, at Interact Investor, we have exposure to multi currencies as well, and we offer access to nine of the biggest global currencies that you can hold and invest in within your II accounts.
• 21:40
  So I've got a list here, Richard, of all the football investment analogies we're gonna go through. I think we've covered most of them. I mean, I just wanna reiterate the one of the points from the beginning is that, you know, just like like in football, I think it's important, you know, to have a diversified approach. You've mentioned potentially tinkering and bringing substitutions in. And I think it's it's also important to potentially maintain the shape of of, you know, of of a portfolio, and you can do that by rebalancing investments and reviewing your investments a couple of times a year.
• 22:16
  And, you know, go I think we've we've already covered this point, but just to add a little bit more to it, it's important to consider, is the investment on the pitch, is it delivering? You know, is it delivering to your expectations? And if it doesn't meet your expectations, as you said, you can bring in a you're being in a substitute. And with funds, I think one of the main things to watch out for as well as performance is whether the same full manager is still in place as they were when you first initially bought the funds. Because over time, full managers can leave, And, you know, they they, you know, they quite often do actually leave.
• 22:55
  So you want to make sure that if if if you one of the reasons why you bought the fund was because you like the full manager and the full manager team, And if they then leave company, you you then need to consider whether you follow them or
• 23:08
  Richard Hunter: Yeah. Because you don't want to start all drift.
• 23:10
  Kyle Caldwell: Yep. Exactly. Because there's no guarantees if a new fund manager comes in that they're gonna manage the funds in exactly the same way. They're gonna wanna wanna put their own stamp on the fund. The the objective will probably not change, but I think, you know, any new manager coming in, they want they they have their own ideas.
• 23:26
  Sure. So it's not gonna be managed in in the same way. And and we've seen that, obviously, with with various football teams over the years. And I think
• 23:34
  Richard Hunter: it's also worth mentioning at this point just to get the last possible football analogy in there somewhere, and this is more, again, more Premier League than international perhaps. But managers tend not to last a long time, and we're talking about the the football analogy. In terms of investment, it's very much a long term play, and you need patience. That's not to say you don't review your portfolio as you go along, but you start thinking about tortoise rather than a hair.
• 24:10
  Kyle Caldwell: Well, I think that's a great point to end on, Richard, and thanks for coming on. Pleasure. And that's it for our latest episode of our On The Money podcast. We love to hear from listeners. If you've got a question you'd like one of us to tackle in future episodes, then please get in touch by emailing otm@ii.co.uk.
• 24:28
  As ever, we have plenty of news analysis related to shares, funds, investment trusts, and ETFs on the Interactive Investor website, which is ii.co.uk, and I'll hopefully see it again next Thursday.