Peter Temple: How to be positively passive

For a few years, my portfolio has been based more around asset allocation and passive investing than active stock picking.

So far, this method has worked well, producing positive returns and avoiding volatility. In recent weeks, the “bet”
I made on a sustained improvement in the US dollar has paid off. As
I write, gold bullion is at
a new high in sterling terms, so my decision before Christmas to delay selling was fortunate.

My other dollar-focused investments – the Blackrock Gold & General fund and the iShares exchange-traded fund (ETF) tracking the JP Morgan Emerging Markets Bond Index – have also done well in sterling terms, as has the Fidelity Moneybuilder Global fund in my individual savings account.

With the American economy in a more robust state than the UK’s, and some indication that US interest rates are starting to firm up, I see the dollar being a firm feature for some time to come. My view is that sterling is likely to remain under pressure until the election and possibly not improve much even after that. So, even at the risk of “missing the boat”, I am wary of committing any further cash to the UK equity market until the middle of the year at the earliest.

Although focusing on asset allocation is my preferred investment approach, it is not without risk. Get the asset allocations wrong, and performance can suffer.

In hindsight, I have had too high a weighting in cash and property in the past year and not enough in equities. As a result, while my capital has been preserved, I have fallen some way short of generating the best return that might have been possible. On the other hand, this conservative approach has served me well since the late 1990s,
so I am not planning to alter it too much.

One school of thought suggests that there is an optimum set of weightings for different asset classes: developed and emerging market equities, bonds, hedge funds, private equity, and commodities. Combine them in the right way, and you can maximise long-term returns while keeping risks to a minimum. The theory also holds that any tweaking of weightings away from the long-term optimum percentages only increases risk without necessarily improving returns.

In other words, you should get the best results from passive index tracking of a wide range of assets
in the weightings that
have statistically generated the best returns with the least risk.

Passive investment is important because of the ultra-low charges – as the charges on an actively managed portfolio can halve returns over a span of 30 years.

I am considering adopting this approach for some of the uninvested cash in my pension fund, using the Frontier Multi-Asset Platform fund. It is known for adopting the approach
I have described, and has sizeable weightings in global equities and bonds (split roughly equally and representing around half of the portfolio), a further 10 per cent or so in emerging market equities and bonds, equal amounts in real estate and hedge funds, and the balance in commodities and managed futures.

Investments are hedged to remove currency risk. Two racier versions of the fund incorporate leverage – which can increase returns and volatility – and, in one case, an additional “satellite” portfolio of riskier higher return investments.

My task now is to persuade my adviser that this approach is a good idea, perhaps as a way of restructuring the smaller of my two pension funds.

Peter Temple is an active private investor writing about his own investments. He may have a financial interest in any of the companies and trading strategies mentioned.