Insights
How to gain exposure to a diversified portfolio of companies: collectives, equities, or trackers?
When thinking about expanding your business portfolio, it is important to consider what is the best way to get your exposure and at what cost. This is a risk-taking, challenging business for every new investor, so it is always difficult to decide what is the best approach.
This guide is an introduction to the various instruments you can use, and strategies you can adopt, such as:
- alternative investments
- equities
- company shares
- collectives
- trackers
How much of your business portfolio should be in alternative investment
There are a series of benefits for expanding your portfolio through alternative investment, mainly focused on increased diversification and higher returns.
Adding alternative investing to your business strategy, such as private equity investment, can significantly lower financial loss risk and increase your business portfolio’s overall performance.
When it comes to alternative investments, it really depends on your priorities, whether it is diversification, cost, whether you want to invest in certain sectors or companies, or indeed you want to actively exclude any. There are also considerations around liquidity. Depending on the size of the portfolio, it may be more cost-effective to favour one approach over another, however, all have merits and drawbacks.
There are, broadly speaking, three main routes to investing in equities and they all have slightly different characteristics, each of which will appeal to different investors.
What does it mean to invest in direct equities
These are the individual shares in companies that you can buy directly. For instance, the FTSE 100 is an index of the 100 largest listed companies in the UK and an investor can buy into any of these companies directly. As an investor trying to build a portfolio, you will want to own a selection of Equities to give your portfolio enough diversification to ensure you’re not putting all your eggs in one basket, yet still, give you good returns.
How to invest in private equity
How much of your portfolio should be in one stock?
There are academic studies out there that try to put an exact number on it; generally, people agree somewhere between 20 and 30 Equities is an optimal number that spreads the risk without over-diversifying. The costs are cheap – you pay a very small cost to buy the shares in the market (the “spread”), whatever Stamp Duty might be applicable (0.5% on transactions over £1000), and then your platform charge.
Benefits of investing in private equity
The benefits include being able to invest in exactly the types of companies you want and in whatever weightings you want. You are not forced into owning anything you do not want to own and you can if you are skilled or lucky enough, beat the market performance by owning the higher growth companies and avoiding the bad ones. The larger the company, the more liquid it is because there tends to be more buyers and sellers. Investing directly, you are in complete control which can be a good or a bad thing. You also then need to invest the time to monitor your Equities on an ongoing basis.
What is passive investment
Passive index trackers have become increasingly popular for investors who simply want exposure to various markets, for instance, the FTSE 100 or the S&P 500 Index. The trackers – in the form of Exchange Traded Funds (ETFs) – aim to move up and down almost exactly with the underlying index they are tracking.
What are the costs and benefits of passive investing
They are increasingly very cheap and it is a highly competitive industry and so liquidity is usually very good. They are especially good for people who do not want to outperform or underperform a market but just want the exposure, and hence it is referred to as passive investing. You can, though, still, build a portfolio made up of many different ETFs and change the allocations to various markets or geographies easily.
Investing in FTSE 100 tracker
However, you have no control over what the underlying index has in it – investing in an FTSE 100 tracker means you will have significant exposure to Oil, Gas and Mining companies… sectors that can be very volatile. If you are an ethical investor, these sectors may not be part of your plans and so you have to be careful about which indices or ETFs you decide to buy. And whatever companies end up going into the index every quarter that it is rebalanced, you automatically get exposure to them. The costs are simply the platform charge and whatever the ETF charges (this can be less than 0.1%, but can be much more).
What are actively managed collective funds
These are baskets of Equities that are actively picked by a fund manager and so could bear little resemblance to its benchmark. The fund manager takes your money and invests it in a large number of equities and so they are usually well diversified. The fund will usually have a stated aim, for instance investing in US Smaller companies, or UK Income companies.
Passive index trackers vs actively managed funds
There are hundreds of funds to choose from and will all have slightly different processes in how they select their underlying investments. They differ from Trackers as they will try to beat a certain index, or invest with specific criteria/restrictions, meaning their performance can be very different to their benchmarks. They tend to have higher costs than a Tracker as there is usually an ongoing annual management charge, and although these are under downward pressure they can be the best part of 1% on an annual basis.
The benefit is that you are paying for a manager who between him/her and their teams, spend a lot of time analysing the companies they are investing in and therefore claim to have a superior grasp than a simple Tracker. The sector weightings can end up looking very different to that of their underlying benchmarks and so the performance will also vary. Some of the best performing investments are Actively Managed funds, but they also have some of the worst returns where a fund manager can continually fail to beat its benchmark.
What’s the best way to manage your business portfolio
In truth, and like so many other debates that occur, there are always many things to consider when choosing what style is most appropriate for you. There are plenty of ways to skin a cat, so to speak, and a lot of the decision will come down to particular motivations for business investments, what other investments they may already have, and also whether they have any specific requirements.
“Smaller portfolios”, however that may be defined, tend to benefit from the diversification and simplicity that ETFs and Trackers offer, and the more complexity you want to add the more Direct Equities you will want to include. There is no one single solution for everyone, but it is worth spending the time to weigh up all your options when establishing a new portfolio.
Need a piece of investment advice? The Wealth Consultant can find the right wealth manager, suited to your business needs, and help you achieve your financial goals. Contact us for a free consultation today!
