Shares or Funds

It is surprising how many people still invest direct in equities with a portfolio worth less than £200,000. The other day I met an elderly couple with a share portfolio of about £200,000 between them. They told me that they wanted income not capital growth yet the yield on their portfolio was less than 2.5% net. To compound their problem 70% of their holdings were in retail companies. They owned shares in 14 different companies between them. It was a very risky way of receiving a taxed income. 

To be fair they did not have a stockbroker. Undoubtedly a stockbroker would have managed the portfolio to utilise capital gains and reduce risk by investing in a better spread of companies. However I doubt that they would have owned shares in more than 25 companies even with a stockbroker.

I would also question whether a share portfolio was really suitable for low-medium risk investors wanting income. Why expose yourself to the ups and downs of the stock market with a concentrated portfolio for such a low income? It does not make sense to me.

Compare this to funds of unit trusts and OEICs. These typically hold shares in 60 or more companies which help to spread the risk. Other funds hold corporate bonds, high yield bonds, gilts, cash and so on. These funds are managed daily with teams of analysts poring over a stream of economic and company data. 

Advisers should know what each fund is trying to achieve. To help pick the most suitable fund there is a wealth of independent information as well as information provided by the funds themselves. In addition there are past performance tables published monthly in magazines such as Money Marketing. The performance the fund previously achieved is not a reliable guide to how it may perform in the future. You also need to apply knowledge of the markets and economic cycles to have a realistic expectation of future performance.

Some funds hold a mixture of assets to create a high yield with relatively low volatility. These are ideal for people who are prepared to invest for the medium to long term and requiring income with some capital growth. Two of my favourites are Invesco Perpetual Monthly Income Plus and Midas Balanced Income.

If you want long term capital growth from medium risk funds holding UK equities I would look at recognised stock picking funds investing predominantly in FTSE 250 companies. The Schroder UK Mid 250 is definitely worth considering as is Rensburg UK Mid Cap Growth. These funds typically carry higher charges but if you are likely to receive better performance the extra expense will be worthwhile.

Have a chat with your adviser to see whether a fund portfolio would suit you better than a share portfolio.

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