As this is a purely academic exercise we will ignore dealing costs. The portfolio will also be rebalanced each month so that each fund represents 20% of the total capital. If for instance one funds does very well one month but another fund does badly then some shares of the better performing fund will be sold with the proceeds used to buy more shares of the poorer performing fund. The portfolio is therefore mechanical and for illustrative purposes only.
The six catergoies will be as follows:- a single FTSE 100 stock
- a "Core fund"
- any other equity ETF
- a commodity
- a bond ETF
- a REIT fund
FTSE 100 Stock
If you recall from the recent post on FTSE 100 stocks the top stock was Standard Life (SL.)
Friday's closing price was 220.4p a share, putting it's expected return at just under 8% a year. The most recent full year dividend was 13.8p a share with an average of 13p a year per share over the last 3 years. this gives a 3 year average yield of 5.9%. Analysts predict a 15.27p a share dividend 2 years from nowgiving a dividend yield annual growth rate of 5.2%. Remember as a margin of safety we take 40% of this figure for our growth expectations giving us 2.1% a year. Finally as the yield is above 5.5% there is no need for an adjustment rate.
This gives us an expected return of:
R = Div + Growth + Adjustment
=5.9% + 2.1% + 0.0%
=8.0%
For GBP1,666 we can buy 755 shares at 220.4p each.
Core Fund
Core funds consist of large global funds and developed funds. The list includes UK FTSE100, USA S&P500, China, Europe, Emerging Markets, BRIC and World. It excludes single countries (with the exemption of those mentioned above), smaller company funds,and more specialised regions (eg. East Europe, or Latin America).
If you recall recently from the post on core equity funds, EUROSTOXX 50 was the most attractive with an expected return of around 7.5%. IMF growth forecasts for Europe average 0.3% a year over the next 2 years. Halving this and adjusting for inflation gives us a growth rate of 2.65% a year. The high dividend again means there is no adjustment rate. Using the ishares EUE ETF we have an expense ratio of 0.35% a year
Friday's closing price was 1788p a share so for GBP1,666 we can purchase 93 shares.
Other Equity Fund
For our other equity fund we will take ISFE ishares Far East ex Japan Small Cap. Brazil (IBZL) and Taiwan (ITWN) both looked attractive but currently have downtrends. For the core fund this was ignored as the core funds are "safer" so technical analysis carries less weight in our decision.
The distribution yield is currenlty 2.56% with an expense ratio of 0.74% giving a gross yield of 3.30%. IMF forecasts for the region are 5.7% a year for the next 2 years. Halving this and adjusting for inflation gives us a growth rate of 5.35% a year. The fairly high dividend yield gives us an adjustment rate of -1.26% based on a normal dividend yield of 4.25% (it's lower than the normal 4.5% for funds as this is a smaller company fund which traditionally have lower yields as they tend to be growth stocks).
This gives us a total expected return of:
2.56% + 5.35% - 1.26%
= 6.65%
At Friday's close of 1507.2p a share we can purchase 110 shares for our allocation of GBP1,666.
Commodity
For our commodity pick the current best available is wheat. With a close of 630.25 on Friday and a 10 year price target of 1018 we get a gross expected return of 4.92% a year. Using ETFSecurities WEAT fund with an expense ratio of 0.49% our net return falls to 4.43% a year.
WEAT shares are currently USD1.604p each. With GBP1,666 to invest we can buy 1,599 shares.
Bond Fund
For our bond fund pick we have SLXX ishares UK Corporate Bond. For valuation of bond funds see here. The expected returns will be the yield to maturity of 4.16%, minus double the credit risk (0.09% as it is A rated) of 0.18% and the expense ratio of 0.2% gives 3.78% a year.
The closing price of SLXX on Friday was 12093p a share, meaning we can purchase 13 of these and have about GBP90 in cash left over.
REIT Fund
For our REIT fund we will select ishares Asian Property Fund. If you recall from the posting on International REIT funds, the Asian fund was the best. Prices have risen a little since then meaning the expected returns have fallen but remain a respectable 7.25%.
At Friday's close the price was 1371.7p meaning we can purchase 121 shares.
Summary
The table below gives a summary of the holdings based on the above:
|
Item
|
Ticker
|
Share Price
|
Shares
|
Total
|
|
Standard Life Shares
|
SL.L
|
220.4p
|
755
|
£1,665
|
|
EUROSTOXX 50 ETF
|
EUE.L
|
1788p
|
93
|
£1,663
|
|
Far East ex Japan Small Cap ETF
|
ISFE.L
|
1507.2p
|
110
|
£1,658
|
|
Wheat ETC
|
WEAT.L
|
$1.604
|
1,599
|
£1,666
|
|
UK GBP Corporate Bond Fund
|
SLXX.L
|
12093p
|
13
|
£1,573
|
|
Asian Property Fund
|
IASP.L
|
1371.7p
|
121
|
£1,660
|
|
Cash
|
|
|
|
£115
|
|
Total
|
|
|
|
£10,000
|
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