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Provider says they would suit beginners and more experienced investors
Thursday 30 Mar 2017 Author: Daniel Coatsworth

The general public are hungry for help when it comes to investing. Many people want to put money aside for later in life but don’t want, or cannot afford, to pay for financial advice. They just need someone to put them on the right path for their investment journey by providing exposure to a diverse range of asset classes in one go.

The natural solution is to invest in simple, low-cost, diversified funds. And that’s exactly what ISA and self-invested personal pension (SIPP) provider AJ Bell is offering with its launch of five passive funds.

Who are the funds aimed at?

The funds cater for different types of risk appetite and should appeal primarily to beginners; anyone owning shares seeking to add a strong diversified backbone to their portfolio; as well as individuals just looking for ideas.

They could be interesting ways to fill a pension, if you’re some distance from retirement, an ISA or even a Junior ISA to help a child or grandchild in later life.

AJ Bell’s new funds range from ‘Cautious’ to ‘Adventurous’ and provide access to shares, bonds, commercial property and cash.

What's inside the funds?

The provider has researched the market and selected what it believes to be the cheapest and best exchange-traded funds and tracker funds to sit inside its own funds.

You’ll find products from the likes of BlackRock, Vanguard and iShares inside each of AJ Bell’s five funds. They will all track certain indices like the S&P 500 to get exposure to US companies or a group of global corporate bonds, with each of the funds giving a diversified portfolio across a range of assets and geographies.

What you won’t find is any type of actively-managed fund or smart beta exchange-traded fund within AJ Bell’s portfolios. There is no one buying and selling stocks to play certain news events or equity valuations. Instead, its funds are completely passive which helps to keep costs down.

That’s an important point, particularly as one of the biggest criticisms of funds that invest in other funds is the multiple layers of fees. You pay the fund provider and the managers who run the funds that sit within the portfolio.

AJ Bell says it can offer ‘fund of funds’ and still keep fees low at 0.5% a year. That money covers its management fee and the running costs.

There is no transaction charge to buy them and AJ Bell is waiving its normal custody charge for holding the funds until January 2019.

How were the funds created?

‘We started by wanting to achieve a certain risk level over a 10 year period as we are very conscious that it’s not just how much money you make but how you deliver those returns that’s important to investors,’ says Ryan Hughes, AJ Bell’s head of fund selection.

‘We worked with credit agency Moody’s; as economic forecasters they make ongoing forward-looking 10-year assumptions of what returns and volatility of assets classes will be.

‘They then work with our investment team to build the optimal portfolio to achieve certain levels of risk and get the best possible returns,’ he adds.

Lots of multicolored men silhouettes made with paper for crowd concept

All about volatility 

Hughes says AJ Bell has created volatility-targeted funds, not returns-targeted. That may sound a bit confusing if you’re not familiar with investing.

In essence, volatility is a measure of how much a share price will move around over time. We’re not talking about rising 10% or 20% in value, for example. Instead, think of a share price chart. If there are wild swings in the price and the chart is very squiggly then you could assume the stock has higher volatility.

A low volatility figure means an investment’s value should not fluctuate dramatically; instead, you should see changes in value at a more-steady pace over a period of time. Typically, potentially higher returning assets have higher volatility than lower returning assets; think equities versus bonds.

‘Having the right asset mix should ensure we keep that volatility within the range we want,’ explains Hughes. ‘Our aim is to give you an investment instrument that will meet your expectations over time and doesn’t give you some nasty surprises.

‘If you are a cautious investor, for example, you want funds to always behave like a cautious fund. Some fund managers suddenly change the risk profile of their fund when they see an opportunity, great if they get it right, but painful if they don’t. We don’t want that with our funds, we want consistency and to deliver returns in a manner that all investors are comfortable with.’

How much money could I make?

AJ Bell has used financial models to demonstrate the possible outcomes from investing in the fund. You can see these potential outcomes on its website.

Its interactive charts show the range of likely outcomes for an investment over 20 years. The fund charge of 0.5% is included in the projections. The results are only forecasts and not guaranteed outcomes.

To give you an example, £10,000 in the Cautious fund could potentially turn into a range of £15,433 to £28,584. Admittedly that is very wide range – but it shows the most likely band of returns based on the financial model. Taking the medium, you’d potentially turn £10,000 into £20,890.

If you go higher up the risk spectrum, the forecast returns for £10,000 invested in the Adventurous fund range from £15,901 to £74,104 over 20 years. This illustrates how higher risk doesn’t always equal higher returns.

Having an idea how your investment might behave during different economic conditions can provide an idea what the potential rewards of a fund might be if things are going well, and also what the potential losses could be if things go badly.

A good mix of asset classes and geographical coverage should hopefully help your portfolio withstand a wide variety of economic environments.

Hughes ultimately believes any one of the AJ Bell funds will effectively provide instant diversification through a single product. He also says the funds aren’t just aimed at the complete beginner.

‘We see the funds as diversified core holdings for an investment portfolio. You might then want to add some satellite holdings on top – such as an investment that plays a certain sector theme, AIM stocks or niche funds.’

Please note that Shares is published by AJ Bell Media, which is a subsidiary of AJ Bell.  Shares does not endorse the funds mentioned in this article.  Investors need to carry out their own research to determine if suitable for them and value can go down as well as up.

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