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David Stevenson: my lazy(ish) portfolio for thrill seekers

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David Stevenson: my lazy(ish) portfolio for thrill seekers

Over in the US the concept of lazy portfolios has really taken off. They are usually embraced by investors who like passive funds and are built around a simple insight – that investing for the long term should be simple, easy to implement and cheap. You can see an excellent exposition of these ideas at the Bogleheads website, which is dedicated to the ideas of the late, great Vanguard founder Jack Bogle. This US website nicely sums up the thinking as follows:

'Lazy portfolios are designed to perform well in most market conditions. Most contain a small number of low-cost funds that are easy to rebalance. They are "lazy" in that the investor can maintain the same asset allocation for an extended period of time.' 

In their simplest form these usually combine some ‘bog standard’ equity trackers alongside a smattering of bond funds – usually always provided by the likes of Vanguard or iShares.

Crucially though, there are some riffs on this idea of simple, cheap, long-term investing with variants such as a US permanent portfolio which has US equities, gold bullion, US treasury bills and US long-term government bonds, all in equal measure – the  idea here is very defensive  and is all about long-term capital preservation.  

Simple shouldn't mean boring

I’ll be quietly outlining a bunch of lazy portfolios over the next few months in this column but I wanted to start with two crucial spins. The first is that although a portfolio should be simple, it shouldn’t always be completely static in composition. Even amongst passive Bogleheads there is a strong argument for annual rebalancing. I think there’s also an argument for accepting that things do change and that there are long-term structural changes that wax and wane over a long cycle – and have an impact on stock markets. This might require the investor to back new ideas and themes and cut out old ones.

The other key idea is that most lazy portfolios are very balanced in their objectives, usually with a bunch of boring asset classes mixed in with growth assets to achieve some downside protection. This is fine for many investors but in my experience, younger investors in particular are thinking ultra long term and are happy to go for growth in the broadest sense of the word. They are happy to sit tight for decades and therefore the idea of having a mix of bonds in there isn’t appealing. In technical language, they  are happy to embrace volatility and go for riskier stuff.

We can have all sorts of arguments about the sense of this but I would suggest that the long term track record of an investment trust like Scottish Mortgage (SMT) suggests that there is a demand for this approach. This is a high conviction, actively managed fund which takes concentrated bets on long-term winners – and has grown hugely in size to become the biggest investment trust on the block.

But Scottish Mortgage also exemplifies a risk – in the trade it’s called idiosyncratic risk, or betting on the instincts of the fund manager. For full disclosure I should say I have shares in Scottish Mortgage. The investment trust’s managers Tom Slater and James Anderson might make some daft decisions in the future. Maybe their bet on Amazon (AMZN.O) won’t pay off?

The alternative approach is to buy more passive funds where there is no active fund manager taking those big bets. Why not assemble a bunch of exchange-traded funds (ETFs) which are also aimed at long-term investing, built around big themes of change or disruption – and which might generate big long-term gains?

Cue thematic ETFs. These are rightly controversial. They are full of marketing hype. They are frequently tiny in terms of assets under management. They are more expensive than bog standard main market trackers. They are also fashion seeking and tend to hone in on bonkers ideas that the crowd likes, such as crypto assets.

I think these are all valid criticisms, but these slightly tarnished thematic ETFs also serve a demand. Investors like to take concentrated investment decisions. They like looking at big secular themes about change disruption and change and investing in these ideas. Active managers such as Pictet and Robeco have built powerful business franchises mostly on this demand. Crucially, investors like to invest in a theme, but across two or three sectors. Thus a traditional single-sector ETF might not work.

I would add one other important driver. Sure, have a core lazy portfolio that ticks all the traditional yardsticks – cheap, broad, easy to trade, and boring. But be aware that the human psyche also requires excitement to motivate investment. We crave something more speculative, especially in our satellite portfolios. One can rubbish this impulse and stick to boring basics and the academic economist community will give you a big thumbs up. But my suspicion is that you’ll still feel the urge for some ‘speculation’ and you may end up doing it in a rather unsystematic fashion.

My seven big themes

So, why not embrace your inner enthusiast for risk and big narratives and maybe build a lazy-ish portfolio of really adventurous stuff, built around themes that you think might change the world. To help you think your way through this I’ve identified what my thematic portfolio would look like. I’ve identified seven big themes that I think are super important – you could buy all seven ETFs and have a very broad exposure to growth stocks.

And no, they aren’t all about technology. I think that we are just at the beginning of a huge agritech cycle which will transform the agricultural business. I also think we are about to face absolutely unprecedented challenges in the water industry which will also require huge investment. The drugs deregulation agenda will take the world by storm and what we’re seeing in cannabis in Canada is just the tip of the spear (or bong).

As for more conventional technology themes, I would identify four key ideas that I’m fascinated with. Cyber security is a constant concern and in an age of big power politics, is only about to get worse. I don’t need to labour all the challenges around robotics and artifical intelligence nor the opportunities from the genomic revolution. Last, but no means least, I think the growth of the Asian consumer markets and especially technology products is a genuine once-in-a-lifetime transformation.

I’m not planning to give a big exposition of why I chose these themes – its just what I think will be important. I also freely accept that a big thematic driver might not turn into a big source of capital gains, especially if the fund is poorly designed and constructed. That’s why I wouldn’t for instance ever invest in an ETF focused on crypto picks and shovels - the moniker handed to those companies focused on the infrastructure supportingcrypto currencies. I just don’t see how you can invest in a sector that is so early stage. It’s also why I’m very cagey about say, ageing society ETFs, which are too broad and unfocused.

My simple desire is to map out seven ETFs which give you access to the big themes in a relatively cost effective fashion – although these ETFs are usually far more expensive than plain vanilla peers.  I’ve also mapped out an alternative actively managed fund where available, plus a suggestion for a single stock alternative.

And one last thought. I quite like two other really important themes. The first is that fintech is going to produce some huge winners, especially as the banks are challenged. We are just at the beginning of these revolution but there aren’t any European ETFs tracking this space – just two US ETFs which can be easily purchased in the UK. Better perhaps to look at the specialist investment trust called Augmentum (AUGM),  which is quoted here in the UK.

The other idea is that an aging population is also a wealthy population. This plays to the fantastic business model that is fund management. But no fund, and certainly no ETF, focuses on this. Which is why I have identified two simple single stock suggestions: BlackRock (BLK.N) which I think is cheap and a great play on all parts of the asset management spectrum including ETFs. And then there’s St James's Place (SJP), a wealth manager built on utterly ridiculous margins whose business will, I suspect, resist the rise of fintech.

Theme ETF ETF charge (%) ETF one-year return (%) Fund Share
Agribusiness iShares Commodity Producers Agribusiness 0.55 2 Sarasin Food and Agriculture Opportunities, BlackRock World Agriculture, Barings Global Agriculture Deere (DE.N)
Water Lyxor World Water 0.6 0 Pictet Water Geberit (GEBN.S)
Cannabis (US) ETFMG Alternative Harvest 0.75 35 n/a GW Pharmaceuticals (GWPRF.PK)
Cyber security L&G Cyber Security 0.75 35 n/a Splunk (SPLK.O) and Rapid7 (RPD.O)
Robotics L&G Robo Global Robotics and Automation 0.8 -8.5 Pictet Robotics  
  iShares Automation and Robotics 0.4 -7.6 Polar Capital Automation and Artificial Intelligence  
Genomics and biotech L&G Pharma Breakthrough 0.75 7.2 BB Biotech (BION.S)  Syncona (SYNCS)
  Invesco Nasdaq Biotech Ucits 0.38 0.4    
Asian e-commerce and technology HanETF EMQQ Emerging Markets Internet and Ecommerce 0.86 n/a Scottish Mortgage (SMT) Naspers (NPNJn.J)
Letfield ideas not accessible via European ETFs          
Digital payments and the rise of fintech (US) Tortoise Digital Payments 0.4 n/a n/a Augmentum (AUGM)
  (US) ARK Fintech Innovation 0.75 n/a n/a  
Asset managers and wealth managers n/a n/a n/a n/a Blackrock (BLK.N), St James's Place (SJP)

My new book!

I’ve just published a new book on ETFs. It’s called The Ultimate ETF Guidebook and it hits online and real bookshops this week. If you want to buy a copy Citywire readers can get a 30% discount here. I’ve also got one book to give away every week for the next few weeks to lucky readers. Just make for the best ETF, and why, in the comments section below.

Any opinions expressed by Citywire or its staff do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account your personal circumstances, objectives and attitude towards risk.

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