Optimal Equity Portfolio: Five Funds for Diversification Beyond US Tech

In today’s ever-evolving investment landscape, investors aiming for full equity exposure without overly relying on US tech giants can benefit from a well-rounded portfolio. Nick Hyett, an investment manager at Wealth Club, offers insightful recommendations for five funds that strike a balance between risk and potential returns.

Why Consider Full Equity Exposure?

For long-term investors willing to embrace risk, fully committing to equities often provides the best chance of achieving substantial compound returns. Historically, many investors have found success by tracking indices heavily weighted with US technology companies. These mega-cap stocks—like Nvidia, Microsoft, and Alphabet—have showcased remarkable growth, allowing for lower-cost access through inexpensive tracker funds.

The Pitfall of Concentration Risk

While investing solely in these tech giants can yield impressive returns, it also carries the risk of overexposure to a concentrated market. Hyett warns that such reliance can lead to volatility and speculates that a more diversified investment approach could bolster returns with reduced risk.

The Recommended Portfolio Breakdown

Hyett’s strategy represents an ideal portfolio for entirely equity-focused investors wishing to minimize exposure to US mega-caps. The portfolio encompasses both passive tracking and active management strategies, ensuring diversification across various sectors and regions.

Primary Fund Selection

• L&G Global Equity Index Fund (45% Allocation)
  • Overview: This fund tracks the FTSE World index, providing a broad equity exposure while still capitalizing on significant tech giants’ successes.
  • Emerging Trends: Key holdings include emerging players fueling the global adoption of artificial intelligence (AI), such as Broadcom and Taiwan Semiconductor Manufacturing.

Complementing Active Funds

To add depth to the portfolio, Hyett suggests allocating 15% each to three active global funds, which will enhance diversification while incorporating various investment styles:

1. Pzena Global Focused Value Fund

• Investment Focus: This fund targets undervalued stocks globally, holding 44% in North American equities but significant portions in Asia-Pacific companies like Samsung and Alibaba.
• Performance: Having outperformed the FTSE World Index with a 100.3% gain over five years, it’s a cornerstone for value-focused investment.

2. Scottish Mortgage Investment Trust

• Growth Potential: Known as the “growthiest of growth funds,” this investment trust aims for long-term gains, often holding onto companies for a minimum of five years.
• Top Holdings: Current favorites include Mercado Libre, SpaceX, and Bytedance, showcasing a focus on transformative businesses that drive innovation.

3. IFSL Evenlode Global Income Fund

• Quality Focus: This fund prefers high-quality, dividend-paying stocks, even if its recent performance has lagged. Hyett believes it offers robust downside protection and reliable income streams.

Exploring Emerging Markets

Despite a global outlook, Hyett stresses the importance of including emerging markets in the overall strategy, recommending a 10% allocation to the L&G Global Emerging Markets Index Fund. This fund features key holdings in major companies like Tencent and Alibaba, and can help counterbalance market conditions influenced by a weaker dollar.

Conclusion: Balancing Growth and Stability

While this diversified portfolio emphasizes a more balanced approach to equity investing, Hyett acknowledges that it might not outperform a simple FTSE World index investment during strong market periods for US tech. Nonetheless, he emphasizes that this carefully curated collection of funds could reduce volatility while enhancing long-term returns.

Investing in a diversified equity portfolio, as Hyett recommends, may serve to not only mitigate risks but also capitalize on broader market opportunities as they arise. As market dynamics shift, such an adaptable strategy can keep investors well-positioned for success in the unpredictable world of investing.