What is an Investment Portfolio?

The term ‘portfolio’ refers to a collection of financial assets, either held directly or in investment funds.  Our portfolios only hold investment funds (normally around 10 funds) and are designed according to the investor’s risk tolerance, time frame and investment objectives. The spread of investment assets influences the risk/reward ratio of the portfolio and is referred to as the ‘asset allocation’ of the portfolio.

Asset allocation is an important factor in determining returns for an investment portfolio based on the principle that different assets perform differently in different market and economic conditions. The basic asset classes are stocks, bonds, property and cash. Diversification reduces the overall risk in terms of the variability of returns for a given level of expected return. By creating a portfolio holding investment funds, a very wide diversification is achieved, while the strategic and tactical asset allocation is controlled by us.

What do funds invest in?

A fund in turn also invests in portfolio typically be made up of holdings in equities (stocks) and bonds, but can also include more specialised products such as property, passive investments and cash or cash-like products intended to reduce volatility. The performance of a fund that invests primarily in equities and corporate bonds will be dependent on the performance of the companies it invests in.

Funds are also split into categories based on what assets they are invested in (bonds or equities, for example), the regional bias (a North America fund will focus on stocks listed in North America) or sector concentration (a commodities fund may predominantly hold mining stocks).

A fund can also be classified by its perceived level of risk. For example, in the mixed asset sector (meaning the fund holds both equities and bonds), the funds that have a higher level of equity exposure are considered higher risk.

The majority of funds are actively managed, meaning an investment professional with significant experience will routinely research and analyse the holdings in the fund, aiming to deliver gains higher than a relative benchmark.

Do funds pay an income?

Funds can pay an income, or they can invest with an aim to grow the capital you’ve invested – or a mixture of both. It depends on the fund, the share class you hold, and the objective of the fund. Some funds aim for capital growth, and do not pay a significant income because they invest in companies which do not pay dividends – instead reinvesting their profits into the business with a view to growing the enterprise. Other funds invest in more mature businesses, which do pay a dividend, so these funds are more likely to provide an income.

The amount of income a fund returns to an investor is expressed as yield. The yield is the interest or dividend paid by an investment. A fund’s yield is expressed as a percentage based on the investment’s cost, and varies depending on the type of fund. The yield on an income-based fund can range from 2 to 10 per cent.