The funds in and out of our model portfolios

A handful of changes have been made by Morningstar, which now makes the investment decisions. 

Earlier this year, interactive investor announced a handover of the day care of its rated lists to Morningstar’s Manager Selection Services Group.

From 1 April, Morningstar took over the day care of our five model portfolios. As a result, a handful of changes have been made, with new constituents, ejections and tweaks to the percentage weightings of some of the holdings.

The changes were prompted by the adoption of a new benchmark for the five models, which has altered the asset allocation. From 1 April, the benchmark is the Morningstar UK Adventurous Target Allocation Index. One of the main differences between the new benchmark and the previously used benchmark is a higher weighting to US shares, which has led Morningstar to boost US exposure in some of the models. The index has 90% in equities and 10% in bonds.

Below, we explain the new funds and those that have exited.

The new percentage weightings for all the constituents in the five models can be found on the model portfolio page. 

As stated in our methodology, the Super 60 and ACE 40 funds are considered first for the models. However, there is also the option to look outside the rated funds.

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Additions and ejections for the growth models   

In Active Growth, Morningstar opted to reduce bond exposure. As a result, Jupiter Strategic Bond, which comprised 10% of the model, has been ejected.

The proceeds, and some reductions to exiting constituents, have been put into two new holdings: passively managed Vanguard US Equity Index and the LF Ruffer Diversified Return fund. 

In Low-Cost Growth, two new holdings have been introduced, which takes the number of constituents up to 11. Both new holdings have a 5% weighting and they are the Vanguard FTSE Developed Europe ex UK ETF and the Vanguard US Equity Index. Various other tweaks have been made to percentage weightings for the rest of the portfolio, and the new percentages are stated on the model portfolio page.

For Ethical Growth, there are three additions and one removal. The three new members are BNY Mellon Sustainable Real Return, Trojan Ethical Income and the iShares MSCI USA SRI ETF. The latter was picked to increase US exposure.

Exiting the model is Syncona (LSE:SYNC). Morningstar said the move to sell the life science investment is to “reallocate to less risky alternatives”.

Various other changes have been made to percentage weightings in the rest of the portfolio. Please see our model portfolio page for more details.

The ins and outs for our income models

In Active Income, there are two new additions. Both give the portfolio greater US exposure, namely M&G Global Dividend and Artemis Monthly Distribution, with respective weightings of 10% and 5%. Morningstar describe both as “high conviction” funds.

To fund those purchases, Utilico Emerging Markets (LSE:UEM) has been removed, with Morningstar saying the model has sufficient emerging market exposure from existing constituent Murray International (LSE:MYI). Utilico Emerging Markets had a 10% weighting. The 5% weighting to Artemis Monthly Distribution was funded from halving Jupiter Strategic Bond's weighting from 10% to 5%.

In Low-Cost Income, the Invesco FTSE RAFI US 100 ETF is a new addition with a 5% weighting. To fund this change, bond and emerging market exposure has been reduced. Global equity exposure has also been increased, with the SPDR® S&P Global Dividend Aristocrats UCITS ETF now having a 20% weighting, up from 15%.

The benefits of rebalancing

Many investors do not have the time or confidence to make their own investment choices, which is where interactive investor’s model portfolios can help.

The models can used as reference tools for inspiration for fund ideas across various sectors and asset classes. Or the constituents could be purchased individually as the building blocks of a relatively adventurous and diversified portfolio.

Investors who follow our model portfolios could manually balance to the suggested target weightings – such as quarterly, twice a year, or once a year.

Therefore, it would be a case of working out how the percentage weightings have changed for the constituents in your own portfolio, and then taking a view on whether to adjust those weightings up or down to the suggested target weightings.

For example, let’s say you invested £10,000 in Active Growth. To keep things simple, let’s say Scottish Mortgage (LSE:SMT) returned 100% over one year – which actually did happen in 2020, although it would be unwise to expect those sorts of sky-high returns to occur again over such a short time period. The rest of Active Growth returned 0% over the same year. Scottish Mortgage’s weighting of 15%, or £1,500 in Active Growth, will have increased. The portfolio is now worth £11,500, given the £1,500 stake in Scottish Mortgage has doubled. Scottish Mortgage’s percentage weighting will now be 26.1% (£3,000 divided by £11,500).

A 15% weighting amounts to £1,725 on £11,500. Therefore, a total of £1,275 from profits made in Scottish Mortgage would need to be sold. This would then need to be split evenly between the rest of the constituents to increase their percentage weightings back up to their target weightings – as they all will have slightly declined in this instance given Scottish Mortgage’s strong performance. 

Care needs to be taken not to incur unnecessary transaction costs and potential tax implications if investments are not held in ISAs or SIPPs.

Therefore, followers of the portfolios may prefer to have their own tolerance rule, and rebalance only when the weighting becomes out of kilter with the rest of the portfolio.

In practical terms, rebalancing your portfolio is just a tidying-up exercise. A diversified portfolio, such as our five model portfolios, will have a mixture of different investments – typically shares, bonds and property – which behave differently from one another.

If the value of a certain investment goes up significantly more than the others, it increases your overall exposure to that asset, and in turn increases risk, which you might be uncomfortable with.

By taking some or all of the profits, the percentage weighting is reduced back to the risk level the overall portfolio was at when you first invested. The money can then be distributed evenly among other asset classes.