Last Christmas, I placed a carefully wrapped present under the tree for each member of my family – except Jason, my sister’s partner. On Christmas morning, he seemed a little disappointed at the absence of a gift as others joyously opened theirs. But it was only short-lived. Suddenly, I got out my laptop and proceeded to open an investment Isa in his name – with his permission of course, plus a few key details (for example, his National Insurance number). Frowns turned into smiles.
I deposited the sum I would have spent on his Christmas present into his Isa to get him started. Within ten minutes it was all done – he was an investor at the age of 30 and we could return to the festivities.
Hardly festive I know, but Jason had wanted to invest for some time yet he didn’t really know where to begin – so I thought it the perfect gift.
The gift that goes on giving: Several asset managers have launched off-the-peg funds that do all the work for you
While other presents he received are now long forgotten, his Isa is quietly growing and one day will fund something he really wants. Indeed, he has since set up a monthly direct debit into his Isa so he can invest on a regular basis. As his money grows, so does his enthusiasm for investing.
One of the greatest barriers to getting started – a point Jason had made to me in the past – is the amount of information we are told we need to know before we get going. But there is a shortcut – and using it means you don’t need to have an opinion on the outlook for emerging markets or know the meaning of terms such as ‘gilts’, ‘alpha’ or ‘bull market’. You also don’t need to spend hours swotting up.
It’s an off-the-peg fund – a fund designed to be the only one you will ever need. It’s what I ended up buying for Jason.
Off-the-peg funds that do the work for you
The investment industry has belatedly cottoned on to the fact that most people now get into investing out of necessity.
The days are long gone when savings accounts could be relied on to provide an income.
Final salary pension schemes are also fading away, leaving us with more responsibility for taking control of our financial futures.
That is why several asset managers have launched off-the-peg funds that do all the work for you.
These so-called low cost ‘multi-asset’ funds include the Life-Strategy range from Vanguard; the MyMap range from BlackRock; and the Sustainable Universal Map offerings from BMO.
You can buy and hold one single fund. They’re cheap, easy to manage, invested in a mix of equities and bonds, and ready to go.
Or you can use them as a foundation and add more funds later as you gain knowledge and confidence.
‘Some people don’t want to spend their life researching investments,’ says Jason Hollands, a director of wealth manager Tilney.
‘These off-the-peg funds are ideal for someone who doesn’t want to be an active investor, but who would rather file and forget about them,’ he added.
What’s my aim…and how much do I save?
There is one thing you need to know before you choose an off-the-peg fund. ‘You need to know why you’re investing,’ says James Norton, senior investment planner at Vanguard.
For example, you could be investing to buy your first home in a few years’ time, to ensure a more comfortable retirement, or for a child’s future. Once you’ve decided your goal, you can work out how much money you will need – and therefore how much you should be investing. You can also work out how much investment risk you need to take to achieve your goal.
Before starting, make sure you have three to six months of outgoings in a savings account, that you’ve paid off any unsecured debts – and that you are unlikely to have to touch your invested cash for five to ten years minimum.
How much risk am I happy to take?
Each off-the-peg fund range offers a spectrum of options according to risk. In general, the more risk you take, the greater chance of higher returns over the long term. Make sure you review your fund choice occasionally.
‘Even if you’re not interested in the nuts and bolts, every year you should check it’s still right for you,’ says Hollands.
‘If you downsize your home, get an unexpected windfall, have children, get divorced, or are approaching retirement – all these could change your investment approach.’
What am I actually investing in?
One of the golden rules of investing is never to put all your eggs in one basket. If you invest in a sole company and something goes wrong, you could lose everything. Therefore buying a single fund can feel counter-intuitive.
Yet that’s why these off-the-peg fund ranges are so clever. Within a single fund there can be thousands of different holdings.
You will own indirectly tiny amounts of everything – from electric car manufacturer Tesla through to retailer M&S; US companies through to businesses in some of the world’s emerging economies. The funds are predominantly made up of shares and bonds.
How much do the funds cost in fees?
They are cheap. Vanguard LifeStrategy funds levy a total annual charge of 0.22 per cent. BlackRock MyMap funds charge 0.17 per cent – while BMO Sustainable Universal MAP funds cost 0.35 per cent a year.
This matters. As Norton explains: ‘Cost is one of the few things investors can control. Every pound you hand over in costs is a pound less for you to spend.’
All sounds good…so what are the flaws?
You will never outperform with these funds. They are designed to track global stock and bond markets. If markets go up, so will your investments, and vice versa.
If you are just starting out, doing no better – but also no worse – than the ‘average’ may be good enough.
Dzmitry Lipski, head of fund research at wealth manager Interactive Investor, says: ‘These funds don’t offer much flexibility, but this can be a good thing. Yes, many investors like to construct their own fund portfolios, but sometimes the fewer changes you make the better.’
Interactive Investor recommends six off-the-peg funds as part of its ‘Quick-start funds’ range – details can be found on its website.
AND THIS CHRISTMAS I’M GIVING A PENSION
Guess what my sister’s partner Jason is getting for Christmas from me this year? After the success of his Isa, he’s receiving a pension.
Around 3.5 million self-employed people in the UK – Jason is among them – are not paying into a private pension, raising the risk that they could be sleepwalking into retirement misery.
They are also missing out on valuable pension contributions from the Government.
A perception that pensions are complex and require considerable investing knowledge is one of the things holding people back.
However, much like in the Isa market, new products are being launched to make managing a pension yourself easier.
For example, Vanguard offers Target Retirement funds, which are a complete ready-made portfolio in one single fund, designed around when you want to retire.
As you get closer to the age you plan to retire, your fund automatically starts to switch out of higher-risk, higher-reward investments into more stable ones.
Are these funds ultimately safe?
Blackrock and Vanguard are enormous companies. Between them they hold assets worth more than £10trillion. Of course, there are no guarantees any company won’t fail, but there are several key protections in place.
‘Your money is ringfenced as an investor, so even if one of these companies did go bankrupt, your funds would be protected,’ says Adrian Lowcock, a chartered wealth manager with investment fund analyst Willis Owen.
‘Also, because of their size, they have sophisticated checks and balances to make sure everything works as it should.’
How have they performed in 2020?
This year has been very challenging for financial markets. Since these fund ranges are designed to track stock – as well as bond – markets, they have been affected.
For example, Vanguard’s most risky LifeStrategy fund is down by less than one per cent this year, but up by nearly 10 per cent over five years. If you’d put £1,000 into the fund when it launched in June 2011, you would have £2,260 today.
Meanwhile, its least-risky fund – with a greater allocation to bonds – is up 3.8 per cent this year, just 5.75 per cent over five years.
BlackRock MyMap’s most cautious fund is up 6.9 per cent this year, while its most risky is up 12.3 per cent.
The MyMap range is designed to protect investors from the type of volatility we have seen in recent months and it appears to have worked. However, the range was only launched in May last year, so we can’t yet judge its long-term track record.
Will I be able to invest ethically?
Blackrock has recently launched an ESG (environmental, social, governance) fund into its MyMap range and hopes to launch more. Vanguard does not offer an ESG LifeStrategy fund, but says it has other ESG funds in its portfolio.
Both claim to use their power as shareholders to help change companies for the better – and what clout they have if they choose to use it. Together with Norway’s sovereign wealth fund they own around ten per cent of the FTSE100 according to financial data company Factset. BMO offers three ‘risk-targeted’ sustainable multi-asset funds as part of its Universal MAP range.
What else do I need to know?
The easiest way to open one of these off-the-peg funds is through an online investment platform. Make sure you pick a platform with low fees and good customer service. To compare them, check out thisismoney.co.uk/platform from our sister publication This Is Money.
To keep your investments tax free, use an Isa. Or, if you’re saving for the long term, you could consider a self invested personal pension.
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