Not every functional portfolio is made up of several funds, and for investors who get a headache thinking of what strategy to buy next, sometimes easier solutions work best.
Building a two-fund portfolio comes with a few caveats, however. A traditional global equity fund might seem like the obvious choice for diversification, but investors need to be careful, as many of these funds are heavily skewed towards the US, said Joe Richardson, discretionary investment manager at Dennehy Wealth.
“Often they have more than 60% of their holdings concentrated in that market, which as we know is dominated by a handful of major tech firms. While these companies have driven strong returns in recent years, such concentrated exposure might undermine the diversification that investors are looking for from a global fund,” he said.
For this reason, he proposed a balanced active/passive portfolio solution.
BNY Mellon Multi-Asset and iShares Value Factor ETF
For the active option, Richardson picked the BNY Mellon Multi-Asset Global Balanced fund, a standout performer in the IA Mixed 40-85% Sector.
Co-managed by Paul Flood, Simon Nichols and FE fundinfo Alpha Manager Bhavin Shah, it gained the maximum FE fundinfo Crown Rating of five and was a top-decile performer over the past 10 and five years against its peer group. It returned 12.4% over the year to date.
The fund also appeared on Trustnet earlier this year for being one of two funds with a perfect 10-year track record, for having ticked just about all the boxes since 2021 and as the best of the best (funds with top long-term performance, a leading manager and the highest Crown Ratings). In September, Flood told Trustnet he has been allocating more money to investment trusts.
“This fund shows strong and, importantly, consistent performance, making it a reliable choice for balanced exposure to global markets,” Richardson said.
He suggested complementing this active fund with a passive option such as the iShares Edge MSCI World Value Factor exchange-traded fund (ETF).
Source: FE Analytics
“We believe valuations do matter and there are so many strong companies out there globally trading at discounts and offering a compelling opportunity looking forward – particularly looking at smaller companies, Asia, the UK, Japan,” he said.
“This ETF focuses on undervalued stocks worldwide, and although we might have a short memory because the recent decade has seen growth outperform, historically value stocks have significantly outperformed growth over the long-term.”
Even with the recent value underperformance, this ETF has still delivered strongly – since January 2015, it returned 114.3% against 109.4% for the BNY Mellon fund.
A 50-50 combination of the two (or above 50% for the iShares ETF for those wanting to add more risk) gives investors “diversification away from the US, alignment with valuations and strong historical performance”.
L&G Global Equity and Brookfield Infrastructure
For breadth, there’s no better place to turn than a global index, according to Nicholas Hyett, investment manager at the Wealth Club.
Passive funds are all about accessing a broad portfolio of investments at a low cost, and Legal & General’s Global Equity Index fund, which tracks the FTSE World index with an ongoing charge of 0.08%, is “hard to beat” on value.
He would put 85% of an investible pot in this vehicle.
A global equity index tracker such as this gives investors “a great base exposure to stocks and shares”, he said.
Other asset classes such as bonds, commodities, real estate and private equity deserve a place in a well-diversified portfolio, but for investors that are limited in what they can buy, Hyett believes infrastructure to be the alternative investment. He would allocate the remaining 15% of a portfolio to Canadian-listed Brookfield Infrastructure Corporation.
It provides exposure to a large, diversified infrastructure portfolio overseen by one of the world’s leading infrastructure managers. Investments range from US data centres to Brazilian railways and Indian telecom towers. The portfolio has historically delivered a steadily rising dividend paired with attractive capital growth.
“Infrastructure revenues tend to be inflation-linked, providing some of the inflation protection investors like in real estate or commodities,” he said.
“At the same time, long-dated, contractual and often government-backed revenues mean infrastructure assets can deliver something of the investment ballast you find in bonds.”
For investors who would prefer a fund managed by Brookfield, the Brookfield Global Listed Core Infrastructure fund is part of the Investment Association universe.
Fidelity Index US and Premier Miton US Opportunities
FundCalibre managing director Darius McDermott opted to tap into the strong stock market performance of the US.
Performance of portfolios against index over the year to date 
Source: FE Analytics
For this, an index fund is “often a go-to choice and for good reason” – over the past five years, few funds have outperformed the S&P 500.
The Fidelity Index US fund, which aims to replicate the performance of the S&P 500, is a “solid option” in this category for McDermott.
However, the index has become increasingly concentrated, with its impressive performance heavily reliant on the success of a handful of tech giants.
To balance this concentration risk, he picked the actively managed Premier Miton US Opportunities fund for complementary exposure.
“Despite having no holdings in the S&P 500's dominant Magnificent Seven, this fund has delivered an impressive annualised return of 13.9% over the past decade, surpassing the S&P 500’s annualised return of 11.4% over the same period,” he said.
This article has been the last instalment of a series on two-fund portfolios. Previously, we covered the core/satellite, multi-asset, equity/bond and the value/growth approaches.