Graduating from university and entering the professional world is an important step in life, which arguably leads to a different perception of money and wealth.
Recent graduates have a longer time horizon than, say, new retirees but they still have to plan ahead for major spendings in the medium term. That can include a mortgage, a wedding, perhaps having children and, albeit in a distant future, retirement as well. They are also likely to have to repay a student debt.
Therefore, graduates have specific investment needs to prepare for the decades ahead of them.
Trustnet asked Alena Kosava, former head of investment research at AJ Bell, what the portfolio of a recent graduate should look like.
She said: “As a recent graduate this individual most certainly has a long-term investment horizon, with the timeframe spanning decades until they eventually retire. That means that holding a relatively high exposure to growth assets, such as equities, could be an appropriate option given ability to take risk under the circumstances.
“This will allow to maximise their potential for capital gains over the long term. Of course, for any investor it is critical to consider your own individual needs, including ability as well as willingness to take risk.”
With a 30% allocation, JPM Global Equity Income is the largest position in the portfolio suggested by Kosava.
The fund is part of the IA Global Equity Income sector and has a sizeable allocation to emerging markets.
She said: “The objective [of the fund] is to create a portfolio which is designed to offer an attractive total return supported by an income at a level above the market but with capital appreciation as well over the long term (5-10 years).
“The managers operate a sector agnostic and style agnostic approach to income investing. Whilst not being managed with an explicit ESG guideline in place, it integrates ESG into the research process as a measurement to determine future sustainability of dividends.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund is top quartile in the IA Global Equity Income sector over 10 years and has also beaten its benchmark (MSCI AC World) in the same period.
The second largest allocation in the portfolio is another equity income fund from JP Morgan Asset Management, namely JPM Emerging Markets Income.
Kosava said: “Yielding c.4.2%, the fund aims to provide a portfolio designed to achieve income while participating in capital growth over the long-term (5-10 years).
“Diversified across c.90 names, the fund offers sufficient compositional breadth, while ensuring diversity of drivers underpinning its dividend.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund is second quartile in the IA Global Emerging Markets sector over 10 years, while its two largest holdings are Taiwan Semiconductor and Samsung Electronics with an allocation of at least 7% each.
For a core allocation to the UK market, Kosava chose Liontrust UK Growth, which is also the third largest holding in the portfolio.
She said: “A core strategy in the IA UK All Companies sector focused on investing primarily in UK-listed businesses, with a bias away from mega-caps, whilst allocating capital across the market cap spectrum.
“Focused on bottom-up stock selection with little macro inputs. This is a sector-agnostic product, although typically avoiding miners and banks and no formal sector constraints. A reasonably focused yet diverse portfolio of c.60 names at varying stages of their own individual cycles in a variety of sectors, contributing to the stability of the portfolio performance over time.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Liontrust UK Growth is a top quartile fund in the IA UK All Companies sector over 10 years and has its largest allocations in the industrials, healthcare and consumer staples sectors.
For a value approach to the UK market, Kosava added Jupiter UK Special Situations.
She said: “Having witnessed one of the toughest periods for value investing since the global financial crisis of 2008, value investing made value stocks staged a strong rebound in 2022. Whilst the outperformance was meaningful, valuations of value stocks offer considerable further upside.
“Jupiter UK Special Situations focuses on identifying and exploiting special situations value stocks within the UK market. The fund has delivered attractive risk-adjusted returns compared to the broader UK value area of the market, whilst offering an element of style diversification within the equity allocation of the overall portfolio.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Similarly to Liontrust UK Growth, Jupiter UK Special Situations is top quartile over 10 years in the IA UK All Companies sector. Its largest allocations are in the financials, consumer discretionary and industrials sectors.
For the exposure to fixed-incomes, Kosava opted for a fund in the IA Sterling High Yield sector.
Invesco High Yield aims to achieve both income and capital growth over the medium to long term (3 to 5 years plus).
Kosava said: “This is a core high yield and core duration product, with the relatively narrow duration corridor of c.3.5 – 4.5/5.0 years. It has been slightly more aggressive vs the IA sector and the market over time.
“The fund tends to underperform in falling markets (although not by much), whilst typically outperforming on the upside. The bulk of the performance over time has been underpinned by credit selection.”
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund is top quartile in the IA Sterling High Yield sector over 10 years. As expected from a high yield fund, it invests mostly in non-investment grade corporate and government bonds. It can also invest in bonds with no credit rating.
Kosava added an exposure to small-caps, as smaller firms tend to have a higher growth profile than larger businesses, offering a good source of diversification within portfolios based on their characteristics.
She said: “Whilst larger businesses tend to outperform smaller stocks prior to, and at the start of recessions as investors tend to favour more stable larger firms through more uncertain periods, small-caps typically do well when exiting a recession and through economic recovery periods.
“Smaller firms are nimbler and able to react faster than large-caps to changes in this type of business environment. As markets are discounting information, it is not unusual for small-caps to start outperforming their larger counterparts soon after a start of a recession.”
To tap into the growth potential of small-caps, Kosava chose ASI Global Smaller Companies, which seeks to generate growth over the long term (five years or more).
She added: “The manager runs a relatively focused portfolio of stocks, whilst focusing on quality, growth and momentum opportunities across the small companies’ universe.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund is third quartile in the IA Global sector over 10 years and invests in small-caps with a global mandate. However, its largest geographical exposure is the US.
The last fund in the portfolio is a flexible long-only multi-asset strategy focused on capital preservation and absolute return generation.
The Trojan fund aims to outperform inflation (UK RPI) over the long term (5-7 years),
Performance of fund vs benchmark over 10yrs
Source: FE Analytics
Kosava said: “The fund generated positive returns during most negative calendar annual performance periods for the FTSE All Share index.
“The investment process enables the manager to invest in an array of different global asset classes, including fixed income, equities, precious metals and cash.”