Nutmeg uses exchange-traded funds – ETFs – to keep the cost of investment to retail investors low.
Port (pictured) says that on average the passive funds he uses cost 25 basis points – 0.25 per cent – and with a charge from the company of 0.3 per cent to 1 per cent their customers can pay as little as 0.5 per cent.
While investors are increasingly aware of passive options for gold and the main stock markets – Nutmeg uses Vanguard for the UK and HSBC for the US – Port says that the range or products now available is far wider. He picked three products in topical investment areas that offer investors a cheap alternative.
PIMCO Short-Term High Yield Corporate Bond Index Source ETF
Yields on bonds have fallen lower and lower in recent years, with investors being pushed from government bonds to investment grade corporates and into higher-risk high yield bonds as the asset class has seen an influx of investors desperate to escape highly-volatile equity markets.
Port still sees value in the high yield end of the market, and he uses this Pimco ETF in investors’ portfolios.
“Typically when index funds get to one year maturity on their bonds they sell the bond, but this one allows them to mature which reduces transaction costs and takes on less interest rate risk,” he said.
“You get good access to short-dated bonds, and they are quite inaccessible, even in active funds.”
Performance of fund since April 2012
Source: FE Analytics
The fund was only launched in April of this year, and has so far made 6.14 per cent. It has a total expense ratio (TER) of 0.55 per cent.
iShares JPMorgan $ Emerging Markets Bond ETF
This ETF aims to track the JP Morgan Emerging Markets Bond Index Global Core Index, which includes government bonds issued by large developing economies such as Brazil, Russia and Indonesia.
Port says that the broad range of countries included in the index is appealing, and explains that even if the spreads on emerging market government debt have fallen recently – a function of the increased interest in the area – he still thinks there is value there.
The $4.48bn fund was launched in 2007 and charges a 0.6 per cent annual management charge (AMC).
iShares FTSE EPRA/NAREIT Developed Markets Property Yield ETF
This ETF offers exposure to real estate companies from developed countries – excluding Greece – which have a one-year forecast dividend yield of 2 per cent or more.
Port explains that although he doesn’t think the outlook for property as an asset class is particularly rosy, it’s an excellent option for investors looking to protect themselves from inflation – a particular issue for lower-net-worth investors.
“Hedging with index linked bonds has become expensive so we are looking for other assets that give us inflation protection, and we think this is under-valued,” he said.
Data from FE Analytics shows that the fund has made 21.18 per cent in the past 12 months, slightly less than the 21.94 per cent of its index.
Performance of fund versus index over 1yr
Source: FE Analytics
The fund has a TER of 0.59 per cent.