Baking up an investment portfolio

I’ve always fancied myself as quite the baker and, if you follow FundCalibre on twitter, you’ve no doubt seen a number of creations: both cookies and cakes. Lockdown has been the perfect opportunity for me to test out some new recipes – and I wasn’t the only one: it seemed everyone was taking a stab at their version of banana bread, leaving my local shop without flour for weeks! But just like toilet paper hoarding soon stopped, people also quickly realised baking was not for them.

A misconception is that baking and cooking go hand in hand. But, as I’m sure many can attest to, (colleagues included) being a good cook doesn’t necessarily mean you’re a good baker. Cooking is an art form: there’s so much freedom in measurements, ingredients, even the method you use to prepare the meal (sauté, steam, grill, roast, you name it). Baking is more of a science. It generally calls for accurate and precise measurements of the ingredients, and you can’t fry cookies because you don’t want to preheat the oven!

So why am I rambling on about baking? Because, much like baking, building an investment portfolio is a science. You’re not simply throwing all your leftovers together and hoping for the best with a last minute stir-fry, and you’re not taking shortcuts with a microwave. Baking and investing take preparation, patience, concentration and precision.

‘Baking is too precise for me. I cook with a pinch of this or that.’ — Eva Longoria, actress

Cake batter cookies have been on repeat during lockdown: I’ve made over 5 batches already. They’re gooey, sweet, full of sprinkles and the perfect evening treat. They’re also easy and a good representation of a traditional cookie recipe. So, here’s how I can use them to create my investment portfolio too.

Dry ingredients make up the substance of most baking recipes: flour, baking soda and salt. This is the bulk – or your equities if you like. Premier Multi Asset Growth & Income has over 70%* in equities. Just like we mix cake flour and plain flour for that gooey blend, these equities are spread across the globe with the majority (26%*) in the UK followed by 12.8%* in Japan and 9.7%* in Europe.

Now to the “wet ingredients”. Butter in a sugar cookie is like the glue – the peace of mind that, even if you slightly overcook them, they will still be indulgent because you’ve added 300g of butter! The butter holding our investment portfolio together could be an absolute return fund: Janus Henderson UK Absolute Return, Brooks Macdonald Defensive Capital or TwentyFour Absolute Return Credit all fit the bill. Absolute return funds can vary greatly though, and while some funds will invest in just equities, others will invest anywhere and in a variety of assets, so look at the funds individually. Think of it like should you use unsalted or salted butter? If you go for unsalted, you can salt to taste, but if you choose salted you get to skip a step!

You’ve whipped your butter, now it’s time to add the sugar and eggs.

Sugar is the cornerstone of a good cookie: like a less risky bond fund perhaps. I always mix my sugars to get a really good taste profile, traditional white sugar is great and safe – hello investment grade bonds – but add a little brown sugar or some coloured sparkling sugar and you might be taking a risk, but it could pay off (high yield bonds, I see you).

Wanna know the secret to the “cake” cookie? An extra egg yolk! It’s the simple but secret weapon of this recipe. Property easily fits this category. And you’ve got options with either physical property funds or a property shares funds. Both BMO European Real Estate Securities and TIME:Commercial Long Income have outperformed their sectors over the last five years by 28.4%** and 13.1%** respectively, giving that little something extra.

Now it’s time for the show-stopper: the sprinkles. I don’t know about you, but I like to mix it up. A little bit of funfetti, maybe some pearls… Sprinkles are a small part of your recipe and it’s easy to overlook them, but they add the all-important finishing touch. Specialist funds fit the bill here, adding something to your portfolio that might otherwise be missing. Merian Gold and Silver, ASI Latin American Equity, VT Gravis UK Infrastructure Income or Smith & Williamson Artificial Intelligence are a few options.

Waiting for the fruits of your labour

Waiting is the hardest part about baking. You do all the work and then sometimes you have to wait hours to actually enjoy it. Much to my husband’s dismay, I always freeze my dough (sometimes overnight) before baking to keep the cookies nice and fluffy. I also “under-bake” by a few minutes and leave them on the tray to continue to cook for 5-10 minutes outside the oven so they’re soft and gooey.

While these steps might not be for everyone, it’s a good reminder that, as with baking, investing is not done instantly but it’s typically worth the wait. And much like checking the oven, you’ll need to keep an eye on your investments to ensure you’re getting the most out of your money. Consider adding a reminder to your calendar to review and update your portfolio, at least once a year, as your priorities may change.

*Source: Fund factsheet, June 2020
**Source: FE analytics, total returns in sterling, 8 Jul 2015 to 8 Jul 2020

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.