It’s therefore probably no surprise to find out that my investing strategy is largely based around the teachings of his book (I started in 2007 and so I used the first edition as a basis). At its most basic he starts with what he calls a Level 1 portfolio mix consisting of Level 1 UK equities and Level 1 UK bonds. He then goes on to show how you might diversify a portion of your wealth away from these to create a portfolio for all seasons. Importantly though no matter what your investment horizon large allocations always stay with the Level 1 building blocks. So the question then becomes what Index should be used to represent Level 1 Equities? As always Hale has the answer with “For your Level 1 equity allocation, the return benchmark should be the return of the whole domestic market, which provides a diversified and representative benchmark as it includes most public companies, be they large or small and weighted according to their market size... The FTSE All Share is the index of choice for the rational investor.”
I followed this guidance with no other exposure to UK Equities other than the All Share until late 2011 when I realised, that for me at least, I wanted more dividends than my strategy was forecast to give me at the end of my accumulation stage. I therefore started to diversify a percentage away from Level UK Equities towards a UK based High Yield Portfolio (HYP). Today that HYP contains 17 companies with 83% of them by valuation coming from the FTSE100 and 16% coming from the FTSE250. I then continued with this strategy until I reached the point where it looked like my total portfolio would enable me to live off the dividends. I’m fairly comfortably there now and so don’t need to keep growing my dividends at such a great rate.
With £178,000 now invested in both the FTSE All Share Index and my HYP I feel it’s now time to further diversify what I’m invested in from a “UK Domestic Equity” perspective. To do this I’m going to take a step back for a second and look at the whole UK market. The London Stock Exchange currently has 2,339 companies listed on both its AIM and Main stock markets with a market capitalisation of £3,821 Billion. Many of these will of course generate some or all of their earnings from overseas and only 1,576 of them are incorporated in Great Britain.
Given the point in my investing journey I find myself I have no need to invest in ‘ten bagger’ or ‘penny’ stocks. I’m therefore going to restrict myself to shares that can also make it into the FTSE Indices which as a criteria includes “Only Premium Listed Equity Shares, as defined by the Financial Conduct Authority in its Listing Rules Sourcebook, which have been admitted to trading to the London Stock Exchange with a Sterling denominated price on SETS are eligible for inclusion in the FTSE UK Index Series.” I show these 901 companies in the chart below categorised into their FTSE Indices vs a total Market Capitalisation of £2,048 Billion.
Click to enlarge, London Stock Exchange Premium Listed Shares
Now this is where it gets interesting. Analysis shows that in that market of 901 companies:
- 78% (£1,632 Billion) is actually the Top 100 (the FTSE100 which is actually 101) companies;
- 16% (£343 Billion) is the next 250 (the FTSE250 which is actually 251) companies;
- 3% (£73 Billion) is the next 291 (the FTSE Small Cap Index) companies; and
- 2% (£42 Billion) remains via 258 companies.
So my choice of where to diversify next is simple for me. I’m going to start getting more exposure to the FTSE250 to bolster that 16% exposure. I’ve started that journey via Vanguard’s FTSE 250 UCITS ETF (ticker: VMID) with its low 0.1% OCF (Ongoing Charge Figure). This is what my UK Equity Portfolio looks like today:
Click to enlarge, RIT’s UK Equity Portfolio
As always DYOR