Nutmeg – a review of our investments
Regular readers will recall that, having disposed of our consumer debt, we have been making some investments over the past months. At the moment we have no particular aim and just want somewhere to store money while thinking about serious investment opportunities.
Nutmeg is a platform where you set up a fund – there is no real limit to the number of funds but the initial investment per fund must be at least £1000. You set the level of risk for each fund on a 10 point scale, your timescale and hand over your cash. It seems simple – and it is.
The general idea is that money from each fund goes into a few common pots according to the fund profile. Twice a month, these pots will be invested, rebalanced, etc. Rather than invest in individual stocks, Nutmeg trades in Exchange Traded Funds which are more liquid and have minimum transaction charges. So instead of thousands of individual portfolios being handled, Nutmeg work with relatively few and (hopefully) this enables them to give more attention to them. After all, most of us have pretty much the same requirements – somewhere reasonably safe to store our money. If we want absolute safety, we would leave it in a bank (well, perhaps ‘absolute’ is no longer appropriate these days). But we are prepared to take a small risk.
To us amateurs it looked the business and conversations with Nutmeg were very helpful in understanding the ins and outs of the procedure.
So we took the plunge and added first £1000 then a further £3000 before the end of the last tax year. Since then we have added a further £8000. These were put into an ISA – a tax free wrapper. We set a 5 year time frame and a risk level of 7.
Previously people had to choose between an execution-only service – you choose what to buy and the broker carries out the deal, trousering a large sum for this almost automatic task – or you hand it all over to someone to ‘manage’ it for you, again costing the earth. There are ‘in-between’ systems where you get suggestions and either follow them or not but all this seems to be too complex unless you are going to drill into every suggestion to see how well it stacks up.
As I wrote recently, stockbrokers have got themselves a bad name for excessive charges and inconvenience. Nutmeg’s charges are simple and transparent – between 0.3% and 1% is all they charge.
It seems we are not alone in our thinking. Economist John Kay has also invested quite substantially, as this piece from City Wire noted. He commented that people were looking for better and cheaper intermediation – the process that brokers and the like provide.
So for a total of £12000 invested, how has it done?
I downloaded the daily outcomes since the beginning of April. Of course these are all over the place but I wanted a sensible comparison. The website just gives a percentage gain over the investment, which isn’t very useful – the current ‘profit’ is 1.57% but in reality, (a) it has been invested over a lot less than a year and (b) the funds have been added progressively.
The obvious comparison is the annualised rate of return – for any day’s outcome, what is the effective annual interest rate? These is shown in the figure at the top of this post.
The solid line shows the straight percentage return on investment against the date. In the early days, the ROI dipped down to -30% before rising to over 30%. This early volatility is to be expected – whatever the variation, factoring it up to an annualised number will amplify the changes. Eventually it settled down to a range from 4.4% to 9.5%. There appears to be an approximately monthly period on the values – which presumably is because of the regular investment cycle.
However, new money is held as cash pending the investment cycle so a longer term trend should be slightly higher. Allowing 10 days for the investments to be made (a minute BoE level interest is paid on cash), the annualised return over the past month changes to between 4.9% and 11%, shown by the dashed line. The initial ROIs are much more volatile simply because they are considered over many fewer days but they settle down to be very close – but slightly higher.
If the most recent returns carry on and we make no further investment, then we should have increased our £12,000 by £478 or £527 respectively by the end of this year. Not startling but rather better than leaving it in the bank.
This is broadly what was expected – and substantially more than available from ordinary cash ISAs. It includes the management fee which is 1% – currently £26.23 plus £5.25 VAT. There are no further fees and as we increase our investments, these will drop down to 0.3%.
We did have a little problem to start with trying to add money but that was in substantial part because we were overseas at the time on a poor connection. Then we set up a payment system so we can direct money from our bank account and that worked OK but at the moment if you have more than one fund, the target fund cannot be specified when the money is sent – you need to login to allocate the money. We would also like to have a joint ISA account which should be technically possible as the ISA allocation is not actually made until the end of the tax year but that is not available (yet) and have a pension fund (a SIPP) under the same system – again this is something that we hope will come.
We haven’t yet tried to draw funds out but are assured that this is free as long as we wait for the rebalancing time – a very sore point with us at the moment.
Nutmeg is a simple and elegant approach and does not rip you off. Once our roof is done and paid for (and possibly solar panels if we can afford it) we will use Nutmeg for passive investment pending some really good ideas to build our serious nest egg.
We have added an Excel spreadsheet tool that contains our present figures to the Tools page – go play with it!
Our apologies to our North American readers – Uncle Sam won’t allow you to use it. Maybe Nutmeg will open a US system – after all they use BNY Mellon to do the investment!
We benefit from the link to Nutmeg as partners in their affiliate program but wrote this independent article because we genuinely think highly of their product.