Using income funds as part of growth strategy for pension portfolio
Anya78
Posts: 3 Newbie
I have been given a list of recommended funds by my employer’s IFA (risk level determined via a questionnaire). There wasn’t really much opportunity to discuss the fund choices with him (we each only get a 15 minutes chat), so I wondered if anyone here knows the reason for using an income fund for growth?
The suggested portfolio invests 19% in Invesco Perpetual High Income, 15% in Fidelity Special Situations, 36% in international regional equity trackers and the remainder split between UK direct property, strategic income bonds and UK corporate bonds.
The proportion of UK equity seems really high to me, as this represents 41% of the equity allocation. My work fund currently has 75% in an international equity tracker and 25% in a UK FTSE all-share tracker, and whilst my portfolio has achieved higher returns than the suggested portfolio since 2013 (the chart history available from Trustnet), it also has a much higher risk score.
Ideally I would like to move away from being so much in equities (I have another pension pot with Cavendish which has global smaller companies, emerging markets and direct property), but feel a bit puzzled by the recommended funds.
I am 38 with £130k in total split between my work pension, a Cavendish SIPP and a Fidelity ISA.
The suggested portfolio invests 19% in Invesco Perpetual High Income, 15% in Fidelity Special Situations, 36% in international regional equity trackers and the remainder split between UK direct property, strategic income bonds and UK corporate bonds.
The proportion of UK equity seems really high to me, as this represents 41% of the equity allocation. My work fund currently has 75% in an international equity tracker and 25% in a UK FTSE all-share tracker, and whilst my portfolio has achieved higher returns than the suggested portfolio since 2013 (the chart history available from Trustnet), it also has a much higher risk score.
Ideally I would like to move away from being so much in equities (I have another pension pot with Cavendish which has global smaller companies, emerging markets and direct property), but feel a bit puzzled by the recommended funds.
I am 38 with £130k in total split between my work pension, a Cavendish SIPP and a Fidelity ISA.
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Comments
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The Invesco Perpetual High Income Fund, despite its name, only has a yield of 3.1%, rather less than the FTSE100. The fund has a very good history and was one of Neil Woodford's funds before he set up on his own and I believe continues to operate a similar strategy. Like Woodford Equity Income it performed particularly poorly over the past year, though at other times has done well.
I agree that 41% UK is high. Judging by the reliance on both IP High Income and Fidelity SS, and the UK % the overall approach seems old-fashioned to me.0 -
I agree, 41% UK seems a little over the top.
Equity income funds will tend to contain companies that are well established, profitable and have cash reserves with which to cover their dividends during the harder times. So they will tend to be a bit more defensive than an equivalent index tracker. That may be the rationale.
Seems like a 60:40 portfolio with less in UK equities might be closer to what you would want.0 -
Equity income funds will tend to contain companies that are well established, profitable and have cash reserves with which to cover their dividends during the harder times. So they will tend to be a bit more defensive than an equivalent index tracker. That may be the rationale.
If so, it's a flawed one.
It's true that holding reserves (e.g. Cash) offers downside protection. The OP might be advised to model holding 5% cash and comparing again.
Further, the "equivalent index tracker" to compare against is one which tracks an equivalent index, not an all share index. The problem is there are no perfectly matched indexes to a fund (except the fund which tracks it), only a series of "best fits". You might find a high yield index is the best fit, for instance, but that it's not perfect because the active fund throws a smattering of holdings outside that index in. The fisher price trustnet and Morningstar style rankings are largely to blame for perpetuating the myth.0 -
I was referring to cash reserves held by the underlying companies, rather than cash reserves held by the fund manager.TheTracker wrote: »It's true that holding reserves (e.g. Cash) offers downside protection. The OP might be advised to model holding 5% cash and comparing again.
In the simple case, where the active fund manager sets up a screen for companies meeting certain requirements relating to dividend yield, dividend cover, EPS growth etc, then it seems reasonable to compare his performance to that of the market within which he is actively picking shares (even if he is not a human being, but rather an algorithm). Especially when the fund is being proffered as exposure to UK equities and the non-UK portion of the equities is made up of traditional market-cap weighted index trackers.Further, the "equivalent index tracker" to compare against is one which tracks an equivalent index, not an all share index. The problem is there are no perfectly matched indexes to a fund (except the fund which tracks it), only a series of "best fits". You might find a high yield index is the best fit, for instance, but that it's not perfect because the active fund throws a smattering of holdings outside that index in. The fisher price trustnet and Morningstar style rankings are largely to blame for perpetuating the myth.
The active management decision by the IFA in this case is to replace a FTSE All share tracker with an equity income fund, with a side order of 'special situations' (and then 'go large' on this portion).
One may well consider that it would be more efficient to replace the FTSE All share tracker with a smart-beta index tracker.0 -
IMHO most IFA portfolio's today would consist of between 15-20% UK Equities and no more unless for exceptional personal circumstances/preferences.0
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Well, that HO is quite speculative as you haven't canvassed most IFAs about what most of their investors' portfolios holdIMHO most IFA portfolio's today would consist of between 15-20% UK Equities and no more unless for exceptional personal circumstances/preferences.
But clearly they will have investors with a huge range of objectives from accumulation to decumulation which will all have different risk profiles.
For a portfolio of 70% equities and 30% non-equities such as what the OP has, a 15% UK allocation would mean that only about a fifth of the equities were domestic market with almost four fifths 'away'. That level of domestic exposure might be a little low for someone of an averagely normal risk appetite; it's not as if the general public follows the world free float market cap and would want/ expect their IFAs to put them in a fund mix which had 94% of the equities overseas as you sometimes see folks here talking about.
If you take a couple of cheap multi-asset funds mentioned here from time to time which have 65-75% equities and 25-35% non equities (like the OP's suggested pension); Blackrock Consensus 70 and L&G Multi-index 6 would both give you more than your suggested 15-20% in UK equities and they are not trying to accommodate "exceptional personal circumstances / preferences". The Vanguard Lifestrategy UK range doesn't have a 65-75% equity version but its philosophy is 25% equities at 'home' - popular with many, but rather lower in UK exposure than what a number of its competitors would do (increasing volatility accordingly).
Of course, what 'most IFA portfolios today' look like is not too relevant if the OP has been through a risk profiling exercise and been given general pointers by the employer's IFA. He would not be trying to match the employee's asset mix to what 'most portfolios look like' but to what a 'suitable portfolio for that type of person would look like'. Personally, half my equities in UK-centric funds would be too much for my own preferences but it would not be completely outrageous, depending on various factors for the individual and what the non-equities stuff is in.0 -
Thanks for your replies. I've looked on Trustnet and can see that the Invesco Perpetual fund has a much lower risk score than a UK equity tracker, so perhaps that is why it is included.
Do the overseas equity funds increase volatility due to exchange rate variances? Last year the IFA recommended I amend my proportions of international to UK equities to 50:50 rather than 75:25 to reduce volatility, but I would have thought having a large proportion of my funds in one geographical area would increase the risk factor of a portfolio. Perhaps I am misunderstanding how the risk is calculated.0 -
It's just a measure of how much a fund swings up and down on a daily basis relative to the FTSE 100 index. A lower risk score would indicate a smoother ride, but it wouldn't necessarily mean the loss potential is lower. Direct property is a good example of an asset class that is medium-high risk, but tends to have very low risk scores due to the fact it is illiquid, so there are no daily price movements to be captured in the fund price.Perhaps I am misunderstanding how the risk is calculated.0 -
Do the overseas equity funds increase volatility due to exchange rate variances?
Generally. Do you regard volatilty as bad?
Last year the IFA recommended I amend my proportions of international to UK equities to 50:50 rather than 75:25 to reduce volatility, but I would have thought having a large proportion of my funds in one geographical area would increase the risk factor of a portfolio. Perhaps I am misunderstanding how the risk is calculated.
That would reduce volatility (would reduce currency movements) but would (as you say) increase risk as you have more in one economy (not the geography so much).
If you are starting to question the IFAs decisions, then I'd say you are either ready for a new IFA or a more hands-on approach yourself.0 -
bowlhead99 wrote: »Well, that HO is quite speculative as you haven't canvassed most IFAs about what most of their investors' portfolios hold
But clearly they will have investors with a huge range of objectives from accumulation to decumulation which will all have different risk profiles.
For a portfolio of 70% equities and 30% non-equities such as what the OP has, a 15% UK allocation would mean that only about a fifth of the equities were domestic market with almost four fifths 'away'. That level of domestic exposure might be a little low for someone of an averagely normal risk appetite; it's not as if the general public follows the world free float market cap and would want/ expect their IFAs to put them in a fund mix which had 94% of the equities overseas as you sometimes see folks here talking about.
If you take a couple of cheap multi-asset funds mentioned here from time to time which have 65-75% equities and 25-35% non equities (like the OP's suggested pension); Blackrock Consensus 70 and L&G Multi-index 6 would both give you more than your suggested 15-20% in UK equities and they are not trying to accommodate "exceptional personal circumstances / preferences". The Vanguard Lifestrategy UK range doesn't have a 65-75% equity version but its philosophy is 25% equities at 'home' - popular with many, but rather lower in UK exposure than what a number of its competitors would do (increasing volatility accordingly).
Of course, what 'most IFA portfolios today' look like is not too relevant if the OP has been through a risk profiling exercise and been given general pointers by the employer's IFA. He would not be trying to match the employee's asset mix to what 'most portfolios look like' but to what a 'suitable portfolio for that type of person would look like'. Personally, half my equities in UK-centric funds would be too much for my own preferences but it would not be completely outrageous, depending on various factors for the individual and what the non-equities stuff is in.
OK point taken about 'most' IFA's, however, I do know quite a few friends that work with an IFA on their investments and non of those that have a 7 risk profile (70% equity) hold more than 15-20% in UK equities. I would of thought IMHO that this amount in UK equities at the current time is sufficient. At the top end at 20% is surely adequate? 0
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