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    • Anya78
    • By Anya78 15th Mar 17, 4:05 PM
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    Anya78
    Using income funds as part of growth strategy for pension portfolio
    • #1
    • 15th Mar 17, 4:05 PM
    Using income funds as part of growth strategy for pension portfolio 15th Mar 17 at 4:05 PM
    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.
Page 1
    • Linton
    • By Linton 15th Mar 17, 4:37 PM
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    Linton
    • #2
    • 15th Mar 17, 4:37 PM
    • #2
    • 15th Mar 17, 4:37 PM
    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.
    • masonic
    • By masonic 15th Mar 17, 4:44 PM
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    masonic
    • #3
    • 15th Mar 17, 4:44 PM
    • #3
    • 15th Mar 17, 4:44 PM
    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.
    • TheTracker
    • By TheTracker 15th Mar 17, 4:55 PM
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    TheTracker
    • #4
    • 15th Mar 17, 4:55 PM
    • #4
    • 15th Mar 17, 4:55 PM
    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.
    Originally posted by masonic
    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.
    • masonic
    • By masonic 15th Mar 17, 5:14 PM
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    masonic
    • #5
    • 15th Mar 17, 5:14 PM
    • #5
    • 15th Mar 17, 5:14 PM
    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.
    Originally posted by TheTracker
    I was referring to cash reserves held by the underlying companies, rather than cash reserves held by the fund manager.

    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.
    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.

    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.
    Last edited by masonic; 15-03-2017 at 5:22 PM.
    • MPN
    • By MPN 15th Mar 17, 6:52 PM
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    MPN
    • #6
    • 15th Mar 17, 6:52 PM
    • #6
    • 15th Mar 17, 6:52 PM
    IMHO most IFA portfolio's today would consist of between 15-20% UK Equities and no more unless for exceptional personal circumstances/preferences.
    • bowlhead99
    • By bowlhead99 15th Mar 17, 8:32 PM
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    bowlhead99
    • #7
    • 15th Mar 17, 8:32 PM
    • #7
    • 15th Mar 17, 8:32 PM
    IMHO most IFA portfolio's today would consist of between 15-20% UK Equities and no more unless for exceptional personal circumstances/preferences.
    Originally posted by MPN
    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.
    • Anya78
    • By Anya78 15th Mar 17, 10:26 PM
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    Anya78
    • #8
    • 15th Mar 17, 10:26 PM
    • #8
    • 15th Mar 17, 10:26 PM
    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.
    • masonic
    • By masonic 16th Mar 17, 6:16 AM
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    masonic
    • #9
    • 16th Mar 17, 6:16 AM
    • #9
    • 16th Mar 17, 6:16 AM
    Perhaps I am misunderstanding how the risk is calculated.
    Originally posted by Anya78
    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.
    • AnotherJoe
    • By AnotherJoe 16th Mar 17, 6:32 AM
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    AnotherJoe
    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.
    Originally posted by Anya78
    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.
    • MPN
    • By MPN 16th Mar 17, 10:30 AM
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    MPN
    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.
    Originally posted by bowlhead99
    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?
    • MonroeM
    • By MonroeM 16th Mar 17, 4:54 PM
    • 97 Posts
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    MonroeM
    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?
    Originally posted by MPN
    VLS funds are 25% UK equities which many people on this forum have said is top heavy. In my opinion, in the current climate of uncertainty that 20% is more than adequate although in the portfolio I am constructing it is nearer 15%!
    • Anya78
    • By Anya78 16th Mar 17, 11:43 PM
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    Anya78
    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.
    Thanks, that makes much more sense now. Given the funds are held in a pension pot, I'm not worried about short term volatility, but more about reducing slightly the impact of a large drop when the next crash comes.

    I think I'll leave my equity holding in the funds I currently hold for now. I agree that 41% UK equity seems very high, and more than I feel comfortable holding at present. It's interesting that other IFAs are recommending more like 15-20% UK equities, but maybe they have reduced volatility another way.

    For now I will look into the bond funds recommended. I thought about including bond funds a year ago, but decided they were very high with too much potential to fall in value. A year later they are even higher! Is a strategic income bond fund likely to be a reasonable choice in the current low interest/low inflation climate? The one recommended is the Scottish Widows Strategic Income Bond Fund. I can't find any information on this, other than that it is invested in 72% UK investment grade corporate bonds and 28% UK high yield.
    • MPN
    • By MPN 18th Mar 17, 8:56 PM
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    MPN
    I agree that 41% UK equity seems very high, and more than I feel comfortable holding at present. It's interesting that other IFAs are recommending more like 15-20% UK equities, but maybe they have reduced volatility another way.
    Originally posted by Anya78
    As I mentioned, most people I know have a risk profile of 70% Equities and out of this a maximum of between 15-20% in UK Equities. They will reduce risk and volatility with the remaining 30% of their investments possibly through bonds and property.

    As MonroeM said even VLS funds only have 25% UK Equity and she prefers only 15% UK Equities so IMO 41% is extremely high!
    • coyrls
    • By coyrls 18th Mar 17, 9:07 PM
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    coyrls
    As I mentioned, most people I know have a risk profile of 70% Equities and out of this a maximum of between 15-20% in UK Equities. They will reduce risk and volatility with the remaining 30% of their investments possibly through bonds and property.

    As MonroeM said even VLS funds only have 25% UK Equity and she prefers only 15% UK Equities so IMO 41% is extremely high!
    Originally posted by MPN
    You really know the risk profile of the people you know? How did you get that information?
    • MPN
    • By MPN 18th Mar 17, 9:12 PM
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    MPN
    You really know the risk profile of the people you know? How did you get that information?
    Originally posted by coyrls
    Its no big secret with my friends we always chat about our investments, strategies etc and exchange views just like on this forum. Many of the posters on here openly tell us their risk profile or whether they are 100% equities or VLS40 etc. I can't really see any particular reason to be secretive about these things.
    • bowlhead99
    • By bowlhead99 19th Mar 17, 1:01 AM
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    bowlhead99
    As MonroeM said even VLS funds only have 25% UK Equity...
    Originally posted by MPN
    The phrase "even VLS funds have only 25% UK Equity" as if for you to imply that VLS funds are generically a low risk way of investing, is not something that makes sense to do, IMHO. As I mentioned in the earlier post, a couple of rival multi-asset funds with similar charges (L&G MI and Blackrock Consensus) have higher proportions of UK equity.

    L&G MI is risk targeted while VLS is performance targeted in fixed ratios of holdings. You can see on the recent charts, VLS 60 and especially VLS 80 have had a very high relative recent performance in their mini league table of "mixed assets, 40-85% equities". Reasons for that include having a high overseas component within their equities, particularly US component, at a time where foreign markets performed quite well and sterling weakened significantly making the overseas holdings more valuable in pounds.

    They have 75% of their equities overseas and the UK equities they hold are concentrated in companies with non-UK revenues. So, no wonder they are flying high in the charts when UK has a relative poor year. But something like a VLS80 with that exposure is relatively high risk. VLS80 has done almost 30% in a year and 40% in three. Funds performing like that do not necessarily fit with an 'average' risk profile.

    Sure, many of us do hold that sort of ratio if it chimes with our risk appetite but if someone is not looking for that level of volatility (especially if they have hinted to us and perhaps their advisor that they are looking to hold lower levels of equities because they already have a separate pension crammed with smaller companies, emerging markets etc) it is easy to understand why the OP's advisor suggested higher exposure to domestic assets.

    ...and she prefers only 15% UK Equities so IMO 41% is extremely high!
    As I mentioned in an earlier post, yes half your equities domestic is pretty high, and many might put a greater proportion of them overseas.

    However, the fact that one particular poster (MonroeM) - who only started looking into investments four months ago - is deliberately looking for a low exposure to the UK because of what she perceives as a "current climate of uncertainty" and as a result is targeting 15% home country equity is certainly not something that you can extrapolate and say that most IFA portfolios would only be 15-20% UK.

    Generally if someone says they are concerned about a climate of uncertainty, they do not go and put a massive proportion of their money in a foreign country. So, she is perhaps tilting her portfolio out of naivety rather than you being able to infer that she is doing it out of insight borne of years of investing experience (we know she does not have much in the way of investing experience over the last few economic cycles - she has nil, having acquired her portfolio on divorce and only looked into it at the back end of last year). She has just read some things, agrees with them and is doing a low-UK equity plan, which might be the right thing to do or it might not.

    This is not me being critical of MonroeM who has probably has learned a lot since being here about what she wants and how she might develop her knowledge and target her investments to create a solution that works for her.

    It is just to add a counterpoint to your using her, or VLS, as an example of how an average person should create their portfolios, when you say that 15-20% UK equity is the sweet spot because 'even VLS is only 25% UK' and MonroeM prefers a low percentage so anything more is extremely high.
    Last edited by bowlhead99; 19-03-2017 at 1:04 AM.
    • kidmugsy
    • By kidmugsy 19th Mar 17, 2:05 AM
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    kidmugsy
    Consider someone whose biggest equity investment (his house) is in the UK, whose biggest bond investment (his future State Pension and DB pension, say) is in the UK, and whose Personal Capital (present value of future earnings) is in the UK.

    You could argue that it might be wise to hold most of the rest of his wealth as foreign investments.
    • MPN
    • By MPN 19th Mar 17, 10:15 AM
    • 175 Posts
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    MPN
    The phrase "even VLS funds have only 25% UK Equity" as if for you to imply that VLS funds are generically a low risk way of investing, is not something that makes sense to do, IMHO. As I mentioned in the earlier post, a couple of rival multi-asset funds with similar charges (L&G MI and Blackrock Consensus) have higher proportions of UK equity.

    L&G MI is risk targeted while VLS is performance targeted in fixed ratios of holdings. You can see on the recent charts, VLS 60 and especially VLS 80 have had a very high relative recent performance in their mini league table of "mixed assets, 40-85% equities". Reasons for that include having a high overseas component within their equities, particularly US component, at a time where foreign markets performed quite well and sterling weakened significantly making the overseas holdings more valuable in pounds.

    They have 75% of their equities overseas and the UK equities they hold are concentrated in companies with non-UK revenues. So, no wonder they are flying high in the charts when UK has a relative poor year. But something like a VLS80 with that exposure is relatively high risk. VLS80 has done almost 30% in a year and 40% in three. Funds performing like that do not necessarily fit with an 'average' risk profile.

    Sure, many of us do hold that sort of ratio if it chimes with our risk appetite but if someone is not looking for that level of volatility (especially if they have hinted to us and perhaps their advisor that they are looking to hold lower levels of equities because they already have a separate pension crammed with smaller companies, emerging markets etc) it is easy to understand why the OP's advisor suggested higher exposure to domestic assets.

    As I mentioned in an earlier post, yes half your equities domestic is pretty high, and many might put a greater proportion of them overseas.

    However, the fact that one particular poster (MonroeM) - who only started looking into investments four months ago - is deliberately looking for a low exposure to the UK because of what she perceives as a "current climate of uncertainty" and as a result is targeting 15% home country equity is certainly not something that you can extrapolate and say that most IFA portfolios would only be 15-20% UK.

    Generally if someone says they are concerned about a climate of uncertainty, they do not go and put a massive proportion of their money in a foreign country. So, she is perhaps tilting her portfolio out of naivety rather than you being able to infer that she is doing it out of insight borne of years of investing experience (we know she does not have much in the way of investing experience over the last few economic cycles - she has nil, having acquired her portfolio on divorce and only looked into it at the back end of last year). She has just read some things, agrees with them and is doing a low-UK equity plan, which might be the right thing to do or it might not.

    This is not me being critical of MonroeM who has probably has learned a lot since being here about what she wants and how she might develop her knowledge and target her investments to create a solution that works for her.

    It is just to add a counterpoint to your using her, or VLS, as an example of how an average person should create their portfolios, when you say that 15-20% UK equity is the sweet spot because 'even VLS is only 25% UK' and MonroeM prefers a low percentage so anything more is extremely high.
    Originally posted by bowlhead99
    No matter how experienced an investor you are and your need to be so defensive for 'the country you live in' in my opinion you cannot justify a portfolio of 41% UK equities even with a lower risk profile!
    • masonic
    • By masonic 19th Mar 17, 10:57 AM
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    masonic
    No matter how experienced an investor you are and your need to be so defensive for 'the country you live in' in my opinion you cannot justify a portfolio of 41% UK equities even with a lower risk profile!
    Originally posted by MPN
    One needs to consider that the stockmarket in which a company is listed is a flawed measure of geographical exposure and that there are investment strategies that are agnostic of geography. There are therefore perfectly justifiable investment strategies that may arrive at a portfolio in which 41%, or even a higher proportion, if underlying companies are listed on the UK stockmarket.

    In this case, we have inferred from the choices made that the IFA is probably not choosing that 41% allocation for good reasons, but that doesn't mean that it is never justified to do so.
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