Sorting out my PEPs and ISAa

vulcan59

Apologies for the length of this post, hope it makes sense. I am reviewing my stocks and shares PEPs and ISAs. This is what I currently have.

Scottish Widows PEP invested in their "UK Equity Income Shareclass A" fund value £10000.
Virgin PEP invested in Virgin UK Index Tracking fund value £17000.
Virgin ISA invested in Virgin UK Index Tracking fund value £32000.

From reading here and using the Bestinvest portfolio checker I have come to the conclusion that I should be rebalancing this £59,000 to reduce the exposure to equities and spread the equities so they are not all UK. I want to end up with something like this -
70% Equities split 50% UK, 20% Europe, 15% USA, 15% Japan and pacific.
Remaining 30% in bonds and property - not sure about the split.

Could someone advise me on the best way to do this. I'm thinking along the lines of transferring all of the above to Bestinvest or Hargreaves Lansdown and investing in a selection of funds to match my proposed percentage split. Some questions that I have -

I want to continue investing monthly as I have been doing with Virgin (£250 / month to a mini ISA). Can I continue to do that and still keep the split of funds I want?
Can the PEPs and ISA be combined into an ISA with Bestinvest or HL or do they have to stay separate?
Should I consider keeping the Virgin tracker and just moving some of the money elsewhere?
I can get some money into gilts and bonds by transferring into the Virgin income trust within my current ISA, is that a good idea? It invests in low risk gilts and high rated corporate bonds.
Is the Bestinvest Portfolio checker a good way of finding funds and adjusting the balance or are there better ways? It seems very difficult to get to their recommended allocation of assets. I can get the geographic split but then find that the split between large, medium and small caps is wrong. What should get priority?

Many thanks in advance.

EdInvestor

First of all, the Government has announced that PEPS and ISAs will be merged, so after April, your Virgin money will be amalgamated.

What is the ppoint of this "rebalancing?"At the moment you are 100% in equities of which 20% (the equity income) is medium-low risk and 80% (the tracker) is medium-high risk.

I want to end up with something like this -
70% Equities split 50% UK, 20% Europe, 15% USA, 15% Japan and pacific.
Remaining 30% in bonds and property - not sure about the split.

The result of this change will be a portfolio which is

30% low-medium risk
70% medium-very high risk

The foreign equities carry additional foreign exchage risk, so the net effect is that your risk exposure will be much the same as now.Was that the plan?

It is IMHO not a good idea to invest in bonds at present.

Do you have any real idea about your attitude to risk?

Are you Risk averse ( no risk, cash only),Very cautious, Cautious, Balanced, Adventurous or What the hell, you've got to be in it to win it?

Do you have bits of each category in your investment style?If so, how would you allot a pot of money percentage wise to each category?

eg

Sample overall portfolio (low-med risk)

risk averse 20% (cash)
very cautious - (bonds, gilts)
cautious (equity income funds, bricks and mortar property funds) 50%
balanced (UK equities/trackers,special sits,mainstream big cap foreign,property shares)20%
adventurous (emerging markets, single country funds, commodities funds,UK small cap funds)10%
What they hell etc...(hedge funds, private equity, derivatives) -

dunstonh

rebalancing is where you re-balance the spread of funds back to an allocation appropriate to your risk profile. If you had 10 funds with 10% in each, over time they would go out of sync with each other. Typical performance would see the higher risk ones go up more than the lower risk ones which would increase the risk of your investment. A rebalance on this example would see the funds brought back to 10% each.

Your fund choice currently is poor as is your choice of provider. You are paying the charges as if an adviser was doing the work but you are not using an adviser.

There are two main ways at looking at allocation. Sector allocation and asset allocation. With unit trust funds, it is easier to look at sector allocation. With Investment trusts or shares, it is easier to look at asset allocation.

You need to do something as you have been underperforming the sector average for UK. Your portfolio needs tweaking and you have enough funds to build a proper sector allocated portfolio that matches your risk profile.

Chrismaths

EdInvestor wrote:

The foreign equities carry additional foreign exchage risk, so the net effect is that your risk exposure will be much the same as now.

I don't subscribe to Modern Portfolio Theory as a whole, but it's a good starting point for a novice investor like Ed. If you have a look here, and here under the section of "efficient frontier" and look at the picture of the Markowitz frontier, you realise that you can achieve a higher level of return for a given risk (or a lower level of risk for a given level of return) by prudent diversification.

That's not having an equity income fund and a growth fund (as you recommended on a previous thread), because they will be 85-95% correlated.

vulcan59

EdInvestor wrote:

First of all, the Government has announced that PEPS and ISAs will be merged, so after April, your Virgin money will be amalgamated.

What is the ppoint of this "rebalancing?"At the moment you are 100% in equities of which 20% (the equity income) is medium-low risk and 80% (the tracker) is medium-high risk.

Do you have any real idea about your attitude to risk?

Are you Risk averse ( no risk, cash only),Very cautious, Cautious, Balanced, Adventurous or What the hell, you've got to be in it to win it?

-

Thanks for the reply. The thinking behind this is that 100% UK equities with 80% in a tracker is too much in one area and petentially too volatile. I'm trying to increase the possible upside to this investment and limit the downside.

Risk wise I'm cautious and I should have said in the first post that I'm looking for growth not income with a 7 - 10 year view.

RichardandJudy

I've got a small Halifax Pep How do I check the performance and likely yield so that I can decide what to do with it.
I have been suggested to turn the money in the PEp into and ISA and one linked to China how do I do this

dunstonh

I've got a small Halifax Pep How do I check the performance

You can check past performance on morningstar, trustnet or citywire websites.

and likely yield so that I can decide what to do with it.

future performance is unknown. We can only judge potential and expectation but it is an estimate.

I have been suggested to turn the money in the PEp into an ISA

No. You dont need to do that. You should not withdraw the money and put it into an ISA. All you need to do is transfer between providers. This should be done at zero cost to you (although a small fee is allowable if there is a lot of work involved).

one linked to China how do I do this

Halifax investment funds are generally rubbish and they way they tell you to invest is very poor (normal for tied agents from banks as they are not allowed to give proper investment portfolio advice). You should be doing something. However, whether you should put it all into a China fund is a big jump in risk. You are talking about a fund with a +100/-50% a year potential performance. Could you handle a 12 month period where the investment could drop to half it's value?

Single fund investing is also old fashioned and will result in lower returns over the long term.

EdInvestor

vulcan59 wrote:

Thanks for the reply. The thinking behind this is that 100% UK equities with 80% in a tracker is too much in one area and petentially too volatile.

Moving money into overseas equities will increase risk.Moving into bonds and property will reduce it.Moving to UK equity income funds from trackers will reduce risk.

Risk wise I'm cautious

In that case your current porfolio is not appropriate for your risk profile and nor are your proposed changes.

You should think about having 50-60% max in equities, and they should be UK big caps. The rest in property and bonds/cash.

vulcan59

EdInvestor wrote:

Moving money into overseas equities will increase risk.Moving into bonds and property will reduce it.Moving to UK equity income funds from trackers will reduce risk.

OK thanks, that's a nice simple concept to bear in mind although I realise there will be good and bad income funds so more research to do there.

EdInvestor wrote:

You should think about having 50-60% max in equities, and they should be UK big caps. The rest in property and bonds/cash.

I'll think along those lines and see what I can come up with. Any comments on my original question about whether the Bestinvest portfolio healthcheck tool is a good way to work out the balance of funds?

dunstonh

I'll think along those lines and see what I can come up with. Any comments on my original question about whether the Bestinvest portfolio healthcheck tool is a good way to work out the balance of funds?

Its free to use and you have to remember that free tools are generally less value than paid for tools. Plus I seem to recall someone say it works on asset allocation rather than sector allocation. With unit trust/oeics it is harder to get a close match on asset allocation.

EdInvestor

Have a look at this US asset allocation calculator

Although it's for retirees, adjust the age and it will work. IMHO you can replace the fixed interest category with commercial property to get a reasonable approximation to the UK context.

Note when they talk about "tax-deferred" plans they mean our personal or money purchase pensions. When they say "pensions" they mean our final salary or guaranteed state pensions.