Portfolio sanity check, please

jon3001

gadgetmind wrote: »

I'm (hopefully!) less than a decade off early retirement, but will almost certainly use drawdown.

Hi,

This is an important detail which escaped my notice when I first skimmed your post.

Do you intend making further changes to your portfolio when you reach drawdown? As you count-down the years to retirement I would be shifting the composition to a more income-orientated and less volatile allocation. Volatility will be a killer when you're drawing down.

Properties and equities will still be important for that. You may wish to use income-oriented funds over a tracker (E.g. Invesco Perp European Equity Income). I'd be scaling back the small-cap allocations (e.g. 7.5% Euro; 2.5% Euro small-cap vs 5%/5%).

Small-caps and commodity futures won't generate anything but negligible income but you could bank capital gains during the good times.

In general the amount you have bonds should cover 5-7 years expenses to cover bear markets.

Linton

What I find interesting is to examine the constituents of your proposed portfolio in terms of geography and sector. This information is on Trustnet.

1) FTSE100 tracker is much too high. The three largest sectors, Oil, Financials, and Raw Materials amount to over 50% of the index. This strikes me as rather unbalanced. It is also looks far from being representative of the UK economy - I assume that was your purpose of investing in a UK index. If you wanted a UK focus perhaps more in the FTSE250 would be more appropriate.

2) EM and Pacific are not that well defined - you need to be clear what you are investing in. For example the HSBC Pac index majors on Australia and more or less ignores China completely. The First State Asia Pac managed fund does the reverse. Different EM managed funds again concentrate on different areas. Just buying an Index may or may not give you what you want.

3) I would definititely go for more small caps. The problem I see with Indexes based on total market capitalisation is that they seem to be over influenced by very large companies in much the same industries. In a global economy, I believe diversification of industry is as important as diversification of geography.

Linton

jon3001 wrote: »

Here's the FTSE's top 10 consitiuents:
1 BHP Billiton [Mining] (£148B)
2 Royal Dutch Shell [Oil and gas] (£135B)
3 HSBC [Financial services] (£118B)
4 Vodafone Group [Telecommunications] (£93B)
5 BP [Oil and gas] (£91B)
6 Rio Tinto Group [Mining] (£86B)
7 GlaxoSmithKline [Pharmaceuticals] (£61B)
8 Unilever [Consumer goods] (£56B)
9 British American Tobacco [Tobacco] (£49B)
10 BG Group [Oil and gas] (£49B)

You honestly don't see any potential for some of the world's largest resource companies, banks and tobacco companies, etc to produce solid dividends over the next 10 years and expands their international markets?

I agree that some companies of that pedigree are worth investing in, though it would seem better to buy them as individual shares, primarily for income. Their chance of a high % growth could be somewhat limited by their size.

For growth I see small cap and specific global geographies and industries as more approriate.

gadgetmind

jon3001 wrote: »

Do you intend making further changes to your portfolio when you reach drawdown? As you count-down the years to retirement I would be shifting the composition to a more income-orientated and less volatile allocation. Volatility will be a killer when you're drawing down.

Yes, that's the intention, and for my unwrapped investments, I'm already adopting an income stance.

As for volatility, I have three years of income held as ILSCs and cash, so I can go gentle on the investments if they catch the odd cold. I notice you mention 5-7 years, which is scary, but perfectly achievable given a combination of ILSCs and bonds in pensions.

I also only need 3.6% drawdown AFTER state pensions kick in, so will only be potentially hitting the investments hard for 11 years.

You may wish to use income-oriented funds over a tracker (E.g. Invesco Perp European Equity Income).

I might later, but the quest for income doesn't always seem to deliver the best capital performance.

Small-caps and commodity futures won't generate anything but negligible income but you could bank capital gains during the good times.

I'm fairly relaxed about whether the money comes via income, dividends, or capital. After retirement, there will be a fair bit of money (unwrapped holdings and PCLS) to slowly trickle across into ISAs as fast as CGT/ISA limits allow.

dunstonh

My current pension is with Skandia

Why are you not using the blackrock class D trackers available on Skandia and choosing to go with the more expensive HSBC & L&G trackers?

The blackrock trackers are one of the positive points of the skandia platform.

Many posters here will tell you that they're 'globally-focused' and will have very little in the way of UK exposure. IMHO that's a mistake.

Whilst starting with the caveat that investing is about opinions, most of the current sector allocation models have seen a decrease in the amount allocated to UK equities over the last 18 months.

gadgetmind

Linton wrote: »

If you wanted a UK focus perhaps more in the FTSE250 would be more appropriate.

I did have 250 higher originally (already 30% of UK holdings) but might increase it.

For example the HSBC Pac index majors on Australia and more or less ignores China completely.

My China exposure comes from the L&G EM fund as it's the 2nd largest holding at 16%.

The problem I see with Indexes based on total market capitalisation is that they seem to be over influenced by very large companies in much the same industries.

I do sector balancing in my unwrapped portfolio but lack strong evidence that this is the best long-term approach.

Of course, we risk heading back towards "active versus passive" ...

gadgetmind

dunstonh wrote: »

Why are you not using the blackrock class D trackers available on Skandia and choosing to go with the more expensive HSBC & L&G trackers?

Are they available without involving an IFA? Sadly, my IFA continues to ignore my emails regards moving my Skandia holdings in the low-fee direction.

Most of the HSBC trackers are now pretty cheap, and my overall TER seems fairly good. However, Blackrock does seem to offer more variety.

Whilst starting with the caveat that investing is about opinions, most of the current sector allocation models have seen a decrease in the amount allocated to UK equities over the last 18 months.

Is that for new portfolios or are existing ones being rebalanced in that direction?

Lokolo

Linton wrote: »

I agree that some companies of that pedigree are worth investing in, though it would seem better to buy them as individual shares, primarily for income. Their chance of a high % growth could be somewhat limited by their size.

For growth I see small cap and specific global geographies and industries as more approriate.

Good shout. Great minds think alike

IronWolf

There are some decent yields available on corporate bonds at the moment, definitely more attractive than gilts to me.

Ark_Welder

gadgetmind wrote: »

Blackrock Global Property Securities tracker = 10%

Depends on what you're trying to achieve: liquidity or uncorrelation. The underlying assets for the tracker are still company shares. In the event that markets in general take a hit, so shares are unloaded en masse rather than just individual companies/sectors/countries, then property shares might fall to the same extent as all other shares. Similar situation with holding individual REITs.

But as you might have seen in 2008/9, unitised property products might invoke a 6-month - or even an indefinate - lock-in. But the units will be priced to the underlying buildings rather than daily investor demand.

Have a look at your existing property fund to see how this invests. Might be worth holding on to it if you are trying to reduce correlation between assets.

gadgetmind wrote: »

I'm also tempted to reduce UK, US and Europe a little and bias more towards Pacific and EM, but I already have as much there as in the US. Thoughts?

Depends on how you think the world's economies are going to develop. FE and EMs still have dependencies on the developed economies, so slow-downs here will still have an effect there - they're still a way away from having enough trade just between themselves, although they are getting there.

gadgetmind wrote: »

I'm aware that I don't have diect commodities or any significant small cap in there, and while I have exposure to those elsewhere, I would like commodities exposure in this portfolio. Ideas?

Main areas are PMs, industrials and agricultural. Potentially, three ETFs (of the physical variety, if possible!). Don't have sufficient interest in this area, myself, to make further suggestion, I'll merely note that the Marlborough fund would make the asset-allocation decisions for you...;)

gadgetmind wrote: »

I looked through a load of them, and today's hot names (First State, Aberdeen, etc.) have outperformed, others have lagged behind the index. Who's to know which to pick from here onwards?

Although you will here 'Hugh Young' in relation to Aberdeen and FE/EM, they do seem to take more of a team approach rather than rely upon individuals. Not sure about First State - which is a bit slack given that I hold one of their ITs...:)

gadgetmind wrote: »

I wasn't going to buy my gilts straight away as yields are currently too low. Sitting on cash might seem silly, but it will be a few weeks before HMG deliver the other 25% anyway, so I'll wait until at least then.

I think that gilts are probably one of the more difficult areas right now: conventionals are trading above par, some linkers offer a negative real yield, all suggests that they're overpriced. But that assumes that normal service will soon be resumed...

If you do have a specific target date then you could consider holding one conventional and one linker, both of which mature around that date. Your return on the conventional is a known, as is your inflation-indexation. Funds, both active and passive, will still be investing in new issues - even up to your target date - and so your return could work out less than direct holdings in the event of normal service resumption. Some of this might also depend upon your investment platform, i.e. are there platform charges for holding gilts but none for funds? Will RDR change this anyway?

gadgetmind wrote: »

I might later, but the quest for income doesn't always seem to deliver the best capital performance.

Investing for income does not necessarily mean holding (just) higher-yielding investments, such as +5% shares and/or high-yield bonds. A share/fund that has a 2% or 3% yield now but that can grow the distribution over time might be able to deliver capital growth and deliver a 5% yield (based upon today's share price) when you need the income - and still have the potential for growing distributions into the future.


[Edit]

Prompted by IronWolf's post, don't necessarily discount corporate debt. Investment grade should (and normally would) offer different correlation to equities. High-yield (non-investment, or 'junk') has more correlation with equities.