Asset Allocations Between Pension and ITs

TCA

I'm planning to buy into some income generating investment trusts but wondering if I should be looking at asset allocation/geographic spread in relation to my pension fund holdings?

I'm 43 (so pension is a long way off) and currently non UK resident, so won't contribute any more without the tax breaks (or to S&S ISAs) but can reallocate what's there between a limited selection of funds. Will list the options in the next post.

My Friends Life pension is largely sitting in the default fund choice, FP Balanced Index Enhanced Fund of Funds, which is 70% Passive, 30% Active. I have about £50k in there which is held in mostly BlackRock Index funds, geographically as follows:

UK 47.53%
USA 11.97%
Europe ex UK 11.95%
International 9.20%
Asia Pacific 4.60%
Japan 3.44%
Cash 9.17%
Others 2.14%

I also have a riskier £7k in FL First State Global Emerging Market Leaders but although prepared to go riskier than my current mix, I would prefer this pot to be no more than medium+ risk overall.

The rest of my savings amounts to about £200k in fixed rate bonds, maturing up to 5 years off, currently earning about 4.6% net. So now I don't fancy watching the value of my capital and income eroding now the days of higher interest appear to be over.

My plan is, over time, to invest each chunk of maturing cash bond into investment trusts so as to generate a replacement income stream and hopefully get some capital growth into the bargain. This could also form the basis for my eventual pension. From reading on here and elsewhere I like the look of City of London IT, Merchants Trust, Murray International, Temple Bar, F&C Commercial, Henderson Far East, Aberforth Smaller Companies and Edinburgh IT among others.

So I'm guessing I'm asking what others would do in this situation and whether my strategy is a valid one? I wouldn't be reliant on the income from ITs at this stage (so let's assume my other current and future needs are taken care of by other income and I retain a cash safety net) but would like to maximise it as time goes on with perhaps a view to replacing employment income.

If my strategy holds water, for income from investment trusts, should I be looking at mix of asset allocation and geographic areas, as opposed to just picking UK trusts with strong dividend records etc....? And should I be buying with regard to my pension holdings or think about reallocating my pension in tandem with this, or should I just configure the pension for growth and look at ITs separately?

Of my cash pot, I've got a 3 year bond worth about £50k maturing in the next 6 months, which would be my first tranch for investing in ITs. Also wondering whether I should be attempting to time the market given it would be lump sum investments?

Apologies for the long post but thanks in advance for any pointers.

TCA

Double post removed

Totton

Might be worth a chat with a financial adviser but if it were me then I'd be wary of being too heavy in UK holdings, perhaps get that down 10-15% as you add further holdings. Shame that Newton Asian Income isn't on your fund list, that did well for me at one time.

I'd be wary of income producing IT's at the moment, do your homework on those as many could be overpriced due to the preference for income holdings at the moment.

Keeping things cautious / medium risk is not difficult with IT's, you could also take a look at PNL, CGT, CLDN and WWH although the first 2 are possibly expensive whilst CLDN is a dogs dinner on a big discount and WWH has proven an excellent 'steady eddie' for me.

I haven't tried it today but usually tracking performance of a good fund like First State Global EM against say Templeton EM (TEM) shows them to have similar returns, I prefer TEM at the moment as it has had a rough time so may be a good time to buy/add.

Timing the market is difficult, I tend to just weigh up the economy whilst remembering that the markets have usually priced in most of the next few months. A good idea is to split your investment into say 3 pots and buy stock say every 1 or 2 months, alternatively you can drip feed monthly but depending on which study you read pound cost averaging either works or doesn't, personally I don't market time unless I can't sleep at night :-)

Sorry it's a bit muddled, I think you could benefit from a financial adviser.

HTH,
Mickey

gadgetmind

Totton wrote: »

I'd be wary of income producing IT's at the moment, do your homework on those as many could be overpriced due to the preference for income holdings at the moment.

Yes, income is the new black, and many of these are on a premium.

I prefer TEM at the moment as it has had a rough time so may be a good time to buy/add.

I bought into TEM a few months ago. Early days.

I'm currently watching a few European ITs as these are on massive discounts despite holding some top notch companies. Decent yield too.

I hold JEO and am watching HEFT.

gadgetmind

TCA wrote: »

My Friends Life pension is largely sitting in the default fund choice, FP Balanced Index Enhanced Fund of Funds, which is 70% Passive, 30% Active.

That wasn't the default in my FL pension but I actively chose it. It's a great fund but too heavy on UK IMO, so see later note.

I also have a riskier £7k in FL First State Global Emerging Market Leaders

I also hold that in my FL pension! I then added some Blackrock Global ex UK because of what I said above.

From reading on here and elsewhere I like the look of City of London IT, Merchants Trust, Murray International, Temple Bar, F&C Commercial, Henderson Far East, Aberforth Smaller Companies and Edinburgh IT among others.

All good ITs.

And should I be buying with regard to my pension holdings or think about reallocating my pension in tandem with this, or should I just configure the pension for growth and look at ITs separately?

I can't get my head around this question. I hold different unwrapped assets to what I hold in SIPP/ISA wrappers, but this is for the tax advantages of dividend income. But other than this, I look at total return before anything else.

TCA

gadgetmind wrote: »

That wasn't the default in my FL pension but I actively chose it. It's a great fund but too heavy on UK IMO, so see later note.

My pension is a former works pension of 15 years ago. Don't even think it was FL-ran to begin with, so I may have started with a completely different fund before transfer. In fact I probably did given the Bal Ind Enhanced FoF started in 2005! I do recall getting 3 choices of funds and picking the "middle" risk option.

Can I ask why you're such a fan of the fund? Granted it has returned 42.7% since launch (that could be my answer) but I guess I'm looking over the last 5 years and seeing 2.6%. I actually reviewed this 4 years ago and made some switching selections but bottled it. Would have made some nice returns too! I can see how you'd want to reduce the UK proportion. FL Bal Ind Enh FoF:

FL BLACKROCK UK EQUITY INDEX (AQUILA HP) 32.96%
FL BLACKROCK US EQUITY INDEX (AQUILA HP) 12.01%
FL BLACKROCK EUROPEAN EQUITY INDEX (AQUILA HP) 10.30%
FL BLACKROCK FIXED INTEREST TRACKER 7.02%
FL BLACKROCK OVERSEAS BOND INDEX (AQUILA LIFE) 5.33%
FL BLACKROCK CASH (AQUILA HP) 4.56%
FL ENHANCED CASH 4.56%
FL F&C STRATEGIC BOND RET INC 3.84%
FL BAILLIE GIFFORD JAPANESE EQUITY PN 3.51%
FL BLACKROCK PACIFIC RIM EQUITY INDEX (AQUILA HP) 2.90%

Given you also hold ITs (as I intend to), out of interest, can I ask what else you hold in your pension fund (other than First State GEML), if that's not too nosy?

gadgetmind wrote: »

I can't get my head around this question. I hold different unwrapped assets to what I hold in SIPP/ISA wrappers, but this is for the tax advantages of dividend income. But other than this, I look at total return before anything else.

I didn't explain it too well. I was wondering whether if I was following an asset allocation approach (i.e. fixed %ages of equities, fixed interest, commercial property, cash....), should this be performed inclusively over both my pension fund together with any prospective investment trusts I buy?

Or if I'm looking for dividend income from ITs, do I use a different strategy to my pension fund approach?

An IFA would of course help me but just asking what other people do if in a similar situation.

gadgetmind

TCA wrote: »

Can I ask why you're such a fan of the fund?

It's done well against its peers over most periods, which is about all you can ask really.

Given you also hold ITs (as I intend to), out of interest, can I ask what else you hold in your pension fund (other than First Asia GEML), if that's not too nosy?

It's complicated. My FL pension is just that Fund of Funds, FS Asia Pacific, and a Blackrock Global tracker.

My SIPP uses Vanguard trackers, bonds ETFs, a strategic bond fund, a few infrastructure funds, some property companies, and about 5% labelled "themes" aka "it seemed like a good idea at the time". The latter is mainly populated with ITs etc. that were on deep discounts due to a variety of factors.

I didn't explain it too well. I was wondering whether if I was following an asset allocation approach (i.e. fixed %ages of equities, fixed interest, commercial property, cash....), should this be performed inclusively over both my pension fund together with any prospective investment trusts I buy?

Yes, you should do this to get your overall risk right, but you need to have an asset spread in each pot or you can't rebalance.

Or if I'm looking for dividend income from ITs, do I use a different strategy to my pension fund approach?

That's difficult. I'm not totally sold on this whole switching from growth to income at retirement strategy, and have no problems in using capital gains from assets both as tax efficient income and a way of moving unwrapped holdings into ISAs.

I'm therefore combining some equity income assets with more growth oriented ones, but then using ITs such as Personal Assets, RIT, and Ruffer for balance. I've got CGT on my watch list but resent paying a premium for it!

TCA

gadgetmind wrote: »

Yes, you should do this to get your overall risk right, but you need to have an asset spread in each pot or you can't rebalance.

This could be a daft question, but why is that necessary? Supposing for simplicity my desired asset spread was 50% equities, 25% commercial property and 25% cash. So my pension pot is £50k of equities and I hold £25k of F&C Commercial Property Trust and £25k of cash. This is what I meant regarding "overall" allocations.

Can I not just rebalance by switching funds within my pension and/or by buying something else with the cash?

gadgetmind wrote: »

I'm not totally sold on this whole switching from growth to income at retirement strategy, and have no problems in using capital gains from assets both as tax efficient income and a way of moving unwrapped holdings into ISAs.

That's very useful. It hadn't crossed my mind to use capital gains as an income but I still think I prefer the dividend approach. No reason why I can't do both though. Cheers.

gadgetmind wrote: »

I've got CGT on my watch list but resent paying a premium for it!

Re a low yielding asset like CGT - is the logic that this allocation would fare better in times when equities are falling?

gadgetmind

TCA wrote: »

Can I not just rebalance by switching funds within my pension and/or by buying something else with the cash?

Yes, as long as you have a mix of assets in each pot, you can rebalance. However, if (say) your ISA was 100% equities, and equities dropped, you'd have no bonds in there to sell, so couldn't rebalance until next ISA season.

I have a SIPP into which I can't put any additional money, and nor can I take anything out for a few years. It therefore needs to be a portfolio in its own right rather than just part of one.

That's very useful. It hadn't crossed my mind to use capital gains as an income but I still think I prefer the dividend approach. No reason why I can't do both though. Cheers.

Some ITs such as Personal Assets have an option to automatically sell some of your holding every year for just this purpose. I'd rather do it myself, but it does show that its total return that matters.

Re a low yielding asset like CGT - is the logic that this allocation would fare better in times when equities are falling?

It's seems to keep ticking away through thick and thin.

http://imgur.com/NS03R

(Not my graph, dunno why those other holdings were specifically chosen.)

TCA

gadgetmind wrote: »

Yes, as long as you have a mix of assets in each pot, you can rebalance. However, if (say) your ISA was 100% equities, and equities dropped, you'd have no bonds in there to sell, so couldn't rebalance until next ISA season.

I get you. I'll be buying IT's outside of tax wrappers, so less of an issue for me.

gadgetmind wrote: »

It's seems to keep ticking away through thick and thin.

http://imgur.com/NS03R

Aah. The 0.49% yield cited on Morningstar plus a large amount of fixed interest holdings between 0.5% and 3% perhaps gave me the wrong idea of the return.

TCA

And right on queue, an article on this very subject on Monevator:

"Asset allocation strategy – what we can learn from rules of thumb"

http://monevator.com/asset-allocation-strategy-rules-of-thumb/