Portfolio critique please but be gentle!

bigchipper

Hi

I am 55, married and in reasonable health. I aim to retire in 5 years time on a public sector final salary pension of around £20k (for which I am making additional contributions). My other half works part time and has only a small amount of deferred final salary pension provision (estimated to be worth about £3k at age 60). We both have more than 35 years NI conts so should get at least the full standard state pension. By this time my mortgage will be paid off and my children will have finished uni and hopefully be self sufficient.

I received an inheritance of £120k last year and while I am using half to fund kids uni and as my rainy day emergency pot the other half I have invested to achieve a better return than i could get from miserable savings accounts rates with a view to this providing some additional income to supplement the pensions in due course. I would say my attitude to risk is cautious although willing to take a bit of extra risk given the surety of my final salary pension.

My issue is I am approaching the time when I want to rebalance the portfolio but its clear I have adopted an eclectic magpie approach to my selection in an attempt to ensure sufficient diversification and I am pretty sure I have more funds than I need (25 or so!), too low a holding in some while others will be just be unecessary duplications (not mention poor performing choices). Grateful therefore for any suggestions on how best to rationalise these to around a dozen (or less) and maintain an appropriate balance My funds and percentage holdings are:

Artemis Strategic Assets R Acc 5%
Fidelity Moneybuilder Balanced 7%
First State Asia Pacific Leaders A GBP Acc 2%
HSBC FTSE All Share Index Ret Acc 5%
Invesco Perp Income Inc 7%
Investec Cautious Managed A Acc GBP 3%
JOHCM UK Equity Income B Inc 3%
Liontrust Income Ret 3%
M&G Global Basics A Acc GBP 2%
M&G Optimal Income A Inc GBP 4%
M&G Strategic Corporate Bond A Acc GBP 3%
Newton Asian Income GBP 3%
Newton Global Higher Income 3%
Newton Real Return A 3%
Schroder Global Equity Income A Inc 4%
Threadneedle UK Equity Income Ret Inc GBP 5%
Trojan Income O Inc 3%
Unicorn UK Income A 3%
Vanguard LifeStrategy 80% Equity Acc 16%
Bankers Investment Trust PLC Ord 3%
F&C Global Smaller Companies 2%
Monks Investment Trust PLC 2%
Scottish Mortgage Investment Trust 6%
Temple Bar Investment Trust PLC 5%

Apologies for the length of the post but any advice welcome

b-c

Linton

I agree that you have far too many funds. It is very difficult to see what the overall structure of the portfolio is and many of your funds are ultimately investing in much the same shares. Assuming that my understanding is correct that you are investing £60K I would argue that anything under 4% is too small to be worth the effort.

I suggest you take a 3 stage structured top-down approach to designing your portfolio. What I present is an example of the sort of approach one could use.

1) Specify requirements.

The key requirement is how much of your money is to be required in what timescale.

For example:
a) 20% for a retirement lump sum in 5 years
b) 50% to provide an income from 5-15 years
c) 30% for long term, > 15 years

These requirements arent cast in stone, but form the basis for a rational decision on where to invest. If you change you mind on the requirements at a later date you will then know what to change in your portfolio.

2) Identify appropriate investment sectors and % holdings

a) capital held 5 years or less, no income requirement

You need safe investments for short time frames as you dont want a market crash in the 4th year to devastate your savings as you would have no time to rebuild them.

So you are talking about deposit accounts and normally safer investment bonds such as gilts and corporate bonds issued by major companies. Unfortunately safe investment bonds are unusually expensive at the moment and so you are probably stuck with deposit accounts.

b) 5-10 years, no income required for the time being

In this time frame you can afford to take some investment risk in the expectation that underlying upwards trends could outweigh short term fluctuations. So the type of sectors you could look into are balanced or cautious managed funds. Perhaps a general global fund together with a bond fund, or cash awaiting a lowering of bond prices.

c) >10 years

Now you can begin to take some greater risk to gain a greater return. Perhaps bring in emerging markets, small companies and other niche areas. There is a much decreased need for very safe bond or cash savings as the extended timescale provides a good opportunity for recover from any major downturn. For example the credit crunch caused a major fall in share prices typically by say 30-50%. However most investments have recovered to at least their state before the crash. Just checking some of my investments I see several which are now 50%-100% higher than their highest value prior to 2008. I havent yet found any lower.

3) Identify funds

This is the easiest part - chose what you consider suitable funds to cover the sectors/%s identified in stage 2.

Maintaining portfolio

Once a year you can review your requirements, desired sector allocation and actual sector allocation and adjust portfolio accordingly.

bigchipper

Linton

Thanks for your prompt and full reply.

I have no need for income in the first 5 years - I have other funds saved in deposit accounts and am still working. My final salary pension which will provide a further lump sum in five years time so no real need for that either.

My main aim is to generate additional income from year 5 onward with a higher demand in years 5 to 12 until state pensions kick in and tailing off progressively from around year 20 or so as i get older. So my requirements are probably more along the lines of 75% short to medium term income and 25% longer term. In terms of investment risk appetite, therefore I probably fall between your categories and C) particularly so given my underpinning FS pension which will be index linked

It was with this type of rationale i have selected the range of funds I currently have - ie mainly cautious but with a hint of spice, split between income generation and growth and covering a range of sectors to provide diversification. My problem is i think I have overdone it and it has become unwieldy.

I have taken on your point re a 4% minimum.

Thanks

b-c

kidmugsy

bigchipper wrote: »

Hi
I am 55, married and in reasonable health. I aim to retire in 5 years time on a public sector final salary pension of around £20k (for which I am making additional contributions). My other half works part time and has only a small amount of deferred final salary pension provision (estimated to be worth about £3k at age 60).

Perhaps your top priority should be to tax-shelter income and capital for your spouse in case you die much earlier. The obvious route is in S&S ISAs for her. From your portfolio you could sell the annual ISA limit per annum (currently £11520) and reinvest in her ISA. That gives you a natural occasion on which to sell the old and buy a new, more focussed portfolio.

You could always consider the principle of the Harry Browne Perpetual Portfolio ("PP"), which consists of holding 25% in cash, 25% in gold, 25% in long-duration government bonds and 25% in shares, and - vital, this - rebalancing if any one goes outside the range 15% - 35%. Over the five years you could be working towards this spread, aiming to reach it for retirement, and getting into the habit of checking the proportions at the start of each tax year as you plan adding to her S&S ISA/s.
http://earlyretirementextreme.com/wiki/index.php?title=Permanent_Portfolio

The hope is that this PP will give you nearly as good a return as an all-share portfolio, but be much less erratic in value. Apparently it tests very well from the early 70s until now (you start in the early 70s because previously the gold price was fixed against the dollar). How it will do in future, of course, OTWT. Still, it would reduce your management problem to keeping an eye on only four assets. You might well choose to think of your emergency cash as a separate pot of money from your investment portfolio, I'd guess.

Declaration: I have no experience of the PP but am considering it for the approaching maturity of the Cash ISAs we have had on good interest rates that are going to expire..

bigchipper

Kidmugsy

Thanks. In actual fact the £60k or so investment is already split in ISAs between the good lady and I and, funds allowing I will continue to split future investments this way. She will also benefit from 50% spouse pension should I predecease her.

In terms of savings split i am presently sitting at around 3/5 in savings (part in cash isas) with the other 2/5 used for S&S investment. My intention in time would be retaining a smaller savings/emergency pot and to transfer more funds to the investment portfolio as finances allow (eg when I get the lump sum from my FS pension although I would also consider inverse commutation at that time due to the surety of index linked return and increase in widows pension that would bring ).

b-c

Ark_Welder

Firstly, do you have an actual amount of income decided upon that you would like to take from the fund portfolio? Then work this out as a percentage of the total value of the funds. This will give some indication of whether the all of the funds needs to be used to generate an income in five years' time, or whether a 5/12 year split is possible.

Remember that the lower the level of income taken initially, the greater chance the portfolio has to grow and provide a higher level of income later on. Of assets that generate income, any surplus income can be reinvested. But assets that are more growth-oriented and generate little or no income do rely solely on an increase in value to be able to deliver a return later on - by either turning those assets into income generators, or by selling the capital. So you do need to be confident of the assets that you decide to hold for this purpose.

Group the existing holdings by type, e.g. Monks and Scottish Mortgage are both Global Growth. This will help to identify duplications within sectors. But do look at the types of assets held within the funds in the same sector because these might provide enough of a difference to justify their presence, e.g. Unicorn UK Income holds companies more towards the smaller end of the spectrum, whereas Temple Bar is more towards the larger end.

Also have a think on whether you want to manage any regional allocation yourself, or whether a fund (or funds) that does this for you is preferable: i.e. you have a global income fund but also hold regional income funds - there is likely to be some duplication between these in the underlying companies, so you might not have the level of diversification that you think.

Similarly, look at how the funds in the same sector(s) invest (as alluded to with Unicorn and Temple Bar). If funds invest in the same types of companies (e.g. UK large-cap dividend payers) with the difference being holding them in different amounts, then if (i.e. when) those types of companies fall out of favour then that will affect all of those funds. So if multiple funds in the same sector is desirable then try to find those that do things a bit differently from one another, e.g. large, mid and small caps.

bigchipper

Ark Welder

Thanks. On your first point I hadn't really thought through income needs in such detail. Just aware that between the time my wife and I retire and we get the state pension we would need to augment our personal pensions in some way (and probably less so thereafter). Taking into account slight retirement and pension age differences we would probably need the following to maintain our existing standard of living (net of mortgage and at today's prices so to speak):

£300 per month for first years 1 and 2 of retirement
£1200 per month for years 3-6
£700 per month between year 7 to 9
£200 per month from then on

Probably would be able to get by with less but clearly it would be nice if more could be taken earlier on when we are likely to be more able to enjoy things.


I will also have a go at analysing my existing holdings


b-c

sabretoothtigger

Enter all the funds into an online portfolio site. I think HL does one for free that will show overlaps between each fund

Totton

You can use the Trustnet portfolio tool at http://www.trustnet.com, there is also one at http://www.morningstar.co.uk/uk/ but that has restrictions for non-subscribers. Another useful tool to compare funds is at http://tools.morningstar.co.uk/uk/fundcompare/default.aspx?LanguageId=en-GB

I find it useful to have no more than 10 funds, preferably 7. I also try to have a minimum 5% stake and a maximum 15% in any one fund. I also seek to have no more than 25% with any one company should I hold more than one fund with the same company although that has previously reached 65% when I was mostly in a Vanguard LifeStrategy tracker.

Overall you can have as many funds as you are comfortable with, for me you have too many and it is difficult to understand the strategy being employed.

In terms of income from the portfolio, I've read that 4% is a decent aim if you wish the portfolio to maintain its capital.

HTH,
Mickey

Ark_Welder

bigchipper wrote: »

Taking into account slight retirement and pension age differences we would probably need the following to maintain our existing standard of living (net of mortgage and at today's prices so to speak):

£300 per month for first years 1 and 2 of retirement
£1200 per month for years 3-6
£700 per month between year 7 to 9
£200 per month from then on

I think that you might struggle to achieve this just with £60k, certainly on a sustained basis - years 3-9 are likely to substantially erode your capital.

Set up a spreadsheet with a column for the amount of capital, with the first row containing 60k. Use the subsequent rows to simulate a progressive annual net total return of 5%, (which might even be a rather generous expectations on a number of counts: inflation; GDP growth, etc). Deduct the annual income amounts from the relevant years before applying the next 5% increase. You will see something similar to:

[FONT=Courier New]               5.00%   

      55   60000.00  
      56   63000.00   0
      57   66150.00   0
      58   69457.50   0
      59   72930.38   0
      60   76576.89   0
      61   76805.74   3600
      62   77046.03   3600
      63   66498.33   14400
      64   55423.24   14400
      65   43794.41   14400
      66   31584.13   14400
      67   24763.33   8400
      68   17601.50   8400
      69   10081.57   8400
      70    8185.65   2400
      71    6194.93   2400
      72    4104.68   2400
      73    1909.92   2400
      74    -394.59   2400[/FONT]

However, if you add to the appropriate year the lump sum from the pension that you will be receiving then you will see a different picture. Adding in half the lump sum gives a level of sustainability from age 70 onwards - whilst always remembering that this 'projection' is purely a theoretical exercise and a guarantee of zilch. (I'm assuming the lump sum to be the same as mentioned in your thread from earlier in the year).

If you should feel inclined to try this out yourself then I suggest erring towards the downside for the annual increase, i.e. below 5%. If it is assumed that the annual income amounts are expressed in real terms rather than nominal then a real-terms annual increase is likely to be lower then 5%. I've just found an article from PIMCO that forecasts annualised nominal returns of 4%-5% (I haven't read all of it yet, nor any associated or later articles). If inflation of 3% is assumed then that would suggest real returns of 1%-2%. Try these numbers instead of 5%, both without and with the addition of the lump sum.


A bit off-track for how to rebalance your portfolio, but there you go!

bigchipper

Ark Welder

Thanks for this. I have a similar spreadsheet which is is based on the premise of a cautious (?) 2.5% net return but factors in use of the full £60k lump sum and a small endowment of £20k when I am 60, and also the wife's LS of £10k a couple of years later.

While this indicates we will be OK post retirement my hope is to try and max the return on the underlying investments to more than the 2.5% net estimate without taking undue risk. The funds will be in ISAs to reduce tax liability. Being a newbie to investing in S&S I am worried my scattergun approach to the fund selection might be letting me down in this regard.

The other thing to note is that i my planning I am using our current net income (net of mortgage pyts) as our target income in order to maintain our current standard of living but this may give us a better standard of living due to lower costs (work travel and clothes etc, NI and pension contributions etc)


Thanks to to Totton and Sabretoothtiger for their replies

b-c