Balancing a pension portfolio

sheilanick

I have around £500k invested in various defined contribution pension schemes with Axa Wealth and Scottish Equitable (Aegon).In addition I have £100k in with profits funds from Standard Life and Friends Life. I want to change some of my invested funds as either the sector is under performing against other sectors, or the fund itself is ranked low compared to other funds available in the sector. In total I have 40 individual funds spread over 21 sectors and I do know the value of what I have invested in each sector.

I have found some useful articles which tell me how to balance a portfolio based on approach to risk and length of time to retirement, however I am unsure how I should choose the actual underlying investment sectors.

For those of you with SIPP plans, please would you share your tips for selecting sectors and funds. I wondered if there are any great publications out the that would be worth reading? I have been using Trustnet mostly for fund information, but sector analysis has been more difficult to find.

Final thought, it is a lot easier to manage my Hargreaves Lansdown ISA online, than my individual pension funds, so I am considering transferring my four funds under one umbrella, which I assume would be a SIPP. I have seen some negative comments on HL regarding their charges, so who do you recommend I should consider if I go down this route?

Thank you in advance for your advice

dunstonh

I want to change some of my invested funds as either the sector is under performing against other sectors, or the fund itself is ranked low compared to other funds available in the sector.

That is risky investing. You dont just eliminate a sector because of a period of under performance. The worst performing sectors in a period are often the best performing in a later period. A portfolio would cease to be balanced with a sector removed.

I have seen some negative comments on HL regarding their charges, so who do you recommend I should consider if I go down this route?

HL offer a good DIY product but their charges are not transparent and can be quite expensive. They will have to chance their pricing in the coming months to comply with 2014 rule changes. If you make use of the features and options then it can be money well spent. However, many people have come out of PPPs and gone into SIPP thinking it was cheaper when instead it was more expensive. If you are going to build a bespoke portfolio then it needs servicing to ensure it remains balanced and funds are tweaked for the economic cycle. If you are not going to put that work into it then you should avoid doing it.

jamesd

For each of these sectors/regions please say whether you think they are a. underperforming and b. better to sell than buy at the moment:

1. Commercial property
2. Gilts
3. Emerging markets
4. United States
5. Europe
6. High grade corporate bonds
7. Short-dated corporate bonds
8. Natural resources

Everyone else, please leave it to Sheilanick to answer first. Bonus for providing your reasoning for your answers.

For the amount you have Hargreaves Lansdown are likely to be one of the most expensive DIY products available. Products with fixed annual or quarterly fees and possibly dealing costs will bee to your advantage, those with percentage-based holding charges not. If using ETFs at least there is currently a cap on the 0.5% charge for holding them at HL but their press coverage implies that this will end up being eliminated and replaced with an uncapped flat percentage charge.

Linton

Portfolio construction is a major topic, not one that can be covered by a few tips. In my view it will have far more effect on your long term investment performance than which specific shares, funds or even sectors you happen to chose. With a pot of money the size of yours professional advice from a specialist may be the best way forward.

It may help your thinking if I outline the approach I have taken for a £100K SIPP about to go into capped drawdown. To keep numbers simple, assume that £5K will be taken each year.

1) We need to ensure that the SIPP can meet the next few years payments without having to sell investments should the markets undergo a major fall.

So - keep £20K in something safe. High grade bonds would be nice to get some return but they are expensive at the moment, so cash may have to do.

2) For the next say 8 years we can take some equity risk. Very broad diversification is important. Something like a Vanguard 40% Life Strategy Fund could fit the bill, as could a Balanced or Cautious Managed Fund. Another option could be a Global Tracker combined with a Bond fund. Perhaps an unambitious Income fund can be considered as part of the portfolio.

There is a reasonable chance that these will at least increase in value with inflation. So we can put £40K in this type of investment.

3) This leaves us with £40K which will need to supply the income in year 13 and beyond. 13 years is pretty long term so we can afford to take risks using more volatile investments here as one can reasonably expect that there will be plenty of time to recover from any disastrous falls in the first say 8 years. Appropriate investments are niche funds investing in small companies, emerging markets, technology, health etc, any sector you can see that has the potential for major long term gains. One needs a range of say 10 of these with a global spread as some will work out and some wont.

With a basic strategy laid out choosing sectors/funds become pretty straight forward. The intention is to buy and hold, but each fund has a clear purpose arising from the strategy and so can be sold should it cease to fulfil that purpose.

Every year or so one can assess the actual allocations and rebalance according to the situation at the time.

This is not presented as a text book example of good investing nor as the only way such a SIPP portfolio could be constructed. What is important I believe is the top-down thinking based on assessment and management of risk, the way this leads to the sectors in which to invest, and the relative unimportance of which particular fund is chosen.

kidmugsy

sheilanick wrote: »

(i) I have found some useful articles which tell me how to balance a portfolio based on approach to risk and length of time to retirement, however I am unsure how I should choose the actual underlying investment sectors. ....

(ii) Final thought, it is a lot easier to manage my Hargreaves Lansdown ISA online, than my individual pension funds, so I am considering transferring my four funds under one umbrella ...

(i) I have been pondering moving to this system of investment as our Cash ISAs mature and lose their inflation-beating interest rates.
http://earlyretirementextreme.com/wiki/index.php?title=Permanent_Portfolio

(ii) Personally I'd sleep easier if my money were scattered around a few providers rather then concentrated at one. Surely someone who can keep an eye on "40 individual funds spread over 21 sectors" should find it easy to monitor say four or eight funds spread over four providers?

gadgetmind

jamesd wrote: »

Everyone else, please leave it to Sheilanick to answer first. Bonus for providing your reasoning for your answers.

Ooo, you spoil sport! I'd already made a mental buy/overweight/hold/reduce/sell tally as I went down your list.

Linton

kidmugsy wrote: »

...
(ii) Personally I'd sleep easier if my money were scattered around a few providers rather then concentrated at one. Surely someone who can keep an eye on "40 individual funds spread over 21 sectors" should find it easy to monitor say four or eight funds spread over four providers?

Splitting a portfolio over multiple providers can make rebalancing a hassle as you cant easily transfer cash between them. So you will end up having the same investments with multiple providers. And then you might as well use different investments.

I use 4 platforms, but each one supports logically different portfolios -

His and hers long term high risk ISAs which are run separately, because of the rebalancing problem, but happen to both be with the same provider - Fidelity.

High Yield Income Portfolio with iii

Her capped drawdown SIPP (in progress) with SIPPdeal

My flexible drawdown SIPP (in progress) with BestInvest

grey_gym_sock

jamesd wrote: »

If using ETFs at least there is currently a cap on the 0.5% charge for holding them at HL but their press coverage implies that this will end up being eliminated and replaced with an uncapped flat percentage charge.

that's not how i interpret HL's comments. they've said that tracker OEICs/UTs, where they now charge £2 per month, will move to a percentage charge. but i didn't see suggestions that charges for ETFs would change. however, i could be wrong; and it's not a great moment to move to HL, with all this uncertainty (for the next few months). of course, the uncertainty applies to many other providers, too.

on using multiple providers: i do, but mostly in a "natural" way, i.e. by keeping ISAs and SIPPs and unwrapped with different providers.

jamesd

gadgetmind wrote: »

Ooo, you spoil sport! I'd already made a mental buy/overweight/hold/reduce/sell tally as I went down your list.

I know you'd give good answers. If sheilanick chooses not to have a go before Tuesday, feel free then.:)

jamesd

grey_gym_sock wrote: »

that's not how i interpret HL's comments.

Sheilanick seems to be using only funds at the moment so my mention if ETFs was mainly an aside. I think we don't really know what HL will do at the moment.

grey_gym_sock wrote: »

on using multiple providers: i do, but mostly in a "natural" way, i.e. by keeping ISAs and SIPPs and unwrapped with different providers.

I do just by accident at the moment, work and personal. But it's more likely that I will start to split deliberately because I do a fair amount of simple holding and a percentage based charge for funds won't be very favourable if that's the way HL goes.

At the moment I have one work pension pot of £50,000 or so that I'm just not moving into HL. It seems unlikely that the move will end up being to them, but we'll see what happens to that and the rest of the couple of hundred thousand or so of pension and ISA money. Most likely seems a near-complete move away from HL soon after they make their announcement.

sheilanick

jamesd wrote: »

For each of these sectors/regions please say whether you think they are a. underperforming and b. better to sell than buy at the moment:

1. Commercial property
2. Gilts
3. Emerging markets
4. United States
5. Europe
6. High grade corporate bonds
7. Short-dated corporate bonds
8. Natural resources

Everyone else, please leave it to Sheilanick to answer first. Bonus for providing your reasoning for your answers.

For the amount you have Hargreaves Lansdown are likely to be one of the most expensive DIY products available. Products with fixed annual or quarterly fees and possibly dealing costs will bee to your advantage, those with percentage-based holding charges not. If using ETFs at least there is currently a cap on the 0.5% charge for holding them at HL but their press coverage implies that this will end up being eliminated and replaced with an uncapped flat percentage charge.

Interesting. Your list of course includes the sectors which I am considering and where I currently have approx 50% of my funds invested. Rightly or wrongly, I feel this is too high. My concern is not simply being invested in these sectors per se, but rather that in some of the low return sectors I also have poorly performing funds, with a high £ value.

I did not say that I intended to eliminate any sector, but I am more interested in how you narrow down your investment sectors as I doubt that many people have their pension invested across every available sector, so at some point sector selection has to be applied, hence my request for recommended reading on the subject.

So to take the following funds as an example. SE Blackrock absolute alpha, ranked 378/408, returning -2.6% over the last year, compared with sector average over same period of 10.3%...... I have £53000 invested. Or SE Blackrock Aquila over 5yr index gilt with £50000 invested.

I can do nothing. I can stay in the same sector but move my investment to an alternative fund in the hope of an improvement in relative performance. Or I can move all or part of my funds out and reinvest in a sector where I am underinvested.

So there we go.