Where should we put the low risk element of our portfolio?

bigadaj

Further to my post on pensions board about property, I thought it worth discussing here but widening it out.

To use tim hales analogy, I'm struggling to find good places for my water though happy enough with my whiskey!

I've got premium bonds and cash and a small amount of commercial property. I have a good chunk in cash but this needs a better home, more will go into equity but I'm looking for other homes.

Gilts and bonds look poor value, and national savings products are now either non existent or poor value.

I'm thinking about emerging market bonds, international property or infrastructure but would be interested to hear others comments thoughts or observations.

gadgetmind

I went through this a couple of years ago and went for -

1) Strategic bond funds that have a history of low volatility.
2) Corporate bond ETFs (ISXF, SLXX)
3) Infrastructure (HICL, BBGI, JLIF, etc.) but these are now all on premiums. Even the newly launched TRIG sailed up to a 5% premium in just a few weeks. I'm now only investing in this area via new funds/issues.
4) Commercial property in unloved areas via REITs and ITs on big discounts.
5) A few retail bonds.
6) Multiple NS&I linkers, but these aren't available right now.

TBH, I'm letting cash accumulate right now as I'm struggling to find anything more exciting.

Of course, you could stick the whole "water" allocation into Ruffer or Personal Assets!

Gareth1989

gadgetmind wrote: »

Of course, you could stick the whole "water" allocation into Ruffer or Personal Assets!

This is what I have done in opting for Ruffer. I would also like to own HICL and John Laing Infrastructure but as mentioned these are trading at a decent premium.

bigadaj

Thanks for that, as you say many options that would have been reasoanble a few years ago either aren't available or are looking unappealing.

I need to do a bit more research into investment trusts and reits, apart from that there isn't a lot methinks, interesting to see what hale says about it when his new edition comes out.

Ark_Welder

I'll ditto gadgetmind re. cash accumulation and a RICA\PNL approach. The last two have come in for a certain amount of stick recently, but some of this misses the point of what they're about: namely, to give a level of protection against future possibilities rather than to have delivered a matching return against single asset classes that have had a good run. More steady as she goes rather than Thar she blows!. Both are current holdings within my SIPP and are being held as substitutes for bonds - as much, because I can (or rather could) take the additional risk of not moving into cash and near-cash assets as R-day approaches (sounds like it's the time to update my own thread, regarding the SIPP ...)


I am avoiding EM bonds right now, with my last holding sold about a year ago. Too many negatives without a corresponding level of negative investor interest. Whilst there might be some opportunity here, that, for me, carries a level of risk which does not warrant having to sell down another holding with which I'm happy (and cash is a holding, for my purposes).

EM bonds did have a good run up until recently, but have tailed off since the possible tapering of QE was highlighted. There have also been a number of first-time EM sovereign bond launches, and other launches at record low rates. Tends to send a signal of over-enthusiasm for the asset class when even the institutions are prepared to accept what is presented to them. Some EM debt markets are also quite small compared to developed markets, so if there should be a bit of a rush to withdraw from them then that could depress prices further.

If I did want exposure right now then I would look at a more generalist high-yield fund that can hold EM debt rather than a dedicated fund. That, or a genuinely flexible bond fund that might be found in either the Strategic or Global bonds sectors.


In addition to offices and retail, there is also industrial property to look at and there are companies that concentrate on this type. But property is another asset class that has found some favour again recently. The discounts on various ITs in this sector have largely disappeared, and the prices of many REITs have risen. So not perhaps the best time for increasing existing holdings, but might have some potential for diversifying away from holdings of existing asset classes, and diversification such as this might help to reduce the overall level of risk of a portfolio.

Ditto, infrastructure trusts, which seem to be on a permanent premium these days. Does this matter? These trusts (and REITs) make me think more of businesses operating through a tax-efficient structure than as being investment funds. Perhaps try to value them on a price to revenue basis instead? Just an idea rather than a solid suggestion. One observation is that inftastructure trusts tend to be mentioned as having inflation-linked dividends, or similar. Not necessarily so. Whilst some (or much) of their income might be linked to inflation, this won't necessarily translate into an inflation-linked increase in the dividend if operational costs are rising at a faster rate.

A potential entry point for new holders might be when a fund raising is announced via an issue of new shares. Not necessarily by buying new shares (which might apply restrictions that are more favourable to existing investors), but by buying the existing shares which may fall in price to be closer to NAV. HICL has certainly followed this pattern in recent years, and I'm hoping that this will be the case again because I have decided that HICL will form a holding in the SIPP for drawdown purposes. If past issues are a guide then the next one will be made in February/March. And if that doesn't put the mockers on an issue being made next year then nothing will!


Regarding international property, how is 'property' to be defined? There are ETFs and other funds that hold shares in property companies and REITs, but not so many that hold the physical assets, not without looking at offshore companies/funds. I think that physical brings a greater level of diversification than those that hold shares because the prices of property company shares can move in line with other types of equity rather than just in line with the underlying assets. This, however, being a potential issue with holding a listed closed-end fund rather than an open-ended fund. Perhaps I should put it as: how do you like to hold your property? as a fund? or as a fund of property funds?

I would be wary of property funds/companies that are still trading at wide discounts. This may be indicative of a high level of gearing, which may need to be repaid soon. If this cannot be refinanced with a new loan then assets will have to be sold and this will move NAV down towards share price rather than the other way round. Again, there might be opportunity here, but the level of risk is perhaps incompatible with the question being posed in the thread's title.

There are a couple of funds that might be worth investigating further that invest in ground rents, one open-ended and the other closed-ended. Both have drawbacks, though. The price of the closed-ended fund having the potential to deviate from NAV - either up or down. Investments into open-ended fund being possible only with professional advice or if the investor is able to demonstrate that they have professional investor status. The funds respectively being the Ground Rents Income and Freehold income Authorised, both mentioned in previous threads.


Everything looks expensive, one way or another. Cash might be considered as being expensive if the cost of holding is that which is lost to inflation. However, the inflation that matters is that which is to come, not that which has gone - and that which is to come is speculation rather than certainty, however much the 'certainty' is dressed up. Perhaps moving into asset classes or sectors that are not currently held is the way to lower risk, but that does mean that the appropriate asset is likely to different for each individual. So no right or wrong answers.

grey_gym_sock

why would you count ITs like Personal Assets as 100% in the low-risk part of a portfolio? don't they hold a substantial amount of equities (even if they're defensive equities)?

for instance, if they hold 40% equities, and 60% I-L bonds + gold + etc, then shouldn't you count it as 40% high risk, 60% low risk?

gadgetmind

Yes, PNL and RICA are really cautious portfolios rather than a single component that you can use to build a portfolio. However, I'm happy to hold both alongside equities, REITs, infrastructure, and fixed interest and just lower my equity allocation elsewhere to allow for such indirect holdings.

IronWolf

I would say shorter term bonds, then you are less exposed to the risk of interest rates rising.

Yes the interest rates are low but that's just the way it is atm. Low risk means low returns.

Glen_Clark

Ark_Welder wrote: »

I'll ditto gadgetmind re. cash accumulation and a RICA\PNL approach.

Just googled that and got;
RICA = Rail Industry Contractor's Association
PNL = Pacific National Laboratory :huh:

Rollinghome

Glen_Clark wrote: »

Just googled that and got;
RICA = Rail Industry Contractor's Association
PNL = Pacific National Laboratory :huh:

Try googling on Google Finance instead: www.google.co.uk/finance

Glen_Clark

gadgetmind wrote: »

4) Commercial property in unloved areas via REITs and ITs on big discounts.

Yes I have been looking at Land Securities (Retail Properties Investment Trust) etc, but then keep reading about the demise of the High Street and seeing empty shops / charity shops paying low rents, and wonder if there is a good reason for the discount

gadgetmind wrote: »

Of course, you could stick the whole "water" allocation into Ruffer or Personal Assets!

Aren't they on a premium?