Choice of investments - pension

Snakey

I saw some neat threads on here where people had posted their investment choices and others had commented on whether their selection looked OK. I'm not asking for financial advice, just a bit of a sense-check from people who might know more than me.

I have a total fund value of around £600k and will not be able to access it for another 15 years minimum (if they don't change the rules again by then), so this is properly long-term as I wouldn't be intending to take it all out at once anyway.

The one thing that makes this maybe different from the norm is that I am about to stop making contributions and may never be in a position to make any more. It's probably for the best in terms of not wanting to hit the LTA (which may be reduced even more by a future Government), but don't know whether it makes any difference to what it should be invested in.

Here it is:

25% SL BlackRock UK Equity Tracker Pension Fund
20% Standard Life North American Equity Pension Fund
10% Standard Life Overseas Equity Pension Fund
10% Standard Life Property Pension Fund
10% Standard Life International Equity Pension Fund
10% Standard Life European Equity Pension Fund
5% Standard Life Far East Equity Pension Fund
5% Standard Life Asia Pacific ex Japan Equity Pension
5% Standard Life UK Equity Pension Fund

WDYT - good, bad, meh?

Should I come out of property now that I have skin in that game in the form of my very own (mortgaged) flat?

As far as I'm aware I can shift things around as I see fit.

Thanks for reading!

dunstonh

Why use an overseas equity fund and international equity fund when you are using single sector overseas funds? The idea of using an overseas equity fund is to save you picking individual sectors. You are doing both.
Where is Japan, Emerging Markets, fixed interest (gilt and bond) and global bond?

Do you have the risk capacity and tolerance for 90% equity? You are looking at around 35-40% loss potential in a 12 month period. Would you accept £180,000 being wiped off your fund value?

How does the risk volatility rating of your portfolio tie in with your own profile?
How frequently do you intend to rebalance the portfolio?
what model are you using to ascertain those asset allocations? (are you using asset allocation or sector allocation)

The one thing that makes this maybe different from the norm is that I am about to stop making contributions and may never be in a position to make any more.

Which links in with my above comment.

It's probably for the best in terms of not wanting to hit the LTA (which may be reduced even more by a future Government),

If its reduced then you just apply for fixed protection as is the case every previous time the LTA was reduced.

Should I come out of property now that I have skin in that game in the form of my very own (mortgaged) flat?

How much does your flat earn you? How comparable is your flat to commercial property?

Snakey

Thank you so much! This was just what I wanted.

The penny hadn't dropped about the LTA fixed protection being for people who weren't making any more contributions, since that was never my situation. But it would be an option for me now I suppose.

Flat earns zip, I live in it, and not remotely comparable to commercial property... I was looking at that in completely the wrong way (just thinking "well, I already benefit from any rise in the UK property market, so...").

Re: the sector thing. As you can probably tell since you have experience in this stuff, there was no strategy. I just went through and picked the things I liked the look of, with one eye on the charges and going for the higher risk stuff on the grounds that I had plenty of time to put more money in if it all tanked. Now that last bit has changed - still got the time, no longer feel confident about having the money - I need to get some of this into safer places.

You mention single sector funds overlapping with some of the more generic-looking stuff, again I am not asking you to give me financial advice here but would the way to stop that be to come out of the three 5% holdings, or should the change be more fundamental than that (should I literally just have everything in 4-5 holdings rather than the ten I've got)?

Japan may be hidden in the Far East one, but not significantly I wouldn't have thought (given that it's only 5% anyway).

I will go away and do some research about asset and sector allocations.

Linton

You need to ensure that your investments cover a wide range of geographic areas and non geographic sectors - eg industries and company size. This can be done in two ways, either you leave the choice to a fund manager or you decide the % allocations yourself.

In the former case you could well buy just one multi asset fund, or possibly two to spread a bit of risk. If you wanted to do things yourself you would need to decide what %s you wanted and buy more niche funds to meet your objectives.

It doesnt make sense in general to do both unless perhaps a general fund does nearly what you want but you would like to tweak the %s a bit. In that case you would have the majority of your money in the general fund and small amounts elsewhere. I dont see any good reason to have a small % of ones money in a general fund.

bowlhead99

Snakey wrote: »

Now that last bit has changed - still got the time, no longer feel confident about having the money - I need to get some of this into safer places.

So, reduce equity allocations in favour of UK and global bonds and real estate.

You mention single sector funds overlapping with some of the more generic-looking stuff, again I am not asking you to give me financial advice here but would the way to stop that be to come out of the three 5% holdings, or should the change be more fundamental than that (should I literally just have everything in 4-5 holdings rather than the ten I've got)?

What you have done is bought specialist funds for the various regions of the developed world:
North America
Europe
Far East
Asia Pacific ex Jap (which is basically the same as the Far East one but without the 40% Japan allocation)
Two different UK funds: one tracking an index, one active management which will overlap the index significantly.

As Dunstonh mentions you are missing most emerging markets (although China and some of the smaller Asian ones will appear within the FarEast/AsiaPac fund)

Then, you've bought two general global funds: International Equity and Overseas Equity. The Overseas one is similar to International but excludes UK (which probably makes more sense given you already have two separate UK funds).

I don't think 'dropping the three 5% funds' is the right thing to do, even though it cuts down the number of funds quite quickly - because then you would seem to be heavily lacking Asia and Japan compared to Europe and US and UK, because you've augmented the general international funds with single region funds in part of the world and not all of them.

Basically what you have at the moment is quite a bit of overlap. If it fits with your plans, buy a large number of specialist single region funds or a smaller number of international funds. It seems to me that if you followed the latter route you would only need to supplement the international funds with other single region funds if you didn't like the mix that the international funds were giving you.

I mean, for example you might decide the overseas fund has too much North America in it (half the fund) for your preference - even though North America does represent half the developed world's market capitalisation - so you would look to top up other areas according to your preference by using some other funds on the side. However, it's difficult to see why that would lead you to add a North American fund on the side as well as the Europe and Asia etc etc etc so much that you cut back the 'general' international / overseas funds to only 10-20% of the equities.

Basically either have lots of little specialist funds and rebalance them or fewer generalist funds and rebalance them. The generalist funds can be single asset classes (e.g. equities or bonds or real estate etc) or multi asset. Trying to use all different types of funds in a portfolio just gives you more of a headache when it comes to rebalancing, imho.

I will go away and do some research about asset and sector allocations.

Good plan! There are plenty of ways to do it.

TheTracker

First thing I'd do is consider fixed income, where are the bonds, gilts, cash? Most people would fall between 80/20 and 40/60 on equity/fixed. Perhaps you've just not told us about that part.

Your holdings basically boil down to 30% UK Equity, 60% World-UK Equity, 10% Property, with some gaps in the world coverage.

Consider if the 1:2 split for UK:World is right for you. I have a similar ratio, but you need to weigh it against your needs and view of where both you and the UK are going long term.

Consider whether you want to weigh geographies or go for the entire market cap balance. For the latter, buy a World-UK, for the former construct the usual suspects (US, Europe, Asia, etc). Seems you have a fairly random scattering here and this is the area to think about. Personally I just go UK and World-UK.

Consider Emerging Markets. Most people would have about 10% of their equities in such a class.

I'd then build myself a low cost tracker portfolio against those allocations. World-Total, World-Small, World-Emerging, UK-Total, UK-Small, UK-Emerging at whatever %'s fit you. Looks to me you can cut down the fees considerably. I would recommend reading a couple of books on the nature and characteristics of these classes rather than what looks like an historical gut feel.

I would personally keep property for its diversification factor, but maybe a little less of it.

You'd have about the same number of funds at the end, but removed the overlaps and reduced the fees.

What you have now looks quite good versus what people often post for comment. I guess you wouldn't have built up 600k without knowing how most of this works.

Snakey

Plenty of food for thought there guys, thanks very much.

Outside my pension I have £60k in a cash ISA and about £15k outside it (Santander 123). Does the rough percentage of bonds and cash etc need to be within the pension, or could I use the ISA and the non-ISA to provide some of that balance? It's currently only getting 1.5% (First Direct).

I was thinking of sticking it all in the stock market just because the returns are so lousy on cash, but it might be good to do it differently because I might need the ISA money in the next 4-5 years. If it was in bonds and cash etc I wouldn't be taking a loss if I had to take it out, like I might if it was all in shares, while the pension can sit more heavily on the stock market because I can't touch it for 15+ years anyway.

Does that make sense, or am I missing something vital?

bowlhead99

Yes cash can act as a low risk part of your portfolio even if it is in a physically different pot. However, you do need to consider if it's really 'part of your portfolio' if actually you wouldn't use it to top up the other asset classes in a crash or add to it from your equity investments when equities go up a lot.

Worth considering that bonds can lose value just like shares can, so if you absolutely don't want to lose capital on the £60k ISA because you need it in 4 years, don't put it in shares or bonds other than the very safest short dated ones. Bonds have performed very nicely in recent years. The capital prices have gone up by more than you would expect for a fixed income product. But the income is fixed which means the capital prices can go down quite a lot when other opportunities (like higher interest rates on newly issued bonds, or higher paying deposit accounts, or cheaper equities) become available.

You are right that with a 15 year time horizon you can have more equities. However in the last 15 years (i.e. since 1999) we have had two major crashes in which UK equities dropped 40% or so, some markets more, others less. Markets are unpredictable. If you need the cash in exactly 15 years, you don't know if that point will be 5 years after a big crash, allowing 5 years to recover, or perhaps right at the bottom of a crash that takes 10-20 years to really recover.

Of course, the purpose of the £600k is retirement provision. For you, you might be thinking retirement is 15 years away so that's what my £600k is preparing for. Or, that might simply be the age that you hit 55 or 57 or whatever the age is that lets you access the pot, but it is not the age that you would really want to go to grab the cash and spend it all. For example, you might live to 105, so you need the £600k to last half a century AFTER the point that's 15 years from now.

So, there's certainly an element of the pot that can be 100% equities. But if you don't like the idea of a big crash coming up to retirement, a token 10% of your overall portfolio sitting in cash ISAs is scant consolation, and an element of the pension pot should not be equities at all.

Of course, investing goals and risk tolerance and risk capacity is different for all of us. You could lose £100k forever and still have a happy retirement. Others could not. But you might be freaked out by it and not want it to happen. It is fair to say that the majority of people 15 years away from retirement would not be 90% equities (IMHO).

digannio

I'm taking the simple approach with one of the Legal & General Multi-Index Funds that suit my position. The costs are reasonable, seems a good spread in terms of asset classes and geography and all the rebalancing done for me. Don't think it will set the world on fire but hopefully will tick along steadily over time.
Usual caveats apply in that I declare I know absolutely nowt about owt:)