Portfolio Restructuring - Comments Please

AlanP_2

I am in the process of restructuring our current investments and looking forward to what I am going to do with future investments and would welcome your views.

Current situation is we have two “pension pots” in my wife’s name as she is a 40% taxpayer.

The first is an AVC pot alongside her LGPS DB scheme that is intended to be taken in its entirety as a TFLS when she retires in 5-9 years’ time.

The second is a PP in funds with Fidelity via Cavendish the use of which is undecided at the moment TBH.

If early retirement becomes a reality it will need to provide an income until the DB schemes kick in at unreduced rates (2024 for me and 2025 for her). If not needed for this it will continue to grow, with withdrawals to fund larger items possibly (big holidays and the like).

The final pot is a S&S ISA that we will plan to open in April but may be delayed in favour of pension investments depending on outcome of Budget as it relates to pension tax relief.

Total investments in the 3 pots will be ~53% compared to ~47% cash holdings (15% of which is in P2P, remainder in Current / Regular Savers) by the end of 2016. It’s a high cash proportion I know but with 3 children all in their twenties we are expecting weddings and / or helping with house purchases in the next few years.

On the investment side the AVC Pot will be 50%, PP Pot will be 45% and AVC pot will be 5% of the overall portfolio by end of year and the current investments are as follows:

• AVC Pot – 100% in Standard Life (SL) Global Equity 50:50 Pension Fund (50% UK & 50% Global equity split).
• PP Pot – 83% in VLS 80, 8% in Vanguard Dev Europe ex-UK and 7% in Vanguard FTSE EM.

The issues I started out to address with the above were:

1. The very high proportion allocated to the UK as a result of the AVC investment.
2. Lack of Property anywhere in the portfolio.
3. Lack of Bonds in the AVC pot.
4. Limited exposure (if any) to smaller companies.
5. Limited rebalancing options in AVC and to a certain extent in PP.

My planned restructure will be as below with rebalancing as required:

AVC Pot which is limited to a limited choice of Standard Life funds:

• SL UK Equity Pension Fund – 10%
• SL SLI UK Smaller Companies Pension Fund – 10%
• SL North American Pension Fund – 30%
• SL European Equity Pension Fund – 15%
• SL Japanese Equity Pension Fund - 5%
• SL Asia pacific ex Japan Equity Pension Fund – 7.5%
• SL Property Pension Fund – 7.5% (physical UK property)
• SL Mixed Bond Pension Fund – 12.5% (UK, 58% Corporate & 42% Gov’t)

As retirement gets nearer I would move towards a larger Bond / Fixed Interest allocation, slowly reducing the Property & Equity elements as there is an, undefined at present, “hard date” when this needs to be cashed in.

Fees on the above work out at 0.68% across them all.

PP Pot:

• VLS 80 – 35%
• L&G Multi Index 6 – 35%
• Vanguard FTSE EM – 10%
• Vanguard Global Small Cap – 15%
• Blackrock Global Property Securities Equity Tracker – 5%

Fees on the above work out at 0.29% for funds plus 0.3% to Cav/Fidelity = 0.59%.

Proposed ISA Pot will be a 50/50 split between Woodford Equity Income & Fund Smith initially.

Overall this gives me an allocation of:

• UK – 21.34%
• North American – 28.62%
• Europe ex-UK – 12.18%
• Japan – 5.57%
• Asia ex-Japan – 5.83%
• EM – 6.52%

Equities Total = 80.5% (allocations above not exact as different funds treat different countries as EM or Asia etc. but close enough).

Property – 7.11%

Bonds / Fixed Interest – 12.83%


So, have I missed anything obvious here that I should be including or excluding?

Have I addressed the issues I started with?

Have I introduced other issues?


Subject to any tweaking I will then run this lot through the tools on Trustnet and get a more detailed sector / geography breakdown.


Thanks.

Linton

Looks like a sensible approach to putting together a diversified portfolio. Some details may be worth discussing.....

- Europe and Japan Small Companies are worth considering. US small companies seem to offer minimal benefit over the wider US index. The Vanguard Global SC fund is nearly 60% US. So your SC holdings may not provide the extra performance you were hoping for.
- EM tends to have significant commonality with Asia-Pac ex Japan. Suggest you consider Asia-Pac as a major sector and probably ignore the rest of EM though you could perhaps go for more focussed funds to get emerging europe/africa/Latin America or try a frontiers market fund.
-UK still seems rather high and Japan rather low. My Japan specific fund holdings are Small Companies which dont seem to suffer the stagnation of the wider market.
- why do you need both L&G multi index and VLS80?

Playing_with_Fire_2

That looks like a solid plan to me, my points to consider are below:

That is a lot of cash, you have plans for some of it and we each have our comfort levels but that is a lot of cash.

For the UK property, do you consider your home (if applicable) an investment in UK property (eg would you downsize in the future or get concerned if house prices dropped). International property might increase diversification for you?

Are you planning to take the TFLS when you have access to it and spend it immediately or would you invest outside the pension and drawdown that pot? If you are planning on spending all/most of the AVC pot in 5 years time it looks a bit light on bonds (the volatility of the stocks could hurt you). If you could delay your spending and/or use the huge amount of cash for living expenses while the market recovers then this is fine.

You've checked whether a global tracker/fund is available and cheaper within the limited funds or you prefer to rebalance?

The PP pot looks pretty ballsy as a standalone, but makes sense as a part of the portfolio that you don't need so can take some risk with - have I read that right and would you be happy to leave it alone if the papers were screaming about the next big ugly bear market?

I don't know anything about managed funds except that I don't like the charges so can't offer any opinions on the S&S ISA.

It can't tell quite how old you are, and what your plans are, but have you considered what your financial position would be if you decided not to work again or couldn't work again? With healthy DB pensions and chunk of savings it seems like you might be able to stop work now if you wanted to, but perhaps you would lean towards the ISA rather than pension if this were the plan.

Nice portfolio

AlanP_2

Linton wrote: »

Looks like a sensible approach to putting together a diversified portfolio. Some details may be worth discussing.....

- Europe and Japan Small Companies are worth considering. US small companies seem to offer minimal benefit over the wider US index. The Vanguard Global SC fund is nearly 60% US. So your SC holdings may not provide the extra performance you were hoping for.
- EM tends to have significant commonality with Asia-Pac ex Japan. Suggest you consider Asia-Pac as a major sector and probably ignore the rest of EM though you could perhaps go for more focussed funds to get emerging europe/africa/Latin America or try a frontiers market fund.
-UK still seems rather high and Japan rather low. My Japan specific fund holdings are Small Companies which dont seem to suffer the stagnation of the wider market.
- why do you need both L&G multi index and VLS80?

Thanks.

Will look at splitting the SC allocation and tend to agree with you that EM & Asia-Pac ex-Japan have a lot in common - including some countries depending on which funds you look at.

Will look at the options around that generic sector.

Agree UK is still quite high relative to it's market significance but would be spread across large companies through VLS & L&G funds in the PP and the UK Equity fund in the AVC and smaller companies through the SLI fund in the AVC. The ISA is mainly UK focused but is actively selected as opposed to being anything and everything in the FTSE 100 / 250.

I had Japan at about 7.5% overall when I started planning this but it has ended up being lower as I have tweaked so will revisit that.

As for VLS and L&G I wanted a reasonable easy way of getting exposure to non-UK fixed interest and property. L&G provides property and they both have a broad spread of fixed interest holdings.

They both use slightly different approaches which I am hoping will complement each other over time.

Balancing a spread within each pot and across the full portfolio by having a number of pots each with their own "time line" makes developing a rounded portfolio challenging as I am finding.

For example the AVC or ISA are likely to be taken first under our current plans but changes in employment circumstances could turn that on it's head.

AlanP_2

Playing_with_Fire wrote: »

That looks like a solid plan to me, my points to consider are below:

That is a lot of cash, you have plans for some of it and we each have our comfort levels but that is a lot of cash.

For the UK property, do you consider your home (if applicable) an investment in UK property (eg would you downsize in the future or get concerned if house prices dropped). International property might increase diversification for you?

Are you planning to take the TFLS when you have access to it and spend it immediately or would you invest outside the pension and drawdown that pot? If you are planning on spending all/most of the AVC pot in 5 years time it looks a bit light on bonds (the volatility of the stocks could hurt you). If you could delay your spending and/or use the huge amount of cash for living expenses while the market recovers then this is fine.

You've checked whether a global tracker/fund is available and cheaper within the limited funds or you prefer to rebalance?

The PP pot looks pretty ballsy as a standalone, but makes sense as a part of the portfolio that you don't need so can take some risk with - have I read that right and would you be happy to leave it alone if the papers were screaming about the next big ugly bear market?

I don't know anything about managed funds except that I don't like the charges so can't offer any opinions on the S&S ISA.

It can't tell quite how old you are, and what your plans are, but have you considered what your financial position would be if you decided not to work again or couldn't work again? With healthy DB pensions and chunk of savings it seems like you might be able to stop work now if you wanted to, but perhaps you would lean towards the ISA rather than pension if this were the plan.

Nice portfolio

Thanks.

It is a lot of cash but as we don't know when we will need access to it and it is earning a reasonably good return at the moment we are comfortable with it. Averaging about 6% across it all which while inflation is so low compares quite well to long-term typical investment returns of say 5% above inflation with less downside risk (happy to accept P2P portion is not necessarily lower risk than equities).

Don't consider home as an investment in the same sense as being discussed here. The physical property fund in the AVC has a UK commercial focus and there is no international equivalent on offer from the limited choice on offer.

Would be happy to look at an international physical property fund in the PP if anyone has any suggestions. Most of those on the Cavendish list seem to be Property Equity but I will have another look.

As the AVC pot is tied to starting to draw a DB pension (at an undefined point in time but no later than April 2025) it would need to be cashed in at that point. Realistically I doubt if we would spend it straight away so re-investment beckons for it. Each year, as we get closer to that point I will be moving more into Fixed Interest for that pot and away from Equities & Physical Property so whilst it is about 12% Bonds and 7.5% Property at the moment I would expect it to be 25% Bonds and 6% property in 2017, 35-40% and 5% in 2018 and so on.

No trackers on offer within the AVC options but there is a Global Equity option at a similar fee which could replace the individual geographic funds but prefer the option of being able to rebalance at the finer grain level. Bit more time & effort but should make it easier to consider and review the overall portfolio as it gets added to and (hopefully) grows.

Happy to leave PP alone and let it do its thing. Assuming we work until normal retirement the DB pensions and the State will provide a very good "base level" of income - this is the icing on the cake.

Being forced to access DB pension early and taking a hit of ~5% a year on the payments would be less than ideal so it also provides a buffer against that eventuality (as does the cash pot).

The SL funds in the AVC are actively managed and so would the two initial choices for the ISA. AVC fee at 0.68% is not too far from the overall Tracker + Platform fee on the PP. Agree the ISA fees will be higher but (at least so far) both funds have "earned" their higher fees by the looks of it.

Our ages are 56 for me and 55 for my wife. No definite plans as regards retirement although I am more inclined to go early than she is.

Couldn't go now as there is still a mortgage lurking in the background (cleared by the time we are 60) that we could clear now by using our cash but when they lend to us at 1.99% and pay us 4-6% to lend it back to them it doesn't seem like a great plan.

Playing_with_Fire_2

Perfect - I agree with you on the mortgage front - with the cash to pay it off you have all of the upside (high cash interest) and none of the downside (risk of rates increasing to unaffordable levels, equities crash)

ruperts

Linton wrote: »

...US small companies seem to offer minimal benefit over the wider US index. The Vanguard Global SC fund is nearly 60% US. So your SC holdings may not provide the extra performance you were hoping for.

Sorry for the slight thread hijack, but if you don't mind me asking, what is this view based on?


I hold the Vanguard Global SC fund and have noticed that it has performed poorly in comparison to UK Smaller Companies funds in the last year at least, but I assumed this was caused by different geographies being at different stages of the cycle, and that performance would balance out over the long term, rather than US Smaller Companies having any inherent reason to perform less well.

Linton

ruperts wrote: »

Sorry for the slight thread hijack, but if you don't mind me asking, what is this view based on?


I hold the Vanguard Global SC fund and have noticed that it has performed poorly in comparison to UK Smaller Companies funds in the last year at least, but I assumed this was caused by different geographies being at different stages of the cycle, and that performance would balance out over the long term, rather than US Smaller Companies having any inherent reason to perform less well.

Look at the long term (10 year) performance of the average US SC fund against the S&P500, the average UK SC fund against the FTSE Allshare, the average european SC fund against one of the European All companies indexes, and similarly for Japan. I think you will find that the average US SC fund performs much closer to its all-share equivalent than any of the others which all show much higher performance. The Trustnet charting tool will help here.

As to why it happne,. I dont know but have a few thoughts.....
1) The FANGs (Favebook, Amazon, Netflix and Google) and similar have caused the US S&P 500 index to perform better than is normal for large companies
2) The US is the largest source of investors, and they cant be bothered or dont have the knowledge to invest in "international" small companies
3) The US Market is closer to being an Efficient Market than the others. Evidence for this is that trackers perform relatively better in the US market than elsewhere.

AlanP_2

ruperts wrote: »

Sorry for the slight thread hijack, but if you don't mind me asking, what is this view based on?


I hold the Vanguard Global SC fund and have noticed that it has performed poorly in comparison to UK Smaller Companies funds in the last year at least, but I assumed this was caused by different geographies being at different stages of the cycle, and that performance would balance out over the long term, rather than US Smaller Companies having any inherent reason to perform less well.

Not sure what it is based on other than the same sort of analysis you have done but open to correction on that.

I took it to mean, in the context of my original post, that typically a SC fund is looking to boost the overall return as it has historically been a better sector over a given period of time. If the Vanguard fund is mainly US (which it is) and US SC's don't provide as large a return as the same in other geographies then I won't get as much of a boost by holding this SC fund as I thought I might just because I have included an SC fund. Does that make sense?

So if I accept that point of view and want to get a boost from investing in SC's I would be more likely to get it by choosing a fund or funds that is less US focused.

EDIT - Crossed with Linton and whilst I haven't done the research as yet his 3 possible reasons sound plausible particularly #2 and #3.

grey_gym_sock

10 years is not long enough to tell whether smaller companies are going to outperform in the long term. AIUI, it is perfectly expected that they might fail to outperform for 10, or even 20, years; but they are (if you believe in the "size" premium) expected to outperfom eventually. so i wouldn't dismiss US small-cap so quickly.

similarly, you shouldn't expect UK or european or japanese small-cap to outperform big-cap in every decade, just because they did in the last 10 years.

you might ask: is it even worth overweighting small-cap, if it can take so long for it to win out? personally, i would say yes, because
1) whether or not there is any small-cap premium, small-cap is different from big-cap, and it feels more diversified to me to have a portfolio which is not dominated by big-cap (despite the fact that some ppl define a market-cap-weighted portfolio - which would be about 80% big-cap - as being maximally diversified); and
2) i try to put most of my small-cap allocation in "small value", for which there is stronger evidence of outperformance than for small-cap in general.

Linton

grey_gym_sock wrote: »

10 years is not long enough to tell whether smaller companies are going to outperform in the long term. AIUI, it is perfectly expected that they might fail to outperform for 10, or even 20, years; but they are (if you believe in the "size" premium) expected to outperfom eventually. so i wouldn't dismiss US small-cap so quickly.

similarly, you shouldn't expect UK or european or japanese small-cap to outperform big-cap in every decade, just because they did in the last 10 years.

you might ask: is it even worth overweighting small-cap, if it can take so long for it to win out? personally, i would say yes, because
1) whether or not there is any small-cap premium, small-cap is different from big-cap, and it feels more diversified to me to have a portfolio which is not dominated by big-cap (despite the fact that some ppl define a market-cap-weighted portfolio - which would be about 80% big-cap - as being maximally diversified); and
2) i try to put most of my small-cap allocation in "small value", for which there is stronger evidence of outperformance than for small-cap in general.

Suggest you look up the performance of the UK Small companies fund sector in the past 25 years. Since 1991 the IA UK Small Company fund index is up around 1300%, the FTSE AllShare about 600%, both with dividends re-invested. Is there a UK Small Cap Premium?