Drawdown portfolio - views

eyeonretirement

I am trying to build a portfolio to use in drawdown for my wife and myself. We have no other pensions other than our self invested SIPP's and ISA's other than the state pension in a few years time. My aim is only draw down the natural yield using UFPLS and keep under the taxable levels ( £11500?). I would keep 2 or 3 years income in cash and the rest invested with annual rebalancing. I would value peoples opinion on the portfolio I am playing around with.

SIPP 1 – Funds
Woodford Equity Income UK 3.00%
Artemis Income UK 2.00%
JOHCM UK Equity Income UK 3.00%
Artemis Global Income GLOBAL 5.00%
SPDR Global Divi aristrocrats GLOBAL 5.00%
F&C Commercial property IT PROP 3.00%
First state Global listed infra OTHER 2.00%
SUB TOTAL 23.00%

SIPP 2 – Funds
Trojan Income UK 3.00%
Fidelity Moneybuilder divi UK 3.00%
Rathbone Income UK 2.00%
Scottish American IT GLOBAL 4.00%
UK Commercial property IT PROP 3.00%
3i Infrastructure OTHER 3.00%
SUB TOTAL 18.00

ISA 1 - IT's and ETF's and Bonds
City of London IT UK 3.00%
Temple Bar IT UK 3.00%
Newton Global Income GLOBAL 5.00%
Aberdeen Asian Income IT GLOBAL 4.00%
Artemis Strategic Bond FIXED 4.00%
TwentyFour Dynamic Bond FIXED 4.00%
Rathbone Ethical Bond FIXED 4.00%
SUB TOTAL 27.00

ISA 2 - IT's and ETF's and Bonds
Edinburgh IT UK 4.00%
Marlborough Multicap Income UK 3.00%
Murray International IT GLOBAL 5.00%
Schroder Asia Income GLOBAL 4.00%
Jupiter Strategic Bond FIXED 4.00%
New City High Yield IT FIXED 4.00%
Henderson Strategic Bond FIXED 4.00%
LXI REIT PROP 3.00%
SUB TOTAL 31.00%

Fermion

I've been in Drawdown for about 18 months now and have invested in some of the funds in your various portfolio lists. The only comment I would make it to check carefully the yields of the individual funds - some have a relatively low dividend/income yield which would mean that you would may need to actively monitor performance and may need to sell units on a regular basis to balance the "natural yield". For example Aberdeen Asia (currently circa 1.27%), - I actually invested in Newton Asia Income(currently circa 4.19%) although Jupiter Asia income has similar yields.

Also don't forget to check the charges - I'm with HL and they have done deals with some of the investment managers to reduce charges (often they have special reduced charge fund classes which are usually part of their list of Wealth 150 funds)

bigadaj

Fermion - be careful not to fall for the hl marketing hype, the discounts they negotiate may or may not be real or unique but in most cases they still are less than the additional costs over other platforms.

OP - I'd be very wary of bonds currently with low interest rates and the risk of capital loss when interest rates increase. Also some investment and infrastructure funds are at large premiums, which may or may not be a concern to you but is soemthing to be aware of.

Linton

I need to assume that your total pot size is sizeable - say several £100K. If not you have far too many funds.

I see three major problems:

1) Duplication
There is no point in having so many funds invested in the same things. eg 5 or 6 UK Equity Income funds with assorted ITs that could be similar. One possibly, two at a stretch but 5 is pointless. The sheer number makes it unneccessarily difficult to understand and manage the portfolio. The maxim I try to adopt is that each fund one invests in should have a well defined and unique purpose.

2) Management
Running 4 separate platforms with limited options for transferring money from one platform to another is a pain ( I have 5). The problem is that with rebalancing of funds and management of overall % asset allocations you are liable to move towards every pot holding the same funds in different proportions. The only way I have found to control things is to treat the whole lot as a single portfolio (or in my case 3 logical portfolios) spread across all platforms rather than 4 or 5 portfolios each trying to do the same thing. Whether this is right for you I dont know, but you do need some clear approach.

Another issue to be considered is minimising tax, in particular by avoiding going into a higher rate band. One can do that by ensuring that one's income comes predominantly from S&S ISA's being fed from capital taken from the SIPPs in quantities that make maximum use of one's current tax band.

3) Diversification
This is the big one. To provide a steady, inflation matching, sustainable income over decades you need to ensure you are protected as far as possible against whatever the global economic markets may do. Diversification is required across a range of factors, the major ones I can see as being problematic with your portfolio are::
- Geography: You need to be invested globally. You are heavily invested in the UK. You are hardly invested at all in the USA, by far the largest market in the world.
- Investment type: You are heavily into income generation funds. You need to have a significant % of growth funds in your portfolio to provide inflation protection and possibly to insure against shortfall risk.
- Industry sector: A major effect of investing for income and investing significantly in the UK is that your % holdings in some industries (eg Finance/Banking) are likely to be high and in others, particularly technology, will be very low. Remember the banks in 2008. They were major dividend payers.
- Sources of income: You are relying completely on natural income. You need a balance of natural income and income from capital. Both need to come from as wide a variety of investments as possible.

dunstonh

I'm with HL and they have done deals with some of the investment managers to reduce charges (often they have special reduced charge fund classes which are usually part of their list of Wealth 150 funds)

Virtually all platforms have super clean funds available. It is just the range that varies. HL do not have the largest range but they are virtually unique in the way they market those that have a superclean deal on their platform. You should never buy your investments on the basis of provider/platform marketing.

eyeonretirement

My pot is approx £750K combined. I intend to run as one portfolio as best I can, all four are on the one platform. My overall aim is

UK 30-35%
Global 30-35%
Fixed 20-25%
Property 10%
Infrastructure and other 5%

I understand the problem with bonds, but what else can people do other than property and other bond proxies. I didn't think 30% in the UK was too much, as I am based in the UK. I am relying on capital growth in the income funds and IT's to stay ahead of inflation as I didn't want to start getting into top slicing capital growth as it is a further complication and goes against my instincts.

I was hoping by investing in global funds that I can leave the decision to move in and out of geographic areas to a more knowledgeable manager than myself. I want to try and keep this as simple as possible. My retirement plans do not include micro-managing my income I didn't feel 14 funds per person was excessive?

bostonerimus

Too many funds.
I'm retired and take a total return approach where I use dividends, interest and capital gains and 90% of my money is in just three funds.....domestic equity, international equity, bond index. All are trackers to keep costs down and the portfolio (if you can call it that) is simple to manage.

Marine_life

eyeonretirement wrote: »

...but what else can people do other than property and other bond proxies?

You could consider allocting some of your portfolio to P2P or crowdfunding. In asset backed lending you should be able to achieve 6-7% with limited risk and 10%+ with higher risk. Including hands off options if you don't want to manage individual loans.

bowlhead99

eyeonretirement wrote: »

I understand the problem with bonds, but what else can people do other than property and other bond proxies.

It is a tough one.

Infrastructure is something that has some "bond proxy" characteristics but important to note that different types of infrastructure assets will be more or less correlated with bonds or equities. I made a few very general comments on that on another thread a couple of weeks ago:
http://forums.moneysavingexpert.com/showpost.php?p=72527211&postcount=13

Your 3i fund has some direct infra assets but is heavily "UK" in its focus; while the FS global listed infra fund is more about buying shares in listed infrastructure or utility companies themselves (eg, largest holding National Grid) rather than directly holding infra project assets.

The FS fund is an easy way to get some global exposure to utilities and similar assets but - National Grid as an example is a stable dividend stock whose price has gone up consistently with other similar stocks in the chase for yield that everyone has been playing for the last few years of low interest rates. So, your FS global infra fund holding things like that will perform similar to other equity income funds that hold that sort of company share - it's sort of doing the same thing as other more generalist global equity income funds, just specialising in a limited set of industry sub-sectors rather than providing true diversification into a new area.

The other non bond "diversifiers" that pay income do at the end of the day tend to be variations on a theme of bond or equity yield. There are some hedge/ absolute return funds that don't pay much in the way of dividend and just seek a stable return across up and down market conditions. They don't typically meet "high income" criteria but I agree with Linton that your don't have to have all of your money deployed in high income areas; general growth over time is fine if you have large portfolio.

There are things like Architas Diversified Real Assets which is a fund-of-funds holding a mix of equity and credit-related assets together with specialist property, ABS, infra, absolute value/volatility strategies in addition to some more esoteric areas like timber and commodities. As a fund of funds the OCF is over a percent but it is a big bag of diversification which yields about 3%. It only has a few years of operating history but an interesting set of holdings.

didn't think 30% in the UK was too much, as I am based in the UK. I am relying on capital growth in the income funds and IT's to stay ahead of inflation as I didn't want to start getting into top slicing capital growth as it is a further complication and goes against my instincts.

As mentioned, I agree with Linton that you shouldn't be blinkered in only investing in something that has a high level of income and then hoping its capital return is good enough to keep up with the Joneses. You are cutting off a lot of the world market (where high dividends might not be prevalent due to cultural or local taxation factors) and a number of different industries.

You don't get a big yield from Facebook, Amazon, Tesla, Alibaba. In fact you don't get anything. You don't get enough dividend income from Tencent or Apple for people to include them in their equity income funds - even though Tencent has literally 800 million monthly active users and Apple made about $45bn profit over the last four quarters (more annual profit than the entire market cap of any UK listed company outside the top 20 FTSE stocks). If you are rejecting all these companies for not meeting your "dividend income objective" you are perhaps missing a trick.

The goal is to be diversified. A portfolio that's generally built of bonds, bond proxies and companies that pay high div yields so investors have piled into them as bond substitutes, has the potential to do terribly in a rising interest rate environment where bonds fall in value and people stop holding dividends stocks because they are not so desperate for yield any more that they would really want the equity risk.

I was hoping by investing in global funds that I can leave the decision to move in and out of geographic areas to a more knowledgeable manager than myself. I want to try and keep this as simple as possible. My retirement plans do not include micro-managing my income

The problem is, you are not literally leaving the management decisions to managers to deploy your money globally as they see fit. You are tilting your demand away from such a neutral, expertise-led strategy - by saying, within the overall remit of getting me a high level of natural income, please deploy my money globally as you see fit." To do that they necessarily ignore some regions, industries and company types that would make perfectly reasonable investments if you would dare to think on a "total return available from the investment" basis.

So in a sense you have micro managed your portfolio before you've even started, by rejecting certain types of holdings out of hand, even though managers with free rein have had excellent results from "growth led" or "mixed, income and growth" strategies which would have been nice to include in your portfolio if the objective was to grow or preserve wealth over the longer term while periodically taking out some cash.

didn't feel 14 funds per person was excessive?

My parents have a smaller portfolio than yours in terms of £ value, and are in close to 30 funds between them. And there's a bit of overlap with some things they both hold, so each has 15-18. That is probably overkill, and I will try to cut them down after they finally get around to changing platforms this summer - though doesn't really hurt anyone if you're still able to see the wood for the trees and understand what it is that you are periodically rebalancing.

However, they are covering a lot of areas with those 15 specialist funds. If they each had 15 funds and ten or eleven of them each were UK equity income, they would come across indecisive and you would wonder why they had got so many doing the same job and how they were going to cover the rest of the planet and all the other asset classes effectively with the other four or five.

I appreciate if you're working from multiple tax pots you are going to have some duplication because - as Linton says - it's hard to keep rebalancing properly when you have restrictions on moving cash between the people and pots. And if your UK equity income fund in pot A is Fund ABC and you want a UK equity income fund for pot B you don't necessarily need to choose Fund ABC again, you could pick Fund XYZ to take that role in pot B. Some differences in manager or strategy is OK and you might feel more comfortable going with two similar-but-different funds for his n hers instead of going "all in" with one choice. That's how my parents have 30 instead of 15.

The downside is needing to keep monitoring 30 funds to see if they all still meet your requirements and whether the managers or strategies are subtly or not so subtly changing. But if you are using active fund managers you should really be looking at what they are doing and what rival funds are doing anyway, to ensure they are generally still ok compared to their peer group in the grand scheme of things, or if not, you understand why.

That's less of a concern with Boston's index-tracking philosophy above, where it's pretty clear to see if the manager met his objective or had a huge tracking error that makes you want to change fund provider. But passively sitting back and taking the index result is not for everyone, if you don't want the volatility of an index or can't find a decent index for the niche to which you want exposure for a particular portion of your wealth.

bostonerimus

bowlhead99 wrote: »

That's less of a concern with Boston's index-tracking philosophy above, where it's pretty clear to see if the manager met his objective or had a huge tracking error that makes you want to change fund provider. But passively sitting back and taking the index result is not for everyone, if you don't want the volatility of an index or can't find a decent index for the niche to which you want exposure for a particular portion of your wealth.

You can dial in levels of volatility to a passive strategy depending on the asset allocation of the overall portfolio and it's common to have a cash/short term bond allocation that you can use to ride out any really nasty down turns. If you have an annuity or defined benefit pension you might want to take more risk in the portfolio and have a larger percentage of equities for some growth.

I'm a big fan of real estate for income and owning a rental property is a nice income diversifier, but I wouldn't want it to be more than 20% of my portfolio.

eyeonretirement

Many thanks for the detailed reply. Food for thought. My current portfolio is a mix of growth and income funds. My thinking in moving to all income producing ones is to avoid my natural aversion to selling funds that are growing well ( top slicing) but I do fully understand the point you are making in that I am reducing the size of the pool I can pick from. It's a dilemma for me, I have grown my portfolio quite well over the last few years but I dont enjoy it and as I get older and retire I just want to enjoy life and not be stressing over my income. I do envy people with company pensions that just pay a monthly income with no fuss or effort.