Investing during Brexit

sixpence.

JohnRo wrote: »

OP what yield target are you aiming for?

I personally don't see why there has to be a heavy UK focus to obtain a healthy yield. The UK 100 index is composed of many large global companies anyway and isn't directly dependent on the health of the UK economy, the exchange rate of GBP is the bigger concern in that regard.

A basket of globally oriented and diverse collectives can be used to achieve a very respectable level of dividend income.

Alternatively there are individual collectives specialising in delivering a decent yield derived from global equities, with potential for some strong capital growth in the good years alongside.

What about something like this as a global equity income component?

I am thinking of making 35% of my portfolio Vanguard FTSE all share Index. Are you saying that this would count as a global investment because of the global outreach of some UK companies?

I will look into Artemus but I am not so attracted to managed funds and am mostly considering Index funds. For example the vanguard (above) offers a 3.32% income after all charges. Not bad.

TheTracker wrote: »

Creating separate income and growth portfolios is one popular approach. Some people just don't like the overhead - fees, memory, and psychology - of selling to create income, or have a tax situation that makes dividends more favourable.

But if doing so means you have to take on extra home bias - to the extent of 58% of your portfolio being UK - that seems an extraordinary manoeuvre to make to enjoy the benefits of trading less often or reducing dividend tax. And of course you need to actively manage that income portfolio on the flip side.

As a reminder, in theory the dividend policy of a stock is irrelevant to the return of the stock. In practise, the popular desirability of dividend paying stocks creates a demand that in effect reduces its total return. You pay to told a dividend yielding stock.

In uncertain markets, such as you are predicting, a history of paying dividends can be harmful. Any drop in forecast dividend is seen as a sign of weakness and there may be a sell off, or the company may try to cover the shortfall by selling some assets that it should not otherwise have had to sell. You get the dividend, but your capital is worth less.

Understanding all these factors is key in deciding the drawdown strategy you'll take.

Audaxer wrote: »

Artemis Monthly Distribution Fund I is worth considering as it's a globally diversified multi asset fund with a yield of just over 4% and only a small amount of UK equity.

Using Index funds will allow me to invest passively. The question is: is 58% too much?

Here is my idea so far. I have put the dividend yields (minus all costs and charges!) in brackets... the non bracket percentages refer to the portfolio weighing

FTSE 100 Vanguard tracker 35% (3.32%)
European Index 15% (2.14%)
Asia Ex-Japan Index 20% (3.28)
Royal London Bonds 15% (4.73%)
Ishares corporate Bond index 15% (1.86%)

bowlhead99

sixpence. wrote: »

I am thinking of making 35% of my portfolio Vanguard FTSE all share Index. Are you saying that this would count as a global investment because of the global outreach of some UK companies?

He's saying the FTSE100 (which is usually a bit over 80% of your FTSE All-Share) does have a very large non-UK component so that it isn't as much of a 'UK' investment as you might think. It is heavily weighted to the very largest companies that choose to list on the UK stock exchange so gives a high concentration in certain industries, which source the majority of their income/profits from abroad and have many of their assets overseas.

The UK All-Share is certainly more 'UK' than something like your proposed Asian tracker, but has quite an international flavour to it. Though only in certain industries. It has some big oil companies, banks, pharma etc which are global giants. It doesn't have, for example, the major car manufacturers or technology firms like Microsoft or Google or Facebook. It isn't really what JohnRo was describing as 'a basket of globally oriented and diverse collectives'.

People will say that the UK index has a strong international flavour to it but that is because it weights your money to the biggest companies which are inevitably more likely to have foreign assets or incomes. If you take companies like HSBC, Shell, BP, British American Tobacco and Glaxo - they are global players. If you look for companies that do most of their work at home instead of abroad - like Lloyds Bank, National Grid, Sainsbury, Whitbread, Royal Mail - they will still be paying you dividends but they are smaller and so an investment in the UK All Share index will put much less money into them.

By using the UK index for your UK allocation, you have six to seven times as much allocated to the first set of companes mentioned than to the second. You might be happy with the yield, but yield isn't everything and a lot of people people would look to structure their assets with a more even spread across industries and geographies. So for example if targeting money from one fund in their portfolio to be invested 'in the UK' in addition to the other regional funds they hold (Europe and Asia etc), they might make sure the UK money was going into companies with heavier UK exposure rather than just the biggest companies that happen to be listed here.

I will look into Artemus but I am not so attracted to managed funds and am mostly considering Index funds. For example the vanguard (above) offers a 3.32% income after all charges. Not bad.

The headline yield is not bad - it's good by comparison to some of the other regions where there's less demand from investors for their companies to pay dividends. As others mentioned, UK companies have a higher yield as a quirk of the investing culture and the index has a particularly high yield relative to the average UK company as it is weighted to those big 'cash cow' companies like tobacco companies and big pharma or oilers or financial services companies - or the likes of Unilever or Diageo etc - which generate cash and throw it out to the investors. But using the index does mean a high weighting to some industries over others.

You mention being a fan of investing passively but if size of dividend yield was what you wanted because you see dividends as being a key thing for this portfolio to deliver, there are active funds which would focus on doing that, and get you more. If a balanced allocation across industries was what you wanted, there are active funds which would focus on doing that. There is certainly more than one way to do it.

You have said you have particular objectives for the different portfolios "one will be for income and one will be for growth". Generally, if you have a specific objective then using market-capitalisation-weighted tracker funds such as a UK all-share tracker or an Asia-ex-Jap tracker or a Europe tracker, is not the way to achieve it, as none of those funds have your particular objective in mind when they allocate your capital. If you use such funds - as you have put in your model portfolio below - you will have to work harder as their values fluctuate up and down to preserve whatever precariously balanced objective you think you want them to deliver.

Trying to get to your objective using funds which are not designed for the objective has caused you to entirely miss out the largest two stock markets in the world (North America and Japan) because you don't like the yield which the standard market-cap-weighted indexes produce in those regions. A decision to miss out literally half the world's equity markets by value - and just close your eyes to those locations and go elsewhere because the average yield in their indexes is a little low - seems a very blinkered way of investing.

Using Index funds will allow me to invest passively.

Yes using index funds will allow you to not use active funds and avoid having anyone doing work for you to target your objective. You have to do all the targeting yourself; and in your list of funds that you ended up with you are missing out huge parts of the global economy. So the yield might look nice but you are very concentrated in some regions which won't be good for the stability of your portfolio.

The question is: is 58% too much?

FTSE 100 Vanguard tracker 35% (3.32%)
European Index 15% (2.14%)
Asia Ex-Japan Index 20% (3.28)
Royal London Bonds 15% (4.73%)
Ishares corporate Bond index 15% (1.86%)

If you want stability of income then it makes sense to have a lot of 'home bias' in your allocations because then you avoid the significant fluctuations due to foreign exchange. Unfortunately the way you are trying to achieve it (through the UK index) means you have quite a lot of 'international' aspect because of the concentration of certain large companies in the top end of the FTSE100, so you are not hiding from that exchange effect, though you are upping the industry sector concentration. The decision on how to structure your portfolio is of course yours, I am just not a fan of the way you are doing it for your objective.

You mention 58% UK ; with over a third of the portfolio in a UK index tracker, the rest of the UK allocation comes I assume from the bonds?

If you are building a diversified income portfolio then overseas bonds (both developed and emerging markets) are very useful. If the purpose of the bonds is to take the edge off the natural volatility of equities in a 70/30 equities/bonds portfolio, then fair enough if you want most of the bonds to be UK-focused and in your own currency. However if you are looking to make the most of income opportunities for a portfolio objective of income generation, you don't need to have any more than half your bonds being UK ones. So with 35% in a UK equities tracker and half of the 30% bond component being UK bonds you would then be at 50% UK.

That's not as 'bad' as 58%, but personally I would be aim to be less than 50% UK, and not do it the way you are doing it. Half your money in one country's markets (even though those markets are impacted considerably by international influences) seems a lot of eggs in that basket when there are plenty of baskets around the globe for you to use. Ignoring US and Japan and Emerging Markets seems a shortsighted approach.

As an aside, you started the post by saying "I am thinking of making 35% of my portfolio Vanguard FTSE all share Index" so I gave you comments on that and about how it is dominated by the FTSE100 which is a poorly diversified index and makes up over 80% of the all share by value. However by the time we get to "here is my idea so far" you are saying "FTSE 100 Vanguard tracker 35%" . You should be aware that the FTSE100 is a different index to the FTSE All-Share. It misses out the 500+ companies that are not the 100 biggest ones.

So by choosing FTSE100 instead of All-Share you'll pick up Marks & Spencer and Just Eat and Direct Line but miss Royal Mail, Rightmove and Bellway - they are all £4-5bn companies but the latter three are currently outside the 100 due to their valuation on the day the index last got reviewed. If you must use an index for your UK investing, please use the better one, the All-Share. Don't be tempted by a slightly higher dividend yield in one or the other, just recognise that the 100 is less diversified and over the long term the All-Share will probably produce better results due to more diversification and smaller average company size.

Here is my idea so far. I have put the dividend yields (minus all costs and charges!) in brackets...

Not sure if you picked up the comments from other posters above that the dividend yields which the funds quote in their performance, are what they delivered to their investors historically and are already after the management fees and other running costs or operating costs were taken off.

Also they are of course backward-looking measures. The performance you'll actually get, will be something else. Really with your stated objective of 'income' for this portfolio, what you want to do is set up your portfolio to optimise the income opportunities - at the expense of some growth opportunities - but I don't see that you will do that effectively by just picking regional indexes and buying everything in those indexes, and then ignoring everything in other regions.

Linton

economic wrote: »

The only reason for the decision between a dividend stock vs a non-dividend stock is the tax situation. Otherwise it should not matter, simply put the best stock should be bought. You can always sell part or all of a stock if you need cash. Of course this ignores transactions costs as well but these are likely to be irrelevant compared to the size.

My current portfolio yields about 1.5%, most of which is automatically reinvested. This is similar to a globally diversified fund.

This may be correct if your prinary objective is long term growth. However if you have a need for a steady-ish income to fund ongoing expenditure dividends have useful advantages. Three significant ones:

1) Dividends go into your current account regularly, automatically, and charge free, so no need for possibly difficult decisions as to which investment to sell.
2) Dividends are much less volatile than share prices
3) High dividend paying companies are mostly of a different character to those which could give you high growth so they provide useful diversification.

Linton

TheTracker wrote: »

The volatility of the total return of a dividend paying stock is no different than the volatility of a non-dividend paying stock, all else being equal. That a company chooses to put its return into 'a' and 'b' buckets of say 4% and 3% versus 7% and 0% is a post-return management decision unrelated to volatility of total return. The volatility of 'b' tells you very little about 'a+b'.

1) Serious dividend paying companies do not choose to put their returns into dividends as an ad hoc post return decision. Once they get a reputation for paying consistent dividends they are in general stuck with it unless the company gets into real difficulties. The need to pay a steady dividend may well influence their management strategy. The company owners, the share holders, may want a steady income now rather than future promises.

There are several sectors where constraints on a company market size limits the value of significant re-investment of profits. For example a water company wont start massive investment and a national advertising campaign to sell more water. And yet such companies can be highly profitable. Dividends are their only way of returning value to the share holders.

2) If you need income to fund ongoing expenditure a steady income is far more important than volatility in the share price. On a year to year basis an income investor may well not care about the share price, but will certainly care if their income drops off.

Linton

Sorry OP, I fear that you are wandering around without any clear strategy. Your new portfolio seems very flawed to me:
1) Bowlhead has identified the problems with your FTSE100 based investments.
2) You propose investing in the Ishares UK Corporate Bond Index - trustnet gives its yield as 2.37%. Hardly something to tempt an investor seeking income. The Royal London Corporate Bond fund is a bit better at 3%, but again not great.

I am afraid that if you want income you will need to look outside index funds. My income portfolio is generating about 6% with 100% active investments.

Does your portfolio represnt your total set of investments or is it just the income side? If the former missing out on the US is a very serious gap and if the latter you arent getting the income to distinguish it from a general balanced portfolio.

It seems to me that you have about 3 sensible choices if you are seeking income....
1) Invest all your money in something (or a couple of somethings) like the L&G Mixed Investment income fund which currently provides a 3.6% yield but invests very broadly world wide with only 17% in UK equity. There are other funds with similar characteristics. Perhaps this is worth a look with a slightly higher yield and much longer history.
2) learn a lot more and set up separate income and growth portfolios, both invested very broadly but focussed on achieving their separate objectives.
3) If you have a significant pot, say more than £75K-£100K, consult anIFA.

Dont solely base your future financial security on comments from people on the internet if you dont yet have the skills to challenge what they say.

JohnRo

sixpence. wrote: »

I am thinking of making 35% of my portfolio Vanguard FTSE all share Index. Are you saying that this would count as a global investment because of the global outreach of some UK companies?

You started out saying this

Looking for people's opinions on the following: The UK economy looks uncertain with Brexit, and London property prices drooping.

What I'm saying is that the UK 100 index, and UK all share index, being dominated by the UK 100 component, are not dependent on or severely impacted by the state of the health of the UK economy in isolation.

Of course the UK economy may well be affected by global events which in turn affect the fortunes of the global UK 100 companies within the index but that's not the same thing as being affected by the UK economy.

Headquartered, listed and traded in the UK does not equate to operates in the UK economy.

In light of your original assertion, that the UK economy looks uncertain, which I agree with, I'm not then suggesting the UK 100 (or the all share) are good choices because they're 'global' and not directly affected by the UK economy. They're a poor index investment choice afaik.

sixpence.

Linton wrote: »

Sorry OP, I fear that you are wandering around without any clear strategy. Your new portfolio seems very flawed to me:
1) Bowlhead has identified the problems with your FTSE100 based investments.
2) You propose investing in the Ishares UK Corporate Bond Index - trustnet gives its yield as 2.37%. Hardly something to tempt an investor seeking income. The Royal London Corporate Bond fund is a bit better at 3%, but again not great.

I am afraid that if you want income you will need to look outside index funds. My income portfolio is generating about 6% with 100% active investments.

Does your portfolio represnt your total set of investments or is it just the income side? If the former missing out on the US is a very serious gap and if the latter you arent getting the income to distinguish it from a general balanced portfolio.

It seems to me that you have about 3 sensible choices if you are seeking income....
1) Invest all your money in something (or a couple of somethings) like the L&G Mixed Investment income fund which currently provides a 3.6% yield but invests very broadly world wide with only 17% in UK equity. There are other funds with similar characteristics. Perhaps this is worth a look with a slightly higher yield and much longer history.
2) learn a lot more and set up separate income and growth portfolios, both invested very broadly but focussed on achieving their separate objectives.
3) If you have a significant pot, say more than £75K-£100K, consult anIFA.

Dont solely base your future financial security on comments from people on the internet if you dont yet have the skills to challenge what they say.

I have already said in the original post that this is an income portfolio. My growth portfolio contains a lot of US and Japan.

I will consider your points, in the mean time do you want to share your income portfolio? I would be interested in seeing how, when fees are taken into consideration, you are generating 6% income.

Will clarify here that I made a mistake and it is not a FTSE100 tracker but an all share index.

EDIT: I just looked into the L&G fund you suggested. Do you mean this one? http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/legal-and-general-mixed-investment-20-60-class-i-accumulation

If so it has a disappointing yield and a high cost to boot...

sixpence.

bowlhead99 wrote: »

He's saying the FTSE100 (which is usually a bit over 80% of your FTSE All-Share) does have a very large non-UK component so that it isn't as much of a 'UK' investment as you might think. It is heavily weighted to the very largest companies that choose to list on the UK stock exchange so gives a high concentration in certain industries, which source the majority of their income/profits from abroad and have many of their assets overseas.

The UK All-Share is certainly more 'UK' than something like your proposed Asian tracker, but has quite an international flavour to it. Though only in certain industries. It has some big oil companies, banks, pharma etc which are global giants. It doesn't have, for example, the major car manufacturers or technology firms like Microsoft or Google or Facebook. It isn't really what JohnRo was describing as 'a basket of globally oriented and diverse collectives'.

People will say that the UK index has a strong international flavour to it but that is because it weights your money to the biggest companies which are inevitably more likely to have foreign assets or incomes. If you take companies like HSBC, Shell, BP, British American Tobacco and Glaxo - they are global players. If you look for companies that do most of their work at home instead of abroad - like Lloyds Bank, National Grid, Sainsbury, Whitbread, Royal Mail - they will still be paying you dividends but they are smaller and so an investment in the UK All Share index will put much less money into them.

By using the UK index for your UK allocation, you have six to seven times as much allocated to the first set of companes mentioned than to the second. You might be happy with the yield, but yield isn't everything and a lot of people people would look to structure their assets with a more even spread across industries and geographies. So for example if targeting money from one fund in their portfolio to be invested 'in the UK' in addition to the other regional funds they hold (Europe and Asia etc), they might make sure the UK money was going into companies with heavier UK exposure rather than just the biggest companies that happen to be listed here.

The headline yield is not bad - it's good by comparison to some of the other regions where there's less demand from investors for their companies to pay dividends. As others mentioned, UK companies have a higher yield as a quirk of the investing culture and the index has a particularly high yield relative to the average UK company as it is weighted to those big 'cash cow' companies like tobacco companies and big pharma or oilers or financial services companies - or the likes of Unilever or Diageo etc - which generate cash and throw it out to the investors. But using the index does mean a high weighting to some industries over others.

You mention being a fan of investing passively but if size of dividend yield was what you wanted because you see dividends as being a key thing for this portfolio to deliver, there are active funds which would focus on doing that, and get you more. If a balanced allocation across industries was what you wanted, there are active funds which would focus on doing that. There is certainly more than one way to do it.

You have said you have particular objectives for the different portfolios "one will be for income and one will be for growth". Generally, if you have a specific objective then using market-capitalisation-weighted tracker funds such as a UK all-share tracker or an Asia-ex-Jap tracker or a Europe tracker, is not the way to achieve it, as none of those funds have your particular objective in mind when they allocate your capital. If you use such funds - as you have put in your model portfolio below - you will have to work harder as their values fluctuate up and down to preserve whatever precariously balanced objective you think you want them to deliver.

Trying to get to your objective using funds which are not designed for the objective has caused you to entirely miss out the largest two stock markets in the world (North America and Japan) because you don't like the yield which the standard market-cap-weighted indexes produce in those regions. A decision to miss out literally half the world's equity markets by value - and just close your eyes to those locations and go elsewhere because the average yield in their indexes is a little low - seems a very blinkered way of investing.
Yes using index funds will allow you to not use active funds and avoid having anyone doing work for you to target your objective. You have to do all the targeting yourself; and in your list of funds that you ended up with you are missing out huge parts of the global economy. So the yield might look nice but you are very concentrated in some regions which won't be good for the stability of your portfolio.

If you want stability of income then it makes sense to have a lot of 'home bias' in your allocations because then you avoid the significant fluctuations due to foreign exchange. Unfortunately the way you are trying to achieve it (through the UK index) means you have quite a lot of 'international' aspect because of the concentration of certain large companies in the top end of the FTSE100, so you are not hiding from that exchange effect, though you are upping the industry sector concentration. The decision on how to structure your portfolio is of course yours, I am just not a fan of the way you are doing it for your objective.

You mention 58% UK ; with over a third of the portfolio in a UK index tracker, the rest of the UK allocation comes I assume from the bonds?

If you are building a diversified income portfolio then overseas bonds (both developed and emerging markets) are very useful. If the purpose of the bonds is to take the edge off the natural volatility of equities in a 70/30 equities/bonds portfolio, then fair enough if you want most of the bonds to be UK-focused and in your own currency. However if you are looking to make the most of income opportunities for a portfolio objective of income generation, you don't need to have any more than half your bonds being UK ones. So with 35% in a UK equities tracker and half of the 30% bond component being UK bonds you would then be at 50% UK.

That's not as 'bad' as 58%, but personally I would be aim to be less than 50% UK, and not do it the way you are doing it. Half your money in one country's markets (even though those markets are impacted considerably by international influences) seems a lot of eggs in that basket when there are plenty of baskets around the globe for you to use. Ignoring US and Japan and Emerging Markets seems a shortsighted approach.

As an aside, you started the post by saying "I am thinking of making 35% of my portfolio Vanguard FTSE all share Index" so I gave you comments on that and about how it is dominated by the FTSE100 which is a poorly diversified index and makes up over 80% of the all share by value. However by the time we get to "here is my idea so far" you are saying "FTSE 100 Vanguard tracker 35%" . You should be aware that the FTSE100 is a different index to the FTSE All-Share. It misses out the 500+ companies that are not the 100 biggest ones.

So by choosing FTSE100 instead of All-Share you'll pick up Marks & Spencer and Just Eat and Direct Line but miss Royal Mail, Rightmove and Bellway - they are all £4-5bn companies but the latter three are currently outside the 100 due to their valuation on the day the index last got reviewed. If you must use an index for your UK investing, please use the better one, the All-Share. Don't be tempted by a slightly higher dividend yield in one or the other, just recognise that the 100 is less diversified and over the long term the All-Share will probably produce better results due to more diversification and smaller average company size.

Not sure if you picked up the comments from other posters above that the dividend yields which the funds quote in their performance, are what they delivered to their investors historically and are already after the management fees and other running costs or operating costs were taken off.

Also they are of course backward-looking measures. The performance you'll actually get, will be something else. Really with your stated objective of 'income' for this portfolio, what you want to do is set up your portfolio to optimise the income opportunities - at the expense of some growth opportunities - but I don't see that you will do that effectively by just picking regional indexes and buying everything in those indexes, and then ignoring everything in other regions.

1. Surely if the all share index is not as weighted to the UK as I think it is then it is a more diverse investment?

2. Do you have any resources for resarching active funds? I feel safe with index funds as the market, generally speaking, always goes up!!!8230; I suppose I am skeptical of managed funds unless they are specialist (for example in my growth portfolio I currently have two managed funds: for China and India)

3. I would like to know more about funds that focus on dividends, but like I said I am distrusting of managed funds. Would an IFA be a good idea? I hope to have 100k invested by 2023 (using 20k per year in my ISA)

4. I'm only 28 and looking for income but a bit of growth aint bad either.

5. I am not concerned about missing out on USA or Japan as these are well-represented in my growth portfolio which is built around, and mostly consists of, a VLS 60.

6. Is using index funds (ie the concentrated portfolio that you describe) a better idea if I have a growth portfolio that is more diversified?

7. I know the yield of index funds can change, but isn't this also the case with managed funds and, on top of that, managed funds are more likely to increase fees...

Thanks Bowlhead, I really appreciate you taking the time to comment.

JohnRo

sixpence. wrote: »

1. Surely if the all share index is not as weighted to the UK as I think it is then it is a more diverse investment?

Geographically perhaps, but the all share is dominated by the UK 100 which itself is notorious for having little in terms of a broad, diversified sector spread.

The UK 100 is dominated by a small handful of huge companies operating in some rather volatile sectors. Almost half of it is Financials, Oil & Gas & Basic materials. Only ~1% is Tech.

You appear to be under the illusion that because it's an index it's automatically diverse.

The issue with that is not that the all share doesn't hold diverse companies, it does, it's that it's a market cap index.

The weighting of all those diverse companies is dictated by market cap, which means all the hundreds of interesting diverse companies in the all share index account for a small proportion of what you're buying, in other words their effects, on the index performance, are hugely diminished by what happens to the mega caps. The minnows vs. the whales.

sixpence.

JohnRo wrote: »

Geographically perhaps, but the all share is dominated by the UK 100 which itself is notorious for having little in terms of a broad, diversified sector spread.

The UK 100 is dominated by a small handful of huge companies operating in some rather volatile sectors. Almost half of it is Financials, Oil & Gas & Basic materials. Only ~1% is Tech.

You appear to be under the illusion that because it's an index it's automatically diverse.

The issue with that is not that the all share doesn't hold diverse companies, it does, it's that it's a market cap index.

The weighting of all those diverse companies is dictated by market cap, which means all the hundreds of interesting diverse companies in the all share index account for a small proportion of what you're buying, in other words their effects, on the index performance, are hugely diminished by what happens to the mega caps. The minnows vs. the whales.

You are still essentially owning a slice of British equity overall, which is quite diverse in itself... I get what you're saying though.