Thoughts on my Asset allocation and financial position

krish123

bowlhead99 said:

krish123 said:

Prism said:

krish123 said:

A good comment earlier mentioned is that i can convert the VLS to income units later down the line however, the yield on this investment is rather low at 1.6% i believe.

If the yield isn't high enough for your requirements then sell some units to make up the difference. Don't let the yield dictate your income. Make you own plan and then work out how best to extract that.

one quick question, will the divi yield rise on VLS80? i think they have increased it in the past, am i correct?

The dividend yield from VLS80 is simply a function of how much income (dividends and bond interest) is received by the fund from the company shares and corporate & government bonds it holds. The fund will pay out all its spare income (after the 0.22% running costs and tax etc) to its investors as dividend.

If interest rates are low and bonds expensive, what they receive from the bond portfolio will be low as a proportion of the value of the bond portfolio.  If the dividends it receives are low because many of the large companies in the index don't pay dividends (e.g. Amazon and Google) or because some companies that usually pay dividends have cut or suspended them (e.g. some banks and oil companies and covid-affected industries), the dividend income will be low as a proportion of the value of the equity portfolio.  So the combination of the bond and equity income as a proportion of the overall value of the fund at a point in time, may not be very high. 

The dividend yield of the fund (how much the fund pays out to investors as a proportion of its share price at the time they pay it out) would increase if they start to get more receipts from their investments without the fund value going up by the same percentage (e.g. if they start to get 20% more income and the fund has only gone up in value 10%, the yield from the fund will be higher than it was before). Likewise if the fund crashes in value because the bonds and equities it holds become less desirable based on market conditions, but income is still being received from them - because the companies don't cut their dividends and the bond issuers still keep paying their interest on time, then the ratio of income being received by the fund and passed on to its investors will be higher as a proportion of its share price.  Still, while it's nice to get lots of income as a proportion of your investment value, you would not really want the yield to be going up due to the shares crashing in value, because you will be worse off overall because your shares are not very valuable.

The bottom line is that the VLS fund does not just 'decide' to increase the dividend they pay. As a UK open ended investment company, HMRC makes them pay out all the spare income that they earn and haven't spent on running costs. The yield of what they pay to you is just a function of what their holdings are paying to them, as a ratio of their own share price (which they can't control either). So, I wouldn't go thinking to yourself, 'they increased the dividend in the past, maybe they'll do it again'. The dividend will just be what it will be.   If share prices are on the floor and interest rates and inflation really high, you are likely to see a higher dividend yield, but won't necessarily feel like you're getting a great return.

Thanks for the informative post Bowlhead, completely makes sense. Im in the accumulation version of fund, so will as suggeted sell units to supplement income when required.

I would like to thank you personally btw, you were on of the very helpful posters when i signed up to this forum back in 2014.

I am enjoying the invesment journey and feel i have learned alot since, but still so much more to learn!

krish123

Audaxer said:

Prism said:

krish123 said:

A good comment earlier mentioned is that i can convert the VLS to income units later down the line however, the yield on this investment is rather low at 1.6% i believe.

If the yield isn't high enough for your requirements then sell some units to make up the difference. Don't let the yield dictate your income. Make you own plan and then work out how best to extract that.

I agree. As I said, if you want income from VLS80 best to just go for the accumulation version of the fund and sell 4% of the units or whatever percentage you want for a year's income. However if you only need an income top-up of around 1% to 1.5% you could have the income version of VLS80 and take the dividends as your income.

I think the other funds mentioned to give you what is not in the VLS80 is just a distraction that will add to your costs and not necessarily improve returns over the long term. If for example the BRIC ETF fell by 60% in a crash, would you be prepared to rebalance by selling some VLS80 that maybe had dropped only 30% in the crash. I think it is difficult decisions like this that make that strategy over-complicated, especially for an inexperienced investor.

I woud indeed, as the best time to top up is when there is a dip in price, im not afraid of taking some risk and am in the game for long term.

bd10

krish123 said:

bd10 said:

Hi krish -- do you really want to hold the property tracker from ishares? I had a look at the portfolio, all REITS. First one Japanese. No data on occupancy rate on the web site. Either the site needs updating or the writing is on the wall so to speak. In my eyes, the commercial real estate market is dead for the next decade, worse than post-2008.

I have been trying to plug the gaps of what is missing in VLS80 and property is one of them. Not all of the REITS in this fund are commercial, one for example supplies care homes and support for elderly people, another is digital storage. Overall i still see people needing to rent. Why do you think real estate is dead? I also dont think many companies will be working from home permanently, companies want control of employees and hence will have them in the office.

My personal reasons for being pessimistic on commercial real estate is this:
Be it the UK, Europe, US, elsewhere, governments have thrown a lifeline to businesses in some way or another after they were ordered to shut. This is not over yet. Yes, we gradually open up and businesses are coming back, but having lost at least one quarter of revenues - and not all can make up for it by selling online - they will need to renegotiate their rents. We have restrictions of how many customers are allowed in on a per sq ft basis, that is likely to remain in place till year end. So, revenues may pick up but will this be enough relative to the fix cost basis, ie. the rent? Personally I doubt that. Also, sectors will adjust. The whole presenteeism is over. One way to combat this would be to convert commercial real estate to residential because there will always be some demand for residential real estate.

I expect a wave of restructurings and some insolvencies here in UK but also elsewhere and large malls will be the first to be hit. Shopping habits have changed permanently in my opinion.
Sooner or later REITS will be hit and I bet plenty of their projects will turn NPV negative. If this is in a trust form, well, they remain in double digits discounts for the years to come. Have a look at the AIC and check the premia/discounts of real estate investment trusts or if they are a mutual fund, this can easily turn in a Woodford debacle of another wave of redemtions, firesale and all that.

Residential may be a a safer bet. But once furlowing schemes will come to an end, how many jobs will not be permanently cut? There will be some adjustments. Add to that - and this is a repeat of post-2008 - credit will still be there but high LTVs will be out of the question and banks will be more cautious overall, both in secured and unsecured lending.

If I were to consider real estate as investment, I would pick trusts over funds as esp. commercial real estate is not that liquid and at the moment very illiquid. Also, I would look which REITS or funds have closed for redemption or have gone under and go through their portfolios in details to see where they got caught out.

krish123

One last thing i was contemplating with my portfolio was to move to VLS 100%. I understand bonds in the current environment are going to return very little and in the future with interest rates low. As i have a long term horizon and am willing to take on risk, do you think this would be a wise move?

If i were to do this, whats the best way to get the funds moved over? Do i simply sell my entire VLS80 holding and once themoney becomes available, reinvest it into VLS100?

bowlhead99

VLS80 is a potentially volatile fund anyway, and if you don't mind that level of volatility you may find that the VLS100 is not much greater as the bond index allocation in VLS80 will only dampen the equity movement to a certain extent and you could still experience 40-50% drawdowns from peak to trough in extreme market conditions, with what you have.

If your platform offers a 'switch' service or you already have lots of spare money in your investment account, you can simply say you want to redeem (say) £1000 of VLS80 and buy £1000 of VLS100. The platform will arrange for the £1000 redemption proceeds (or the cash that you already have on hand in the account) to meet your obligation to pay the subscription price of the other; if the orders go in at the same time they will be due to settle in cash on the same day.  If £1000 was not the full value of your investment you could do some more the next day. 

If your platform does not offer switches or pre-fund transactions with its own money, and you don't have any spare money in the account, you would have to redeem out of VLS80, wait for the sale price per unit to  be confirmed on your contract note (the proceeds per unit can't be known until after the 9pm valuation point has been reached and the accountants have done their work) and then you could place an order to buy that value of the new fund.

AnotherJoe

krish123 said:

One last thing i was contemplating with my portfolio was to move to VLS 100%. I understand bonds in the current environment are going to return very little and in the future with interest rates low. As i have a long term horizon and am willing to take on risk, do you think this would be a wise move?

If i were to do this, whats the best way to get the funds moved over? Do i simply sell my entire VLS80 holding and once themoney becomes available, reinvest it into VLS100?

Move to a better global fund. There are plenty of low cost index funds including from vanguard, that don't have the skew towards oil and finance caused by the 25% "U.K." (not really U.K.) weighting.