Drawdown Pensions - your experiences during 2020 and intentions in 2021?

Thrugelmir

Deleted_User said:

Thrugelmir said:

DT2001 said:

Deleted_User said:

thriftytracey said:

Thinking back about it I don't think it was as much as 20%, maybe about £30k down on £299k.  Apologies I wasn't checking the values back then.  I don't know if you can retrospectively check the value back in March 2020.

My portfolio is Royal London Governed Retirement Income Portfolio 3.
RLP Global Managed 33.25%
RLP Medium 10 yr Corporate Bond 11.11%
RLP Medium 10 yr Index Linked 10.20%
RLP Property 7.58%
RLP Medium (10 yr) Gilt 6.96%
RLP Global High Yield Bond 6.42%
RLP Sterling Extra Yield Bond 6.34%
RLP Cash Plus 5.31%
RLP Commodity 5.15%
RLP Absolute Return Government Bond 2.94%
RLP Deposit 2.39%
RLP Short Duration Global High Yield 2.35%
Investment Attitude to Risk:  Cautious to Moderate.

Lets try to “reverse engineer” what you own and why.  I am guessing by assigning you a “cautious to moderate” ranking, they limited you to 30-35% stock.  Traditional portfolios are split between “risky” high return assets (stocks) and “low risk, low return” assets (bonds). 

Based on your artificial risk rating, you would normally have a 35/65 percent split.  This is because the advisers follow a standard procedure and don’t understand your real risks.   And 35/65 might be ok in a high interest environment when the bonds can grow. Right now we are in an environment  when real return on high quality bonds is expected to be below zero. Interest rates cant go down by much when they are zero. If they go up, you lose even more. On top of that you have 2 layers of fees, perhaps 1.5%.  So the majority of your portfolio is expected to return less than zero. And that will compound over time. Not in a good way.

RL decided to mitigate the interest rate risk a bit. You have 10% in interest linked bonds. That’s insurance but you pay for it.   

They also have about 10% of junk bonds. That makes your return a bit better when the times are good but hurts you when the times are bad. Its a risky asset. As is property. And commodity. Add all of that to equity and well over half of your portfolio is in “risky” assets which get dumped during a crisis.  

In summary, RL gave you few stocks because of your presumed risk profile and tried to offset the resulting low return and high portfolio costs by juicing it with assets which are just as risky as equity (if not more) but not as good.  

If I were you, I would swap all of this for a very simple and cheap single multi-asset fund with at least 60 or 70% in equity and the rest in high quality bonds.  Given where we are, portfolios with just 30% equity are too risky in reality if not on paper. 

Can I ask who defines the level of risk for funds?

I think I understand your answer and the logic however my concern is that many on here suggest everyone should improve their investment knowledge (agreed) and DIY but you are suggesting a portfolio that would be considered too risky for an investor with a cautious attitude. My point is how do you ensure you build the correct retirement plan if the basis on which you formulate it maybe flawed?

DT2001 said:

Deleted_User said:

thriftytracey said:

Thinking back about it I don't think it was as much as 20%, maybe about £30k down on £299k.  Apologies I wasn't checking the values back then.  I don't know if you can retrospectively check the value back in March 2020.

My portfolio is Royal London Governed Retirement Income Portfolio 3.
RLP Global Managed 33.25%
RLP Medium 10 yr Corporate Bond 11.11%
RLP Medium 10 yr Index Linked 10.20%
RLP Property 7.58%
RLP Medium (10 yr) Gilt 6.96%
RLP Global High Yield Bond 6.42%
RLP Sterling Extra Yield Bond 6.34%
RLP Cash Plus 5.31%
RLP Commodity 5.15%
RLP Absolute Return Government Bond 2.94%
RLP Deposit 2.39%
RLP Short Duration Global High Yield 2.35%
Investment Attitude to Risk:  Cautious to Moderate.

Lets try to “reverse engineer” what you own and why.  I am guessing by assigning you a “cautious to moderate” ranking, they limited you to 30-35% stock.  Traditional portfolios are split between “risky” high return assets (stocks) and “low risk, low return” assets (bonds). 

Based on your artificial risk rating, you would normally have a 35/65 percent split.  This is because the advisers follow a standard procedure and don’t understand your real risks.   And 35/65 might be ok in a high interest environment when the bonds can grow. Right now we are in an environment  when real return on high quality bonds is expected to be below zero. Interest rates cant go down by much when they are zero. If they go up, you lose even more. On top of that you have 2 layers of fees, perhaps 1.5%.  So the majority of your portfolio is expected to return less than zero. And that will compound over time. Not in a good way.

RL decided to mitigate the interest rate risk a bit. You have 10% in interest linked bonds. That’s insurance but you pay for it.   

They also have about 10% of junk bonds. That makes your return a bit better when the times are good but hurts you when the times are bad. Its a risky asset. As is property. And commodity. Add all of that to equity and well over half of your portfolio is in “risky” assets which get dumped during a crisis.  

In summary, RL gave you few stocks because of your presumed risk profile and tried to offset the resulting low return and high portfolio costs by juicing it with assets which are just as risky as equity (if not more) but not as good.  

If I were you, I would swap all of this for a very simple and cheap single multi-asset fund with at least 60 or 70% in equity and the rest in high quality bonds.  Given where we are, portfolios with just 30% equity are too risky in reality if not on paper. 

Can I ask who defines the level of risk for funds?

The underlying assets held determine the risk level. By diversifying a portfolio it's possible to mitigate the volatility of an asset class.  Risk in itself comes in numerous forms. 

Very much depends on what you are using to diversify. Adding property, commodity and junk bonds to equities does not reduce risk of drawdown at all. In a crisis all of these assets will be screwed.

Volatility is not the same as risk.  

[Deleted User]

Read slower. “Risk of drawdown”. Thats the same as drawdown risk. 

ukdw

Deleted_User said:

dunstonh said:

I paid a few thousand in fees this year and that is because I trust my IFA to do what is right.  Or am I being naïve?  I did question a couple of the funds when I read in the press their poor performance.  This is the reply he obtained from Royal London:-

Royal London is generally a cheap and simple option.  The Governed Portfolios effectively build a multi-asset fund equivalent (fettered fund of funds would be the closest match).     It's a simple solution that will never be the best or worst.  its relatively low cost and you get the mutual bonus to offset some of those charges.

But from the sound of it it seems that I shouldn't need to do this if I had invested elsewhere as this isn't a great product?

Its starting to get a bit long in the tooth but its not a bad option.  yes, you could have done better.  But you could also have done worse.   Its a simple option. Simple options will rarely be the best...

According to Trustnet this portfolio costs 1%.  On top of that OP pays thousands in fees to the adviser. Most of the assets in this portfolio have expected real returns less than the fees. 

This is not a low cost option. This is unacceptably high cost. A better quality multi-asset fund will cost around 0.1 to 0.2% per year total.  

Not sure if there are any other hidden charges, but It is my understanding that Royal London's starting point and historical prices on their fact sheets and trustnet are based on a built in charge of 1%. However they generally apply a discount to this based on the size of the pot. 

In the case of the OPs £299k the discount would probably be about 0.6%  - bringing the net charges down to about 0.4%

Another thing not taken in to account in RL price history on Trustnet is their 'Profit share' - which is a variable level of further discount, which is likely to not be very high this year due to COVID, but in the last few years was I think around another 0.15% - so you could argue that this brings the OPs effective charge rate down to 0.25% before advisor charges. 

[Deleted User]

ukdw said:

Deleted_User said:

dunstonh said:

I paid a few thousand in fees this year and that is because I trust my IFA to do what is right.  Or am I being naïve?  I did question a couple of the funds when I read in the press their poor performance.  This is the reply he obtained from Royal London:-

Royal London is generally a cheap and simple option.  The Governed Portfolios effectively build a multi-asset fund equivalent (fettered fund of funds would be the closest match).     It's a simple solution that will never be the best or worst.  its relatively low cost and you get the mutual bonus to offset some of those charges.

But from the sound of it it seems that I shouldn't need to do this if I had invested elsewhere as this isn't a great product?

Its starting to get a bit long in the tooth but its not a bad option.  yes, you could have done better.  But you could also have done worse.   Its a simple option. Simple options will rarely be the best...

According to Trustnet this portfolio costs 1%.  On top of that OP pays thousands in fees to the adviser. Most of the assets in this portfolio have expected real returns less than the fees. 

This is not a low cost option. This is unacceptably high cost. A better quality multi-asset fund will cost around 0.1 to 0.2% per year total.  

Not sure if there are any other hidden charges, but It is my understanding that Royal London's starting point and historical prices on their fact sheets and trustnet are based on a built in charge of 1%. However they generally apply a discount to this based on the size of the pot. 

In the case of the OPs £299k the discount would probably be about 0.6%  - bringing the net charges down to about 0.4%

Another thing not taken in to account in RL price history on Trustnet is their 'Profit share' - which is a variable level of further discount, which is likely to not be very high this year due to COVID, but in the last few years was I think around another 0.15% - so you could argue that this brings the OPs effective charge rate down to 0.25% before advisor charges. 

Thats a lot more reasonable than I thought, assuming both discounts are applied annually.  The adviser charges will still bring long term expected real return to nothing. The problem is that asset allocation still seems dodgy. 

 In the current environment, if the markets do badly, the portfolio drops hard.  If the markets do really well, it underperforms.  Heads - you lose, tails - I win. 

JohnWinder

'My investments have put three children through private schooling, my financial advisor's'. Let that not be us.

BritishInvestor

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

thriftytracey said:

But from the sound of it it seems that I shouldn't need to do this if I had invested elsewhere as this isn't a great product?

Hindsight is a wonderful tool.  Everyone is suddenly an expert after the event. Being cautious is using sound investment judgement when there's uncertainty.  Which there's no shortage of at the currrent time. Following the herd isn't always a wise strategy. 

Hindsight has nothing to do with it. You are surely paying an adviser for a robust retirement plan and peace of mind. A robust retirement plan would be very unlikely to have required any adjustments to spending plans during the recent downturn

Of course it's hindsight. You are using that very thing in making the statement above. I doubt that global pandemics would have been factored into many investors retirements plans. 

It really isn't hindsight - given the brevity of the downturn, benign inflation, the multi-year run-up in asset prices prior to the event, quality bonds holding up reasonably well and spending adjustments typically being made on a structured, annual basis, I'm perplexed.

If I had an investment advisor and they said that to me. I'd be running a mile. 

That's fair enough, but I believe that if you had been through a retirement planning exercise and were presented with the evidence during the crisis (firms such as Timeline were all over this), you may have a different view.

For someone that retired in March 2019 with a 60/40 portfolio, their portfolio would've been down around 5.5% over the year (ignoring fees). 
So imagine Mrs Miggins went through a retirement planning process in March 2019 and agreed a withdrawal plan and the plan showed a given success rate. Her annual review was in March 2020 at the bottom of the market. The plans were updated and the success rate had dropped from 94 to 91%, with a  worst-case drop in portfolio longevity of a year for example. Why the need to make drastic spending adjustments?
For someone retiring more than one year ago, or having annual reviews that didn't coincide with the market trough, the outcome would be even less of an issue.

This tends to help when we have periods of market volatility.
https://www.timelineapp.co/blog/timeline-introduces-new-feature-for-withdrawal-policy-statement/

BritishInvestor

Deleted_User said:

DT2001 said:

Thruglemir
“The underlying assets held determine the risk level. By diversifying a portfolio it's possible to mitigate the volatility of an asset class.  Risk in itself comes in numerous forms. “

I thought Mordko was saying that high quality bonds are high risk in the current environment but I thought generally a fund of them has been considered lower risk than equities. Who determines that risk indicator say on HL website?

I am saying this.  Right now I find it really hard justifying ownership of any long duration bonds in the developed world. Maths is against them. Deflation is the one and only scenario working for them.  This is not a normal situation and traditional “risk” measures are very misleading. 

DT2001, you've got to be clear what you want the bond part of a portfolio to deliver. If it's to reduce overall volatility and also to reduce potential drawdowns, then you'd tend towards Bond A.
Bond C might be highly rated, but given its high sensitivity to interest rate changes (long duration), can suffer if rates rise. If you look closely during Feb you will see some significant price movements for funds such as these.
Bond B is lower credit quality, and tends to suffer when the markets wobble - Figure 14 in the doc shows the GFC performances of the various asset classes.
https://www.vanguard.co.uk/documents/adv/literature/total-return-investing.pdf

NottinghamKnight

Deleted_User said:

Read slower. “Risk of drawdown”. Thats the same as drawdown risk. 

I think there is a conflict in the use of the term drawdown, in the UK this is traditionally used for management of pension assets after crystallisation, the american terminology has crept in which is that drawdown means a correction in the market, very different things. Not necessarily in this instance but just through it worth stating.  

cfw1994

JohnWinder said:

'My investments have put three children through private schooling, my financial advisor's'. Let that not be us.

LOL!
A dangerous statement....it might also have put yours through as well, if they are any good
We chose to not use a financial advisor....feels to me like their 0.5% or so is better in our pockets, happy to DIY...but I appreciate many are nervous about money & do need help....but this is a MoneySavingExpert website, so there are likely many here who are interested and capable enough to do the same as us...

DT2001

BritishInvestor said:

Deleted_User said:

DT2001 said:

Thruglemir
“The underlying assets held determine the risk level. By diversifying a portfolio it's possible to mitigate the volatility of an asset class.  Risk in itself comes in numerous forms. “

I thought Mordko was saying that high quality bonds are high risk in the current environment but I thought generally a fund of them has been considered lower risk than equities. Who determines that risk indicator say on HL website?

I am saying this.  Right now I find it really hard justifying ownership of any long duration bonds in the developed world. Maths is against them. Deflation is the one and only scenario working for them.  This is not a normal situation and traditional “risk” measures are very misleading. 

DT2001, you've got to be clear what you want the bond part of a portfolio to deliver. If it's to reduce overall volatility and also to reduce potential drawdowns, then you'd tend towards Bond A.
Bond C might be highly rated, but given its high sensitivity to interest rate changes (long duration), can suffer if rates rise. If you look closely during Feb you will see some significant price movements for funds such as these.
Bond B is lower credit quality, and tends to suffer when the markets wobble - Figure 14 in the doc shows the GFC performances of the various asset classes.
https://www.vanguard.co.uk/documents/adv/literature/total-return-investing.pdf

Thank you for that link.
So do the Risk ratings on websites, such as HL, put funds with Bond A in a much lower category than Bond C? 
Where do the bonds held in the OP’s RL portfolio fit?
If, as Mordko, says they protect against deflation is that sufficient reason to hold them in view of the underperformance expected during inflation/higher interest rates?
Risk ratings are based on historical data? So how, to help the DIYer, do you assess their ‘true’ current risk?