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

Robert_McGeddon

ukdw said:

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. 

I believe RL's charges/discounts not to be quite this straightforward.

1.  The discount is not applied to the overall pot at a single rate but rather in tiers. The first £34K (or thereabouts) is discounted by 10%, the next £34K (or thereabouts) by 50%, and so on.  I estimate the overall rate charged for a £300K portfolio to be 0.56%. There is a discretionary "bonus" rebate of maybe 0.15% which, if given by RL, would reduce the overall charge rate down to 0.41%

2.  Discount applies to 'Core investments' only - drawdown funds do not get a discount.

arnoldy

I think basically much of the UK financial services "products" are pretty poor to abysmal,  if you know what you are doing DIY - and as evidenced by the debate above the charges have their part to play in the "center of mediocrity" . Yes I'm sure that people can point to the odd star with hindsight - but that's water under bridge talk.
As simple proxy for the FTSE250  (basket of FTSE250 shares) would have given you a total return of about 10% pa averaged over the last 30 odd years (nb your money doubles every 7 years at 10% pa). Charges almost 0 if you own the underlying shares.
Add in some low cost smaller Cos USA/Japan/Europe + India + sp500 tracker and that's what I'm going to do. The internet enables this: its a great liberator to cut out as many suits as feeders on your money as you can.

BritishInvestor

DT2001 said:

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?

It's probably worth taking a step back and understanding what returns you need to ensure you are unlikely to run out of money (assuming you are planning for, or at retirement). Assuming you've undertaken this exercise, and are happy that you can stomach the corresponding potential volatility and drawdown with the corresponding asset allocation, the next/final step would be to build an investment engine to deliver the returns. 

https://theirrelevantinvestor.com/2019/02/19/un-complicating-investing/
https://finalytiq.co.uk/lessons-118-years-capital-market-return-data/

An investment engine can be as simple or complicated as you like, but in broad terms you have growth assets (e.g. equities) whose goal is to ensure the portfolio outlasts you, and defensive assets (e.g. certain types of bonds), which ensure that you can stomach the overall portfolio falls in wobbly markets. You would mix these as appropriate.


Once you have your investment engine outline in place, you can look at implementation.

One approach could be choosing a fund that contains global equities for the growth assets. For this you'd need to ensure you were happy with the diversification - some "global" funds aren't really that global.

If you chose a bond fund for the defensive assets, we've discussed some of the things to look for - some info on currency hedging global bonds below.

https://www.vanguard.co.uk/adviser/adv/articles/research-commentary/portfolio-construction/the-case-for-hedging-currency-in-global-bonds.jsp

You can of course add complexity, but this can come with potential downsides.
Tim Hale's book goes into this approach in detail.

itwasntme001

Deleted_User said:

itwasntme001 said:

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.

You are assuming that all risky assets are +100% correlated.  They are not.  Property, commodity, equities each have their own risk profiles and perform differently across a variety of economic environments/regimes.

If you take a 70/30 portfolio, having 70% in equities compared to having 50% equities + 20% property, I would think that the latter portfolio would suffer reduced draw-downs whilst producing similar returns.

If anything, I think relying on public equities for the bulk of your portfolio, even over the long term, is quite foolish.  Particularly at today's prices.

I think the global market portfolio only allocates about 40% to public equities.

I do not assume they are “100% correlated” (sic).  Correlations for these assets change over time.  They become positively correlated during major events. If you don’t believe me check out what happened to junk bonds in 2008. Just one example. Junk bonds drop more than shares. When companies go bankrupt, those in trouble, the ones forced to borrow at higher interest become prime candidates for returning zilch on the pound. Property funds like this become illiquid.  Haven’t some British property funds stopped trading and banned withdrawals this year? And commodity is cyclical but its always down when something like  2008 happens. Because who will buy oil or metal if the economy is down? 

Buying lots of risky assets like this, even if they are not normally correlated, does not give you safety during a major downturn.  It might however make your model look less risky.  All models work on a fundamental concept called “SISO”. 

You are assuming 100% correlation for all risky assets during a crisis.  You may not think you are but you most certainly are by your explanations.  Correlation is a function of both magnitude and direction.  Asset classes will clearly never always fall at the same time by the same magnitude, even during a "crisis", because they have different cash flow and risk profiles.  So it follows you are more diversified (i.e. less risk) by having assets across a number of asset classes for your risky portion compared to just equities.  Do a historical comparison and you will find this true for at least some combinations.

Junk bonds behave a lot like equities so asset classes such as this will obviously not improve diversification much if at all.  But IG corporate bonds will.  I think property will (UK property fell a lot less than the 50%+ equity crash in 2008/09).  Gold as well as other commodities do (in an inflationary environment commodities can do well whilst equities suffer due to higher rates / input costs).  After this, you can then assess which combination produced the best risk adjusted returns historically.  You will find there are at least a few asset class combinations that have been superior to just 100% equities.  You can diversify your "risky" allocation so you are taking overall less risk than if you just had equities as your risky allocation.

You can not use property OEIC fund liquidations to suggest they are as risky or more than equities.  These are a problem by design - it is absurd to have illiquid assets using OEICs as investment vehicles.

itwasntme001

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. 

It is not just deflation that works for bonds.  It is also disinflation.  But anyway, long duration bonds are obviously very expensive by historic standards.  But how do you know that this won't last for another 10 years?

You can make a good case that risk reward is simply not favourable for bonds.  But then you should do the same for equities given equities are priced off of yield curves.  You may then say "I'll just own more value stocks because they benefit from rising rates", to which I say "how do you know that this will be the case, what if we are closer to full scale AI/robotics automation that will kill off the business models for value stocks and kill off inflation and keep rates low or even negative for a very long time"?

The macro environment is incredibly difficult to forecast, I have not seen anyone do it consistently.  Therefore why presume anything?

itwasntme001

A 20 year gilt yielding around 0.7% may very well look like a good bet over the next 20 years if equities fall nominally over the same time period.  You of course won't know until its happened.  There is a case that we are in a major bubble in risky assets.

BritishInvestor

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

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.

You are assuming that all risky assets are +100% correlated.  They are not.  Property, commodity, equities each have their own risk profiles and perform differently across a variety of economic environments/regimes.

If you take a 70/30 portfolio, having 70% in equities compared to having 50% equities + 20% property, I would think that the latter portfolio would suffer reduced draw-downs whilst producing similar returns.

If anything, I think relying on public equities for the bulk of your portfolio, even over the long term, is quite foolish.  Particularly at today's prices.

I think the global market portfolio only allocates about 40% to public equities.

I do not assume they are “100% correlated” (sic).  Correlations for these assets change over time.  They become positively correlated during major events. If you don’t believe me check out what happened to junk bonds in 2008. Just one example. Junk bonds drop more than shares. When companies go bankrupt, those in trouble, the ones forced to borrow at higher interest become prime candidates for returning zilch on the pound. Property funds like this become illiquid.  Haven’t some British property funds stopped trading and banned withdrawals this year? And commodity is cyclical but its always down when something like  2008 happens. Because who will buy oil or metal if the economy is down? 

Buying lots of risky assets like this, even if they are not normally correlated, does not give you safety during a major downturn.  It might however make your model look less risky.  All models work on a fundamental concept called “SISO”. 

You are assuming 100% correlation for all risky assets during a crisis.  You may not think you are but you most certainly are by your explanations.  Correlation is a function of both magnitude and direction.  Asset classes will clearly never always fall at the same time by the same magnitude, even during a "crisis", because they have different cash flow and risk profiles.  So it follows you are more diversified (i.e. less risk) by having assets across a number of asset classes for your risky portion compared to just equities.  Do a historical comparison and you will find this true for at least some combinations.

Junk bonds behave a lot like equities so asset classes such as this will obviously not improve diversification much if at all.  But IG corporate bonds will.  I think property will (UK property fell a lot less than the 50%+ equity crash in 2008/09).  Gold as well as other commodities do (in an inflationary environment commodities can do well whilst equities suffer due to higher rates / input costs).  After this, you can then assess which combination produced the best risk adjusted returns historically.  You will find there are at least a few asset class combinations that have been superior to just 100% equities.  You can diversify your "risky" allocation so you are taking overall less risk than if you just had equities as your risky allocation.

You can not use property OEIC fund liquidations to suggest they are as risky or more than equities.  These are a problem by design - it is absurd to have illiquid assets using OEICs as investment vehicles.

Re property - the Vanguard link I posted earlier had the performance of Global REIT during the GFC (which I think is a reasonable comparison vs global equities) - it didn't fare very well. But that said, people tend to be split over whether to include an explicit property fund in the growth part of their portfolio. 
For IG corporate bonds, is this as part of the growth or defensive part of the portfolio?

BritishInvestor

itwasntme001 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. 

It is not just deflation that works for bonds.  It is also disinflation.  But anyway, long duration bonds are obviously very expensive by historic standards.  But how do you know that this won't last for another 10 years?

You can make a good case that risk reward is simply not favourable for bonds.  But then you should do the same for equities given equities are priced off of yield curves.  You may then say "I'll just own more value stocks because they benefit from rising rates", to which I say "how do you know that this will be the case, what if we are closer to full scale AI/robotics automation that will kill off the business models for value stocks and kill off inflation and keep rates low or even negative for a very long time"?

The macro environment is incredibly difficult to forecast, I have not seen anyone do it consistently.  Therefore why presume anything?

I'm not sure that forecasting is required - it comes down to the point I made earlier - what job is a particular asset delivering in the retirement portfolio. Do long-duration bonds really deliver portfolio dampening in stressed markets, irrespective of their current valuations or when/if interest rates may rise in the future. 

[Deleted User]

NottinghamKnight said:

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.  

Yes, its a measure of downside volatility. Drop from peak to bottom. A genuinely cautious portfolio for someone in a withdrawal mode would sacrifice some of expected long term returns in exchange for smaller falls during a bear market. And it makes sense as sequence of returns can hurt a retiree otherwise. But this particular portfolio sacrifices returns in exchange for sharp drawdowns. 

dunstonh

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. 

Like most pension funds, the default charge listed on fund factsheets is 1%.  There may be some older plants that have that charge but most people will have fund based discounts which takes it to around half that or better.