Is passive for pensions & active for S&S ISA a sensible approach? Also please review my plans.

traveladdict241

Over the last couple of months I've been doing an overhaul of our finances and planning for the future. I am 33M and my wife is 33F. I have read the flowchart, have a modest emergency fund and have taken out income protection insurance for my wife and I - mainly to protect our current lifestyle if the worst happened.

My only debt is mortgage debt of £231k @ 1.68% fixed for 5y, I plan to make no overpayments and believe only 0.82% growth in my house value per year would see me move into the 60% LTV (lowest bracket?) at my next fix. Assuming interest rates don't rise massively my plan would be to fix for another 5y and not overpay, whilst continuing to invest in my S&S ISA assuming this will receive a greater return.

We own a new build property in a nice area, bigger than we need really and could realistically see us not having to move again. We may have kids in the next couple of years and I've looked at the impact on our finances years 0-5 and I'm confident we can keep investing at current levels during maternity then reduced hours for my wife and with additional childcare costs.

My salary is £55k + company car, and I have a 29% share in the company I work for and I typically receive £20k per annum dividend for this shareholding. My wife is on around £52k including bonus, she runs her own car but doesn't do many miles so likely wouldn't need to change this again for 5y+.

We both salary sacrifice into our pensions to ensure we fully benefit from higher rate tax relief (as I am conscious this might not always be there). With employer contributions my contribution is £1200 p/m and hers £1150.

My pension pot is currently £37k with the People's Pension (B&CE THE PEOPLES PENSION GLOBAL INVESTMENTS (UP TO 100% SHARES) 0.5% PN). I was on the default 85% shares fund but upped this to 100% equities. It doesn't seem to do particularly well but I am stuck with PP for now to get my 3% employer contribution. I have opened an AJ Bell SIPP and my plan is to invest in HSBC FTSE All-World Index C Acc.

My wife has £44k in her pension pot and we've changed this to all be in Vanguard FTSE Global All Cap Index A. So pretty much the same fund except the HSBC has lower fee and no small cap.

So bar the People's Pension (which I plan to get out of when I can) the pension strategy is to invest passively in "the market" via the Vanguard/HSBC funds. Considering the earliest we can access this is 25y away I'm happy to be 100% equities and invest in the whole of the market in low fee funds, not betting one area will outperform another taking a long term view on this. So not overly risky, highly diversified etc.

However for my ISA it's not been so easy to get a strategy. My plan is to put £20k per year into our ISAs, drip fed at the same amount into the same funds monthly. Have opened up AJ Bell S&S ISAs for each of us to do this.

One of my primary problems is I have no financial goals in mind. I can't see much lifestyle creep as we live a comfortable life as it is, don't deny ourselves things and travel extensively already. Assuming we keep investing in our pensions at similar rates and even with modest or poor growth over 25y+ we should have very healthy pots. So saving in the ISAs feels a bit like saving for the sake of saving with no end point in sight. As such my ISA investments will be for absolute minimum of 5y but really 10y is my plan - but even then I can see me getting to that point and being like, well what now?!

So considering the ISA savings is money I could potentially afford to lose, or see its value dramatically fall from time to time, I am thinking at my age why not go 100% equities. I was thinking 70% to begin with, then 85%, then came to the conclusion - is 15% bonds just going to hold back when I'm just planning on (hopefully) watching it accumulate anyway.

So my current thinking is rather than go passive (Global All Cap for example) I would pick 4 actively managed funds, 100% equities, to build an ISA portfolio with the following criteria: globally diverse along similar lines to Global All Cap (although I'm comfortable right now with a bit more UK), lots of underlying shares in these funds (so not concentrated eg Fundsmith Equity x30 for example), not overly risky (SMT for example), have outperformed their benchmarks for as long as the data I can see, have outperformed FTSE All World (my benchmark), volatility similar to Global All Cap, not excessive fees.

So basically rather than go Global All Cap again, go active hoping since it's a shorter time frame between those four funds they will beat this over 5-10y (as they have done). The funds I've identified work out 0.61% more fees than the HSBC FTSE All World/Vanguard Global All Cap. So not excessive in my mind.

The funds are: Baillie Gifford Global Alpha Gr B Acc, Rathbone Global Opportunities I Acc, T. Rowe Price Glb Growth Eq Q GBP, Fidelity Global Focus W Acc

Between these four at 25% each (to begin with) 3y volatility is 16.03 versus 14.88 for Vanguard Global All Cap.

Equities are 15.64% Europe, 8.52% UK, 59.59% USA and 16.26% Asia. Of this, and taking out overlaps, I calculate 395 individual holdings with the biggest being 2.07% Amazon, 1.85% Alphabet and 1.22% Microsoft. So I would say this is pretty diverse geographically and spread across a wide range of companies. I note Vanguard Global All Cap is rated 81 on Trustnet and these four funds are 86.75 on average.

Would welcome anyone willing to take the time to have a look at what I'm planning, in particular:

• Any general comments on my plan?
• Any comments on the individual funds I've chosen?
• Does the active ISA/passive pension approach make sense?
• Would you agree that for a 100% equities ISA portfolio this isn't hugely risky?

dunstonh

• Does the active ISA/passive pension approach make sense?

No.   If you have your preferred strategy than anything different to that is less optimal.     You shouldnt be treating your tax wrappers as individual things but just as an administration issue within your wider portfolio.   
Plus, you shouldnt really think of it as an active vs passive issue.   Both styles have pros and cons and operating a hybrid approach is very popular nowadays (i.e. picking the best from both where suitable)

• Would you agree that for a 100% equities ISA portfolio this isn't hugely risky?

100% equities could be lower risk then 80% equities.  What matters are the underlying assets.  Not the ratio of equity vs fixed interest securities.

fizio

I would say that your plan of global index tracker pension and active ISA is a pretty good one at your age and if you are happy to play an active role in keeping an eye on the isa funds. I am not much of active funds person so can't comment on your choices but I do go for some elf's that track specific markets or sectors so that is also worth thinking about.
Good luck

traveladdict241

dunstonh said:

• Does the active ISA/passive pension approach make sense?

No.   If you have your preferred strategy than anything different to that is less optimal.     You shouldnt be treating your tax wrappers as individual things but just as an administration issue within your wider portfolio.   
Plus, you shouldnt really think of it as an active vs passive issue.   Both styles have pros and cons and operating a hybrid approach is very popular nowadays (i.e. picking the best from both where suitable)

• Would you agree that for a 100% equities ISA portfolio this isn't hugely risky?

100% equities could be lower risk then 80% equities.  What matters are the underlying assets.  Not the ratio of equity vs fixed interest securities.

Hybrid being popular these days isn’t something that I’ve noticed, mostly I thought people were one camp or the other. That’s reassuring I guess. 

I agree to look at everything as a whole - I’ve tried to “model” the actively managed isa part by picking funds that overall match the underlying holdings in global all cap, ie similar geographical spread + a bit more uk, so in that sense my strategy is aligned through the portfolio. But I do think there can be pots for different things, long term/short term, so in that sense I think it’s ok to treat investments differently. Especially considering something potentially available now versus something looked away till you are 60.

traveladdict241

fizio said:

I would say that your plan of global index tracker pension and active ISA is a pretty good one at your age and if you are happy to play an active role in keeping an eye on the isa funds. I am not much of active funds person so can't comment on your choices but I do go for some elf's that track specific markets or sectors so that is also worth thinking about.
Good luck

Thanks, this was reassuring

Would be interested to look at suggestions of specific markets/sectors to consider. 

Thrugelmir

traveladdict241 said:

So I would say this is pretty diverse geographically

Location of brass plate is irrelevant. Where the companies generate their revenues is what matters. 

bostonerimus

It's fine to have both passive and active investments, but there's no good reason to use only one in either the pension or the ISA.

bostonerimus

traveladdict241 said:

fizio said:

I would say that your plan of global index tracker pension and active ISA is a pretty good one at your age and if you are happy to play an active role in keeping an eye on the isa funds. I am not much of active funds person so can't comment on your choices but I do go for some elf's that track specific markets or sectors so that is also worth thinking about.
Good luck

Thanks, this was reassuring

Would be interested to look at suggestions of specific markets/sectors to consider. 

It might be interesting, but how are you going to construct such a portfolio. Most amateurs will "stick a finger in the air". You have plenty of portfolios constructed for you in mult-asset funds. If you do want to make your own don't slice and dice so that you end up with a large number of funds. I wouldn't have a single portfolio component less than 20% of the whole and I would not get involved with sectors beyond domestic and international. This will keep things relatively simple.

dunstonh

Thrugelmir said:

traveladdict241 said:

So I would say this is pretty diverse geographically

Location of brass plate is irrelevant. Where the companies generate their revenues is what matters. 

I agree with that totally.   For example, our filters for a region/country require 90% coverage or more in the given area/country.   You would be surprised how many funds drop off because of that filter.  Some have as little as 40-60% due to brass plates.

traveladdict241

This is of interest, where are you finding this filter?

dunstonh

traveladdict241 said:

This is of interest, where are you finding this filter?

FE. who provide Trustnet free of charge, do a professional version that allows much more data to be available and filtering tools that can positively or negatively screen out funds based on your chosen criteria.   However, the amount they charge would not be feasible for an individual to pay for it and I believe you need to FCA number for them to offer it.