I started my own Sipp – an equity-based pension via Hargreaves Lansdown – back in 2004. Like many, I'd sat and watched my cheap, perfectly adequate stakeholder pension go absolutely nowhere. It wasn't a bad pension – a Friends Provident stakeholder invested in with-profits funds. However, it just wasn't increasing in value very much, even though the markets were rising fast at the time.
This lacklustre performance was obviously down to my opting for a with-profits plan, in order to get smoother returns over the investment cycle. At the same time, I had plenty of ideas of my own about how to run a portfolio, although my traditional pension wouldn't let me put them into practice.
My investment plan
• At the core of my portfolio approach are a series of tracker funds that let me target key markets. My aim here is simply to track the various indices so as to exploit the long-term uptrend in equities as cheaply as possible.
• I seek to diversify both across countries and across asset classes, too. This involves more than just buying into several different global investment funds.
• I have also developed an interest in special situations-based bargain hunting. I've always been attracted to the idea of looking for opportunities off the beaten track, prospecting for misunderstood gems and realising intrinsic value. This usually means buying individual shares, rather than funds.
• I'm a firm believer in dividends and interest as crucial ingredients in growing your portfolio. As well as buying shares and fixed-income products, another component of this plan is investing in defined return products – sometimes listed structured products, on other occasions split-caps – that mimic this income stream via a defined payout at some point in the future. Overall, I have targeted an underlying yield on my portfolio of at least 3 per cent a year. for more on defined returns.
• I also like the flexibility to gear up my Sipp to invest in products such as covered warrants and listed contracts for difference that allow me to short-sell markets and shares. In essence, I'm looking to my Sipp as a DIY '130/30' hedge fund, which has predominantly long positions in shares, but also has a large exposure to funds and investment classes with the objective of making money in all sorts of markets.
Within the overall Sipp fund, I’ve operated a number of 'sub-funds' that invest in different themes – overall, I'm hoping to balance out risks and increase my returns.
There's a growing 'special situations' component built around investments in beaten up blue-chips – banks and real-estate companies that I think are trading below their true long-term value.
I’ve also sought out 'alternative investment' categories, such as commodities, using investment trusts and structured products. Then there are more mainstream tracker products that form the core of my portfolio plus those emerging markets funds and hedge funds.
The retired Sipp owner doing income drawdown
John Turkington, former chief accountant and treasurer of Racal and also Mowlem.
John experienced an investment epiphany – a moment after which all the existing old truths about investment just didn't work for him anymore.
"Back in 2002 and 2003, I had a series of fairly conventional with-profits funds and pensions via the likes of Norwich Union and Scottish Widows," says the Beaconsfield-based Sipp investor, "but I just got fed up with all the go-betweens, the advisors and the fund managers. I realised I could probably do much better than these fund managers, so I decided to do it all myself".
Despite his career in senior management at listed companies, John freely admits that he was no expert on equity investing when he started his Sipp with European Pensions Management (EPM) and Selftrade. He decided to take a major plunge into the unknown.
In the first place, he opted to build his whole Sipp around a simple and fairly tried and trusted investment strategy: investing in blue-chip equities. "I really like the idea that you can focus on FTSE 100 companies, where there's regular information, and you can watch them day by day," he explains.
The net practical result of this investment strategy is that John has decided to go against conventional wisdom and invest 100 per cent in equities – not the typical investment for someone entering income drawdown. The shares he goes for are dividend-paying large-caps.
"My long-term total return projection is 10 per cent, of which half is to come from the dividend stream and the other half from capital gains. Up until recently, I'd say I was very much on target," he says.
John's fairly bold equity income-based strategy is in fact increasingly common among older Sipp investors who have chosen to draw down an income from their Sipps rather than buying an annuity. More and more economists believe that the traditional advice to stick to the safety of boring bonds and gilts is flawed.
Nowadays, retirees are living longer and longer. Although a blessing in one sense, greater-than-expected longevity can be a financial disaster. Whereas before, investors often only had to plan for perhaps a decade of non-working life, that figure is often now 15 or even 25 years. As a result, the amount of capital in the Sipp pension pot that provides the income has to keep on growing. If only income-bearing assets are held, inflation could massively reduce its purchasing power after a while.
There is now a better understanding of the inherent risk/return trade-offs implicit in some forms of equity investment. Equities with larger dividends have proved excellent investments over the long run. That potential risk can have a huge impact in the very short term – John's current portfolio is heavily skewed towards banks, which have taken a real beating lately. But over a substantial investment horizon of 10 to 20 years, that higher risk has the potential to be balanced out by a higher return, based in part on that steady stream of reliable dividend income payments.
If John felt he only had five more years left, a tilt towards gilts would probably make sense. But his investment time horizon is not too different from most non-retired investors – he needs a combination of both income and capital gains.
The full Sipp investor
Robert Forster, solicitor in Nottingham.
Robert is a classic Sipp investor who's gone for a higher-cost, full-service Sipp with AJ Bell.
His scheme lets him operate on several different levels. Over the past few years, he's used a group Sipp to co-invest with his firm's partners so that they can collectively buy commercial property. But he also needs the flexibility to run his own equity-based portfolio while receiving investment advice from Gerrards.
"Our Sipp lets us invest in just about everything we want," says Robert, "although in practice that's actually meant mainly commercial property and blue-chip equities."
Robert and his colleagues actually started out with another Sipp provider, but they soon transferred to AJ Bell. Like many full-service Sipp investors, he regards good service and attention to detail as an absolute requirement, and he's perfectly willing to pay extra in return.
"We use our group Sipp to own a number of buildings, which we in turn let back to the partnership," he says. The scheme now owns three properties in total, but they don't rule out buying more in the future. And the rapid decline in the commercial real-estate market hasn't caused them too much concern.
"If we were to lose, say, 10 per cent of the current value of the properties in the fund, it wouldn't be a great tragedy," says Robert. "We're all looking at this for the long term."
His Sipp also allows the group to be flexible in how they mix and match ownership of the buildings – not everyone in the group holds exactly the same percentage stake in each building. The group Sipp scheme allows each property to have different owners with different ownership percentages and even allows scheme holders who have since retired from the partnership to continue to own a stake.
The group structure has one other key feature: it allows each of the investors to run his own segregated Sipp portfolio, which Robert uses to run an equity portfolio. Still, property accounts for 50-60 per cent of the total value of his Sipp holdings.
"I do have an advisory firm – Gerrards – which gives me advice but I make the decisions about what I invest in," says Robert.
Like many Sipp investors, with a strongly equity-biased, blue-chip portfolio, he likes the transparency of owning big companies and he’s made a conscious decision to avoid many hot and fashionable sectors.
"I don't own unit or investment trusts and never have done," says Robert. "Maybe I'm too cynical but when I see too many adverts in the media, I tend to think how much better I can do."
He also steers clear of the standard asset allocation advice that suggests a globally diversified portfolio. "I don't invest in emerging markets stocks and I've no real yearning for international shares as such. Of course, many of the companies I own – like Rio Tinto – have international holdings. But I want my exposure to be to the UK-economy through UK-listed stocks – not in some BRIC (Brazil, Russia, India, China) country."
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