By Chris Dillow and Ben Yearsley , 05 January 2017
- Name Mark Nelson and his wife
- Age Early 70s
- Description Isas
- Objectives Income of £30,000 to £35,000 a year
Our reader should consider reducing his equity weighting to better align the portfolio with his risk profile
Mark and his wife are in their early 70s and in good health. He retired about five years ago, but has since worked as a consultant which has given them an additional income. They own their home, which is mortgage-free.
"We have been able to live comfortably on my company defined-benefit pension and our two state pensions, so we continue investing the maximum yearly allowance into individual savings accounts (Isas), which we contribute to on a monthly basis," says Mark. "But my consultancy is coming to an end and we will soon have to rely on our investments for additional income. We would like £30,000 to £35,000 a year to make up for the lost consultancy income.
"Can this portfolio provide the income we would like? And what is the best way to provide it? At present we hold the accumulation share classes with many of our funds.
"We also wondered if the asset allocation of our investments is suitable, if we have an appropriate mix of active and passive funds, and whether we should trade more often?
"We have sufficient cash to see us through any unexpected events. All of our investments are held in Isas and we are both currently contributing every month, and use up our annual allowances. We have not taken any income from our investments so far.
"Should we continue investing the maximum annual allowance into Isas if we have spare cash, and over time is there any reason why we shouldn't put everything into these even if we don't need it? Isas seem to provide a long-term tax-free shelter for our assets.
"We trade very little - all our investments have been held for at least three years - and many for much longer. Our most recent deal was buying shares in
"We have a medium attitude to risk in that we do not want to lose capital permanently, but can live with short-term falls. We are more interested in continuity of income, although again we can cope with short-term gaps.
"Although we want to pass the investments to our family after we die, we believe we need to maintain a good sum to deal with possible health and care costs. Both our parents lived until their 90s."
Mark and his wife's portfolio
|Holding||Value (£)||% of portfolio|
|BlackRock Continental European Equity Tracker (GB00BJL5BS14)||24,869||3.36|
|BlackRock Emerging Markets Equity Tracker (GB00BJL5BW59)||32,641||4.41|
|BlackRock Japan Equity Tracker (GB00BJL5BZ80)||15,323||2.07|
|BlackRock Pacific ex Japan Equity Tracker (GB00BJL5C004)||25,722||3.48|
|Jupiter European (GB00B4NVSH01)||21,953||2.97|
|Jupiter Strategic Bond (GB00B4T6SD53)||42,408||5.73|
|Legal & General UK Index Trust (GB00BG0QPG09)||39,019||5.27|
|Legal & General UK Property Trust PAIF (GB00BK35DS04)||8,927||1.21|
|Legal & General US Index Trust (GB00BG0QPL51)||38,573||5.21|
|M&G Optimal Income (GB00B1H05718)||13,803||1.87|
|M&G Property Portfolio PAIF (GB00B8FYD926)||8,702||1.18|
|Marlborough Special Situations (GB00B907GH23)||45,277||6.12|
|Perpetual Income and Growth Investment Trust (PLI)||40,197||5.43|
|Royal London UK Mid-Cap Growth (GB00B4V70S51)||35,199||4.76|
|SPDR S&P US Dividend Aristocrats UCITS ETF (UDVD)||40,954||5.53|
|SPDR S&P UK Dividend Aristocrats UCITS ETF (UKDV)||22,101||2.99|
|Standard Life European Private Equity Trust (SEP)||25,817||3.49|
|Standard Life Investments UK Smaller Companies (GB0004331236)||18,621||2.52|
|Tritax Big Box REIT (BBOX)||7,643||1.03|
|Artemis Income (GB00B2PLJH12)||21,848||2.95|
|Finsbury Growth & Income Trust (FGT)||23,814||3.22|
|Fundsmith Equity (GB00B41YBW71)||104,782||14.16|
|Invesco Perpetual High Income (GB0033054015)||56,150||7.59|
|Marlborough UK Micro-Cap Growth (GB00B8F8YX59)||12,758||1.72|
|None of the commentary here should be regarded as advice. It is general information based on a snapshot of the reader's circumstances.|
THE BIG PICTURE
Chris Dillow, Investors Chronicle's economist, says:
You ask what is the best way of providing income. The answer's simple: have a balanced portfolio and create your own dividends by selling some of the holdings when you need money.
I say this because there's a danger in holding income stocks. A high dividend yield can simply be compensation for low future growth or high risk. In 2008, for example, income investors held builders and mortgage lenders - and suffered terribly. It's dangerous to distort your portfolio by chasing income. Taking income from a mix of yield and capital gains is better.
You also ask whether you should deal more often. Generally, I'd say no. The justification for trading is that you know something the market doesn't. But this will only rarely be the case. There's an argument for selling in May and buying on Halloween, or for selling when prices fall below their 10-month average, or for buying when investment trusts are on unusually high discounts to net asset value relative to their average. Otherwise, you should do little.
You also ask whether you should keep investing in Isas. I'd say yes. One of the first rules of investing is to minimise taxes and charges. An Isa does this legally, while giving you reasonable flexibility in terms of withdrawals. You should therefore have as much as possible in them.
Ben Yearsley, investment director at Wealth Club, says:
You are in a nice position financially, with no debt, your house paid for, a final-salary pension and a sizeable pot in the Isa portfolio.
An annual income of £35,000 from a tax-free pot of about £740,000 is achievable, but the yield needed is 4.7 per cent, not leaving much room for long-term growth. The higher the yield, normally the greater risk to capital.
You are both funding your Isas to the maximum limit every year, which is £30,480 combined for the current tax year. I assume this is coming out of your pensions and consultancy income. However, I see little point in continuing to pay £30,000 a year into Isas, simply to take it back out again, especially as achieving a 4.7 per cent yield isn't that straightforward. Don't forget that whatever investments you make in the Isa there will be risk involved. If you find at the end of the tax year that you have spare cash, you can always top up your Isas at this point. That is the simplest way of achieving the extra income.
You might be able to buy extra income using the state pension top-up facility, but you don't appear to have any other spare pot of money other than your Isas, so would need to take it from there to fund it. You would give up some of your capital to do it, but it is worth considering. If you decide to buy extra income using the state pension top-up facility you must do it before 5 April 2017.
HOW TO IMPROVE THE PORTFOLIO
Chris Dillow says:
Your portfolio is basically good. You've got a nice mix of equity assets, which include some cyclicals such as emerging markets and small-caps, via holdings including Marlborough Special Situations (GB00B907GH23).
I also like that you hold a private equity investment trust because this asset class can help mitigate the risk that quoted stocks are less likely to deliver longer-term growth than unquoted ones.
Efficient market purists will chafe at your large holding in Fundsmith Equity (GB00B41YBW71). This, though, is a model of a truly active fund, insofar as it takes a few large positions and doesn't try to hug its benchmark. If you must bet on an active fund manager, it is as good as any.
But you may have too much equity exposure. There's a small, but nasty - and perhaps unquantifiable - chance that share prices will fall even over a long period. Cash helps protect you from this. It might also allow you to profit from short-term dips in that it might enable you to buy when prices are temporarily depressed.
The downside to cash, of course, is its low return. Here, though, you should consider how much you want to preserve capital for a bequest. With average luck, you could withdraw £35,000 a year from this portfolio while preserving its capital, assuming real returns average 5 per cent per year. A bigger cash weighting would mean that such an income would eat into your capital, but with the benefit of reducing your exposure to sharp capital reductions when equities fall. The choice is ultimately a personal one.
Ben Yearsley says:
HSBC has done very well, rising almost 50 per cent over the past six months, so now could be a good time to sell. The good thing about holding all your investments in Isas is that there are no tax implications when selling anything.
You have a broad spread of funds and geographies with just under half invested in the UK, and the US and Europe the next two biggest geographic allocations. As you aren't using the Isa for income, and have a medium attitude to risk, I don't see the need for wholesale changes from an asset allocation perspective.
It could be argued that you are underweight bonds: with a medium risk profile I would expect a slightly more balanced approach and maybe have a bond weighting of around 20 per cent, instead of the current 7.6 per cent. However, after such a long bull run for bonds, they don't look massively attractive. The bond funds you have are very good and at least give the managers the flexibility to protect the portfolio in the event of a massive downturn. A fund you could consider adding is M&G Global Floating Rate High Yield (GB00BMP3SC51), which should benefit in a rising interest rate environment.
You ask about active versus passive. I'm a fan over the long term of active management, although in some areas such as the US it is often better to be passive in the long run. I would, however, definitely be active in emerging markets, Asia and Japan, and would look to sell the passive investments in these regions and reinvest in active funds. Ones to consider include Jupiter Global Emerging Markets (GB00B4PF5918), Schroder Asian Alpha Plus (GB00BDD27J12) and Man GLG Japan Core Alpha (GB00B0119B500).
Your Europe exposure is a nice mix of an excellent active fund, Jupiter European (GB00B4NVSH01), and a tracker. I don't see any problem with this as they could be viewed as core and satellite.
Your UK allocation has some crossover. Why own both Marlborough Special Situations and Marlborough UK Micro-Cap Growth (GB00B8F8YX59)? They are run by the same manager - Giles Hargreave - and have some of the same holdings as each other.
Also why hold Perpetual Income and Growth Investment Trust and Invesco Perpetual High Income (GB0033054015)? Mark Barnett manages both funds and there is a high degree of commonality in terms of their underlying holdings. You have 13 per cent of your assets invested in these two funds. I would sell down one of these two, probably Invesco Perpetual High Income, and add a fund such as JO Hambro UK Dynamic (GB00BDZRJ101). This is a more value style, turnaround fund with a longstanding manager.
You could also look at adding another equity income fund such as River & Mercantile UK Equity Income (GB00B3KQG447).
On the global side, Fundsmith Equity has had an excellent run and I would look to take some profits on this, maybe reducing its weighting by half. It has followed the US 10 Year Treasury bond and it will be interesting to see how the portfolio performs now that US rates are rising. I would consider adding GAM Global Diversified (GB00B66RBL40), which has more of a value and defensive bias, maybe not a bad thing going into an uncertain 2017.
Overall this portfolio is probably a bit too risky, and the crossholdings with some funds increases the risk. By selling HSBC, Invesco Perpetual High Income, half of Fundsmith Equity and possibly some of the Marlborough holdings, you would realise nearly 20 per cent of the portfolio which could then be used to diversify into different areas and add to the bond weighting.