"Nothing too wild" portfolio scores highly

PETER STEPHENSON'S SHARE PORTFOLIO

Source: www.investorschronicle.co.uk

Prices as at 12 September 2012

Chris Dillow, Investors Chronicle's economist, says:

Unlike many investors, you have aligned your portfolio with your attitude to risk. There is indeed nothing wild about this. Your equity holdings represent only a reasonably small fraction of your wealth, which includes your earning power and I hope a decent Foreign Office pension. And there's a defensive bias to your equity holdings. Although these contain two large adventurous stocks - BHP Billiton and Afren - both have quite low (although positive) correlations with SSE and Tesco. This means that if you do lose on these riskier stocks, there's a fair chance your losses will be moderated by better performance elsewhere in your portfolio.

What I also like about this portfolio is its simplicity. Many investors tend to buy many stocks and end up incurring large dealing costs and a portfolio in which the contributions of their better stock picks are diluted away. I much prefer your 'core-satellite' approach of combining meaningful stock picks with a tracker fund - although your core is relatively small.

There are, though, two questions here. One is: why do you have such a defensive bias in your portfolio? If it's because you want to take advantage of the defensive anomaly - the tendency of low-risk shares to do better than they should - then fine. It's also fine if you happen to think these are good stocks in themselves, and you just cannot see growth opportunities in other, racier, stocks - perhaps because such opportunities don't exist.

What's not fine, though, is holding defensives because you think they reduce risk. Even the most defensive stocks are likely to lose you money if the market falls - which is, of course, a considerable possibility. The best way to reduce risk in your portfolio is to have more cash and bonds and fewer equities, not to tweak your portfolio towards defensives. Asset allocation and stock selection are different things.

Which raises my second question: what are those cash savings doing for you? There's lots they are doing: protecting you from equity risk, from the possibility of losing your consultancy work, and from the, ahem, operational risks involved in doing business in Nigeria. If you feel you need cash for these purposes, then fine; your appetite for risk - which determines how much cash you hold - is ultimately a matter of taste. Unless you have a favourable mortgage rate and/or repayment penalties, though, some people might consider using some of that cash to reduce your mortgage.

If you were most investors, I'd be disappointed at the lack of a self-invested personal pension (Sipps) or individual savings account (Isa). One of the big rules of investing is to minimise taxes (legally of course!) - which means having Isas and personal pensions where possible. However, as a non-resident, things are different for you. But, if and when you do return to blighty, I'd recommend taking advantage of these.

These, though, are quibbles. I personally don't see much wrong with this portfolio.

Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, says:

Despite cash savings of around £100,000 and other investments of over £200,000 accumulated, you currently hold a mortgage of £50,000. This raises the question as to whether savings and investments should be used to pay off the mortgage.

Generally speaking, you should repay the debt given that you are probably receiving less in after-tax interest from your cash than you are being charged on the mortgage. However, you should be able to use the cost of the interest to offset against your rental income for tax purposes. This may make the retention of a mortgage more beneficial.

Nonetheless, this will only work when interest rates are low - assuming the numbers currently equate. Certainly, you should ensure that you keep sufficient cash to repay the mortgage should interest rates rise or the tax calculation cease to work.

We assume that having retired from the Foreign Office and with no mention of any private pension arrangements detailed, that you have already made pension provision outside of the investments outlined.

As you are working abroad and considering retirement overseas, tax planning should be a major consideration. Seriously consider some professional tax advice, if you haven't already.

You have outlined your investments objectives as "growing a mixed portfolio of risk and blue chips" with an attitude to risk of "nothing too wild". We interpret this as pursuing a strategy of capital growth, with a medium- to higher-risk attitude being taken.

Turning to current investments held, we note that you have built exposure to an index-tracking fund. Such index-tracking funds can provide the first building blocks to gaining exposure to stock market investment. Such funds look to duplicate the composition of well-know indexes such as the FTSE 100. With no fund manager or analysts to pay, annual management charges are generally low.

On the downside, certain attributes that managers of actively managed funds enjoy are lost. Warren Buffett once said that "you want to be greedy when others are fearful and fearful when others are greedy". Tracker or passive funds are forced to follow the crowd, buying companies that others have already bought as a company grows in value and enters a particular stock market index. Active fund managers can follow Warren Buffett, buying companies where fear dominants investor sentiment - fear or caution that can generate an attractive long-term valuation. The M&G Recovery fund - launched in 1969 - represents just such an example.

As for individual company investments, you hold seven blue-chip companies - all constituents of the FTSE 100 index - along with two energy exploration companies. However, oil exploration company Afren accounts for 28 per cent of your portfolio's value. Afren operates in Nigeria, a fact that we guess may be tied to your consultancy role there. While providing something of an expression of confidence in Afren's prospects, such a weighting is relatively high in the context of the broader portfolio. Consider a partial sale and reinvestment in order to add additional diversification.

As for any potential reinvestment and assuming that the index tracking funds held are targeted at UK markets, you could take the opportunity to increase international diversification. Funds where the manager has discretion to invest across a broad geographical range include CF JM Finn Global Opportunities and the Rathbone Global Opportunities fund.