Mark McAvoy is 61 and semi-retired with a small business providing around £20,000 net profit per year. His wife, who is 57, has just taken redundancy. They have a small mortgage on their home, plus two other mortgage-free properties worth £140,000 in total and returning approximately £7,000 a year. He and his wife have substantial individual savings account (Isa) holdings, plus a pension pot that he does not envisage touching until he is 65 and thereafter on a drawdown basis.
Pension and Isa
Retirement in four years' time
Isa funds held by Mark McAvoy and his wife |
| First State Greater China Growth A Acc |
| Newton Asian Income Income |
| Jupiter European Income |
| M&G Corporate Bond A Income |
| AXA Framlington American Growth R Income |
| F&C US Smaller Companies 1 Income |
| Aviva Investors Global Property 1 Income |
| Ignis UK Property Fund Class A Income |
| First State Indian Subcontinent A Accumulation |
| Invesco Perpetual Emerging European Income |
| Neptune Africa A Acc |
| Neptune Latin America Accumulation |
| Smith & Williamson Global Gold & Resources Fund A Inc |
| Liontrust Special Situations R Income |
| CF Trojan Income O Income |
| M&G Gilt & Fixed Interest Income A Inc |
| Marlborough UK Micro Cap Growth Acc |
Mark McAvoy's pension holdings | |
| First State Greater China Growth A Acc | Gulfsands Petroleum 5.7142865p |
| Newton Asian Income Income | Aviva Investors Global Property 1 Income |
| UBS Global Allocation A Acc | Ignis UK Property Fund Class A Income |
| Rio Tinto 10p | The Sycamore II Property Development Fund EPUT (Closes 17/09/2010) |
| Investec Private Bank 3 years 4% matures 3/06/2013 | WH Smith |
| Investec Private Bank 4 years 4.35% matures 2/06/2014 | **Soft Closed **First State Indian Subcontinent A Accumulation |
| Julian Hodge Private Bank 3 years 3.50% matures 1/09/2015 | Invesco Perpetual Emerging European Income |
| Julian Hodge Private Bank 4 years 3.75% matures 31/08/2016 | Neptune Africa A Acc |
| Scottish Widows Bank 5 years 4.60% matures 14/02/2017 | Neptune Latin America Accumulation |
| Balfour Beatty 50p | Smith & Williamson Global Gold & Resources Fund A Income |
| Jupiter European Inc | Liontrust Special Situations R Income |
| M&G Corporate Bond A Income | CF Trojan Income |
| Aviva 25p | M&G Gilt & Fixed Interest Income A Inc |
| AXA Framlington American Growth R Income | Marlborough UK Micro Cap Growth Acc |
| F&C US Smaller Companies 1 Income | The Sycamore IV Mezzanine Finance Fund LLP (Closes 31/10/2010) |
| BP USD 0.25 | Cash (5.7%) |
Patrick Connolly, a certified financial planner with AWD Chase de Vere, says:
You have taken a sensible and pragmatic approach to your finances, using tax-efficient pension and Isa wrappers and holding a good spread of different asset classes. You have clearly given some thought to the overall risk profile of your portfolio.
It is important that you don't take too much risk as you may need this money to help maintain your lifestyle in the future. However, it is also important that you don't take too little risk as the money could remain invested for a number of years, so you will want to generate growth at least in excess of inflation. You have achieved a good balance here.
However, both your Isa and pension portfolios would benefit from a degree of 'tidying'. You hold 17 different funds in an Isa portfolio worth just £26,000. This makes managing the investments unwieldy. I would suggest an absolute maximum of 10 holdings and none at all worth under £2,000. You hold 24 per cent of your Isa money in commercial property. That is a very high weighting.
You have a much larger pension fund and again have clearly focused on diversifying this portfolio. You plan to use drawdown to generate income from your pension. This is fine for a pension fund of this size, as long as you understand and accept the risks involved, including the potential for capital losses and a lower level of income in the future.
I would question your exposure to commercial property, which seems to be 21 per cent of your pension, with most of this in the Ignis UK Property fund. I suggest moving your property weighting down to about 15 per cent of the portfolio and increasing your exposure to fixed interest by a corresponding amount. We are supporters of the Ignis UK Property fund and use it in client portfolios but would split the money held there between that fund and the Henderson UK Property fund.
The fixed interest holdings are focused on gilts and good-quality investment-grade bonds. This makes perfect sense, although I would be a little wary of having such a large holding in UK gilts through the M&G Gilt & Fixed Interest fund. While these have performed very well, and we are supporters of M&G's fixed-interest teams, there is a strong argument that the potential downside is now much greater than the upside.
I would therefore suggest reducing the holdings in this fund and, in light of an overall increased weighting in fixed interest, diversifying these holdings through adding some slightly higher-risk fixed-interest assets. In particular, I would suggest strategic bond funds such as Jupiter Strategic Bond and Kames Strategic Bond.
You hold six individual shareholdings. I am not sure what the point of these is. They add very little benefit and in the interests of consolidating your investments I would suggest moving this money into mainstream collective funds.
The core equity holdings are invested sensibly, although I would be a little concerned about having a large weighting in the AXA Framlington US Growth fund. This is a fund we recommend and use in client portfolios, but it is a real growth fund, which usually has a high weighting in technology and can be quite volatile. I would therefore consider splitting this exposure with the JPM US Equity Income fund, or even adding further core European exposure such as Henderson European Growth.
You hold a diversified range of higher-risk funds. We are wary of using specialist funds such as these and use none of them in client portfolios. However, you have good diversification here and hold the funds in sensible proportions in the context of your overall portfolio.
Jason Hollands, managing director at Bestinvest, says:
In terms of risk profile, this is an ultra-cautious portfolio. That's fine if your primary objective is minimising volatility, which we estimate is less than 5 per cent a year, but it will potentially come at the price of much more constrained opportunities for growth and - in the current environment - yield at a time when inflation is a lurking concern.
The ultra-cautious positioning of the overall portfolio is in large part a result of an asset allocation mix that is heavily skewed towards cash, investment-grade corporate bonds and gilts. The cash exposure isn't just a function of the fixed-term deposits with Investec, Julian Hodge and Scottish Widows but is compounded by cash positions within the underlying investment funds.
Of some concern is the almost exclusive focus of the fixed-income exposure to UK gilts and investment-grade bonds. Gilt yields are at record low levels - lower, in fact, than inflation - and are therefore particularly unappealing. Additionally, gilts are also trading at prices above their redemption values so, despite their 'low-risk' status, losses can be expected.
Likewise, investment-grade bonds have seen spreads narrow materially as investors have piled into the asset class in recent years. Yields on investment-grade bond funds, typically at 3-3.5 per cent, are now lower than those available on equity income funds (4-4.5 per cent), which also have the capacity for capital appreciation given equities look cheap at the moment. In our view, the easy money is over for investment-grade bonds and from here we expect performance momentum for this asset class to materially diminish as we move into 2013.
Notably, the portfolio has no exposure to high-yield bonds, which we believe is the more attractive part of the credit market, albeit with higher volatility. This is a view also reflected in the positioning of most leading strategic bond fund managers who have the ability to move across the credit and duration spectrum. You might therefore consider allocating a chunk of your fixed-income exposure to funds such as Fidelity Strategic Bond Fund or Kames Strategic Bond Fund to achieve some allocation to high yield but, more importantly, to enhance the flexibility of the way the fixed-income exposure is managed.
The portfolio has around three times more exposure to property funds than we would deploy in a portfolio of a similar risk profile. The property exposure is heavily concentrated in three vehicles, one of which appears to be an unregulated collective investment scheme focused on development projects. The largest property holding, Ignis UK Property, has had a tough run of performance in recent years against market benchmarks.
We think the outlook for UK commercial property remains challenging given anaemic GDP growth prospects. With void rates on the rise there is also likely to be downward pressure on rents, putting a brake on yield growth. There is also a material increase in UK property loan refinancing due in 2013-14, so we expect to see more commercial properties come on to the market as banks refuse to extend credit on non-performing loans at reasonable terms. That is unlikely to support valuations. Given the fact that your portfolio currently lacks any exposure to absolute return funds, some reallocation of the property overweight to a core, multi-strategy absolute return fund with low volatility might be considered. We like Standard Life Global Absolute Return Strategies, which is an umbrella for around 30 underlying trading strategies.
The underlying funds in the portfolio are generally respectable, with Jupiter European, Liontrust Special Situations, Marlborough UK Micro Cap Growth, M&G Corporate Bond, Newton Asian Income as the relative highlights. First State Greater China is a very well managed fund but we are very cautious on China given the need to address deep imbalances in its economy and uncertainties over the direction the new more orthodox Communist Party leadership will take the country. As it happens, the team behind the very highly regarded First State Global Emerging Market Leaders fund is currently underweight China, so there is a case for consolidating the various single market Latin American, China, Emerging Europe and Indian funds within a global fund such as this, where it is possible to capture their regional capabilities overlaid by their global view on where the opportunities are at any given time.
