The Isa portfolio that needs bond exposure

PHIL CHENFORD'S ISA PORTFOLIO

LAST THREE TRADES: Vanguard FTSE UK Equity Income Index Inc, Edinburgh Investment Trust and Fidelity China Special Situations

SHARES OR FUNDS ON WATCHLIST: BP

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, says:

Check with your employer what options are available regarding your DB pension scheme - many employers are letting staff take the pension benefits while remaining employed, but alternative options might be available which could help boost the level of income you receive in later years. If you can take the pension at 60 and remain employed that money would provide an additional income providing an additional free cash flow allowing you to add to your Sipp and Isa.

Based on a 4 per cent income yield (a sustainable level of income where the capital will not be eroded and will continue to have the potential to grow) from your Sipp and Isa, you should be able to meet your retirement income objectives.

However, I would caution against complacency and unnecessary risk taking. The value of your investments can still fall and rise which could impact on the income generated by your Sipp and Isa. In addition the effects of inflation may mean that your income target will have changed when you retire. At this point you should be looking to consolidate your savings and aim for some capital growth to beat inflation but not take on unnecessary risk as your ability to replace money is reduced.

You say you want a mixture of higher-risk investments with some bankers so you fit with the majority of investors in terms of looking for growth with an moderate attitude to risk overall. However, there are three aspects to your portfolio that need addressing:

1. The asset allocation, ie the mix of UK equities, global equities, bonds and property and the quality of the individual funds. There is a lack of exposure to US markets and bonds.

2. Fund choice. Some of these funds used to be run by star managers, but many have moved on. The portfolio needs bringing up to date.

3. Investment size. A number of funds are less than 2 per cent of the portfolio. An investment should be no less than 3 per cent of the portfolio.

The funds below are each less than 2 per cent of the portfolio. Whether they are good funds or not is not the issue, it is important to ensure holdings make a meaningful contribution to the portfolio’s performance. My advice is to switch to top up another holding.

Psigma Income to Liontrust Special Situations

Henderson European Focus Trust Plc to Jupiter Strategic Bond

Fidelity European to Jupiter European

Adrian Lowcock's recommended portfolio changes

BlackRock UK Absolute Alpha

Mark Lyttleton has struggled for a number of years before taking a sabbatical earlier this year. I advise switching to the Newton Real Return. This is managed by Iain Stewart and targets a total return with a focus on value stocks.

Fidelity Global Special Situations and Fidelity Special Situations

These were once the same fund before being split when Anthony Bolton retired. The new managers have not replicated his performance. Switch the Global Special Situations fund into Legg Mason US Smaller Companies, whilst using the proceeds from the Fidelity Special Situations fund to provide some bond exposure in Jupiter Strategic Bond.

Invesco Perpetual Asian

Manager Stuart Parkes is a capable manager but the fund has historically lagged behind the sector leaders such as the Aberdeen Asia Pacific managed by Hugh Young.

Jupiter European Income

Jupiter is seeking to convert this into a global fund with manager Cedric de Fonclare stepping down. Given the imminent change in the fund switch into Jupiter European managed by Alex Darwell.

Newton Higher Income

There has been a change of manager with Richard Wilmot coming in to refocus the fund. However changes will take three to six months. The portfolio has a lot of UK Equity income, so switch to Liontrust Special Situations.

Invesco Perpetual High Income & Edinburgh Investment Trust

The two holdings give a combined exposure of 16 per cent of your portfolio to Neil Woodford. Whilst the manager is a leader of his field it is important to diversify exposure. Therefore sell the Edinburgh Investment Trust and reduce the Invesco Perpetual fund to around 8 per cent of the portfolio. The proceeds can be reinvested into First State Global Emerging Market Leaders.

Henderson Asian Dividend

Managed by Mike Kerley, the fund's exposure to more cyclical areas has resulted in underperformance in the area. Should economic outlook improve we could see this fund bounce back. However I would prefer other funds in this sector for the medium to longer term. Switch this to Aberdeen Asia Pacific

Henderson European Selected Opportunities

Europe has been a challenging area for a number of years. This fund has managed to navigate the market relatively well. However I would prefer to increase exposure to midcap and smaller companies and suggest a switch the Henderson Special Situations fund managed by Richard Pease, who runs a concentrated portfolio.

Henderson Global Strategic Capital

As it is a fund of investment trusts it suffered in 2008 as markets sold off and investment trusts fell to significant discounts to net asset value. Because of the underlying exposure to investment trusts this fund is likely to be more volatile. As this is a small holding I suggest switching the holding to the Newton Real Return creating an investment that is of a reasonable size.

Vanguard FTSE UK Equity Income Index Tracker

Equity income benefits from active management, however switch the holding to continue the reduction of UK equity income and redistribute the investment to Jupiter Strategic Bond.

Andy Parsons, head of investment research at The Share Centre, says:

A balance of income and growth tends to be attractive to investors that are still working and wanting their investments to keep at least apace with inflation, but also want to supplement their income for helping with commitments such as meeting school or university fees.

Your portfolio of funds and investment trusts is largely geared towards income, with around half of the holdings having a historic income yield in excess of 3 per cent. However, you need to preserve some of the capital appreciation you have accumulated over time, so that the portfolio doesn’t suffer too much should market conditions turn sour again.

Over the next several years, as you approach retirement, consider reducing some of the risk and volatility within the portfolio through the inclusion of some debt backed investments. While these type of investments generally do not offer significant capital appreciation, they do provide a greater degree of certainty in respect of income payments.

Combining different asset classes within a portfolio will help provide a consistent and regular income stream, along with helping reduce overall volatility at times of excessive market turbulence. Unless you have an immediate need for income to supplement an everyday lifestyle, consider the power of re-investing to help compound the eventual returns.

Your portfolio has a broad and diverse range of investments that appear to achieve your investment objective. However, when looking closer the portfolio is very heavily concentrated on UK and European equities, currently 70 per cent of the asset allocation. The portfolio is therefore slightly less risky than the higher risk attitude you indicate.

The underlying sector allocation in the portfolio is very well diversified with consumer products, financials, healthcare, industrials and telecoms forming the base of the portfolio, accounting for over 70 per cent. This exposure is suitable for you as the five sectors are all well respected and renowned for being home to strong income producing companies. Across all the funds and investment trusts four individual holdings are in the healthcare arena; Roche, GlaxoSmithKline, AstraZeneca and Novartis.

Timing is one of the most difficult lessons to address when investing, especially knowing when to sell an investment that has performed particularly well. You have identified this as a challenge you have faced, however the old adage 'leave something for someone else' always holds well and therefore we always strongly recommend investors not to be afraid to trim or top slice profitable gains from an investment. In contrast investors should also be prepared to sell at a loss.