Am I holding too many Isa funds?

Steve Young's Isa portfolio

Source: Investors Chronicle. Price and value as at 22 May 2013

LAST FOUR TRADES:

Fidelity Moneybuilder Income (SELL)

Jupiter European Inc (BUY)

First State Asia Pacific Leaders (BUY)

HSBC American Index (BUY)

WATCHLIST:

Troy Trojan

Chris Dillow, the Investors Chronicle's economist says:

There are several things to like about this portfolio. One is that it is sheltered in an Isa and so avoids tax; one of the basics of investing is to make as much use as you can of practical tax allowances.

Another thing I like is your recognition that you can create income by drawdown and selling stocks. Too many investors think that they can only obtain income by holding "income" stocks or bonds, and fail to see that income often comes at a price of either lower growth or higher risk. You’re smart enough to see that what matters is total return and that you can create your own dividends through sales.

Also, this portfolio is well diversified, not just between bonds and equities, but among equities. You've got some defensive holdings such as your telecoms stocks and Invesco Perpetual's High Income fund, which has a defensive bias, as well as a good spread of international stocks.

But this raises my first concern. Taking your cash into account - as we must because what matters is one's total wealth - less than half of your investments are in equities. Such a lowish holding might be reasonable given that equity risk rarely pays off well in the summer months, but I suspect you're not a seasonal investor and instead that such a low weighting reflects a relatively high risk aversion.

Such aversion, though, comes at the price of low returns. As a working assumption, I'd bet on the average annual real returns on your total wealth (including cash) being less than 2 per cent.

Is this sufficient? It is, if you could manage on the income from the portfolio as it stands - though I wouldn't rely upon that being more than £5,000 per year allowing for reasonable drawdowns - or if you can top it up by saving more, or if you can postpone retiring for a while if you feel squeezed. If none of these options apply, then you might want to consider raising your equity exposure some time - though perhaps waiting until the autumn if, like me, you feel the weight of the evidence for seasonal investing.

My point here generalises. It is the case that, ultimately, the amount of risk you take is a matter of individual taste. But before we reach the point where this idiosyncratic matter rules, we should consider whether the amount of risk we're taking is compatible with our investment objectives.

This raises another concern - the role of your bond funds. Bond funds are not like bonds in one important respect - bonds mature but bond funds do not. If you hold an individual bond to maturity you are not taking on price volatility risk - though you are taking on inflation and credit risk. But if you hold a bond fund, you are taking that price risk.

Now, in recent years this risk has paid off handsomely. And because - in many cases - bond risk and equity risk are negatively correlated, there is a case for bond funds as a way of diversifying equity risk. However, there are big dangers that bond prices will fall over coming years. These include: an ending or reversal of quantitative easing; a reduced demand for safe assets as western economies recover; and a reduction in the global savings glut as the Chinese economy rebalances towards consumer spending. A long-term holding in bond funds exposes you to these dangers.

These are long-term problems; they won’t hit us tomorrow. For me personally, though, they make a case for getting ready to lighten such holdings, in favour of either direct bond holdings held to maturity or cash - or, if you want to take on more risk, equities.

Colin Low, a chartered financial planner at Kingsfleet Wealth says:

In general, I really like this portfolio. There are a number of funds that we recommend, both collectives and investment trusts, and I think you have made an excellent selection of investments. Wrapping them within an Isa is also very wise.

You are holding a reasonable sum in cash as well, which is particularly sensible as you move towards your planned retirement. Your intention to allow income to be reinvested for the next few years, beginning to take both income and capital gains from the fund to supplement your income until you receive state pension at age 66.

You feel you are holding too many funds, but I would not say the number is particularly excessive. You could address your holdings with different brokers without too much difficulty as Isa transfers are usually straightforward to organise between platforms/brokers. It may be administratively beneficial to consolidate your assets in this way but you need to check if there are any costs involved.

My research indicates that there is a slightly higher level of volatility than you would expect in a typical balanced portfolio. However, the performance of the portfolio has significantly out-performed those sector returns and, therefore, you should feel particularly satisfied with this result.

Most of the excess returns have come from the individual UK shares that you hold, however, this small number of holdings creates significant stock-specific risk. There are a number of ways you could reduce this risk by diversifying across a greater number of UK equities. To replicate the market, consider a tracker, index fund or exchange traded fund (ETF) as there are lots available. If you wish the UK Equity element to be managed, then Finsbury Growth & Income Trust (FGT) and SVM UK Opportunities (GB0032064304) are concentrated funds that may help.

I note that you have recently reduced your holding in the Fidelity Money Builder Income Fund with a view to purchasing more adventurous assets such as the Jupiter European, First State Asia Pacific Leaders and HSBC American Index funds. The Jupiter European Income Fund in which you are invested has generally lagged its benchmark over the past few years and an alternative would be to use a fund manager who is looking at the underlying stock first rather than being restricted by where it is located.

We often recommend the Artemis Global Income Fund (GB00B5V2MP86) run by Jacob De Tusche Lec, who has a total global mandate, or the M&G Global Dividend Fund (GB00B46J9127) which has been a consistent outperformer. You are using a similarly styled fund in the Scottish Mortgage Investment Trust which has a similar strategy of investing globally on a 'bottom-up' basis.

I am very impressed with your choice of Strategic Bond funds. Although you also have exposure toThreadneedle High Yield Bond which has performed well of late, investors have been well served by the Legal & General Dynamic Bond Trust (GB00B1TWMM97) and the M&G Optimal Income Fund (GB00B1H05155). With the Invesco Perpetual Corporate Fund that you also hold, you are in safe hands as far as your fixed interest exposure is concerned. You may well be aware of ongoing concerns about the liquidity of fixed interest markets and I would suggest that you do take this into consideration with regard to your future investment planning.

Some form of cash flow modelling could be beneficial to assist you in planning your arrangements in more detail. However, overall, your investment structure is both well structured and successful, and I trust that it will continue to work well for you.