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At age 74, is my Isa portfolio too risky?

Our experts think this long-standing Investors Chronicle subscriber is right to think about reducing the risk in his portfolio.
November 26, 2014

Peter is 74 and has been investing for 40 years, during which he has been a regular subscriber to the Investors Chronicle. He wants to produce an income of £20,000 a year from his investments. This, together with his income from pensions, will provide a reasonable standard of living for him and his wife.

Peter aims to make full use of his annual individual savings account (Isa) allowance and Capital Gains Tax exemption. However, he is worried that he has created a portfolio that "closely tracks the indices and probably has too many holdings".

He says: "I think my attitude to risk has been too relaxed, resulting in a high concentration on equities. I am not keen on gilts as I feel they offer little in the way of income or growth but I have some high yield bond investment trusts and have recently started buying into higher grade bonds through exchange traded funds (ETFs). I believe I need a more appropriate asset allocation but am not sure what it is."

Reader Portfolio
Peter 74
Description

Isa and taxable trading account

Objectives

£20,000 annual income

PETER'S PORTFOLIO

Holding%Holding%
NON-ISA HOLDINGS £424,073Rio Tinto (RIO)                      2
Aberdeen Asia Smaller Cos IT (AAS)2RIT Capital Partners IT (RCP)      1
AMEC (AMEC)                 2Royal Dutch Shell B (RDSB)             2
Aviva (AV.)             2Schroder Oriental Income Fund IT (SOI)2
BACIT (BACT)                       1Scottish Mortgage Inv Trust IT (SMT)3
BAE Systems (BA)2Templeton Emerging Markets IT  (TEM)2
Baillie Gifford Japan Trust  IT (BGFD)                1Vodafone Group (VOD)   2
Bellway (BWY)      2ISA HOLDINGS £209,885
BHP Billiton (BLT)                 2Aberdeen Asset Management (ADN)2
British American Tobacco (BATS)             2BT Group (BT.A)        3
British Land (BLND)          3Babcock International (BAB)      2
City Merchants High Yield Trust IT (CMHY)       3Black Rock Commodities Income IT (BRCI)  2
Compass Group (CPG)     2Booker Group (BOK)2
Diageo (DGE)                  2Close Brothers Group (CBG)     2
F & C Global Smaller Cos  IT (FCS)    3GKN (GKN)             2
GlaxoSmithKline (GSK)                   2HSBC Holdings (HSBA)     2
HSBC ETF S&P500 ucits (HSPX)   1Invesco Perpetual Enhanced Income IT (IPE)2
iShares £ Corp Bond exc fin ETF (ISXF)   1Murray International IT (MYI)2
iShares £ Corp Bond ETF (SLXX)     1National Grid (NG.)2
IMI (IMI)                        2Persimmon (PSN)     2
Jupiter European Opportunities IT (JEO)             2St James Place (STJ)  2
Jupiter US Smaller Cos IT  (JUS)             2TR Property IT (TRY)2
New City High Yield Fund IT  (NCYF)               3WPP (WPP)  2
North American Income Trust IT (NAIT)  3Cash £110,57215
Rexam (REX)       2TOTAL PORTFOLIO VALUE £744,530100

Source: Peter as at 31 October 2014

 

Ben Yearsley, head of investment research at Charles Stanley Direct, says:

Your objectives are fairly straightforward; income of at least £20,000 per annum, use of Capital Gains Tax and Isa allowances and growth in excess of inflation. If you want growth and income, then returns of at least 7 per cent per annum will satisfy both criteria.

Let me deal with the Isa allowance and CGT first. First of all don’t just sell funds or shares to use the CGT allowance each year – i.e. don’t force the sale just to use the allowance, as you can’t buy back the same investment within 30 days. However, if you want to use the annual CGT allowance, you can always sell an investment (or part thereof) and buy back either in your Isa or your wife’s name or Isa. The annual Isa allowance is now £15,000 per person, and you both have annual CGT allowances of £11,000. You could even transfer some investments to your wife’s name, complete with the inbuilt gains so she can use both. Clearly once in the Isa all future gains are tax free and income is protected from further tax.

With an investment pot of £644,000 currently and a further £110,000 that I assume is waiting to be invested, an income of £20,000 per annum is easily achievable with a yield of 3 to 4 per cent a year. The yield from the FTSE is above 3 per cent, from investment grade bonds about 3-4 per cent and high yield bonds yield 5 per cent or more. You rightly say you aren’t interested in gilts.

The key question for you is about strategy. Do you want the higher risk areas such as Japan, Asia, Emerging Markets and US smaller companies in your portfolio and could these be replaced by better yielders or those with some more capital protection? Going through the portfolio its hard to pick out investments to ditch. At the age of 74 you still potentially have many years ahead, so having a growing income and capital is still essential, hence some equities, but maybe the mix needs to change and add more capital protection. There is nothing wrong with delivering the performance of a tracker, if the volatility is lower.

I do think you need to simplify your portfolio a bit. If you are performing like an index tracker, you may as well either just buy one or try and move your portfolio into investments that aren’t closely correlated with the index. Normally, I find investors don’t have enough holdings, especially if they are buying individual shares. However, I think 20 is a minimum for a direct share portfolio - and you have 24 share holdings.

The reason you are performing like a tracker is probably that you have lots of big large cap stocks in your portfolio. There are lots of decent yielders in your list, but there aren’t many growth kickers, except for the higher risk invesment trusts. Aviva (AV.) and BAE Systems (BA.) are companies that I would highlight with attractive dividend growth potential – don’t forget growing income as well as capital is vital. Other companies such as BHP Billiton (BLT) and Royal Dutch Shell (RDSA) are becoming more focused on shareholder returns as well.

Rio Tinto (RIO) has had a tough time, but why would you sell your holding when the iron ore price is at a 5 year low? HSBC (HSBA) is causing a few concerns re the propensity to fine banks, but has long term growth potential through exposure to Asia and is still yielding a decent amount.

Murray International (MYI) is an excellent long term holding that has been an excellent dividend grower, although been going through a tough patch recently – there's no reason to sell though. RIT Capital Partners (RCP) fits nicely into the capital protection element that you want. You could look at Personal Assets Trust (PNL) as well in this vein. Blackrock Commodities Income (BRCI) has had a tough time, but it seems wrong to sell after a period of poor performance.

There aren’t any real outright sells across your portfolio – except maybe the bond ETFs – I prefer active management in these areas and if you really want bond exposure Jupiter Strategic Bond Fund (GB00B2RBCS16) my preferred pick. I would be a bit nervous about the high yield bond investment trusts, ie Invesco Perpetual Enhanced Income (ILH), City Merchants High Yield (CHY) and New City High Yield (NCYF) – you are gearing up to buy a risky asset class. Is now the time to do this? The three bond investment trusts and the two bond ETFs could be consolidated into Jupiter Strategic Bond Fund and maybe one other bond fund, Artemis Strategic Bond (GB00B09DMJ21), for example. That would knock three holdings out.

Ian Forrest, investment research analyst at The Share Centre, says:

The first thing that leaps out at me is the sheer number of different holdings you have; I make it 46 in all. Managing and keeping track of all of those must be a Herculean task, even for a full-time enthusiastic investor.

On the positive side you’ve done well to spread your funds across all a variety of assets so that none of them represent more than 3 per cent of the overall portfolio, which reduces the level of risk by increasing diversity. However, the law of diminishing returns begins to kick in once you go beyond about 20 holdings, so I normally suggest that as an upper limit. It is still perfectly possible to achieve your objectives of growth and income, with a smaller, more focused portfolio.

It is not immediately apparent from looking at your portfolio what level of risk you are aiming for. I would suggest reducing the risk level of the portfolio and a smaller number of holdings would help to make that clearer. To help achieve that and reduce your exposure to the volatile commodities sector I would suggest consolidating your holdings in Rexam (REX), BHP Billiton (BLT) and Rio Tinto (RIO) into just one – my preference would be for BHP Billiton given its scale and healthy dividend. I would also consider increasing your holdings in utilities stocks, such as National Grid (NG.), which provide a fairly secure and growing income.

To further reduce the number of holdings it would be worth rearranging the collective investments you own, especially the investment trusts, which focus on geographic regions such as Baillie Gifford Japan Trust (BGFD) and Jupiter US Smaller Companies (JSC). You could consolidate these into a small number of global funds and maybe one or two specialist trusts. 

There’s also an element of duplication in your holdings where you have a number of stocks in one sector but nothing in other sectors. For example, you hold four stocks in financial related sectors – Aberdeen Asset Management (ADN), Aviva (AV.), Close Brothers (CBG) and HSBC (HSBA), both Vodafone and BT in the telecoms sector and Bellway (BWY) and Persimmon (PSN) in housebuilding. By consolidating some of those you could give yourself more exposure to the retail sector, perhaps Marks and Spencer (MKS) or Burberry (BRBY).

It’s good to see you utilising your Isas to reduce capital gains and income tax liabilities. Given that you still have a substantial portion of your portfolio outside Isa wrappers I would strongly suggest you continue to fully use your annual allowance every year and move your holdings into the warm, protective embrace of Isas over time.

The proportion in cash that you hold, just under 15 per cent, seems excessive and given the very low level of interest rates at present it’s unlikely to be helping achieve either of your objectives of capital growth to offset inflation or income generation. I would suggest reducing the cash position over time to below 10 per cent and working your investments a little harder

Capital preservation is naturally a priority given your age and I would agree that the best route for that is through collective funds, such as investment trusts, since the risk level of your portfolio is already relatively highdue to a high proportion of shares, share-dominated funds and index-tracking ETFs.

Finally, bonds may provide little in the way of capital growth but the income they provide should not be overlooked. Monthly strategic income bonds are worth considering since they smooth out income flows.