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I want to leave £1.4m to charity

Our retired reader and his wife want to leave their Isas and personal pensions to charity and so are investing for capital preservation. But our experts disagree on the ideal asset allocation.
January 28, 2015

David is 67 and his wife is 68. They have income of £36,000 from state and occupational pensions, nearly all index-linked. However, they also have investments worth £1.423m held in individual savings accounts (Isas) and personal pensions.

Because they intend to leave this portfolio to charity, they are inclined to a capital preservation strategy. The investments held in the portfolio are influenced by John Baron's investment trusts portfolios for the IC and consist of 20 holdings in collective investments (open-ended investment companies (Oeics), investment trusts and exchange traded funds).

David says: "We have no children and almost all our money will go to charity on our deaths. This is a motivating factor - to benefit good causes without exposing ourselves to unreasonable risk. We enjoy good health and own our home. The only way in which we would be likely to spend significant sums is if one or both of us went into care, but that appears quite remote at present."

We have £186,000 invested outside Isas and personal pensions. In recent years we have drawn on this to make up the difference between our expenditure of £70,000 a year and our income from state and occupational pensions.

Reader Portfolio
David 67
Description

Isa and Sipp

Objectives

Capital preservation

DAVID'S PORTFOLIO

HoldingTax wrapperValue%
Geographical markets
Pacific AssetsIsa, Pension£77,3895
CF Woodford UK Equity Income (GB00BLRZQC88)Pension£76,7845
iShares NASDAQ 100 UCITS ETF (CNX1)Isa£69,9975
First State Asia Pacific Leaders (GB0033874768)Isa£41,9313
Worldwide and themes
Fundsmith Equity (GB00B4LPDJ14)Pension£140,03710
Worldwide Healthcare (WWH)Pension, Isa£100,4107
L&G Global Health and Pharmaceuticals Index Trust (GB00B0CNH387)Pension£84,5736
Witan Investment Trust(WTAN)Isa, Pension£80,2496
Artemis Global Income (GB00B5ZX1M70)Isa£74,9085
Scottish Mortgage Investment Trust (SMT)Pension£70,4045
Property and infrastructure
db x-trackers S&P Global Infrastructure UCITS ETF 1C (XSGI)Pension£85,3196
JP Morgan Global Property Securities (GB00B235R373)Pension£67,5785
TR Property IT (TRY)None£54,8404
HICL Infrastructure IT (HICL)Isa£47,6033
John Laing Infrastructure (JLIF)Isa£43,1903
Bonds and fixed interest
iShares £ Corporate Bond Ex-Financials UCITS ETF (ISXF)Isa£72,0845
Henderson Diversified Income (HDIV)Isa£67,2515
M&G Optimal Income (GB00B1H05718)Isa£65,1385
Baillie Gifford Corporate Bond (GB0005947857)Isa£52,7534
M&G Global Floating Rate High Yield (GB00BMP3SC51)Isa£29,8132
Cash£21,5001
TOTAL£1,423,751100

 

Chris Dillow, the Investors Chronicle's economist says:

You've got the big things right. This portfolio is more than adequate to meet your needs, and you are comfortable with it - which I take to mean that its riskiness matches your own personal attitude to risk. My quibbles are therefore secondary ones.

You say that your ages might justify higher bond exposure and less equity exposure. I'm not at all sure this is right. The belief that older people should own fewer stocks than young ones is, in many cases, mistaken. Although shares expose you to a high chance of moderate short-term losses - which means they are bad for people with short-term horizons - they also offer the small chance of really horrible long-run losses: Japan's Nikkei 225 is 56 per cent lower than it was 25 years ago, for example. For many types of risk aversion, these risks cancel out implying that equity or bond exposure shouldn't change with age.

The main thing is that you're comfortable with the equity-bond mix. I wouldn't worry about obeying questionable rules of thumb about how your portfolio should vary with age.

I would, however, question your holdings of bond funds. These do have their uses. They offer a useful hedge for someone thinking of buying an annuity, because the falls in bond yields that reduce annuity rates also give good returns to bond funds. And they offer protection against many short-term falls in share prices, because heightened risk aversion or fears about global growth often cause bond prices to rise.

But do these arguments apply to you? If not, consider direct holdings of bonds instead. These will save you from the management fees charged by bond funds and - if held to maturity - mean you can lock in a certain return. Granted, it's a low return. But a low return is better than a big loss - which could happen to bond funds if the long-term decline in yields goes into reverse.

Another issue here is your claim that you're a bear of sterling. My personal view is that any view on where exchange rates are heading is dangerous: just ask all those who lost by borrowing Swiss francs. The least bad view on exchange rates in the nearish term - by which I mean a few years - is that they'll follow a random walk. In the longer-term, it's that they will move in line with interest or inflation differentials - but these are small now. For this reason, I personally would not bet against sterling (or on it!)

Does this mean your overseas exposure is risky? It does, in the sense that if sterling rises, your portfolio will buy you fewer sterling-denominated goods and services.

However, as your portfolio is well above what you need for living expenses, this might not be a problem. What's more, there are two justifications for having overseas funds. One is that, insofar as you are leaving the money to charity, doing so is a rough match for the charities' spending. If these are overseas charities, they will be buying foreign goods and services. Overseas funds are a better match for such charities' future liabilities than are sterling-denominated funds. (If your charities are UK-based ones, the opposite applies; it is sterling assets that are the better match for their spending.)

Secondly, if you have no opinion on future developments at all (which is a perfectly reasonable position) you should hold lots of overseas assets. This is simply because having no opinion means your portfolio should match that of the average investor and the average investor, being a non-UK resident, has a globalized portfolio in which UK assets have a low weight. In this sense, passive investing means overseas investing.

On balance, then, I don't think you're doing much wrong.

 

Paul Taylor, a chartered financial planner with McCarthy Taylor says:

You are comfortable with your portfolio, planning to retain your capital for charitable causes after you and your wife no longer need it. You mention long term care as being the only possible requirement that might draw on your assets. Certainly a portfolio of this size and with the property too, should enable you to provide for such a need.

At first glance you appear well diversified but on closer examination we see that two funds hold 17 per cent of the portfolio. We would recommend reducing holdings in Fundsmith Equity (GB00B4LPDJ14) and Worldwide Healthcare Trust (WWH) to address this and to re-balance the portfolio. This would be subject to considering any capital gains tax (CGT) issues on funds held outside of individual savings accounts (Isas).

The overall asset allocation is about right with 57 per cent in equities and 41 per cent in property, infrastructure, bonds and fixed interest. Increasing fixed interest would be a conventional view, but interest rates are not likely to rise in the UK for some time yet and in our view fixed interest is still 'over priced' from quantitative easing (QE). This will not last indefinitely and at some point, in the medium term, interest rates may rise and bonds and gilts will become cheaper to acquire.

We note that you are withdrawing £70,000 per year from non-Isa capital to supplement your income and utilising CGT allowances. Equity exposure is heavily weighted to global funds and we would suggest increasing UK Equity using a tracker fund and a stock picker, focused on UK Equity income. This would give you low cost access to global companies in the FTSE and would increase the income yield, which tends to be lower on overseas funds. Having a large exposure to non-UK assets increases currency risk, which in the current environment is unwise.

We remain confident about the upside for the UK over the long term, although we will see short-term volatility, particularly around the election. We would suggest:

Vanguard FTSE UK Equity Index (GB00B59G4H82)

Over periods of 1, 3 and 5 years it has tracked the FTSE All-Share highly efficiently and consistently. It holds 542 out of 646 of its benchmark holdings and it is a representative sample tracker (rather than fully replicating). It is invested 100 per cent in the UK and carries a low annual management charge of 0.15 per cent making it very cost effective.

For a 'stock picking' option we would suggest:

Royal London UK Equity Income (GB00B8Y4ZB91)

This fund is focused on stocks with a strong free cash flow and superior dividend yield and it has delivered good performance over 1, 3 and 5 years. Martin Cholwill has managed the fund since 2005, and typically avoids bond holdings avoiding drag on capital growth. The fund's performance during Cholwill's tenure has been strong relative to UK Equity Income peers and benchmark. Moreover, the outsized returns have been gained steadily without any significant periods of under or outperformance, thus far.

This fund is a core holding for income given its focus on sustainable and growing income. Its yield is 3.83 per cent.

For long-term growth we still think China should feature but no more than 10 per cent and for this we would suggest:

Fidelity China Consumer (GB00B82ZSC67)

This fund has outperformed its benchmark over multiple periods and we belive the slightly higher than average charges are justified. Fund manager Raymond Ma has specialist knowledge of the Chinese market and has a focused investment remit with a sector bias towards consumer staples and consumer discretionary. This fund is looking to exploit growing levels of consumption within China. The manager looks to strike a balance between growth and value companies within the portfolio with around 70-80 per cent in growing companies and 20-30 per cent in companies with attractive valuations, leading to an overall bias to growth.

• None of this should be regarded as advice. It is general information based on a snapshot of the reader’s circumstances.