Philip is a 58-year-old scientist and worries that his investments are too aggressively positioned, given his age and objectives. He wants to retire at age 65 with income of £25,000 a year (including a full state pension). He has a self-invested personal pension (Sipp) worth £504,000 and an individual savings account (Isa) worth £81,000.
He says: "I have made no contributions to my Sipp since mid-2004, when it was valued at £156,000 so I have benefited from the eighth wonder of the world (compound interest). Most of my investment outperformance can be attributed to a single defensive trade: I converted my entire Sipp to cash in November 2007 and reinvested in January 2009."
His wife is aged 48 and has Isa (£38,000) and Sipp (£7,000) investments that are surplus to her income requirements as she will receive an index-linked pension of £25,000 a year from age 60. She is also eligible for a full state pension.
Their goal is to provide both children with a deposit to buy their first property (£50,000-£100,000 each) and to leave as much as possible of Philip's pension to the children.
Philip says: "If I live to age 90 (my relatives are long lived) my investment horizon is 32 years, so I don't see a good reason to adopt a conservative investment stance. Do you think my investments are too aggressively positioned given my age and objectives?
"I am a strong believer in active management and largely ignore investment costs. I think this makes me unusual given the current trend towards passive fund management and the chorus of advice from financial journalists to focus more on investment costs than investment performance."
Philip wants to know if he has too many funds or has any missing asset classes. He is also considering removing the open-ended funds from his portfolio in favour of investment trusts.
Retirement income & legacy for children
Sipp & Isa
PHILIP AND WIFE'S ISA AND SIPP HOLDINGS
|Philip's Sipp (£504,578)|
|Artemis Global Growth I Acc GBP||21,644||3|
|Artemis Global Income I Acc GBP||18,730||3|
|AXA Framlington Biotech R Acc GBP||13,338||2|
|Close FTSE Techmark A Acc GBP||10,293||2|
|Fidelity UK Smaller Companies A Acc GBP||38,886||6|
|Finsbury Growth & Income Trust (FGT)||36,786||6|
|HSBC American Index C Acc GBP||35,849||6|
|iShares Markit iBoxx GBP Corp Bond ex-Fin||45,911||7|
|JO Hambro UK Equity Income B Acc GBP||33,039||5|
|JPMorgan European Investment Trust||10,728||2|
|JPMorgan US Smaller Companies IT||9,936||2|
|Jupiter Euro Opportunities Trust||15,940||3|
|Lowland Investment Company||15,244||2|
|Pacific Assets Trust||27,019||4|
|Pantheon International Participations||7,558||1|
|Perpetual Income & Growth IT||20,412||3|
|Picton Property Income||22,101||4|
|Royal London UK Mid-Cap Growth A Acc GBP||20,916||3|
|Schroder Asian Income Z Acc GBP||25,091||4|
|Scottish Mortgage Trust (SMT)||23,029||4|
|TR Property Investment Trust (TRY)||22,059||3|
|Worldwide Healthcare Trust (WWH)||28,975||5|
|Philip's wife's Sipp (£7,942)|
|Artemis Global Growth I Acc GBP||3,606||1|
|Fidelity UK Smaller Companies A Acc GBP||2,063||0|
|TR Property Investment Trust||2,249||0|
|Philip's Isa (£81,089)|
|Artemis Global Income I Acc GBP||6,118||1|
|Artemis Global Income R Acc GBP||2,167||0|
|International Biotechnology Trust||6,860||1|
|iShares Markit iBoxx GBP Corp Bond ex-Fin||6,968||1|
|JO Hambro UK Equity Income B Acc GBP||3,034||0|
|Jupiter Euro Opportunities Trust||10,618||2|
|Marlborough Special Situations P Acc GBP||5,971||1|
|Marlborough Special Situations A Acc GBP||13,039||2|
|Pantheon International Participations||12,047||2|
|Schroder Asian Income Z Acc GBP||5,618||1|
|TR Property Investment Trust (TRY)||8,226||1|
|Philip's wife's Isa (£38,793)|
|CF Woodford Equity Income Z Acc GBP||4,924||1|
|Fidelity UK Smaller Companies A Acc GBP||1,668||0|
|Invesco Perpetual Income & Growth Acc GBP||2,281||0|
|iShares Markit iBoxx GBP Corp Bond ex-Fin||3,608||1|
|Lazard Global Equity Income C Acc GBP||5,128||1|
|Pacific Assets Trust||4,883||1|
|Schroder Asian Income Z Acc GBP||5,078||1|
|Schroder European Smaller Cos A Acc GBP||6,131||1|
|TR Property Investment Trust||4,976||1|
THE BIG PICTURE
Chris Dillow, Investors Chronicle's economist, says:
I assume that real returns will average 5 per cent a year; this includes dividends. If so, your Sipp will rise to just over £700,000 and your Isa to over £110,000 by the time you retire. If you give your children £100,000 each this will leave you just over £600,000. You should be able to take £25,000 from this each year and still see the capital grow a little.
This happy scenario, however, makes a big assumption - that we'll get average luck. We might not. I'd budget for a one-in-five chance of your wealth not growing at all in real terms over the next seven years. If this happens, what would you do? You could still get an annual income of £25,000 while preserving capital but only by greatly cutting what you give to your children as a house deposit. Or you could postpone retirement. Or you could make additional contributions to your savings out of current income.
If you think these options are feasible, then your current asset allocation is reasonable. This is a personal matter, which depends upon your own attitude to risk and ability to adjust to losses. What is clear to me, though, is that you shouldn't be distracted by the notion that your portfolio should become more cautious as you get older; such advice, while popular, is in fact very dubious.
Colin Low, a chartered financial planner with Kingsfleet Wealth, says:
An investment timeframe is critical to asset allocation; certainly, with average UK life expectancy being in the mid 80s it is important that anyone approaching retirement should not think too defensively in terms of their portfolio risk positioning and taking a cautious approach would be questionable. However, when you start to utilise pension drawdown, then it would be wise to retain a certain level of more cautious assets from which the income can be taken so that you do not eat into greater numbers of shares or units should the market fall dramatically.
Ben Wattam, investment manager at Mattioli Woods, says:
There are some clear benefits of mirroring the Isa and Sipp from a management perspective and as there are no tax implications it does make sense. However, if the aim is to draw income from the Sipp as suggested and leave the Isa to run, there is an argument to manage them separately and run the Isa with a higher risk budget.
The current size of the Sipp portfolio means that income of £25,000 could be drawn without putting too much pressure on the capital and level of future returns.
Therefore, as you approach retirement there is a strong argument to reduce the equity exposure as you don't need high levels of growth to sustain the income. We wouldn't suggest a lifestyle strategy of moving solely to cash and gilts but a reduction in the level of equity would be prudent.
Chris Dillow says:
Try doing a zero-based review. Imagine you held only a global equity tracker. What would you want to add?
There's a big reason to think 'nothing'. Corporate growth is hard to predict: Sussex University's Alex Coad has shown that it is largely random.
It's also unwise to invest in overseas markets in the hope of growth. Recent good long-term growth in emerging economies might not continue. And even if it does, shares might not benefit: researchers have found little cross-country correlation between medium-term growth and equity returns.
Nevertheless, there might be a case for doing something. Emerging market funds could be a way of diversifying the risk of secular stagnation in the west - the danger of poor long-term growth. Some African funds have been less well correlated with global markets and so might offer slightly better diversification possibilities than most overseas funds while perhaps offering decent returns. Higher-yielding shares tend to outperform in normal economic times as compensation for their extra cyclical risk. If you want to take on the risk of recession, there might therefore be a case for some income funds.
Mr Wattam says:
Your Sipp has roughly 80 per cent in equity, 9 per cent in bonds, 9 per cent in property and 1.5 per cent in private equity with the rest in cash. You understand risk well, have a good knowledge of investment markets and have a long-term investment horizon. Even so, you have clearly seen the benefit from reducing portfolio risk (as per your 2007 decision to move to cash) and we would advocate adding assets to reduce equity market risk (beta), such as absolute return, which can improve the overall portfolio's risk and return characteristics.
The holdings in private equity, property and bonds contribute to this but absolute return can provide a further genuine diversifier and should improve the portfolio's risk-adjusted return.
The absolute return sector is a mix of different vehicles offering various risk and return objectives, therefore it is important that investors understand the strategy that they are buying into. Absolute return strategies can provide diversification of beta and correlation risks and complement equity exposure.
We like your smaller companies exposure but we would add in Japan and emerging markets equities, and diversify your fixed interest holding.
Japan has been our largest equity holding (except for UK) over the past few years and we have been rewarded. Our overweight to the Japanese market is based on its reform agenda, which is a long-term project. We expect that investors will be rewarded over the long term with the fundamental change that is going on with corporate and investor behaviour in Japan. We have argued for using hedged share classes in the past but the yen no longer looks expensive compared with sterling.
Emerging markets no longer offer the opportunity they did a decade ago but there are pockets that we like, such as China. President Xi has a strong mandate to push through reforms and reduce corruption.
Having emerging markets equity exposure provides potential for high levels of long-term growth. We favour lower volatility/market risk (beta) strategies in emerging markets that have consistently outperformed beta neutral strategies.
Within fixed interest, while investment grade bonds have performed well and we continue to hold the asset class, we also use convertible bonds and high yield to complement the holdings and reduce interest rate risk.
Mr Low says:
I would support your holdings in global funds - the two Artemis Global Funds and the Scottish Mortgage Investment Trust have performed extremely well over the last year or two. Global funds like this are more suited for most investors than many layers of geographic funds as it is difficult to see how many investors are able to add value by purchasing at a country level.
Holding investment trusts has served you well but it is primarily not the investment trust structure that has delivered the returns to you but the performance of their underlying holdings and good stock selection. A number of extremely successful fund managers do not offer an investment trust. For example, Fundsmith Equity (GB00B4LPDJ14) could benefit your global portfolio strategy, while Jupiter UK Growth (GB00B54CH949) and Threadneedle UK Equity Alpha Income (GB00B12WJY78) look interesting for UK equity exposure.
Mr Wattam says:
With a £500,000 portfolio (Philip's Sipp), we would not deem 21 holdings as being too many. It is important to balance the benefits of diversification while having conviction in holdings and not having a long tail of smaller holdings that do not meaningfully contribute to performance. The majority of the holdings are around 5 per cent, which is about right as they are large enough to contribute if they perform well but you are not putting all of your eggs in one basket.
Ben Wattam's fund recommendations:
Bailie Gifford Japanese (GB0006012651)
PFS Somerset Emerging Markets Dividend Growth Fund (GB00B4Q07115)
Henderson China Opportunities (GB00B5T7PM36)
Invesco Perpetual Hong Kong & China (GB00B3RW8C79)
RWC Global Convertibles (LU1017300267)
Baillie Gifford High Yield Bond (GB00B03DJ643)
Kames High Yield Bond (GB00B4N9RG69)
Standard Life Global Absolute Return Strategies (GB00B28S0218)
Old Mutual Global Equity Absolute Return (IE00BLP5S809)