Join our community of smart investors

Age 50 and going for growth in my Isa

This investor wants to boost his individual savings account as much as possible over the next 10 years. He needs to trim his holdings and develop a better strategy.

David is 50 and has been investing for 30 years. He says: "My portfolio is very 'historic' in the sense that some holdings have been in it for 25 years. I was pretty good at finding shares but not good at selling."

His portfolio, which has 31 holdings, is mostly in an individual savings account (Isas) and he hopes to move it all into this tax efficient wrapper by age 60.

"I want to achieve an improved capital level in my portfolio over the next five to 10 years," he says. "I can take on relatively high risk for the first five years. In years six to 10 I would like to go lower risk and earn more income. At age 60, I want to withdraw income and capital to supplement my pension.

"I have recently taken redundancy and had a couple of months off. During this time I started to change my portfolio, having undertaken far more investigation into the world of stocks and shares.

"Previously, I was 95 per cent invested in the UK and no real cash - I was just occasionally topping up shares and reinvesting dividends. This has been changed but still needs some more adjustment.

"I want to make my portfolio a little less complicated and better balanced, by using more funds, exchange traded funds or investment trusts. I will sell some of the direct shares in individual companies in order to reduce the number to manage. But I want to keep £10,000 to £15,000 of shares that I would like to proactively manage myself for 'fun'.

"My financial shares are possibly long-term holds although I will sell elements if I need end of tax year profits or losses for capital gains tax (CGT) purposes."

David is confident that he and his wife have sufficient pensions to retire on in 10 years' time. They have no mortgage or dependants and have set aside £25,000 in savings for financial emergencies.

Reader Portfolio
David 50
Description

Individual savings account

Objectives

Capital growth

DAVID'S ISA PORTFOLIO

NameTIDM/ISINIsaValue%
Avation AVAPno£9271
Baillie Gifford Japan TrustBGFDno£1,9311.5
BarclaysBARChalf/half£5,9425
BP PLCBP.half/half£6,0585
BT GroupBT.Ano£5,1794
Caretech HoldingsCTHno£1,0481
CarnivalCCLno£3,2483
Dixons CarphoneDC.yes£1,0181
ExperianEXPNyes£1,2701
Getech GroupGTCno£1,1211
GraingerGRIno£9501
Henderson Multi-Manager Managed Fund A AccGB0031412744yes£12,57511
Henderson Smaller Companies Investment TrustHSLyes£1,8041.5
HSBC UK Growth & Income C AccGB00B715G377yes£13,09911
IMImobileIMOno£7721
IP GroupIPOyes£9171
JP Morgan Emerging Markets A AccGB0030881550yes£3,2313
JP Morgan Natural Resources A AccGB0031835118yes£1,6441
Lloyds Banking GroupLLOYhalf/half£3,5173
Melrose IndustriesMROyes£8231
NAHL Group NAHno£1,1151
OneSavings BankOSByes£9981
Pets at Home GroupPETSyes£1,0371
Poundland GroupPLNDyes£9461
Royal Bank of Scotland Group RBShalf/half£8,6317
Threadneedle European Select Fund ZNAGB00B8BC5H23yes£1,9281.5
Whitbread WTByes£7,7016
Witan Investment TrustWTANyes£1,5031
Woodford Patient Capital Trust WPCTno£1,8931.5
Fidelity Global Special SituationsGB00B196XG23yes£5,4715
Artemis Global Growth AccGB0006795743yes£5,8715
Cash  yes£12,83911
Total  £117,007100

Source: Investors Chronicle

 

OTHER HOLDINGS

Cash Isa: £40,000

Emergency cash fund: £25,000

Pension income (gross) between David and his wife from age 60: £40,000

Wife's pension pot of £50,000

Wife's share and fund portfolio: £20,000

Mortgage free house: £500,000

 

THE BIG PICTURE

Chris Dillow, the Investors Chronicle's economist says:

This portfolio looks like that of a long-term investor who finds it easier to buy than sell.

Over time, such an investor will end up with lots of different shares and funds with the result that you over-diversify: you end up with a portfolio that tracks the market - in your case a mix of the UK and global market - but at a higher cost.

It's in this context that funds can be dangerous, as they can add more to fees than to performance. Of course, you're right that good funds should beat mere trackers. But this poses two questions that investors don't pay sufficient attention to.

One is: is the environment favourable to stock-pickers or not? If smaller stocks beat the market, it is: this is because in such circumstances most shares will beat market indices which, being weighted by market capitalisation, are dominated by big stocks. In the last few years, this has been the case. But this might not remain true: small cap performance relative to big stocks waxes and wanes.

Secondly: do you have the ability to pick good funds? Everyone likes to think they have. But this belief might owe more to overconfidence and the illusion of skill than to actual ability.

Although the answers to both these questions is uncertain, what is certain is that actively managed funds charge higher fees, and these compound horribly over time. I'd therefore suggest that you start the process of simplifying this portfolio by asking what your actively managed funds contribute to the portfolio. If they offer access to specific corners of the market or to expertise you want to back (such as Neil Woodford's) they might have a role. Otherwise, they risk duplicating what you already have, at a cost.

This portfolio is perhaps a little riskier than many equity portfolios. This is because it has a weighting towards high-beta assets such as bank stocks and your emerging market and natural resources funds and few obvious defensives.

In this context, be careful about reducing your cash holdings. Yes, I know - to my considerable cost - that interest rates are awful. But this isn't a strong reason to expect high returns on equities. How much cash you hold relative to shares should depend not on the level of interest rates but on your appetite for risk. I'd work on the assumption that this portfolio has around a one-in-seven chance of losing 15 per cent or more over 12 months and around a one-in-four chance of some kind of loss in real terms even over five years.

Can you cope with such a prospect? You'll be better able to do so if you return to work, as your salary would, in effect, help hedge against stock market losses. It is only if this is the case that you should reduce your cash holdings.

 

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

Capital growth is your priority for the next 5-10 years - a decent time horizon. However, don't ignore the benefit of dividends compounding and being reinvested - especially within the Isa wrapper when there is no further tax. If total returns are predicted to be about 7-8 per cent - dividends could make up half of this.

A £10,000-£15,000 "play pot" of shares leads to about 10-15 shares. Even though online dealing rates are cheap these days, costs still eat into your returns. You have 20 companies already so you definitely need to reduce.

 

TAX ISSUES

Mr Yearsley says:

You mention tax as the reason you can't or won't change some of the investments in your portfolio. I always think this is a mistake and that tax shouldn't lead your investment decisions. With annual capital gains tax allowances of £11,100 for you and your wife and an annual Isa allowance of £15,240 this tax year, again for both you and your wife, tax shouldn't be a particular issue. Don't forget spouses can freely transfer assets without tax implications therefore if your wife hasn't used her CGT allowance for example and you wanted to dispose of something, simply transfer to her then sell.

Mr Dillow says:

As for simplifying your equity holdings, I'd urge you not to let the tax tail wag the dog. There's no point selling a good stock merely to save a CGT liability. A better way of minimizing tax is to shift as much as you can into an Isa. A stronger case for selling losing stocks is that there is often negative momentum in shares; ones that have fallen in the last few months have a disproportionate tendency to continue doing so.

 

STRATEGY

Sheridan Admans, investment research manager at The Share Centre, says:

Asset allocation is going to be key to ensure your portfolio is robust and help reduce complications over time. It will also help you to meet your key objective of moving from a portfolio that has a growth bias to one that is income-orientated in the later years.

Your portfolio is dominated by equities and your selection of funds and individual companies mean you have solid exposure to this asset class. However, this dominant exposure means that you are very reliant on the health of UK and global equity markets, which we know from history, and the general cyclicality of markets, is not reliable.

By diversifying your portfolio across asset types, you should be less exposed to dramatic movements in the market than you would be by investing in only one asset class.

It should also help provide a clear plan for re-balancing and help you to stay focused on achieving your long-term goals. For example, if you decided at the outset to invest 10 per cent in property, 10 per cent in commodities, 20 per cent in fixed-interest securities and 60 per cent in equities, at the end of each year you should rebalance back to these percentages by redistributing those assets that have done well into the asset class that now represent less of the portfolio than desired. Over time this should reduce the downside cycle risks a single asset portfolio faces.

Finally, as in the first five years you are seeking growth from your investment, with property, fixed income securities and some equities paying income, I would suggest you reinvest all income as this will support your growth strategy in the early years. In later years this can be changed so the income is paid out.

Mr Yearsley says:

Having a core of funds is a good idea with individual shares round the edge. However, you still need to think about your funds carefully. Why have you got multi-manager funds and individual country funds? Either have a core of multi manager supplemented by spicier individual funds such as natural resources or ditch the multi manager and completely asset allocate yourself. There is no right or wrong answer. I just think you need to tweak your strategy and thinking a bit.

Overall - look at reducing the financial weighting in the indivual shares and culling a few holdings. You also need to think about your fund portfolio strategy a bit more - it appears to be slightly scattergun at the moment. Think about core and satellite holdings and don't forget it is easy to double up exposure without realising by having multi manager, country and sector funds.

 

FUND AND SHARE HOLDINGS

Mr Yearsley says:

I like the Henderson Multi Manager Fund (GB0031412744) - Bill McQuaker heads the team and is an excellent manager. This fund hasn't a huge amount in the UK and is a good core holding.

I would sell Fidelity Global Special Situations (GB00B196XG23) and HSBC UK Growth and Income (GB00B715G377). All the other funds and investment trusts are fine - Baillie Gifford Japan Trust (BGFD) is an excellent holding and JP Morgan Emerging Markets (GB0030881550) is of a similar quality.

I am very positive on the long-term outlook for Asia on a five-10 year view. I would look at Asian smaller companies via Aberdeen Asian Smaller Companies Investment Trust (AAS) - also available as a fund. China has been popular recently - however you need to distinguish between the 'A' and 'H' share markets. H shares in Hong Kong have largely been left behind and still offer decent value, whereas the A share market has been on fire.

Turning to your individual shares, there does seem a wide mix. Financials feature strongly - Lloyds Banking Group (LLOY) has bounced nicely post the election and has paid a dividend recently for the first time in about seven years. It is interesting that you hold one of the challenger banks. The Royal Bank of Scotland (RBS) holding is definitely a recovery stock. Do you need so many banks in the portfolio? They are high risk as they are still a political plaything.

If you want multi manager as a core, think about adding another one from another manager - maybe Jupiter Merlin Growth (GB00B6QGLF53).

Mr Admans says:

I would suggest that over time you look to include fixed-income assets such as bonds via the GAM Star Credit Opportunities Fund (IE00B56BC491).

Property is another asset class to include in your portfolio, through the Legal & General UK Property fund (GB00BLM78D49) or the Picton Property Income Trust (PCTN).

You have exposure to commodities through JP Morgan Natural Resources (GB0031835118). I recommend Investec Enhanced Natural Resources (GB00B2QVX896) to complement this. The Investec fund actively employs the use of derivatives which can help limit the downside effects of unfavourable market conditions.