Tom is 59 and has a small index-linked pension that kicks in at the end of this year. He and his wife own their property outright, but neither of them have jobs that generate any meaningful income as they are now occupied with charity work or hobbies.
They have a portfolio worth £979,916 held in self-invested personal pensions (Sipps) and individual savings accounts (Isas).
Tom says: "We are happy to be retired and frugal, obtaining a minimum £30,000 and ideal £40,000 annual income from these investments if we can sustain that."
Sipp and Isa
£30,000 income per year
|Developed World (29%)|
|Vanguard FTSE All-World UCITS ETF||VWRL||10,957||1|
|Vanguard FTSE Developed World UCITS ETF||VEVE||48,265||5|
|Vanguard FTSE All-World High Dividend Yield UCITS ETF||VHYL||43,738||4|
|JPMorgan Overseas Investment Trust||JMO||16,738||1.5|
|iShares Core MSCI World UCITS ETF||SWDA||10,950||1|
|St James's Place Global Equity||GB00B46FK959||156,000||16|
|UK Focused (28%)|
|Vanguard FTSE 100 UCITS ETF||VUKE||34,773||3.5|
|Perpetual Income and Growth Investment Trust||PLI||8,057||1|
|CF Woodford Equity Income||GB00BLRZQC88||65,490||7|
|Standard Life UK Smaller Companies Trust||SLS||6,694||0.5|
|St James's Place UK Equity||GB00B1KHLS25||156,000||16|
|US Focused (1%)|
|Scottish Mortgage Trust||SMT||11,106||1|
|Infrastructure as Defensive (5%)|
|iShares Global Water UCITS ETF||IH2O||17,194||2|
|iShares Agribusiness UCITS ETF||SPAG||16,449||2|
|Ecofin Water & Power Opportunities||ECWO||7,836||1|
|Defensive'ish Wealth Preservation (10.5%)|
|Finsbury Growth & Income Trust||FGT||17,015||2|
|Lindsell Train Investment Trust||LTI||19,530||2|
|RIT Capital Partners||RCP||16,327||1.5|
|Personal Assets Trust||PNL||49,224||5|
|Strategic Bonds (7%)|
|Artemis Strategic Bond||GB00B09DML43||28,825||3|
|Jupiter Strategic Bond||GB00B4T6SD53||41,056||4|
|Cash at bank/cash ISAs as buffers (5%)||52,000||5|
|Biotech/Healthcare/Rapid Growth (4%)|
|Worldwide Healthcare Trust||WWH||10,238||1|
|Woodford Patient Capital Trust||WPCT||27,010||3|
|ETFS Physical Silver ETC||PHSP||9,238||1|
|db x-trackers Euro Stoxx 50 UCITS ETF (DR) 1C||XESC||20,441||2|
|iShares Euro Total Market Growth Large UCITS ETF||IDJG||6,781||0.5|
|European Assets Trust||EAT||8,165||1|
|Jupiter European Opportunities||JEO||8,278||1|
|SPDR S&P Euro Dividend Aristocrats UCITS ETF||EUDV||7,035||1|
|Rapid Growth Regions -Emerging (2%)|
|New India Investment Trust||NII||9,547||1|
|Utilco Emerging Markets||UEM||4,494||0|
|Fidelity China Special Situations||FCSS||9,461||1|
|Vanguard FTSE Japan UCITS ETF||VJPN||10,377||1|
|Pacific Ex Japan (1%)|
|Vanguard FTSE Developed Asia Pacific Ex Japan UCITS ETF||VAPX||8,501||1|
Source: Investors Chronicle
TOM ASKS: Should we move more into safer assets or with 5 per cent cash and 7 per cent bonds is the buffer ok?
Lee Robertson, a chartered wealth manager and CEO of Investment Quorum says:
Your portfolio has a good spread of core and satellite positions through a mixture of open ended investment companies (Oeics), passive funds and investment trusts. However, we suggest the portfolio becomes more reflective towards a growth and income strategy so that you and your wife can retire if so desired.
Looking at the question of cash and bonds, clearly, this current economic cycle has seen both yields and deposit rates fall to historical lows and therefore neither asset classes are desirable or attractive at the moment, and certainly not against equities. However, once normalisation occurs in the bond markets and interest rates rise then this should create a better investment opportunity. We are particularly worried that the former safe haven of sovereign bonds is anything but.
Paul Taylor, a chartered financial planner and CEO of McCarthy Taylor says:
Your portfolio is structured to go for growth. Investors should be clear about the objectives set for portfolios as the strategy needed to sustain growth is different to one seeking sustainable income. In our growth strategy we look to provide a total return from a mixture of equities and traditional income bearing assets, with diversification from property, infrastructure and commodities. The table below shows where your portfolio is placed compared against ours:
Growth strategy %
Tom's portfolio %
Source: McCarthy Taylor, using FE Analytics
The portfolio has a value of just under £980k and sustaining an income of over £30k per year (3 per cent) looks achievable. We suggest reducing risk, taking gains on equities, by 10 per cent, perhaps selling St James's Place holdings; adding property, increasing infrastructure and holding cash to buy bonds and gilts, as yields start to rise, perhaps when 10-year-gilt yields approach the new 'norm' of 3 per cent also matching your income need.
Mick Gilligan, head of fund research, Killik & Co says:
We estimate the portfolio provides an income of £15,400, assuming no income from the St James Place investments. The names of the St James's Place funds implies that they are held in life assurance policies rather than a Sipp or Isa.
There is significant scope to increase the level of income that the portfolio generates although an income of £50,000 is probably the highest we would suggest pushing the income without putting capital growth and the ability to maintain real value of the portfolio at risk. The £30k - £40k level indicated should allow for decent capital growth over the longer term. However, the shift from capital growth to a more balanced approach would involve a number of changes to the portfolio.
The portfolio is very heavily weighted towards equities with only 7 per cent in non-equity funds and 5 per cent in cash. As it stands the portfolio would bear the bulk of any stock market downturn, particularly given the high weightings in tracker funds. It may be prudent to consider other non-equity funds that could provide more meaningful diversification. Potential alternatives to equity and bond funds include absolute return and hedge funds that run equity market neutral and/or global macro trading strategies. Alternative investment funds (e.g. investing in areas such as peer to peer lending) may also be appropriate for a small amount of capital, if the objective is to generate income without too much correlation to equity or bond markets.
■ Lack of small cap exposure - possibly missing out on source of attractive long term returns
■ Biased towards growth rather than value – possibly more at risk from an equity de-rating triggered by a rate rise.
HOW TO IMPROVE THE PORTFOLIO
1. Enhancing the yield
Mr Robertson says:
iShares Core MSCI World ETF (SWDA)
iShares Agribusiness (SPAG)
Reinvest the proceeds in:
Old Mutual UK Equity Income Fund (GB00B1XG9045)
CF Lindsell Train UK Equity (GB00BJFLM156)
BlackRock Continental European Income Fund (GB00B3S9LG25)
Artemis Global Income Fund (GB00B5ZX1M70)
Invesco Perpetual Monthly Income Plus Fund (GB00BJ04JZ25)
Kames Property Income Fund (GB00BK6MJB36).
This initial restructuring of the portfolio should enhance your overall yield given that you need a running yield on your portfolio of 3.5 per cent to accommodate your income requirements.
The two St James's Place funds represent a substantial overall weighting of your portfolio so we would suggest that you diversify those holding to create further income. St James's Place offers specific high-yield income funds which may suit your requirements better than your current holdings that are more aligned to growth. They also offer a specific income model which would be worthy of investigation.
2. Use currency hedged funds
Mr Taylor says:
While holding index trackers as the core holdings we would also use managers to outperform, particularly in sectors where tracking alone is unfulfilling, such as Japan. Since currencies are notoriously unpredictable, we prefer to hedge out currency risk. The Vanguard FTSE Japan ETF (VJPN), launched on 22 May 2013 has returned 9 per cent to date, while the Schroder Tokyo Fund GBP Hedged (GB00B8BJDX53) 39 per cent, over the same period.
The iShares Core MSCI World (SWDA) produced 71 per cent since September 2010, again we would prefer the hedged version gaining 77 per cent over the same period.
3. Introduce infrastructure and property
Switch out of Ecofin Water & Power Opportunities (ECWO), which returned 40 per cent over the past five years into the First State Global Listed Infrastructure Fund (GB00B24HJL45), which provides broader exposure to the infrastructure sector including highways and railways, airports services, marine ports and services, oil and gas storage and transportation while gaining 81 per cent over the same period.
Property is still a good long term hold for income sustainability, use Legal & General UK Property (GB00BK35F408) to provide a combination of income, around 4 per cent and growth through investing in commercial property, it may occasionally invest in residential property and property development. Typically, the fund has 80 per cent in UK commercial properties, can be as low as 60 per cent. Henderson UK Property OEIC (GB00BP46GF57) invests primarily in commercial property, however, it may invest in cash and other property-related assets for liquidity purposes. Producing an attractive level of income, around 3.5 per cent is the primary focus of the fund.
4. Watch overlap
Mr Gilligan says:
This a low cost portfolio with good use of tracker funds. It also holds a number of funds that we hold in high regard such as RIT Capital Partners (RCP), the Woodford funds and Personal Assets Trust (PNL).
A possible shortcoming is the level of overlap as a result of the global funds. There are likely to be a lot of stocks held across more than one of the global funds and possibly in some of the UK and European funds.