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Improving my shares-only Sipp safety net

Our reader thinks he won't need to draw fully on his self-invested personal pension. But he can improve the shares-only portfolio significantly to leave more to his children
Improving my shares-only Sipp safety net

Simon is 68 and has been investing seriously for the last 15 years. He has a self-invested personal pension (Sipp) worth £463,520 from which he hasn't yet drawn any money.

He says: "I intend to take the 25 per cent tax free lump sum when I am 74 to part pay off a mortgage, the term of which then matures. Otherwise, while the Sipp is a safety net in case interest rates rise too much (on such borrowing) I want to leave the fund to my children.

"My methodology is, knowing I will get trading wrong, to go for what I hope will be good in the long term. Although I do indulge myself with the odd flutter - viz Snap-On (US:SNA), Xaar (XAR) and Toumaz (TMZ), I rarely trade and rarely change investments.

"All investments have a risk. But I am unlikely to take silly risks.

"I want to avoid two levels of charges and so avoid mutual funds. Perhaps this is vainglorious but with so many funds to chose from one might as well have a go oneself and invest direct anyway where one can have some idea what one is doing.

"The disappointments in this portfolio are IBM (IBM), Rolls Royce (RR.) and Standard Chartered (STAN). Most recently, I sold IMI (IMI) and purchased more Inmarsat (ISAT). Antofagasta (ANTO) is on my watchlist."


Cash                                                                         £12,8003
3M (US:MMM)                                                 £70,20015
Bank of Nova Scotia (CA:BNS)                        £28,5006
BNP (FR:BNP)                                                     £31,6007
Costain (COST)                                              £13,2003
GE (US:GE)                                                      £41,3009
Hewlett Packard (US:HPQ)                            £18,8004
IBM (IBM)                                                   £19,9004
Linde (GER:LIN)                                                    £33,5007
Reckitt Benckiser (RB)                                                               £22,1005
Rolls-Royce (RR.)                                             £20,3004
Siemens (GER:SIE)                                                                  £21,5005
Snap-On (US:SNA)                                       £21,3005
Standard Chartered  (STAN)                             £17,4004
Toumaz (TMZ)                                                   £6200
Unilever (ULVR)                                              £85,40018
Xaar (XAR)                                                         £5,1001
Total                                                                             £463,520100

Source: Investors Chronicle as at 25 September 2015.



Chris Dillow, the Investors Chronicle's economist, says:

I half-applaud your approach. I like your scepticism towards unit trusts: the fees of actively managed ones compound horribly over time, and genuinely good fund managers are rare and hard to find. I also like your aversion to trading. Some classic research by Brad Barber and Terrance Odean has found that investors pay "an extremely large performance penalty" for active trading, because they trade upon "information" that in fact has no power to predict returns.

Where I'm sceptical, however, is in your preference for shares that "will be good in the long-term". The problem here is that long-term success is incredibly hard to predict. A group of US economists has found "low predictability" in long-term earnings growth, and Sussex University's Alex Coad has found that corporate growth is largely random. This is in fact a good thing: in a healthy economy firms will be both victims and beneficiaries of what Joseph Schumpeter called creative destruction.

However, you are not alone in perhaps over-estimating your ability to spot good long-term stocks: overconfidence is perhaps the most ubiquitous of all cognitive biases. Investors' tendency to exaggerate their ability to spot good stocks can cause some systematic mispricings. The key to good stock-picking - should you want to try - is to exploit these.


Delyth Richards, head of funds research at Kleinwort Benson, says:

At 68, with a mortgage liability payment to make in six years, we would caution about taking such a high degree of stock-specific risk. Despite your concerns about charges, we would highly recommend adding broad market risk through a collective instrument. This will provide diversification across markets, sectors and currencies, and reduce company specific risk, which is high in a portfolio of only 16 instruments.

Concerns about the drag of fees on performance are valid, but our focus is always on the performance of any manager net of fees. Management fees pay for corporate analysis and due diligence and professional stock selection.



Chris Dillow says:

History tells us that there are four well-attested strategies that beat the market. One is value: stocks on higher yields or lower price-book ratios. A second is momentum: shares that have risen in recent months. A third are defensives: safer stocks do better than they should. And a fourth is quality, defined by objective factors such as profits and recent growth. These four strategies don't succeed all the time: nothing does. But backing them increases your chances of success. Think of stock-picking as being like fishing. Some waters - the aforementioned factors - are richer than others. Fishing in these won’t guarantee you success, but they'll improve your chances.

You should therefore ask of your stocks: do they fit into these four categories? (I don't mean all four: nice though this would be, few stocks satisfy all of them).

I'm not sure many do. Granted, BNP (FR:BNP) and Costain (COST) have some nice momentum, but Rolls-Royce (RR.), IBM (IBM) and the Bank of Nova Scotia (CA:BNS) don't. 3M (US:MMM) and GE (US:GE) satisfy several criteria of 'quality', but I'm not sure your others all do. And there isn't much defensive bias in this portfolio: Reckitt Benckiser (RB.) and Unilever (ULVR) fit this bill, but your banks, Hewlett-Packard (US:HPQ) and Rolls-Royce don't.

In fact, the latter's high betas mean that this portfolio might not be as well-diversified as you think, because all might well fall together if the market generally takes a tumble. You are taking on quite a bit of market risk.

Now, this doesn't mean you should entirely rejig this portfolio. We are approaching the time of year (the winter) when it usually pays to take market risk. What I am suggesting though is that as you tweak the portfolio you should pay more attention to whether stocks fit into the four factors. It's better to rely upon what has a proven record of success than merely upon one's own unfettered judgment.


Helal Miah, investment research analyst at The Share Centre, says:

Although we like Unilever (ULVR) for its defensive qualities and the growth prospects from its emerging markets exposure, at 18 per cent, I think you have too large an exposure here. Your exposure to 3M (US:MMM) is also on the large side. Consider limiting your exposure to a single company, 10 per cent would be sensible for a private portfolio.

While a number of your share holdings are large established blue-chip companies, there is too much of a focus towards industrial or engineering groups. You have 3M, GE (US:GE), Siemens (GER:SIE), Linde (GER:LIN), Rolls-Royce (RR.) and Costain (COST) representing about half of your portfolio. Even two of your big technology stocks, IBM (IBM) and Hewlett-Packard (US:HPQ) are more infrastructure related businesses than outright technology stocks in the modern sense.

You are therefore missing out on other sectors that are in very good health. Although the UK housebuilding sector has done exceptionally well, we believe there is still some upside to go here. Other areas worth considering which should represent a core part of most portfolios would be defensive sectors such as pharmaceuticals where dividend yields amongst the large cap is very attractive while the small and mid-caps company’s good growth rates are still attracting acquisition interest.

Without any funds in your list of holdings, it would seem as though your portfolio lacks exposure in emerging markets. Over the last few years, this may not have been a bad thing given the flight of capital back into the USD. However, the companies you hold are big blue chips, most of whom have some kind of exposure to this region. Other such as Unilever and Reckitt Benckiser have done very well out of the increasing numbers of middle class consumers in the region. Standard Chartered (STAN) may not have fared so well recently, but I believe in the longer run it is well positioned to bounce back with the emerging markets.

Risk in the commodities sector is very high, but your thought of considering buying Antofagasta (ANTO) in some ways should be welcomed as it will give the portfolio some much needed diversification. You could potentially pick up some stocks at good bargains. However, instead of Antofagasta I would prefer a company exposed to a broader range of commodities such as BHP Billiton (BLT) with a stronger balance sheet and an attractive dividend yield in excess of 7 per cent.

You also have a taste for banks in your portfolio; again, this is at the expense of other sectors. Within the financial sector, you could possibly consider one of the large UK based insurers.


Delyth Richards says:

Should you remain wedded to a single stock approach, we favour National Grid (NG.) based on its low volatility and positive quality-value factors. Next (NXT) is also expected to benefit as wage inflation seeps through to consumer spending, and the management’s controlled share back policy provides shareholders with some additional comfort.



Helal Miah says:

I understand your reasons for not wanting to invest in funds for cost; however, they certainly help in diversifying a portfolio, something that your portfolio could do with.

Delyth Richards says:

Given your sensitivity over fees, we suggest you consider making an allocation to Baillie Gifford's Scottish Mortgage Investment Trust (SMT). This long established trust (launched in 1909) seeks to outperform the FTSE All-World Index, and it aims to maximise total return over the longer term, with a concentrated portfolio. The trust seeks to limit fees, with a current management fee of 0.32, and total ongoing charges figure of 0.48 per cent. The trust holds 40 equities, each selected for their long-term growth potential. Unlike investing in a tracker, there is always risk that the trust may underperform in certain market conditions, but, compared with your portfolio, it offers significant diversification versus your holdings, and also provides some diversification versus a purely passive global investment strategy. Alongside this holding, an allocation to Vanguard FTSE All-World UCITS ETF (VWRL), with its low cost charge of 0.25 per cent, would also provide broad equity market exposure, offering global diversification and reduce the risk that a single stock blow up could have on your portfolio.

*None of the above should be regarded as advice. It is general information based on a snapshot of the reader's circumstances.