Cutting back on property to lock in the gains

"Since then the housebuilders more than trebled and LondonMetric (LMP) (the new name for London & Stamford) has achieved total returns of around 70 per cent," he says. "But I have recently sold substantially overweight shareholdings in housebuilders and reinvested elsewhere following considerable gains over the past five years. Matured fixed-term bonds have just released £140,000 for investment and a further £125,000 is going to become available this year, as well as money from the sale of commercial property shares. I want views on the composition of my current portfolio and suggestions as to what I could do with the £265,000 cash.

I have made use of my individual savings account (Isa) and self-invested personal pension (Sipp) allowances, and want to limit investment trusts to special opportunities and my existing emerging and frontier market exposure. I am totally avoiding funds and only invest in UK-quoted shares.

I have recently sold a few losers because I have found better opportunities and can offset the losses against the 28 per cent capital gains tax (CGT) liability I have incurred on my sales of housebuilder shares.

When I retire in three years I plan to continue to taking a relatively passive approach to equity investment, only using Investors Chronicle, property journals and a daily newspaper for research."

Giles' portfolio

Source: Investors Chronicle

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

Almost 30 per cent of your equities are in housebuilders or property, but this exposes you to the risk of a property downturn. This would be especially severe for you because it might hurt your job prospects as a property consultant and also cause banks to do badly - and you have another 20 per cent of your equities in these.

We can't say how great the risk of such a downturn is. But there are some possible triggers. The market is pricing in a long period of very low interest rates but if it revises this opinion to anticipate more rate rises, property could suffer.

Changes to taxes and welfare benefits could drive some buy-to-let investors out of the market. High house prices are already pricing many first-time buyers out of the market. And the UK's large current account deficit might be a sign that some people are becoming more financially stretched: such a deficit means, by definition, that domestic investment exceeds domestic saving, and indebtedness is growing.

Now, I'm not predicting an imminent crisis as history tells us the opposite - the first few months of the year are often a great time for building stocks. Nevertheless, there are a few clouds on the horizon. And the small chance of a nasty loss must influence portfolio formation: you cannot invest on the basis of central scenarios alone, but you should consider low-probability high-impact possibilities too.

Paul Taylor, chief executive officer and discretionary fund manager at McCarthy Taylor, says:

When we last looked at your portfolio it was overweight property and this has worked well for you. However, this remains a risky strategy and we note that you have taken profits on housebuilders. Although the property market is expected to continue rising this cannot be assumed to be a certainty. We have already seen government intervention, initially to help first-time buyers and more recently to dissuade second home owners. While we hold property in our portfolios it is unwise to assume it will always do well. For example, a number of property developers are in insolvency as banks take the opportunity to call in debt. Government will continue to intervene and we do not know what the consequences of that will be.

To manage such risks, diversification is needed. You have increased your exposure to equities to provide better diversification, and your total equity exposure is now 57 per cent, up from 45 per cent in December 2012. I am pleased that you hold Tritax Big Box REIT (BBOX) and Woodford Patient Capital Trust (WPCT) as both are on our favoured list.

IMPROVE YOUR INVESTMENT STRATEGY

Chris Dillow says:

Watch your property exposure closely. One useful guide here might be the 10-month (200 day) moving average. Selling when prices drop below this average has worked well in the past both for equities generally and bubble-prone sectors. Such a rule certainly won't get you out of the market at the top - I'm not sure anything other than luck would. But it would protect you from the risk that property stocks and housebuilders would eventually suffer in another protracted downturn.

This risk should perhaps also influence how you invest your new money. I'd prefer that new investments be lightly exposed to property and banking risk. This isn't easy, given that all stocks tend to fall together in bad times. One possibility is to consider some defensives, such as utilities or tobacco. Another is to consider more overseas exposure as the circumstances in which UK property does badly might well be ones in which sterling falls, which would boost the sterling value of foreign holdings.

But there's a lot I like about your approach. You have relatively little exposure to the more speculative growth stocks that tend to underperform on average over the long run, and you are avoiding funds with high fees. I also applaud your relatively passive approach. Nevertheless, there is a danger in your portfolio that probably doesn't warrant immediate action but will need to be watched over the next few years.

Paul Taylor says:

With retirement looming you need to be clear on the level of risk you are prepared to take. Holding just under 30 direct equities in the UK excluding the property and investment trusts is quite a risky strategy, with a heavy reliance on a few sectors. We advocate using trackers for wider exposure, and the FTSE 250 in particular.

iShares Core FTSE 250 (MIDD) aims to track the performance of the FTSE 250 Index as closely as possible. The fund invests in 250 UK stocks which rank below the FTSE 100 Index as measured by full market capitalisation, and costs 0.4 per cent a year. The FTSE 250 index rose about 9 per cent last year and this fund also has a good yield to supplement returns.

Your lack of desire to hold funds is understandable, both from a cost perspective and because many are closet trackers. However, using trackers to gain exposure Japanese and European markets would have given good returns last year since both these markets outperformed the UK market, and provided some diversification. The FTSE Eurofirst rose 6.16 per cent and the Nikkei 225 rose 7.35 per cent, compared with a fall of 4.09 per cent for the FTSE 100. These returns were also higher than average house price rises as reported by the land registry for England and Wales.

While we still favour primarily holding UK equities, having access to other markets reduces risk and increases opportunity. For example, you could add some modest exposure to Vanguard FTSE Developed Europe Ex UK Equity Index Fund (GB00B5B71H80) which is designed to replicate this index by investing in all or a representative sample of its shares in proportion to the weighting in the index. The fund has an ongoing charge of 0.12 per cent a year.

Likewise, BlackRock Japan Equity Tracker (GB00B6QQ9X96) aims to closely track the performance of the FTSE Japan Index. This is invested in shares of the companies in similar proportions to the benchmark index, and costs 0.17 per cent.

Holding cash gives a poor return but at some point bond yields will rise. Having cash to buy them would be prudent for long-term security, but in the short term some gold exposure might be worthwhile as sooner or later there will be another full-blown crisis. We use Deutsche Bank Physical Gold GBP Hedged ETF (XGLS) but as it is not an income-bearing investment we have limited exposure. Gold looks to have lost out in dollar terms but not in other currencies.

Graham Spooner, investment research analyst at The Share Centre, says:

You aim to retire in three years time, lead a lower-cost lifestyle and take a relatively passive approach to equity investing. In the intervening period you should consider a move to a lower-risk overall portfolio with fewer overweight positions. The obvious move would have been towards funds but you wish to focus on UK quoted shares which could be viewed as an unnecessary restriction.

Some names that could feature in the portfolio in future and lessen the risk would be: Unilever (ULVR), Reckitt Benckiser (RB.), Compass (CPG), Bunzl (BNZL), National Grid (NG.) and AstraZeneca (AZN). I would also suggest topping up BT (BT.A) and WPP (WPP), which could receive a boost in 2016 from the US election, Olympics and European Football championships.

You have some significant overweight positions such as Lloyds (LLOY), ITV (ITV) and Aviva (AV.), as well as property. We remain positive on ITV and Aviva, however, I would favour moving away from too much exposure to individual stocks or sectors.

The four smaller companies in your portfolio have been heading in the right direction in a difficult year. Careful stock picking, I believe, will be a theme for 2016 and although you have had success, smaller companies should probably feature less in future.

I find your exposure to bank shares to be somewhat contradictory in that you hold a number of the old established high street names, along with a selection of the newer challenger banks. Are you hedging your bets? With the exception of OneSavings (OSB) the performance, especially of the old guard, has been uninspiring and there remain concerns over regulatory issues. So I have a slight preference for the newer names.

The overweight position in Lloyds has not helped the portfolio over the last six months. The focus is now turning to the government sale in the spring and the lure of significant dividend growth, and I expect the market will put on its rose tinted glasses as the sale gets nearer, so if you want to reduce the position I would suggest a later date.

Three years ago you ignored advice to sell your holdings in housebuilding shares and this proved to be correct. So to take advantage of the expertise that you have gained as a property consultant, presumably over a number of years.