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Think of your portfolio as a football team

Our reader has far too many holdings so should think of his portfolio as a football team, avoiding needless duplication and an excessively high wage bill
October 27, 2016, Martin Bamford and Adrian Lowcock

Francis is 60 and has been investing for over 10 years. He works full time in a well paid job and has a final salary pension which will provide around £23,000 a year once he is 65. In addition to his investment portfolio which is held in a self-invested personal pension (Sipp) and Individual Savings Account (Isa), he has about £300,000 in Isas and £200,000 in various savings accounts.

Reader Portfolio
Francis 60
Description

Sipp and Isa

Objectives

5% a year from growth and income

"I plan to retire from my current job within the next two years," says Francis. "I want my investments to make a reasonable return of around 5 per cent a year from growth and income, with medium to low risk.

"I reinvest dividends and interest automatically, but will start taking the income when I need it.

"I tend to buy and hold funds, based on reports, investment magazines and other information that comes to my attention. I rarely sell - which could be a mistake!

"I have invested in a few shares on a similar basis, with some successes and some failures.

"My last three trades were buying units worth £1,200 in Baillie Gifford Japanese Smaller Companies Fund (GB0006014921) and £1,000 in Fundsmith Equity (GB00B41YBW71), and shares worth £1,200 in Bovis Homes (BVS).

"These went into my Isa into which I put about £1,000 a month."

 

Francis' portfolio

HoldingValue (£)% of portfolio
Aberdeen Property Share (GB00B0XWNN66)3,745.150.47
Artemis Global Growth (GB0006795743)22670.592.85
Artemis Strategic Assets (GB00B3VDD431)24,690.733.1
AstraZeneca (AZN)2,717.280.34
AXA Framlington American Growth (GB0003509212) 4,194.040.53
AXA Framlington Biotech (GB00B784NS11)9,097.571.14
AXA Framlington Managed Balanced (GB0003509659)17,336.842.18
Barclays (BARC)10,612.071.33
Bayerische Motoren Werke (BMWX:GER)4,259.430.54
BlackRock UK Fund (GB0005773774)12,687.871.6
BT (BT.A)2,514.940.32
CF Seneca Diversified Growth ( GB00B7FPW579)7,888.770.99
CF Woodford Equity Income (GB00BLRZQC88)42,687.085.37
Daimler (DAIX.N:GER)4,835.120.61
Fidelity China Special Situations (FCSS)9,768.481.23
First State Greater China Growth (GB0033874321) 9,477.321.19
Henderson Global Technology (GB0007698847)13,630.681.71
Invesco Perpetual Monthly Income Plus (GB00BJ04JZ25) 12,322.541.55
Invesco Perpetual Tactical Bond (GB00BJ04K711)12,285.331.54
iShares Core MSCI World UCITS ETF (SWDA)12,232.501.54
Jupiter Global Managed (GB0002440245)17,278.342.17
Legal & General UK Property Trust (GB00BK35F408) 20,430.622.57
Lindsell Train Global Equity (IE00BJSPMJ28)21,992.872.77
Man GLG Japan CoreAlpha (GB00B0119B50) 13,222.321.66
Marlborough Nano-Cap Growth (GB00BF2ZV048)5,635.960.71
Morgan Stanley Sterling Corporate Bond (GB00BHZ7N839)10,742.061.35
Newton Asian Income (GB00B8KPW262)4,466.920.56
Newton Real Return (GB00B8GG4B61)25,571.883.22
Old Mutual UK Alpha (GB00B946BX62)12,029.341.51
Old Mutual UK Smaller Companies (GB00B1XG9599)11,795.961.48
Royal Bank of Scotland (RBS)3,031.200.38
Royal Dutch Shell (RDSA)2,822.000.35
Schroder Tokyo (GB00BGP6BR86)20,156.642.53
Standard Life Dynamic Distribution (GB00B7CMQ047) 16,255.172.04
Stewart Investors Asia Pacific Leaders (GB0033874768) 35124.864.42
Stewart Investors Global Emerging Market Leaders (GB0033874545) 23830.423
Tesco (TSCO)3,835.070.48
Threadneedle European Select (GB00B8BC5H23)11,966.871.5
Threadneedle UK Equity Income (GB00B888FR33)11,035.141.39
Woodford Patient Capital Trust (WPCT)9,203.791.16
3i Infrastructure (3IN)5,632.270.71
Aberdeen Emerging Markets Equity (GB0033227561)3,189.530.4
Artemis UK Select (GB0002583267)11,454.731.44
Baillie Gifford High Yield Bond (GB0030816713)5,358.580.67
Baillie Gifford Japanese Smaller Companies (GB0006014921) 1,472.610.19
Bovis Homes Group (BVS)8,192.001.03
British Land (BLND)4,741.890.6
Fundsmith Equity (GB00B41YBW71)16,364.592.06
GlaxoSmithKline (GSK)13,357.911.68
Henderson European Growth (GB0030617699)14,340.041.8
Henderson European Selected Opportunities (GB0032473653)7,699.490.97
Henderson Smaller Companies Investment Trust (HSL)5,251.450.66
Henderson UK Alpha (GB0030956832)7,155.230.9
HL Multi-Manager Balanced Managed Trust (GB0005890487)7,351.170.92
HL Multi-Manager Special Situations Trust (GB0030281066)5,310.400.67
Invesco Perpetual European Smaller Companies (GB00BJ04GP12)3,106.410.39
Jupiter Corporate Bond (GB00B743QK57)5,568.400.7
Jupiter European (GB00B4NVSH01)38,701.824.87
Jupiter Income Class (GB00B6QR2553)28,450.463.58
Jupiter Strategic Bond (GB00B4T6SD53)5,483.380.69
Jupiter UK Growth (GB00B40C5979)28,495.123.58
Kames High Yield Bond (GB0031425233)3,301.680.42
Marlborough Multi Cap Income (GB00B907VX32)3,475.290.44
Schroder Recovery (GB00BDD2F190)4,244.370.53
Schroder UK Dynamic Absolute Return (GB00B3N53472)11,782.561.48
Scottish Mortgage Investment Trust (SMT)5,875.650.74
Stewart Investors Asia Pacific (GB0030184088)6,477.430.81
Templeton Global Emerging Markets (GB0034009190)6,065.110.76
Unilever (ULVR)7,240.810.91
Total795,222.14

 

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

Which would you prefer: a global tracker fund which charges a fee of 0.2 per cent a year, or one that charges a lot more? The answer should be obvious, but perhaps it isn't, because you have chosen the latter. You have something like a tracker fund, except that you're paying the higher fees of many actively-managed funds.

I say this because of the brute maths of diversification.

Imagine you have only one asset. Its price changes will comprise two parts: an idiosyncratic element, such as the extent to which the fund does well because of the manager's stock picks; and a systematic element, caused by the tendency of the asset to rise and fall as the general market rises and falls.

As you add other assets to this, you diversify away the idiosyncratic element: it's possible that one fund manager will beat the market, but unlikely that 50 you've chosen will do so at the same time. But the systemic element remains. And because the idiosyncratic element is getting smaller, the systemic element represents a bigger portion of your portfolio.

Therefore, when you hold many assets you hold something like a global tracker because you're taking systemic risk, but diluting idiosyncratic risk.

This is especially true when you hold funds, because funds themselves have a small idiosyncratic component, or at least, smaller than most individual shares. Because it holds dozens of stocks a fund will move much as the market does. So by holding lots of funds you dilute the already-small idiosyncratic element and end up with a sort of tracker.

There's nothing wrong with trackers, and plenty right - unless you're paying more than necessary for them.

I fear you've fallen into this trap because of a common error: the belief you should buy good funds.

 

Martin Bamford, managing director of Informed Choice, says:

You have done well to build up a substantial Isa and Sipp portfolio, in addition to cash savings, ready to provide wealth in retirement. We often find that the clients who are most financially secure in retirement have a multitude of income sources, rather than relying on one pension pot. Your final salary pension and any state pension will provide a secure foundation for your retirement income, which you will be able to supplement by withdrawing money from the other pots.

I would question your investment goals combined with a medium-risk appetite. In the current economic environment it's important to be realistic about the potential for investment returns. There is often talk about a '4 per cent rule' for sustainable withdrawals in retirement, but I would urge you and others in a similar position to reduce this to 2.5 per cent. Once investment charges and price inflation have been factored in, a healthy person retiring at age 65 should be able to withdraw 2.5 per cent a year from the value of their various investments without too much risk of this running out before they die.

 

Adrian Lowcock, investment director at Architas, says:

You are at a pivotal point in your life. With retirement approaching rapidly you need to think about what it means for you. The first and most important consideration is switching from the accumulation phase, when you are still able to pay into your Isa and Sipp, to when you will be drawing an income from those savings.

You should then consider your cash balance. I would usually suggest having up to three years' annual expected retirement income held in cash, plus money for any planned purchases. Having a decent cash buffer means you aren't likely to need to draw cash out of your investments at short notice and can therefore tolerate the volatility that comes with investing. However, having too much cash in the current climate means your money isn't working for you as effectively as it could.

You also need to think about an investment strategy. You admit that the portfolio has just been left to its own devices, but this means it isn't working as effectively as it could be and isn't designed with retirement in mind. With less than two years to your retirement you need to decide how much income you will need and how much risk you are willing to take with your investments. It would be wise to start addressing this now and not wait until retirement day, when markets might not be favourable.

 

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

Think of your portfolio as a football team. You wouldn't select the best 11 players because you might end up with six attacking midfielders, four strikers and no defenders. Similarly, if you simply buy all the 'best' funds, you'll end up with needless duplication and an excessively high wage bill.

Instead, go through your portfolio and ask of each component: what is this giving me that I haven't already got, or could get cheaper?

For example, you can get equity and bond exposure that fits your risk preferences by holding cheap equity and bond exchange traded funds (ETFs). So why bother with fund managers who charge higher fees for asset allocation?

And while there's a strong case for defensive exposure, do you need to pay several active managers for this when you've got it through your holdings of stocks such as Unilever (ULVR), BT (BT.A) and GlaxoSmithKline (GSK)? Otherwise get it via good actively-managed funds such as Finsbury Growth & Income Trust (FGT) or City of London Investment Trust (CTY).

And if you're investing overseas, which is a good idea, do you really need to incur higher fees to do it when an ETF or index tracking funds would be cheaper? Tracker funds are, in effect, cheap funds of funds. Why build your own expensive fund of funds instead?

In a few cases you might want to back a particular fund manager's skill. But you're not doing this. In holding around 70 assets you're diluting away the contribution that a good manager can make.

My advice, therefore, is simplify this portfolio and get rid of unnecessary fees.

 

Martin Bamford says:

Your Sipp and Isa portfolios are unnecessarily complex, with a large number of holdings and no apparent overall strategy in place. You should start with a blank sheet of paper and design a suitable long-term asset allocation strategy as a starting point for constructing your portfolio. Your approach to date seems to be haphazard, buying funds and stocks based on flavour of the month recommendations, rather than suiting a specific goal. You could achieve your investment objectives with a simple portfolio of 10 to 12 funds, which could be replicated in your pension and Isa.

There is a great opportunity to reduce the overall cost of investing by using index tracker funds, rather than relying entirely on actively-managed funds, which tend to be more expensive. In the current low-yield environment, you should be actively looking for opportunities to cut costs. If you can shave some basis points off fund management and the cost of the platform you use, you will be better off in later retirement.

Buying and holding investments is a good way to avoid kneejerk reactions to market movements or fund manager changes. But you should not fear selling funds if they no longer meet your aims. You do not incur tax when selling funds within your Isa or Sipp, and dealing costs should be very low.

Despite holding a lot of different funds, your portfolios are not particularly well diversified across the different investment types. With relatively little asset class diversification, I would question whether you are investing in line with your medium attitude to risk: maybe you are taking much greater levels of risk than you realise.

 

Adrian Lowcock says:

You have far too many investments. With around 70 holdings across your Isa and Sipp it is hard to know what is performing and what is holding you back. I would aim to bring this down to 20 funds with no less than 5 per cent in any one fund.

I would remove the individual shares, and streamline the funds by consolidating the specialist ones focused on areas such as technology, biotechnology and China, into broader sector funds.

And there are a few multi-manager funds which do not aid diversification in your case, for example the Hargreaves Lansdown Multi-Manager funds. I'd consider switching out of these.

I have put together an example of a funds portfolio for producing a decent income and providing some growth, as follows:

Holding% of portfolioYield (%)
CF Woodford UK Equity Income (GB00BLRZQC88)103.4
Newton Real Return (GB00B8GG4B61)102.23
Legal & General UK Property Trust (GB00BK35F408) 103.1
JPMorgan US Equity Income (GB00B3FJQ482)101.8
Invesco Perpetual Tactical Bond (GB00BJ04K711)102.68
Invesco Perpetual Monthly Income Plus (GB00BJ04JZ25) 54.75
Threadneedle European Select (GB00B8BC5H23)100.24
Morgan Stanley Sterling Corporate Bond (GB00BHZ7N839)103.2
Man GLG Japan CoreAlpha (GB00B0119B50) 60
PFS Chelverton UK Equity Income (GB00B1Y9J570)63.44
JP Morgan Emerging Markets Income (GB00B5M5KY18)63.99
Schroder Asian Income (GB00BDD29732)73.56