- These readers are concerned that too much of their investment portfolio is in Baillie Gifford funds which hold some of the same stocks as each other
- These could continue to perform well, but if the growth/momentum investment good performance reverses this portfolio could experience a substantial fall in value
- So it could be worth crystalising large gains and having a more balanced mix of investment styles
Sipps and Isas invested in funds, residential property, cash
Supplement pension income by selling rental properties, de-risk and grow investment portfolios to supplement pensions income in future, diversify away from Baillie Gifford funds, mitigate IHT, pay into grandchildren's junior Isas
David and his wife are ages 67 and 65, and retired. He gets a state pension worth £9,500 a year and his wife’s will start to pay out in July at an initial rate of £9,730 a year.
Their home is worth about £800,000 and mortgage-free. They also own rental properties worth £660,000, which over the last tax year gave them an income of £12,000.
“We are selling our property portfolio because we wish to simplify our investments as we get older," says David. "We will use the capital raised, after paying capital gains tax (CGT), for living expenses over the next seven years. We will then draw from our individual savings accounts (Isas) and take our 25 per cent tax-free entitlement from our self-invested personal pensions (Sipps). And last of all we will draw from the taxable portions of our pensions.
"About three-quarters of our investments are in Sipps and the rest in Isas, and we have not yet drawn from these accounts.
“I manage our investments, which have performed quite well over the past few years, although the growth may not continue indefinitely. I don't trade frequently, although rebalance the portfolios when required. But as we don’t plan to draw from our investments for around seven years, I plan to de-risk them to a certain extent while still allowing for a reasonable amount of growth. For example, I recently took some profits on the US funds and added to holdings including Capital Gearing Trust (CGT). But I think that the latter still represents too small a proportion of our investments.
"I have also reduced our holdings in passive funds, mainly because their performance has not been as good as that of the active funds.
“Our investments are categorised geographically and the allocation is as follows: UK 16.9 per cent, US 35.4 per cent, Europe 15 per cent, China 7.4 per cent, Japan 4.3 per cent, Asia Pacific 8.6 per cent, and bonds/absolute return 12.4 per cent. This is broadly in line with my intended allocations, although the US is slightly over and bonds/absolute return slightly under what I want them to be.
"Over 50 per cent of our investments by value are in Baillie Gifford funds, which have performed exceptionally well over many years. But many companies appear in more than one Baillie Gifford fund. And the US, Europe and China Baillie Gifford investment trusts hold some of the same stocks as the Baillie Gifford open-ended funds focused on the same areas, further duplicating some holdings.
"I hold both types of fund structure because while I generally prefer investment trusts to open-ended funds, I am reluctant to add to trusts trading at large premiums to net asset value. And when looking for alternatives to Baillie Gifford funds, I have generally failed to find ones that have performed as well and most have higher charges.
"We contribute to Junior Isas for our grandchildren and the investments in these are also mainly Baillie Gifford funds. But they have doubled in value since the Isas were invested in them.
"Our three children are the beneficiaries in our wills. A joint-life second death policy will provide cover for inheritance tax (IHT) over the next 10 years and we will do further planning on this in due course."
|David and his wife's total portfolio|
|Holding||Value (£)||% of the portfolio|
|Scottish Mortgage Investment Trust (SMT)||60,252||3.39|
|Baillie Gifford American (GB0006061963)||58,271||3.28|
|Baillie Gifford US Growth Trust (USA)||58,163||3.27|
|Monks Investment Trust (MNKS)||54,850||3.09|
|Polar Capital Technology Trust (PCT)||51,508||2.9|
|Pacific Horizon Investment Trust (PHI)||49,359||2.78|
|Baillie Gifford European Growth Trust (BGEU)||49,248||2.77|
|Baillie Gifford European (GB0006058258)||49,036||2.76|
|Finsbury Growth & Income Trust (FGT)||45,253||2.55|
|Smithson Investment Trust (SSON)||43,115||2.43|
|Fundsmith Equity (GB00B41YBW71)||41,486||2.34|
|Herald Investment Trust (HRI)||41,559||2.34|
|Standard Life UK Smaller Companies Trust (SLS)||39,903||2.25|
|Baillie Gifford Strategic Bond (GB0005947857)||39,711||2.24|
|Vanguard S&P 500 UCITS ETF (VUAG)||33,602||1.89|
|Baillie Gifford China (GB00B39RMM81)||33,213||1.87|
|Lindsell Train Global Equity (IE00BJSPMJ28)||32,142||1.81|
|Biotech Growth Trust (BIOG)||31,421||1.77|
|Baillie Gifford Japanese Smaller Companies (GB0006014921)||28,189||1.59|
|Vanguard FTSE 250 UCITS ETF (VMIG)||26,022||1.47|
|Baillie Gifford China Growth Trust (BGCG)||24,969||1.41|
|Capital Gearing Trust (CGT)||21,808||1.23|
|Vanguard LifeStrategy 20% Equity (GB00B4NXY349)||20,789||1.17|
|Vanguard LifeStrategy 40% Equity (GB00B3ZHN960)||18,193||1.02|
|Baillie Gifford International (GB0005941272)||17,585||0.99|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.
Chris Dillow, Investors' Chronicle's economist, says:
Your plans are basically right. If you want a simpler life, it makes sense to sell your investment properties first. Reasons for this include the likelihood that property is generally overpriced relative to equities so might be harder hit if or when interest rates rise. But this doesn't mean that you should sell quickly as being a forced seller is one of the worst economic fates that anyone can suffer. Test the market and if you get good offers, take them.
You’re also right to delay drawing from your investments for as long as possible. It makes sense to keep as much as possible within tax wrappers for as long as possible.
I like too that you are using investment trust discounts and premiums as a signal. There's good evidence that a trust’s discount helps to predict returns because they are indicators of investor sentiment. For example, if people are paying £11 for £10 of assets it’s because they are bullish. Sentiment, however, tends to mean-revert over the longer term. So high premiums predict declining sentiment and prices, and big discounts predict rising sentiment and prices. But what matters is a trust’s discount relative to its own history as there are many reasons why discounts vary across trusts – other than differences in investor sentiment.
You should probably stick with your many Baillie Gifford funds – for now. These have done well largely because they correctly anticipated the surge in big tech stocks. They are now benefiting from momentum effects – the tendency for past winners to carry on rising. There’s no point betting against this.
Some investors would disagree on the grounds that big tech is already overvalued. There’s not much point arguing about whether this is the case because overvalued shares can, for a while, carry on rising. But for you this is dangerous. Overvalued stocks can fall a long way. And Baillie Gifford might not be quick to adjust to this because it can be difficult for large funds to change their strategies quickly.
So you need some kind of exit strategy. One that has worked well, especially as a protection against the big bear markets that can occur after overvaluations, is the 10-month rule. This involves selling assets when their prices drop below their 10-month or 200-day moving average. And this strategy advocates sticking with big tech funds for now. But don’t get greedy and remember that most investment themes end at some point.
De-risking your portfolio has been easy. Simple portfolios of global equities, gilts, gold, foreign currencies and cash have delivered good returns at little risk for years. You can build such portfolios cheaply with exchange traded funds – you don’t need to pay the manager of an active fund to do this.
But diversification has been easy in the past because bonds and equities have often moved in opposite directions, meaning that losses on equities have been offset by profits on bonds and vice versa. But this could change. If interest rates and inflation rise significantly, equities and bonds could both fall so what would at one time have been a low-risk portfolio could do badly.
There's no point trying to determine how likely this risk is because nobody knows and, in any case, you should never base your portfolio on forecasts. Rather, the best protection against this possibility is to hold cash.
Tim Stubbs, investment consultant at Tim Stubbs Investment Strategies, says:
About 85 per cent of your investments, excluding cash and property, are exposed to a high-growth/momentum equity style. This is concerning from a risk management perspective because your investments are an extremely concentrated style bet.
I am not trying to impose a regime change. Rather, I believe that you have a portfolio construction design flaw which exposes you to an extreme vulnerability in certain scenarios – irrespective of the merits of individual investments.
If there was a severe reversal of the growth/momentum investment style's outperformance, following a raging bull decade for investments with these characteristics, you could be exposed to a potentially catastrophic outcome. Extremely popular stocks with lofty expectations and high price tags potentially have the furthest to fall if anything threatens their dominance. And many of these stocks are high-risk – something easy to forget during periods of easy money.
Such an outcome may not occur but, like any other, can never be ruled out. Otherwise there would be no need to diversify. And if it does occur, your retirement plans are in the firing line.
You are not alone in this regard – equity benchmarks have failed to keep pace with the big winners and disrupters. And by ruling out the 'tortoises', your portfolio has become loaded with 'hares'. This outcome is typical in today’s investment landscape. Good performers have sucked in the money so many investment portfolios are generally dominated by 'hares'. History shows that this is the way investors behave, in repeating cycles, following strong performance trends. But it does not take away the danger of the pendulum swinging from one extreme to the other.
In recent months, we have had a taster of what a negative scenario could look like for you. Since the first vaccine announcement on 9 November, the growth investment style has underperformed, first at a slow rate and then dramatically over the first two months of 2021 as reflation dynamics took hold. Long-duration assets, including high-growth, sold-off and rising discount rates posed a mechanical danger.
By early March, things had broadly stabilised and ticked back up slightly. But this recent experience is a timely warning that you should assess how comfortable you are with being excessively exposed to what looks like such a specific outcome.
But it’s not all bad news. The past performance of your equity portfolio, assuming it had a roughly similar make-up over time, should have been tremendous. Baillie Gifford is world-class at what it does, as are Terry Smith, Nick Train and many other quality/growth champions of the past decade.
But why only be exposed to what they do? And as your investment portfolio has done so well in recent years and made strong returns, do you need to remain at the 'casino', betting heavily on many high-risk growth and momentum stocks continuing to outperform? Especially as you could easily fix this by taking off the 'big bet'.
You could do this as you de-risk your portfolios. If you crystalise large gains and reconfigure your investments so that they are a more balanced and blended mix of investment styles, you might lock in the hard work and rewards you have successfully amassed. And I agree that you need to do more than slightly increase your holding in Capital Gearing Trust, although this is a positive small step in the right direction.
The geographical allocation you say you have looks good but the style dominance heavily overwhelms this.