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Do we have the right mix of holdings?

These investors have too many holdings, but not enough diversity
August 20, 2021 and George Steger

These readers want to use their investments to cover large expenses and possible care costs later in life

They should consider cutting the number of holdings 

To reduce the time they spend managing their investments they should hold funds rather than direct share holdings

Reader Portfolio
Geoff and his wife 76 and 71
Description

Isas and general investment account invested in direct equity holdings and funds, cash, holiday property bond, residential property.

Objectives

Draw from investments to cover large expenses, cover possible care costs in later life, leave assets to grandchildren, reduce time spend managing grandchildren's Jisas, increase exposure to ESG investments.

Portfolio type
Investing for goals

Geoff and his wife are ages 76 and 71, and retired. They receive pension income of £45,000 a year after tax, which covers their day-to-day expenses and a £500 monthly contribution into each of their two grandchildren’s junior individual savings accounts (Jisas).

Their home is worth about £450,000 and mortgage free.

“We would like to continue using our investment Isas to cover large expenses,” says Geoff. “For example, 18 months ago we drew on them to replace my wife’s car with one which cost over £35,000. We will also draw on our investments to cover care costs in later life, if necessary. My wife and I come from long-lived stock: my mother passed away when she was 96 years old and my wife's mother is now 97. So I would say that my investment timescale is 10 to 15 years, and my wife’s is 20 to 25 years.

"We would like to leave a legacy to our grandchildren, and will pass our assets to our children to hold in trust for them.

"Our investment portfolios have been built up over 30 years. They were originally designed to supplement our pensions income and have provided rising dividend income. In 2019, for example, the payouts totalled £10,000 and we re-invested all of this. But we have not made any new investments over the past 10 years other than reinvesting dividends.

"I would say that we have medium risk appetite. Although over three-quarters of our investments are in equities, we are comfortable with the risks involved. But should they be more diversified by geography and sector to reduce their volatility?

"Also, evidence suggests that companies which meet environmental, social and governance (ESG) criteria often perform better than similar ones that don’t. So we would like to increase our holdings in ESG compliant companies and companies with a poor ESG score that are improving. And we want to reduce exposure to companies with poor ESG records that are not attempting to improve. 

"I run my grandchildren’s Jisas and aim for them to have a 50/:50 growth and income profile. I believe that good income producing shares often outperform growth shares. I would like to take a buy-and-hold approach with the Jisas as I don’t want to spend a lot of time running them, so is their asset mix right? And should the Jisas, which have 15 and 16 year time horizons, be more diversified?"

 

Geoff and his wife's largest holdings
HoldingValue (£)% of the portfolio
Cash49,26011.82
Premium Bonds30,0007.2
Phoenix (PHNX)17,7064.25
Holiday Property Bond (series 2) shares16,1453.87
Scottish Investment Trust (SCIN)13,5053.24
Scottish Mortgage Investment Trust (SMT)9,7282.33
Lloyds Banking (LLOY)9,5012.28
Deutsche Post (GER:DPW)9,4442.27
SSE (SSE)9,0362.17
City Of London Investment Trust (CTY)8,5742.06
F&C Investment Trust (FCIT)8,2441.98
abrdn (ABDN)7,2761.75
Unilever (ULVR)7,2811.75
Witan Investment Trust (WTAN)7,0251.68
Aberdeen Standard European Logistics Income (ASLI)6,5731.58
Aviva (AV.)5,8491.4
Royal Dutch Shell (RDSB)5,6081.35
Merchants Trust (MRCH)5,4441.31
Tritax Big Box REIT (BBOX)5,1501.24
Henderson Opportunities Trust (HOT)4,8341.16
Assura (AGR)4,6811.12
Caledonia Investments (CLDN)4,6281.11
National Grid (NG.)4,4791.07
GlaxoSmithKline (GSK)4,3531.04
Barings German Growth (GB00B9M3QX41)4,1551
Ceres Power (CWR)4,0570.97
Diurnal (DNL)4,0200.96
Tate & Lyle (TATE)3,9420.95
Pennon (PNN)3,8280.92
Apple (US:AAPL)3,7250.89
International Business Machines (US:IBM)3,7300.89
Johnson Matthey (JMAT)3,6650.88
Zotefoams (ZTF)3,6170.87
Persimmon (PSN)3,5540.85
Diageo (DGE)3,3730.81
Learning Technologies (LTG)3,3530.8
Legal & General (LGEN)3,3250.8
Vodafone (VOD)3,3550.8
Balfour Beatty (BBY)3,2050.77
Taylor Wimpey (TW.)3,1810.76
GCP Infrastructure Investments (GCP)3,0260.73
Henderson Smaller Companies Investment Trust (HSL)3,0340.73
WPP (WPP)3,0070.72
Finsbury Growth & Income Trust (FGT)2,9800.71
Verizon Communications (US:VZ)2,9800.71
Dunelm (DNLM)2,9300.7
Topps Tiles (TPT)2,8650.69
Mercantile Investment Trust (MRC)2,8220.68
ASML (NET:ASML)2,8010.67
Assa Abloy (SWE:ASSAB)2,7970.67
Ilika (IKA)2,7300.65
Oxford Instruments (OXIG)2,7190.65
Craneware (CRW)2,6500.64
PZ Cussons (PZC)2,6240.63
US Solar Fund (USFP)2,6060.63
Vistry (VTY)2,4890.6
Judges Scientific (JDG)2,4400.59
Pfizer (US:PFE)2,4720.59
Berkeley (BKG)2,4290.58
Henderson Far East Income (HFEL)2,3980.58
Primary Health Properties (PHP)2,3840.57
Jupiter Emerging & Frontier Income Trust (JEFI)2,3320.56
Antofagasta (ANTO)2,2810.55
AstraZeneca (AZN)2,3110.55
Odyssean Investment Trust (OIT)2,2670.54
Herald Investment Trust (HRI)2,2300.53
International Biotechnology Trust (IBT)2,1170.51
BT (BT.A)2,0960.5
Lokn Store (LOK)2,0990.5
NextEnergy Solar Fund (NESF)2,0990.5
British Land (BLND)1,9000.46
ITM Power (ITM)1,8820.45
Secured Income Fund (SSIF)1,7410.42
Edinburgh Investment Trust (EDIN)1,6670.4
Independent Investment Trust (IIT)1,6700.4
Syncona (SYNC)1,6650.4
Downing Strategic Micro-Cap Investment Trust (DSM)1,5360.37
Duke Royalty (DUKE)1,4460.35
Dunedin Enterprise Investment Trust (DNE)1,3920.33
Royal Mail (RMG)1,3150.32
Travis Perkins (TPK)1,3050.31
Alternative Income REIT (AIRE)1,2610.3
BlackRock Frontiers Investment Trust (BRFI)1,1520.28
Gilead Sciences (US:GILD)1,0030.24
Mercia Asset Management (MERC)1,0200.24
Venture Life (VLG)9210.22
Global Ports (GPH)8720.21
Inland Homes (INL)8840.21
HSBC (HSBA)7100.17
Petrofac (PFC)6530.16
Marston's (MARS)5030.12
Kier (KIE)4000.1
Saga (SAGA)4210.1
Mitchells & Butler (MAB)1790.04
Total416,924 

 

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:

It’s quite reasonable to have an equity-heavy portfolio: cutting equity exposure as you get older is wrong for many people. The issue with your portfolio is how to diversify risk within equities.

There's a simple way of doing this which minimises both the costs of investing, and time and trouble of monitoring a portfolio – holding a fund that tracks the world market. This is, in effect, a fund of all equity funds which is diversified across developed markets, sectors and equity styles in proportion to the weights shares have in total market capitalisation. Just one such fund gives you great diversification, although you might want to hold emerging markets and private equity funds alongside it.

You, however, are going the long way around. Your Isa is over diversified. With 89 different holdings, each individual one makes only a tiny contribution to its overall return. If an average sized holding in your Isa rose 50 per cent in a year, which would be a great achievement, it would add less than 0.6 percentage points to your total returns. That’s no more than the difference between a slightly good day and slightly bad day for the market.

With individual holdings making such little contributions, what drives your Isa’s returns is market risk. You have, in effect, a closet tracker but with far higher costs. And you need to spend far more time monitoring and managing your Isa than you would with a global equities tracker fund. But at least you do not hold many expensive active funds. 

Unless you enjoy spending a lot of time monitoring your investments, simplify them. Start by ditching losing stocks: sell those that are trading at prices below their 200-day moving average. Momentum is a powerful force in stock markets: past winners tend to keep rising for a while and past losers tend to keep falling. So make sure that you are on the right side of such momentum effects.

One caveat to this is your interest in ESG investing. There is some evidence that socially responsible firms have outperformed less virtuous ones, but this will not necessarily continue. If all investors seek virtuous companies their prices will become higher than those of other companies and their subsequent returns will be lower.  ESG-compliant firms will only do well if the number of socially responsible investors continues to grow. So I would urge caution towards this segment. Morality and self-interest can sometimes conflict.

 An issue with your grandchildren's junior Isas is the "Montgomery Burns problem", named after a character in The Simpsons cartoon. He looks at his equity portfolio after years of neglect and finds that it holds Amalgamated Spats, Confederated Slaveholdings and the Baltimore Opera Hat Company. The point being that competition, technical change and political change can destroy once great companies. So you cannot take a hands-off approach to stock-picking over the long term. If you want a longer-term investment that you can leave alone, a global tracker fund is your best bet. And you don’t need lots of holdings to be well diversified.

You are aware that income-producing shares often outperform growth ones. The reason for this is that investors are terrible at predicting medium-term corporate growth, largely because it is more random than they think. This means that many companies they expect to deliver growth don't, while ones they think have gone ex-growth can continue to expand. So be humble about your ability to predict growth.

 

George Steger, senior wealth manager at Investment Quorum, says:

Your Isa is heavily weighted to equities, something which we would consider appropriate for more of a growth, rather than balanced or medium orientated investor.

But as you do not appear to need to draw from your Isa except for one-off expenditures, your capacity for loss appears high. Capacity for loss relates to the impact that a fall in the value of your assets would have on your day-to-day living, and we would deem this to be quite modest as you have sufficient other sources of income. This means that you can embrace the volatility of equity markets without too many short-term worries. You also maintain a significant cash position so are not under great pressure to make forced sales of investments to fund your lifestyle.

Your portfolio has a high allocation to the UK which, at time of writing, appears to reflect relative value and is garnering attention from international investors again. These had avoided the UK following the Brexit referendum. And there are high levels of private equity, and mergers and acquisitions activity, which could reward UK shareholders of targeted companies.

But having too great a home bias can mean missing out on opportunities. Although there are good companies listed in the UK you should broaden your horizons. You need to look globally to get exposure to some of the most exciting long-term disruptive trends such as digitation and automation.

As you wish to be a buy-and-hold investor, consider increasing your exposure to funds and reducing your exposure to direct share holdings. Doing this may reduce the amount of time you spend on day-to-day monitoring and reporting, and reduce short-term volatility.

You could add GAM Star Disruptive Growth (IE00B5VMHR51) as its manager, Mark Hawtin, thinks disruption is responsible for determining winners and losers in every sector and industry. He seeks to invest in the businesses around the world which are creating this disruption. 

Further diversification could be provided with real asset exposure. Sanlam Real Assets Fund (IE00BJ5CB555) invests up to 100 per cent of its assets primarily in a global range of companies which derive their value from underlying real assets. Its holdings benefit from contracted revenue streams, and many of their contracts are inflation-linked so should benefit if inflation surpasses market expectations following the post-pandemic economic recovery.

Consider having the same asset allocation in both your grandchildren’s Jisas. This would reduce your management burden and ensure that both grandchildren benefit from the same investment returns.