Ajay is 67, and has been investing for 23 years. He is fully retired and receives £36,000 a year from state and defined benefit (DB) pensions. His wife still works for a salary of £70,000, and receives a pension of £38,000 per year.
Isa, Sipp and trading account, DB pensions, home and rental property among other assets
Achieve 5 to 8 per cent growth a year for the next five years, build up Sipp, and withdraw money when needed
The couple have around £784,000 in Isas, while Ajay has roughly £108,000 in a Sipp, with his wife's Sipp having around £26,000. They also have a trading account with around £35,000 and a variety of other assets. The couple have a home worth £850,000 with no mortgage and a rental property worth £550,000 with no mortgage that brings in rental income of £10,000 a year after expenses. They also have NS&I Premium Bonds, index-linked NS&I bonds, cash, a venture capital trust (VCT) and a life insurance policy.
Ajay's goal is to achieve investment growth of 5 to 8 per cent a year for the next five years, while also building up Sipp assets to mitigate inheritance tax (IHT) risk. The couple will withdraw from their investments as and when they need.
"We don't need to dip into our investments for now," he says. "My wife plans to stop work in the next two to three years when we will need to supplement our income from investments. As far as withdrawals are concerned, I think it will be about £15,000 a year for holidays and other annual additional expenses. I think our pensions will be enough to fund our day-to-day expenses for living, unless the government decides to tax pensions at much higher rates than expected.
"I have two grown-up children who are financially independent. I want to provide each of them with £100,000 as deposits to buy properties.
"I started investing as a complete novice and slowly picked up some basics. I mainly have a moderate attitude to risk. I could afford to lose up to 20 per cent of the value of my investments.
"I have mainly invested in funds. Recently I have added some exchange traded funds (ETFs), investment trusts and a few stocks. I tend to hold existing investments and every year add new funds which are better rated – something that has diversified our portfolio excessively.
"I think I need to reduce the number of funds to help manage the portfolio. I would also like some suggestions on how to invest my cash Isa, which is worth about £200,000, in the current market situation and tips on IHT planning."
Ajay and his wife's full Isa portfolio
|Holding||Value||% of Isa portfolios||Category|
|Stewart Investors Asia Pacific Leader Sustainability (GB0033874768)||£69,744.00||8.89264034||Asia|
|AXA Framlington American Growth (GB00B5LXGG05)||£55,458.00||7.071117917||US|
|Lindsell Train Global Equity (IE00B3NS4D25)||£38,084.00||4.855863081||Global|
|Vanguard LifeStrategy 80% Equity (GB00B4PQW151)||£37,657.00||4.801418865||Multi-asset|
|Jupiter European (GB00B5STJW84)||£36,640.00||4.671747277||Europe|
|Rathbone Global Opportunities (GB00B7FQLN12)||£32,954.00||4.201767461||Global|
|Fundsmith Equity (GB00B41YBW71)||£32,740.00||4.174481601||Global|
|BlackRock Gold & General (GB00B5ZNJ896)||£30,603.00||3.902005511||Gold|
|Fidelity Global Special Situations (GB00B8HT7153)||£27,014.00||3.444393585||Global|
|FSSA Greater China Growth (GB0033874321)||£26,325.00||3.356543315||Asia|
|ASI UK Smaller Companies (GB00B7FBH943)||£23,541.00||3.001572125||UK|
|Marlborough UK Micro Cap Growth (GB00B8F8YX59)||£20,653.00||2.633340516||UK|
|M&G Emerging Markets Bond (GB00B4TL2D89)||£19,820.00||2.527129668||Bonds|
|Janus Henderson European Selected Opportunities (GB0032437948)||£19,268.00||2.456747449||Europe|
|Invesco Monthly Income Plus (GB00BJ04JZ25)||£18,358.00||2.340718791||Bonds|
|Jupiter UK Smaller Companies (GB00BHBX8S02)||£17,341.00||2.211047203||UK|
|HSBC MSCI World UCITS ETF (HMWO)||£16,331.93||2.082386722||Global|
|Jupiter Financial Opportunities (GB00B8JYV946)||£15,570.00||1.985237585||Global|
|Invesco Corporate Bond (GB00BJ04F760)||£15,025.00||1.915747894||Bonds|
|Fidelity European (GB00BFRT3504)||£13,580.00||1.731504586||Europe|
|Janus Henderson Strategic Bond||£13,121.00||1.672980241||Bonds|
|RIT Capital Partners||£12,369.00||1.577097218||Multi-asset|
|Jupiter Merlin Growth Portfolio||£11,225.00||1.43123262||Multi-asset|
|Threadneedle European Select||£11,132.00||1.419374746||Europe|
|Vanguard LifeStrategy 100% Equity||£10,924.95||1.392975039||Multi-asset|
|Fidelity Moneybuilder Income||£10,864.00||1.385203669||Bonds|
|L&G US Index trust||£10,822.47||1.379908427||US|
|Vanguard S&P 500 UCITS ETF||£9,766.00||1.245204255||US|
|AXA Framlington UK Smaller Companies||£9,757.00||1.244056719||UK|
|iShares Core FTSE100 UCITS ETF||£8,740.99||1.11451136||UK|
|Artemis UK Select||£7,762.00||0.9896862||UK|
|Vanguard S&P 500 UCITS ETF||£6,990.00||0.891253097||US|
|Marlborough UK Micro Cap Growth||£6,734.51||0.858677095||UK|
|Threadneedle European Select||£6,204.97||0.791158616||Europe|
|Lindsell Train Global Equity||£5,901.76||0.752498123||Global|
|Scottish Mortgage Investment Trust||£5,816.25||0.741595254||Global|
|Polar Capital Technology Trust||£5,559.68||0.708881547||Global|
|iShares Core MSCI EM IMI UCITS ETF||£5,293.40||0.674929777||Emerging markets|
|Baillie Gifford Japanese||£5,010.70||0.638884391||Japan|
|Invesco Monthly Income Plus||£4,872.60||0.621276086||Bonds|
|Allianz Gilt Yield||£4,856.00||0.619159519||Bonds|
|Fidelity Moneybuilder Income||£4,682.60||0.597050322||Bonds|
|Invesco Nasdaq 100 UCITS ETF||£4,005.75||0.510749226||US|
|BlackRock Gold & General||£3,095.16||0.394645341||Gold|
|Stewart Investors Asia Pacific Leader Sustainability (GB0033874768)||£3,004.50||0.383085827||Asia|
|Royal Dutch Shell||£2,912.00||0.371291705||UK|
|FSSA Asia Focus||£2,783.01||0.354844961||Asia|
|Jupiter UK Mid Cap||£2,543.00||0.324242722||UK|
|Vanguard FTSE 250 UCITS ETF||£2,158.52||0.275219976||UK|
|iShares Core £ Corporate Bond UCITS ETF||£2,035.80||0.259572683||Bonds|
|Baillie Gifford Japanese Smaller Companies||£1,378.00||0.175700539||Japan|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS INVESTOR'S CIRCUMSTANCES.
Chris Dillow, Investors' Chronicle's economist, says:
You are right to want to cut the number of funds you hold, because this portfolio suffers from a bad case of overdiversification.
To see why, think about what happens as you diversify. You water down the impact upon your whole portfolio of any individual fund. But this cuts both ways: it dilutes the effect of a fund’s outperformance as well as underperformance. And for many funds the chances of big out- or underperformance are small anyway. This is simply because any basket of stocks will be correlated with the market because it dilutes the impact of individual stocks’ returns.
If you hold a couple of dozen funds, therefore, you end up with something like a tracker fund: your equity holdings will perform very similar to the markets.
Except that there’s a big difference – fees. Actively managed funds can easily cost you half a percentage point a year more in charges. Which adds up. Over 20 years it can easily cost you over £2,000 for every £10,000 you invest. Yes, fund managers take more than a fifth of your wealth.
Hence the need to simplify. In principle, you could replace all your equity funds with just two trackers – one to track the world index and another to track emerging markets.
This might seem minimal. That’s because of a framing effect. There are thousands of funds available. If you look at all of these, you’d infer that a well-diversified portfolio must hold lots of them. But there’s another frame to adopt – that of economic theory. This says a portfolio should comprise only two types of asset: safe ones and risky ones. The fundamental question is how to split your money between these. Having made that decision (and your choice of heavy equity exposure is reasonable given your big pension income) a global tracker fund should be your first call.
From this perspective, a single equity tracker fund and cash are all you need. A tracker fund, remember, is a fund of funds: it is a representative sample of every investors’ equity holdings.
All of which answers your question on how to invest that £200,000 in cash. Your default option should be a global tracker.
Of course, you might not want to put it all in at once. Doing so entails a big rise in your equity weighting. And lead indicators of returns such as the dividend yield, ratio of share prices to the global money stock or yield curves point to only average returns over the next few years, suggesting no urgency. But you can drip-feed cash in quite easily.
Which is not to say you should have a wholly minimalist approach. There is a case for some funds, if these give you access to assets that are tricky to get yourself. For me, the most important asset class here is private equity. It’s likely that a lot of future growth will come from unlisted companies. Fund managers can give you exposure to these. Their value in the market for listed shares is somewhat less.
Rosie Bullard, portfolio manager at James Hambro & Partners, says:
The balance of your assets seems sensible for now. You do not plan to make significant withdrawals from the portfolios and your day-to-day living expenditure can be covered by your state and DB pension income. You are an experienced investor and have stated that you can tolerate risk given you are prepared to lose up to 20 per cent of the value of the portfolios. Over time, you may want to reduce the equity exposure in the Isa if withdrawals increase, such as for care later in life, and consider increasing other asset classes to reduce risk. You are in the fortunate position from a tax perspective of having the majority of your assets in Isas and Sipps, so you have the option of changing the asset allocation and risk taken without creating capital gains tax liabilities.
Your plan to give £100,000 to each of your children for IHT planning seems sensible considering you do not need the current level of cash. We suggest keeping an emergency cash buffer for unexpected expenditure.
Sipps can be an effective IHT tax planning tool which allow you to still have funds that you can access if needed. Your wife should consider maximising her pension contributions within the allowance before she retires, and check that she has used previous years’ permitted allowances. We would most likely suggest you draw on your Isas before the pension funds given the attractive IHT benefits of pensions.
As you have pointed out, there is a significant number of holdings in the portfolios. Diversification is only beneficial up to a point and too many holdings are hard to follow. We suggest you consider position sizes of 2 to 5 per cent of the value of your portfolio. For example, your Isas, including the cash Isas, could have position sizes of £20,000 to £50,000 rather than the current average of £14,000.
You hold a number of tracker funds which can help to reduce costs and maintain diversification. But we see limited benefit in holding broad tracker funds, such as ones focused on the global equity market, when you are already actively managing the portfolio. We would only use tracker funds where we could not identify an active manager or individual stocks in a given region or sector that could outperform the market average.
From a geographic perspective, you have a relatively large allocation to the UK but the portfolio would benefit from more exposure to the US given the significant number of investment opportunities in that region. We also suggest that you consider reducing the number of, and total allocation to, global funds and instead focus on funds that have a specific geographic or sector focus.
The addition of individual equities in interesting, but you need to make sure that you have the time and access to information to keep on top of them. If you do, you should consider individual equities listed overseas too as there are lots of interesting opportunities including in the technology and healthcare sectors.