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‘How should I invest my £100,000 inheritance?’

Portfolio Clinic: A reader spies an opportunity to revamp her portfolio
February 17, 2023
  • Kate wants to maximise growth in her portfolio ahead of retirement
  • The portfolio as it stands has a Europe bias and a few recent underperformers
Reader Portfolio
Kate 47
Description

Investments, workplace pension, mortgage-free property

Objectives

Diversify her portfolio and maximise growth ahead of retirement

Portfolio type
Investing for growth

Kate is 47, earns £42,500 a year and would like to retire when she turns 65. She owns a house which is worth around £400,000 and mortgage-free, and pays into a workplace pension.

She has already built up a reasonably sized investment portfolio, having taken an interest 15 years ago. Now, however, an inheritance of £100,000 has prompted a desire to “shake up and diversify” the portfolio, with a goal of maximising its growth ahead of retirement. She also has an additional £20,000 in cash thanks to a bond that matured in 2022.

“I started investing 15 years ago in open-ended funds, especially in the European sector,” she says. “I invested in Jupiter European (GB00B5STJW84) and what was then called the Gartmore European Selected Opportunities fund, which is now run by Janus Henderson. I feel as though I have held on to these funds for too long as they haven’t performed as well as other funds in the sector in the past 10 years so I am wondering if I should switch them. I guess what I am really hoping to do is shake up my portfolio.”

Kate wants her portfolio to generate a return of around 6 per cent a year for the next decade, and at least 5 per cent a year in the 10 years before she retires. She would then like the portfolio to generate an income of 4 per cent a year from when she turns 65.

“As I have a 15 to 20-year window to invest, I am prepared to take risks but not excessive ones,” she adds. “At the moment I feel that it is a bigger risk, with the rate of inflation and [Financial Services Compensation Scheme] protection only covering up to £85,000, to leave my money in a current account.

“I would be prepared to lose up to 20 per cent of my portfolio in a given year, but would be worried if it was much beyond that. I have been worried about where to invest my inheritance with the market seeing such a downturn in the past 18 months.”

When she started investing Kate focused on active growth funds with a bias to Europe, but now she wants a broader approach. “I would like to rebalance my portfolio to include a broader range of asset classes and geographical areas,” she notes.

“Ideally I would like to have around eight to 10 core funds that I could put a small lump sum into and then drip-feed money into these funds each month. I am happy to include more value and defensive investments to make my portfolio more robust.” Kate’s most recent investments were into Stewart Investors Asia Pacific Leaders Sustainability (GB0033874768), TM Tellworth UK Smaller Companies (GB00BDTM8B47) and the iShares S&P 500 Information Technology UCITS ETF (IITU).

Kate has a mixture of potential new investments in mind, including Rathbone Global Opportunities (GB00BH0P2M97), Jupiter Global Value Equity (GB00BF5DRJ63) and Slater Recovery (GB00B90KTC71).

 

Kate's portfolio
HoldingValue (£)% of portfolio
Cash 122,22543.3
Moneyfarm Portfolio 629,25610.4
NS&I Premium Bonds 25,0008.9
Jupiter European (GB00B5STJW84)24,7818.8
Vanguard LifeStrategy 80% Equity (GB00B4PQW151)24,0478.5
Janus Henderson European Selected Opportunities (GB0032473653)14,4985.1
Invesco Global Equity (GB00B3RS9Q62)10,9763.9
AJ Bell Adventurous (GB00BYW8VG25)10,5263.7
Baillie Gifford Positive Change (GB00BYVGKV59)7,8002.8
iShares S&P 500 Information Technology UCITS ETF (IITU)3,9631.4
Royal London Sustainable Leaders Trust (GB00B7V23Z99)3,5091.2
Stewart Investors Asia Pacific Leaders Sustainability (GB0033874768)2,6991.0
TM Tellworth UK Smaller Companies (GB00BDTM8B47)2,6841.0
Total281,964 

 

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.

 

Ben Yearsley, investment director at Shore Financial Planning, says:

Kate clearly has her head screwed on when it comes to her personal finances, owning her house outright with no other debt, and having built up pensions and individual savings accounts (Isas).

With £100,000 to invest and the end/start of the tax year nigh, she has the opportunity to squirrel away two Isa allowances – £40,000 – in a short space of time. With the capital gains tax (CGT) allowance halving from April, then halving again in April 2024, using Isa allowances is even more important.

Moving on to her aspirations, the investment industry isn’t as precise as she wants, with 6 per cent returns per year, followed by 5 per cent returns per year and then 4 per cent income. The easiest part of that wish list is the last one, as generating a 4 per cent income is quite straightforward. The thing to remember is that’s all a long way in the future and therefore she needs to concentrate on her medium-term objective, which is 6 per cent per year growth. In addition, like most people, she will still need her investment pot to grow post-retirement unless she wants her standard of living to deteriorate. In other words, she will still need and want a 6 per cent per year total return after age 65 – it is just that she will be taking two-thirds of that as income, with a third being left to grow.

Her portfolio is typical of many – funds get bought, other ones get added and there often isn’t a spring-clean. Many investors get emotionally attached to funds.

Essentially, she has £235,000 for an investment pot assuming she keeps her £25,000 in NS&I Premium Bonds and £20,000 as rainy-day money, and invests the other £100,000. A reasonable proportion is in an Isa, with the possibility to shelter more. I like her suggestion of having eight to 10 core funds and drip-feeding money in – although with £100,000 it might take a while. I would amalgamate the investments on one platform to make management easier.

I’d look to have a broad blend of equities and real assets – and even a corporate bond fund as the opportunity is currently good. Infrastructure, growth, value and defensive investments could be added.

An example portfolio is suggested below – equally split. It’s a simple portfolio, but that is what Kate wants. It's not possible to say whether this portfolio will deliver 4 per cent, 6 per cent, 8 per cent  or any number in between a year over the next decade, but there is a broad spread of risks, asset classes, styles and geographies.

 

Samuel Back, wealth management consultant at Mattioli Woods, says:

The starting point when viewing any investment strategy is to view it in the context of an individual’s personal circumstances and objectives. When looking at this at the highest level, I assess the following three pillars:

Income: Does Kate have enough income to be able to meet her expenditure requirements?

Access: Does Kate have sufficient funds to meet short-term expenditure requirements? For example, what happens if she becomes unemployed or needs to replace a boiler?

Growth: Once there is sufficient income/access monies, what amount can be committed to the long-term plan?

I would first visit each of these points to make sure every element of her financial plan is well covered, and confirm that the full £100,000 could be committed to the growth element of her plan.

Once the overall strategy is set, it is important to view the current asset allocation in detail. At the highest level, your portfolio can be divided into four key asset classes: equities, fixed interest, real assets and cash. When viewing your asset allocation across these four asset classes, you have the allocations shown in the table.

 

Breaking down the portfolio into key asset classes
Asset classAsset allocation including £100,000 inheritance (%)Asset allocation excluding £100,000 inheritance (%)
Equities42.374.7
Fixed interest4.47.8
Real assets0.816.1
Cash (includes Premium Bonds)52.51.4

 

The asset allocation, excluding the £100,000 inheritance, could be suitable for a medium-to-high-risk investor, and would need to be employed with the understanding that there would be a high level of volatility. When deploying the £100,000, it is important to be aware of the impact of changing the asset allocation. 

Looking at the asset allocation on a more detailed level, you mention there has been an emphasis on investing in European markets. However it is arguable that this market has priced in tough economic headwinds more aggressively than other developed equity markets, so there could be the potential for a swifter recovery or to further invest at lower prices.

You also have a low allocation to real assets, and there could be the opportunity to seek returns that have a reduced correlation to equity markets and provide greater diversification. This could include infrastructure or property, for example. While it has been a tough period for the UK commercial property market, this means there are opportunities within the property sector to invest at relatively low asset prices with many Reit shares trading at a significant discount to net asset value.

Looking beyond traditional funds, structured products are a pre-packaged investment strategy based on a single security or basket of securities which allow investors to link returns with an underlying asset class and an element of capital protection. Structured products can be used as an alternative to a direct equity investment, as part of the asset allocation process to manage risk exposure within a portfolio. They can provide equity-like returns, mitigate the impact of volatility to some extent and offer some capital protection.

With regards to the funds Kate is considering, it is good to see greater diversification although these funds are heavily equity-based and likely to experience volatility. It is also worth considering entering the markets on a phased basis. Although there is a long-term investment horizon, by ‘pound cost averaging’ into markets, there is the opportunity to mitigate uncertain outlooks.