‘My wife has no interest in investing – how do I simplify my £1mn portfolio?’

As we age, making sure our affairs are in order becomes increasingly important. Preparing an investment portfolio for that eventuality is especially difficult when other family members have no investing experience or interest.

John, 87, and Hannah, 80, own a portfolio worth about £1.2mn, split between two individual savings accounts (Isas), a personal pension, Premium Bonds and an overseas equity fund. John makes all the investment decisions but he's starting to worry about this concentration of power.

“I would like to simplify the investments over the next three years so my wife can handle it if I die before her,” says John. “Despite hoping to live to 95, I am conscious that my wife has no knowledge [of how to] to continue managing the investments on my death.”

The portfolio is indeed fairly complex, with investments in 40 different funds and investment trusts on top of £131,000 invested in 74 Aim holdings. The majority of John’s and Hannah’s income comes from other sources – their state pensions, John’s £44,000 company pension and £35,000 from two rental properties – so the investments remain mostly untouched. They draw half of the £26,000 dividends and reinvest the rest. 

The portfolio is heavily skewed towards shares, albeit with a significant exposure to infrastructure. “I sold all bond holdings and 'capital preservation' investments at the tail end of the recent crash, a little too late. I purchased infrastructure and Vietnamese stocks in their place,” John says. He sold holdings in Jupiter Strategic Bond (GB00B4T6SD53) and Ruffer Investment Company (RICA) and bought First Sentier Global Listed Infrastructure (GB00B24HJL45), VinaCapital Vietnam Opportunity Fund (VOF) and Vietnam Enterprise Investments (VEIL).

But the portfolio’s performance has underwhelmed and John is now pondering a change. “I’m torn between holding on to my main losers in the hope of recovery, and the sober thought of going back into safe bonds and the like,” he says. John describes himself as “not risk averse” and is OK with losses of 10 to 15 per cent. He is hoping for above-inflation returns over the long term. “I have tolerated the losses in the past few years with the attitude that they’ll come right eventually,” he says.

Between their home and the two rental properties, John and Hannah also own about £1.7mn-worth of real estate. Overall, the couple's assets are worth £3.3mn, so inheritance tax is a concern. 

"I started investing in Aim about eight years ago, on the basis that even a 40 per cent loss gives our heirs break-even – sadly, so far the investments are down 12 per cent on the £143,000 invested,” says John. The two also have around £406,000 in various trusts for their children and grandchildren, to which they are currently contributing about £1,500 a year, and £130,000 in an offshore investment fund.

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

James Bowes-Lyon, investment director, Tyndall Investment Management, says:

You should start by reducing the number of holdings: there are too many small investments of little conviction. Some 26 of your 41 holdings account for less than 1.5 per cent of the portfolio each. Their impact is minimal and the portfolio is over-diversified.

At the same time, you also have too much invested in Asia, including more than 20 per cent in emerging Asia, 11 per cent in developed Asia and 10 per cent in Japan. Meanwhile, excluding the Aim shares, the largest two holdings represent more than 25 per cent of the portfolio, which is excessively concentrated. The five-year annualised total return of the non-Aim portfolio would have been 6 per cent. It is questionable whether there is enough reward for the amount of risk you are taking.

With a capacity for loss in the region of 10 to 15 per cent excluding the Aim portfolio, I would recommend a low to medium-risk allocation, split 50 per cent in stocks and 50 per cent in bonds, property and the like. At the moment, your high exposure to stock markets makes the portfolio very sensitive to economic growth and market volatility.

So reallocating to bonds is prudent. Following the sharp rise in interest rates, bond yields are now more attractive than in the previous 15 years. In the interests of simplifying the portfolio for Hannah, funds such as M&G Optimal Income (GB00B1H05718) or TwentyFour Income (TFIF) would work well.

Most of the exposure to 'alternative investments' is through infrastructure funds, which have had a torrid time due to the rapid interest rate rises. Higher discount rates reduce the value of future cash flows, impacting valuations, and investors have also been concerned about the higher cost of debt.

Although I would be reluctant to sell after such an extensive de-rating of the sector, I would significantly reduce your holding in First Sentier Global Listed Infrastructure. Diversify your 'alternatives' exposure with either hedge funds, physical gold [funds] or a fund such as Atlantic House Defined Returns Fund (IE00BFLR2202). You have circa 19 per cent invested in the US but no direct holdings. The S&P 500 index is historically difficult to beat, and a tracker such as the iShares Core S&P 500 ETF (CSP1) would give you exposure to the ‘Magnificent Seven’ tech stocks that have been driving the index. While these companies have already gone up a lot, by ‘buying the market’ you would also capture any growth in the remaining 70 per cent of the index, which has yet to close the gap.

An active global fund would help you consolidate the geographical diversification of the portfolio. Options include Murray International Trust (MYI), JPMorgan Global Growth & Income (JGGI) and VT Tyndall Global Select (GB00BGRCF382). Also consider multi-asset funds such as BNY Mellon Multi-Asset Growth (GB00B8454P92), which invests across a range of assets and has a decent long-term track record.

Petronella West, chief executive officer of Investment Quorum, says:

Your portfolio is at odds with your statement that you could tolerate a 10 to 15 per cent loss. Your very high exposure to stock markets, numerous investment trusts and specialist funds has the potential for far greater losses than you are happy with, around 20-30 per cent.

The heavy weighting to Asia is fine for long-term growth investors but the dollar is a big headwind, and the issues in China are not helping. Again these are higher-risk bets.

You should reduce the number of funds so each one accounts for at least 5 per cent of the portfolio. This would mean they have a more meaningful impact and make the portfolio much easier to manage. You should also move back towards a more balanced 60/40 stocks/bond allocation but tread carefully when doing so. The outlook for global equities is tricky; but as you have experienced, bond markets were also painful in 2022, and a re-entry should be managed with extreme caution.

In the short term, you might want to consider investing in money market funds that yield 5 per cent or more and are relatively risk-free. Examples include Fidelity Cash Fund (GB00BD1RHT82). In the near term, while the trajectory of rates is still uncertain, I also like the Axa Global Short Duration Bond Fund (GB00BDFZQV30). Short-duration bonds are less sensitive to interest rate changes compared with longer-term ones. This means that if rates rise, the impact on the fund is lower, helping to mitigate potential losses.

You should also consider more corporate debt, which offers better yields. Artemis Corporate Bond (GB00BFZ91W59) invests in bonds issued by financially stable and creditworthy companies, which provide a level of safety, as these are generally better positioned to weather economic downturns.

Within stocks, I would focus on quality companies, which often demonstrate greater resilience in a high-interest-rate environment with potential recessionary pressures, thanks to their strong balance sheets, stable earnings and consistent cash flows. The iShares Edge MSCI World Quality Factor ETF (IWFQ) is a good option to gain exposure to them globally.

Regarding your disappointing Aim investments, while they offer significant IHT benefits, this sector is very high-risk. Smaller companies do not fare as well in tough conditions, but that’s the nature of this market. This is a longer-term hold.

Finally, if you don’t need the money, you and Hannah should consider making more gifts. These would be potentially exempt transfers – if you survive for seven years after making them, they become free of IHT.