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We want to help our nine kids to buy homes

Our experts help two readers work out how to achieve their goals
December 10, 2020and Tancredi Cordero

These readers want to give their children deposits for homes and cash gifts

This is likely to require a fund worth over £600,000

To hit this target they need to have the right asset allocation

Reader Portfolio
Simon and his wife 41 and 39
Description

Residential property, pensions, Isas and Junior Isas invested in funds and shares.

Objectives

Give children deposits to buy homes and cash gifts, grow Sipp investments to value of £50,000, downsize home to create retirement pot, cut number of holdings, correlate assets with objectives.

Portfolio type
Investing for goals

Simon and his wife are ages 41 and 39. He earns £72,000 per year and his wife runs a business that earns them around £7,500 per year. They have nine children aged between one and 18.

Their home is worth about £300,000 and has a £38,000 mortgage. They also own a buy-to-let property which, minus the mortgage, has a value of £40,000. It generates an income of about £3,500 a year.

“We wish to give each of our children cash worth 25 per cent of the price of an average UK home as a deposit, plus equivalent to £10,000 in today's money, when they reach age 24,” says Simon. 

“We don't intend to retire until illness or circumstances force us to. And when we do, we don't aspire to live in luxury – we just want to have enough money to keep our heads above water. So we want to have £50,000 invested in self-invested personal pensions (Sipps) from which to draw a small pension to top up our state pensions. We also plan to sell our home and move to a cheaper one, and use the money left over from this to create another small pension pot.

“My workplace pension is worth about £3,200 and likely to grow by about £1,500 each year. We currently add about £5,000 per year to our investments, and reinvest about 80 per cent of the dividends and take 20 per cent for income.

"We are prepared to take the risk that we won't meet our objectives, although we would like around an 80 per cent chance of meeting them. I could tolerate a fall in the value of our investments of up to 50 per cent in any given year because we’re investing over the long term and will be dipping into our portfolio at nine intervals. 

“I don’t hold much cash because I think that I could easily borrow against my home in the event of an emergency or unexpected expenses.

“As our main objective is to provide deposits for UK residential properties, a considerable portion of our investments are assets that are correlated to this. Most of our investments are in areas that we think are ‘deep value’ and likely to shine within the next 10 to 15 years. Over a third of our investments are in beaten-up UK value shares, many of which are directly or partially correlated with UK residential property. For example, I think that Lloyds Banking (LLOY) will double in value at some point over the next five years.

"We also have a substantial allocation to emerging and frontier markets - especially India - as with close to 20 per cent of the world’s population it should shine in the next 10 to 15 years. 

"Europe also seems good value, and I have recently added Man GLG Japan CoreAlpha (GB00B0119B50) because it is value-orientated and invests in a value market.

"We don’t have any direct US investments due to concerns on valuations. But in late October I initiated a large position in Impax Environmental Markets (IEM) because Joe Biden seemed likely to win the US election and this could boost investments with an environmental focus. I also think that after the Covid-19 pandemic is over, taking care of the environment is likely be the next big focus. 

"We try to keep our costs of investing down by mostly investing in direct shareholdings or funds for which our investment platform has negotiated good annual charges. We hold around 20 per cent of the investments in Sipps, and the rest in individual savings accounts (Isas) and Junior Isas.

"I am looking to trim the number of our investments from over 20 to 17, as some are the result of opportunistic trades. I would now rather keep focused on a smaller number of holdings.

"I review my portfolio every week. Sometimes I make no changes for three months and at other times I change it every week. Reasons for doing this include a stock reaching our target price, if an investment no longer reflects our goals, or the investments need rebalancing."

 

Simon and his family's portfolio
HoldingValue (£)% of the portfolio
Jupiter Global Value Equity (GB00BF5DRJ63)10,6452.97
Inland Homes (INL)18,5305.17
BMO Real Estate Investments (BREI)2,4050.67
Lloyds Banking (LLOY)13,5203.77
NewRiver REIT (NRR)2,5350.71
Cenkos Securities (CNKS)7,6152.13
Record (REC)7,1602
BMO Commercial Property Trust (BCPT)38,83010.84
Taylor Wimpey (TW.)6,6751.86
Marlborough Nano-Cap Growth (GB00BF2ZV)42,26511.8
LF Equity Income (GB00BLRZQC88)6550.18
ICG Enterprise Trust (ICGT)5,0551.41
India Capital Growth Fund (IGC)15,1004.21
BlackRock Frontiers Investment Trust (BRFI)38,13010.64
Jupiter India (GB00BD08NQ14)23,3406.52
Schroder Small Cap Discovery (GB00B5ZS9V71)23,7306.62
TR Property Investment Trust (TRY)24,3706.8
Hargreaves Lansdown (HL.)6,8601.91
Man GLG Japan CoreAlpha (GB00B0119B50)3400.09
L&G Cyber Security UCITS ETF (ISPY)7,0001.95
Impax Environmental Markets (IEM)20,2905.66
Workplace pension3,2000.89
Buy-to-let property40,00011.17
Total358,250 

 

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

 

INVESTMENT STRATEGY

Tancredi Cordero, founder and chief executive officer of Kuros Associates, says:

You want to give each of your children at age 24 cash worth £10,000 and a deposit for a house worth 25 per cent of the price of an average UK house, which today is around £250,000. That’s about £65,000 plus £10,000 times nine, so £675,000. However, this is to be drawn down over a long period – the next 22 years. And as your eldest is 18 you are still six years away from the first withdrawal. 

This means that your investments will have to weather a long tenure and all the changes that may happen to you personally and the global economy. For example, the latter is likely to include a growing percentage of global gross domestic product (GDP) from emerging markets, ageing populations, the key role of technology in successful businesses, new sources of energy and lower average interest rates.

You wish to have £50,000 in your Sipp when you retire, but also need to pay off a £38,000 mortgage on your first house. However, this is negligible as you have £40,000 in value in your buy-to-let property. 

You have a high risk tolerance, and don’t spend much of the money that you earn. This helps, because to build up the capital you need, you will have to invest as much as possible. Even if you can tolerate volatility it is better to take as little risk as possible.

 

Chris Dillow, Investors Chronicle's economist, says:

You’re taking on a big commitment. Nationwide Building Society estimates that the average house price is £230,000. Nine 25 per cents of that is well over £500,000 in today’s prices – and possibly a lot more if house prices rise. You do, however, have two things on your side.

One is time. Your first payment isn’t due for six years and your last isn't due for 23. This gives you plenty of time to save up and enjoy the power of compounding. And you will accept falling a little short of your objective.

A deep-value approach is sensible if you want your assets to keep pace with house prices. Value stocks and funds are cyclical so do especially well in good times and badly in recessions. This means that they should move like house prices. And working in the education sector means that you are less likely than most people to lose your job in a recession so are better placed than most to take on cyclical risk.

But risk sometimes materialises. Over the next 23 years it is pretty much inevitable that there will be one or more serious downturns in which portfolios like yours will be clobbered. And in downturns, property becomes difficult to sell – at least at reasonable prices. This means that open-ended funds that invest in property might stop investors from withdrawing their money. And property investment trusts could swing out to wide discounts to their net asset value. These are serious risks if you want to make nine withdrawals.

If we had a functioning economy geared towards people’s real interests, there’d be a simple solution – you could invest in house price futures. But we don’t have such an economy or assets.

 

HOW TO IMPROVE THE PORTFOLIO

Tancredi Cordero says:

Your asset allocation is the most important driver of performance, and individual investment selection comes second.

About 70 per cent of your portfolio is in equity funds or shares, and 30  per cent in real estate. Consider diversifying away from these two assets to include some uncorrelated returns and less volatility, which would be helpful in periods like March this year.

You could reduce your real estate exposure by half and put at least 5 per cent of your investments into gold via an exchange traded fund or exchange traded commodity. Options include Invesco Physical Gold ETC (SGLP) and WisdomTree Physical Gold (PHGP). You could also allocate 5 per cent of your investments to general commodities via a passive fund, as these assets would be likely to benefit as the world reopens after a Covid-19 vaccine becomes widely available. But be careful with oil because increased interest in environmental, social and governance investing is likely to affect petroleum in a negative way.

Your portfolio could also benefit from a 1 per cent allocation to cryptocurrency Bitcoin as a driver of uncorrelated returns and hedge against inflation. You can get exposure to this via ETFs. However, I would not do this immediately as [at time of writing] the price is a little high. But if it drops this could be a good move in the longer term. Bitcoin should benefit from central banks’ money printing, which is unlikely to reduce much in the near future.

In terms of your equity allocation, you should add more exposure to China and Japan as these are poised to do very well after the Covid-19 pandemic comes under control. It is good that you already have exposure to India and Frontier markets.

From a thematic perspective, you could add some exposure to healthcare via an ETF such as iShares Healthcare Innovation UCITS ETF (DRDR). This should benefit from increased interest in healthcare following the Covid-19 pandemic as well as an ageing global population.

But perhaps the most important investment theme in the coming years will be renewable energy and you can get exposure to this via iShares Global Clean Energy UCITS ETF (INRG), which is doing very well.

If you are a value investor, consider getting technology exposure in emerging markets. They can offer the same growth opportunities at cheaper valuations as they have fewer eyeballs on them. Options include EMQQ Emerging Markets Internet & Ecommerce UCITS ETF (EMQP).

Also add a quality growth fund to have upside potential with the assurance of a strategy that invests in leading global companies. 

 

Chris Dillow says:

There are two things you can do to mitigate your investment risks.

Invest according to a 10-month average rule, holding assets while their price is above their 10-month or 200-day moving average, and selling them they fall below it. Doing this can protect you from the sort of longer-term bear markets that destroy wealth.

Keep an eye on the yield curve. Economists cannot forecast recessions, but bond markets can. When longer-dated bond yields are below shorter-dated ones, for example, 10-year bond yields are below two-year bond yields, it’s a sign that a recession is on the way. This indicator even predicted this year’s recession as the yield curve inverted last autumn. When this happens, you should reduce your holdings of cyclical stocks.

But right now the yield curve suggests that you should hold cyclical stocks.

I’m more wary of emerging markets that you are. There is strong evidence that good economic growth does not mean good stock market performance. The benefits of economic growth can instead go to new, unlisted or foreign companies, or even to workers. I would regard emerging markets as global cyclical stocks and play them accordingly: hold them when their prices are above their 10-month average and sell them when they fall below it.