Chris is 44 and lives with his partner and two children, aged six and eight. He is a self-employed landlord and runs a property management company, and earns about £100,000 a year. His partner earns about £30,000 a year as a self-employed consultant, but has negligible assets and savings. Their home, which is worth about £500,000, has a £155,000 mortgage on it.
Chris has six buy-to-let properties worth about £700,000, on which there are mortgages of about £350,000. These are held in a limited company owned by himself. He has a further two buy-to-let properties worth about £200,000 on which there are mortgages of £134,000, held in a limited company of which he owns 75 per cent.
Chris also owns a commercial property worth about £600,000 and two residential properties worth £250,000 which are mortgage-free.
“I am hoping to semi-retire at age 55,” says Chris. “I contribute the maximum amount possible each year to my individual savings account (Isa) and about £18,000 a year to my self-invested personal pension (Sipp), and will continue to contribute at these levels until I am 60. I also tend to hold about £50,000 in cash for emergencies.
“I intend to keep buying property for investment until I am 55 – when I find opportunities – but would like to give up the property management business at that age. And in 16 years – at age 60 – I would like to start cashing in my assets as tax-efficiently as possible to buy an index-linked annuity, as at that point I will be more concerned with wealth preservation. Or otherwise something similar that will give me an index-linked guaranteed income. In 23 years I will start to receive the full state pension.
“My children will hopefully go to university and I intend to help them financially to do this. I will also give them around £100,000 each, index-linked from today, to get on to the housing ladder and then endeavour to stay alive for at least seven years! I currently contribute £2,000 a year into each of the children’s Isas.
“I am prepared for my investment portfolio to decline in value by up to 20 per cent in a given year over the next 10 to 15 years. Given that I have 10-plus years to semi-retirement I was fairly laid back about market turbulence, but have become increasingly nervous over the past six months about the markets taking a tumble. As a result I have taken some profits on shares that I think have topped out and moved the proceeds into safer assets such as corporate bonds.
“I prefer to be invested, but it is getting harder to find shares that fit my investment criteria and I am not sure what to do with the cash as I take profits. As long as I can find investments that meet my criteria I am inclined to stay in the market, but if not I will put any cash I want to invest into bonds.
“I reinvest all dividends and never take any income – with all my fund investments I hold the accumulation share classes. I have no specific income requirements for retirement other than to get the maximum amount possible. I review my portfolio and make adjustments regularly, although it is eclectic and probably shows no consistent strategy other than the original purchase criteria.
“I buy shares with a high return on capital employed, and also like a company to have a well-covered dividend out of free cash flow and a positive cash balance.
“I take profits regularly when I think shares have topped out and my investment criteria no longer apply. I sell investments quickly at a loss if I think they are true ‘dogs’, but hang on to out-of-favour shares if I think the fundamentals are still all right. For example, I topped up Plus500 (PLUS) when it slipped last year and it has done well on the rebound.
“I still have faith in funds run by Neil Woodford, but don’t intend to top these up.
“I am reluctant to sell down my holding in Fundsmith Equity (GB00B41YBW71) because I like manager Terry Smith’s investment criteria. However, I have a large percentage of my portfolio invested in it and the fund has done really well, so I feel that my allocation to it may be too much. I also like Fundsmith Emerging Equities Trust (FEET) and think that is going to grow in future, so I intend to top up my holding in it heavily over the next few years.
“That said, I am more interested in having a long-term, sound portfolio than avoiding market risk.”
Chris's investment portfolio
|Investment||Value (£)||% of portfolio|
|Bloomsbury Publishing (BMY)||5,667.42||1.34|
|Brewin Dolphin (BRW)||8,691.39||2.06|
|Burford Capital 6.125% GTD BDS 26/10/24 (BUR2)||5,590.00||1.33|
|Character Group (CCT)||6,560.40||1.56|
|City of London Investment Group (CLIG)||12,996.37||3.08|
|Fundsmith Emerging Equities Trust (FEET)||50,348.34||11.94|
|LF Woodford Income Focus (GB00BD9X6D51)||10,382.00||2.46|
|Polar Capital Technology Trust (PCT)||14,858.88||3.52|
|Regional REIT (RGL)||5,335.88||1.27|
|Watkin Jones (WJG)||12,272.54||2.91|
|Wizz Air (WIZZ)||10,798.92||2.56|
|Woodford Patient Capital Trust (WPCT)||16,047.62||3.81|
|XP Power (XPP)||6,718.14||1.59|
|Burford Capital 6.5% GTD BDS 19/08/22 (BUR1)||10,894.42||2.58|
|ETFS Brent Oil 1 month ETC (OLBP)||13,464.75||3.19|
|Fundsmith Equity (GB00B41YBW71)||129,836.47||30.8|
|Liontrust Asset Management (LIO)||4,845.70||1.15|
|Moss Bros (MOSB)||6,159.60||1.46|
|TB Evenlode Income (GB00BD0B7C49)||14,575.45||3.46|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS READER'S CIRCUMSTANCES
THE BIG PICTURE
Chris Dillow, Investors Chronicle's economist, says:
You seem to be aware of equity market risk. You can protect yourself from this not just by shifting into bonds, but also by continuing to save a lot. If you make regular savings, you will buy more shares when they are cheap than when they are expensive, and that’s a form of hedging.
But your portfolio faces another risk – a fall in property prices. And this might hit not just your property assets, but also the income from your job. So consider how resilient your portfolio is to this.
One way of making it more resilient to a fall in property prices and to protect yourself from falling share prices would be to hold more cash. A problem with property is that it becomes even harder to sell quickly in a downturn, and having to sell at such times can prove to be very expensive. So make sure you don’t need to do this.
A second possibility is to hold foreign currency as in the past sterling has fallen when property prices have fallen significantly. The problem with doing this, though, is that sterling is now quite cheap so might rise in the absence of such falls.
Also try to ensure that your equity portfolio isn’t hit hard by any fall in property prices. One way to do this would be to ensure that you don’t hold stocks that would suffer badly if interest rates rise more than expected. But other than perhaps Persimmon, in this respect I think you’re OK.
Overall, I don’t think you’re doing much wrong. As long as you can keep up a high savings rate you should be on course to meet your objectives.
Paul Derrien, investment director at Canaccord Genuity Wealth Management, says:
Your overall investments – portfolio and property – are working well. They look as though they will already achieve your objectives – funding your future lifestyle and supporting your children through university and into later life.
Your total assets have a good balance, with the properties potentially funding their liabilities over the coming years as well as providing you with an income. These already look as though they can meet both your and your children’s needs. You also have a sensible number of direct equity investments, none of which are excessive in terms of your allocation to them. So keep up the sensible approach that you have.
Your investment portfolio is at a higher level of risk in terms of its equity exposure. But it is by no means an excessive part of your overall wealth, and your inclusion of funds means it is fairly well diversified so broadly meets your risk profile. Therefore a little fine tuning to the asset allocation will be more than sufficient.
Be prepared to change the asset mix where you become nervous. Look to reduce the concentration risk in the portfolio, diversify a little more, and keep using the tax-efficient wrappers. Above all, review your objectives regularly to ensure that you remain on track.
Rachel Winter, senior investment manager at Killik & Co, says
Consider whether you are likely to draw on your Isa before your Sipp. If so, it would perhaps be prudent to focus on the less risky investments with the Isa.
You are consiDering buying an annuity, which you will think about in greater depth when the time comes. But as you want to help your children financially I would consider retaining your Sipp after retiring and investing it in lower-risk income-paying assets. That way your children could inherit any remaining funds in it, which would not be possible with an annuity.
HOW TO IMPROVE THE PORTFOLIO
Chris Dillow says:
One feature of this portfolio is its big weighting to Fundsmith Equity. Although I’m more of a fan of passive funds, I don’t think this is a wholly bad idea.
This is one of the very few funds you own. Too many investors own lots of different actively managed funds and so diversify away any outperformance that a single manager might achieve. So they end up with tracker-fund-type performance but active management fees. You are largely avoiding that error.
However, be aware of the risks to this fund. These include market risk – that if the general market falls pretty much any basket of stocks, however good, will be dragged down.
But there’s also a risk arising from Terry Smith’s style. He buys stocks that are “resilient to change” and “whose advantages are difficult to replicate”. This is similar to Warren Buffett’s advice to look for companies with “moats” – things that protect them from competition. This approach has paid off well for years, because investors have tended to underweight the importance of quasi-monopoly power and so underpriced stocks that have it.
But the big rises in the prices of such stocks suggest that investors may have learned from their error and wised up to the merits of these. And if this is the case future performance won’t be so stellar.
This risk isn’t, of course, confined to Fundsmith Equity: it applies to all strategies based on investors’ past misjudgments, such as momentum investing, so maybe the mis-pricing no longer exists.
|Fundsmith Equity top ten holdings as at 31 January 2018|
Paul Derrien says:
In most years we don’t see falls in equity values of 20 per cent or more. But this can happen and with a portfolio almost exclusively invested in equities, you could suffer a fall in the value of your investments beyond your maximum tolerance level of 20 per cent. You would generally require a split of around 60 per cent equity to40 per cent high-grade bonds to cap the downside to this level, so in periods where you become more nervous of equity markets restructure the portfolio accordingly.
You should address your over-concentration in Fundsmith Equity, which accounts for over 30 per cent of your investment portfolio and is a fairly concentrated fund. The portfolio would also benefit from some additional diversification. I would suggest taking advantage of this fund’s impressive performance and reducing your holding in it to perhaps 20 per cent of your investment portfolio.
If you want to stick withglobal funds have a look at JPMorgan Global Growth & Income (JPGI). This has a good performance record and will not leave you quite as exposed to one investment manager’s approach.
|Fund||1 year total return (%)||3 year cumulative total return (%)||5 year cumulative total return (%)|
|IA Global sector average||13||41.8||73.8|
|JPMorgan Global Growth & Income share price||18.1||65||111.4|
|AIC Global Equity Income sector average||15.6||47.2||73|
|Source: FE Trustnet as at 2 February 2018|
Or reinvest the proceeds in other themes and regions that you like. You plan to add to emerging markets, so selling some of your Fundsmith Equity holding could be a source of funds for doing this. But as you already have about 12 per cent of the investment portfolio in one fund – Fundsmith Emerging Equities Trust – why not diversify into another? If you like emerging markets, how about an Asia fund such as Schroder Asian Alpha Plus (GB00BDD27J12)?
And if you like technology, how about getting some exposure to robotics via an exchange traded fund (ETF)?
Rachel Winter says:
You have a long time horizon of over 10 years and a good understanding of the risks inherent in the stock market, so it’s appropriate for you to be invested primarily in equities and equity funds.
But I also agree with your intention to balance your equities with some less volatile non-equity investments. You mention being comfortable taking a 15 per cent to 20 per cent hit to the value of your investment portfolio in any given year, but the overall market was hit harder than this when the dot.com bubble burst and during the financial crisis. So I would consider having a non-equity allocation of 20 per cent to offer some protection in the event of a market downturn.
Your investments could be more diversified. For example, your two corporate bonds are both issued by the same company. Add some different bonds, sticking to shorter-dated ones with maturity dates of less than seven years as these tend to be less sensitive to interest rate changes.
You could also consider some investments that offer inflation-linked income, such as infrastructure funds, and some different commercial property funds.
The individual equities that you hold are very UK-dependent. Not only are they all listed in the UK, they earn the majority of their revenue here too. UK growth is currently far below that of other major economies, so if you are set on buying individual stocks I would suggest purchasing some overseas companies, or at least some UK companies with more international operations.
Fundsmith Equity has been a fantastic performer and we have a very high opinion of Terry Smith. However, while the fund offers geographical diversity I would bear in mind that it lacks exposure to some sectors of the market and you may wish to account for this elsewhere in your portfolio.
One such area would be financials, which should do well as interest rates start to pick up. Although I hope that Fundsmith Emerging Equity Trust will prove to be a good long-term investment, performance since launch has been disappointing, and many other Asia and emerging markets funds have performed far better.
Fundsmith sector allocation as at 31 January 2018
|Fundsmith geographic allocation as at 31 January 2018|