Roger is 41, and he and his wife have two children aged 12 and 10. When he retires from the army he will receive an index-linked final salary pension which is forecast to pay about £35,000 a year. They own a house worth around £400,000 on which there is a repayment mortgage of £210,000. They let this and expect that it will be mortgage free by the time Roger retires.
Sipps, junior Isas, property and cash
Supplement retirement income, help children to buy homes
They also have a flat in London worth around £450,000 near a Crossrail station which they let. There is an interest-only mortgage of £240,000 on this but they are making payments to reduce the debt and hope to be able to increase these if rents rise when Crossrail opens in 2019. They hope to pay off the mortgage in 20 years so that the rent will supplement their pensions.
Roger started investing in a self-invested personal pension (Sipp) eight years ago and has been managing his family's investments since then. They also have about £10,000 in easy access savings accounts to pay for any unexpected bills, but he and his wife don't have individual savings accounts (Isas).
"I am concerned that I may exceed the lifetime allowance so will soon stop making contributions to my Sipp and use that money to pay off our mortgage more quickly," says Roger. "But we will try and grow our overall portfolio as much as possible over the next 15 to 20 years, hopefully achieving an average total return of 5 per cent a year. My final salary pension and the income from our flat in London will cover our basic outgoings in retirement, and we will then seek to take an income from our Sipps. The drawdown from the Sipps will be for discretionary purchases such as entertainment and travel, and we will be flexible as to when we take it, so we can preserve capital after dips in the market.
"We make monthly contributions to our children’s junior Isas and intend to continue investing in these. We hope that the funds we build up in the Junior Isas, together with the 25 per cent tax-free lump sums from our pensions, will amount to decent deposits for the children to buy homes in about 18 years' time.
"I try to minimise costs so I'm considering moving to a cheaper investment platform. My wife's Sipp is entirely invested in investment trusts because the platform fee for them is capped at £200 a year plus dealing costs, in contrast to 0.45 per cent of the value of any open-ended funds held in it.
"We are fairly relaxed about short-term losses in our Sipps and suspect that we will suffer setbacks over the next 20 years. As we have plenty of time until we retire we could recover from a loss of up to 30 per cent.
"Because we are not reliant on the Sipps for our basic retirement income we can afford to take a relatively risky approach at present – we don't hold any bonds in them and only about £2,000 in cash. However, nearer to the time we retire I may reallocate some of our gains into an absolute return fund as this bull market can't go on forever.
"But I am worried that we may be replicating the returns of a tracker fund because we hold too many funds, which between them effectively mirror the market.
"And as a relatively inexperienced investor I still make the occasional howler. For example, I sold Jupiter European Opportunities Trust (JEO) on the day of the European Union referendum and have embarrassingly bought it back at a higher price. But I have hopefully learnt a salutary lesson – that it is difficult and dangerous to sell in a falling market.
"I don't have time to monitor the portfolio as often as I would like so have sold my holdings in direct shares and niche funds – Randgold Resources (RRS), Lloyds Banking (LLOY) and P2P Global Investments (P2P). I hope that the professional managers will be able to keep a closer eye on the markets for us.
"And we have recently increased our exposure to Europe via FP CRUX European Special Situations (GB00BTJRQ064) and Jupiter European Opportunities Trust, and to Japan via Baillie Gifford Japan Trust (BGFD).
I am constantly tempted to move out of active funds into low-cost trackers. And I am considering transferring some more money into a wealth preservation fund such as Personal Assets Trust (PNL) or Troy Trojan (GB00B01BP952).
|Roger and his wife's portfolio|
|Holding||Value (£)||% of the portfolio|
|Baillie Gifford Japan Trust (BGFD)||6,684.57||4.04|
|BlackRock World Mining Trust (BRWM)||4,740.46||2.86|
|City Of London Investment Trust (CTY)||6,208.28||3.75|
|Edinburgh Investment Trust (EDIN)||5,845.68||3.53|
|F&C Global Smaller Companies (FCS)||6,210.10||3.75|
|Fidelity Special Values (FSV)||6,925.50||4.18|
|Finsbury Growth & Income Trust (FGT)||5,730.00||3.46|
|HICL Infrastructure Company (HICL)||3,192.00||1.93|
|Jupiter European Opportunities Trust (JEO)||8,276.31||5|
|Law Debenture Corporation (LWDB)||9,690.00||5.85|
|Monks Investment Trust (MNKS)||9,204.85||5.56|
|RIT Capital Partners (RCP)||14,035.00||8.48|
|Scottish Mortgage Investment Trust (SMT)||8,745.03||5.28|
|Temple Bar Investment Trust (TMPL)||5,931.80||3.58|
|Templeton Emerging Markets Investment Trust (TEM)||8,616.14||5.2|
|FP CRUX European Special Situations (GB00BTJRQ064)||5,421.60||3.28|
|Fundsmith Equity (GB00B41YBW71)||6,515.78||3.94|
|LF Woodford Equity Income (GB00BLRZQC88)||6,178.50||3.73|
|Lindsell Train Global Equity (IE00BJSPMJ28)||6,040.80||3.65|
|Marlborough UK Micro-Cap Growth (GB00B8F8YX59)||6,493.49||3.92|
|Old Mutual UK Alpha (GB00B946BX62)||6,247.50||3.77|
|Stewart Investors Asia Pacific Leaders (GB0033874768)||6,610.20||3.99|
|Roger's children's junior Isas|
|Holding||Value (£)||% of the portfolio|
|FP CRUX European Special Situations (GB00BTJRQ064)||500||14.29|
|Fundsmith Equity (GB00B41YBW71)||500||14.29|
|LF Woodford Equity Income (GB00BLRZQC88)||500||14.29|
|Lindsell Train Global Equity (IE00BJSPMJ28)||500||14.29|
|Marlborough UK Micro-Cap Growth (GB00B8F8YX59)||500||14.29|
|Old Mutual UK Alpha (GB00B946BX62)||500||14.29|
|Stewart Investors Asia Pacific Leaders (GB0033874768)||500||14.29|
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
Gregg Crawford, senior financial planner at Informed Financial Planning, says:
You have a clear focus on your objectives, which are to ensure that your mortgages are repaid by the time you retire, and that you will have a combination of income in retirement from your final salary, personal pensions and rent. You have also considered how to help your children get onto the property ladder.
It is good that you are preparing to make some changes to your pension fund as its size approaches the Lifetime Allowance threshold [currently £1m and rising to £1.03m in April]. Doing this means you should be able to limit its impact on your retirement planning. You should consider balancing out your pension provision to remove the bias to yourself, particularly as you approach the lifetime allowance. And ensure that your wife uses her pension for your retirement needs to a greater extent.
You should have more of a balance between long-term retirement savings and your deposit funds. This could help if you retire earlier than you currently plan or there is an earlier requirement for capital to help your children. If your wife is aged under 40, she could open a Lifetime Isa, and invest up to £4,000 a year in it and receive a 25 per cent top-up from the government every year until she is 50. The Lifetime Isa cannot be accessed until age 60 (unless to buy a first home) so could be invested for longer-term growth.
Rob Morgan, pensions and investments analyst at Charles Stanley, says:
Pensions are the most tax-efficient means of long-term saving, especially if you are getting higher rate relief on contributions. But I agree that paying down debt is sensible given that you are close to exceeding the Lifetime Allowance, although of course the rules may change. Minimising platform fees by considering other providers is definitely something you could examine, although make sure you take into account any exit fees involved.
HOW TO IMPROVE THE PORTFOLIO
Chris Dillow, Investors Chronicle's economist, says:
Although you're worried that you might have a closet tracker, I have a different concern with this portfolio – that it might be too exposed to a particular risk.
Many of your funds hold large UK dividend payers with a defensive bias, for example, Temple Bar Investment Trust (TMPL), City Of London Investment Trust (CTY), Law Debenture Corporation (LWDB), Finsbury Growth & Income Trust (FGT) and Fidelity Special Values (FSV). And these hold similar stocks to each other. For example, Royal Dutch Shell (RDSB) is the biggest holding in Law Debenture Corporation, City of London Investment Trust and Fidelity Special Values, and the second biggest in Temple Bar Investment Trust.
This is no surprise. If a large fund wants to hold dividend payers there are only a limited number of UK stocks big enough for it to invest in. Large income funds are therefore likely to hold similar stocks to each other.
In the past, a bias towards such shares has been very sensible. Big defensive dividend payers have generally been underpriced. This is partly because investors have underrated the importance of economic moats – sources of near-monopoly power that allow companies to fend off competition – and partly because they have neglected dull defensives in favour of exciting growth stocks.
And therein lies the risk. It's possible that investors have finally wised up to that mistake, and if they have, such stocks might now be fairly priced – or even overpriced – if they have overreacted.
We can't quantify this risk. And there is a sound reason to think that defensives will deliver good returns on average – bullish fund managers avoid them for fear they will underperform a rising market. So in effect there's a risk premium on such shares.
But you still might want to consider lightening your exposure to such funds, and a global tracker would be one way to do this. You say you don't have time to monitor and research investments, in which case a global tracker is ideal.
Another option would be a private equity investment trust. You have a long time horizon, and over the long term there's a good chance that growth will come from companies that have yet to come to market, rather than currently listed ones. And private equity gives you exposure to such growth.
You're considering shifting into a wealth preservation fund, but I'm not sure about this. This isn't because you don't need more stability – I think you do. Even at current lower levels there's a risk that global equities will fall further, and you cannot rely on the market to bounce back over the longer term. For example, Japan's experience in the 1990s and the FTSE 100's current level of only about 3 per cent above its 2000 peak remind us that stock markets can do badly even over long periods.
Instead, my beef with such funds is that they don't do anything you can't do yourself. A mix of equities, government bonds, cash and maybe a little gold can replicate what most wealth preservation funds achieve at a lower cost. And doing this allows you to tailor your risk exposure to your own needs.
Funds do have a use. They can give us access to things we'd otherwise find it difficult to get exposure to, such as private equity, emerging markets equities or portfolios of stocks. And their managers might even occasionally spot underpriced shares.
Wealth preservation funds, however, do neither of these. If you want to scale back your risk exposure, switch some of your equity holdings into cash or bonds.
Gregg Crawford says:
Your growth expectations, based on your current attitude to investment risk, are realistic and unlike many investors you are not over optimistic.
You have an equity focused portfolio, presumably to maximise gains over your investment term. However, you have made losses due to your lack of investment experience and you do not have enough time to monitor the portfolio as much as you would like.
You do not seem to be following any particular model for the portfolio and this is likely to have an impact on the returns – as it has already – as well as the volatility. Running an efficient, focused and proactive portfolio takes time, understanding and commitment. There are many tools available to assist you with asset allocation modelling and investment management. While some of these come at a cost, it can be a price worth paying to deliver less volatile and often higher returns.
I think that you should reconsider having the junior Isas invested via the same aggressive equity strategy as your Sipp. Although you expect that your children will purchase a house in around 20 years due to their ages, they may require financial assistance before then so a lower risk investment strategy may be more appropriate.
Rob Morgan says:
Overall, I like your fund selection, which looks well balanced and suited to your objectives.
Targeted Absolute Return funds would potentially provide an extra layer of diversification, but considering the length of time you are investing for, and that you should be able to absorb the inevitable volatility of the stock market, I see no particular reason to use them more extensively. They could end up hampering long-term returns unless you happen to be skilled or fortunate in timing the market, which is notoriously hard. And your existing holdings in HICL Infrastructure Company (HICL) and RIT Capital Partners (RCP) should be relatively stable as well as offering differentiation.
|HICL Infrastructure Company share price||5.05||4.96||8.76||6.48||11.36||14.57||19.25||3.69||14.34||0.77|
|RIT Capital Partners share price||-14.21||19.24||15.17||2.42||-5.37||13.97||13.3||22.69||14.19||5.83|
|FTSE All Share index||-29.93||30.12||14.51||-3.46||12.3||20.81||1.18||0.98||16.75||13.1|
|FTSE World index||-18.18||19.64||16.28||-5.79||11.83||22.36||11.29||4.34||29.59||13.34|
I would be tempted to add to areas such as smaller companies and Asia to maximise long-term growth prospects. You are in a strong position with an army pension due to provide a good level of income so a higher risk, albeit diversified and balanced, approach is reasonable.
With regard to your concern about being over diversified, each of your holdings is actively managed and, for the most part, offer something entirely different to an index tracker.
Perhaps in the short term the net effect of each of these strategies could result in tracker-like returns as different styles cancel each other out in terms of performance. However, I would not expect this over the longer term. Strong and consistent stock picking by well chosen active funds should shine through as shorter-term factors such as investment style – for example growth versus value – diminish in significance. The use of investment trusts should help compound this as these can use gearing – borrowing to invest. If used judiciously gearing can enhance returns over the longer term, although it can also result in shorter-term volatility.
With the investment trusts, make sure you reinvest dividends periodically to prevent cash drag.