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Owning a stock is not a reason to be bullish on it

Our readers shouldn't hang on to shares that have lost them money in the hope they’ll turn around
January 24, 2019, Rosie Bullard and Kay Ingram

Pamela is 66 and winding down her private practice, but doesn’t have a fixed retirement date in mind. Her husband is 68 and retired. They both receive the state pension, which gives them £1,150 a month, and their combined occupational pensions give them a further £3,030 a month after tax. Pamela is also taking income from her business, on average £1,000 a month after tax. Their home is mortgage-free and worth about £1.2m.

Reader Portfolio
Pamela and her husband 66 and 68
Description

Pensions, Isas, investment bonds and trading accounts invested in shares and funds, cash, residential property

Objectives

Supplement retirement income, replace cars, have funds for emergencies and possible care costs 

Portfolio type
Improving diversification

"We have sufficient income to meet our day-to-day needs, including travel several times a year and an above-average spend on theatre and the arts,” says Pamela. “We haven't needed to draw on the income from our investment portfolio, which is currently about 4 per cent a year, so intend to continue reinvesting the dividends until I retire.

“I also have two undrawn defined-contribution pensions and a stakeholder pension, as well as a self-invested personal pension (Sipp) into which we continue to invest. These pensions, together with the natural income from our investment portfolio, should be more than sufficient to replace the income I currently draw from my business even if inflation is higher in the decade ahead. I have yet to decide how to take up my remaining pensions but will probably do it via a combination of drawdown and an annuity, which I will shop around for.

“We need sufficient capital to meet unforeseen costs, replace two cars in a few years’ time and cover possible care costs when we are older. We do not have children, so legacies and inheritance tax are not major concerns for us.

"In recent years we have fully used our annual individual savings account (Isa) allowances. We should be able to do this for a further three years by transferring the investments held outside Isas into these wrappers.

"Our investment portfolio fell around 8-9 per cent between May and November last year, and we expect it will fall further due to Brexit uncertainty and a downswing in the business cycle following the long bull market. We could tolerate a further fall of 10 per cent to 15 per cent as we can afford to wait for an upturn.

"Over recent years we have been selling our riskier holdings and offsetting any gains against our capital gains tax (CGT) allowances. We have taken profits on shares in two mining companies, two supermarkets, four utility companies, AstraZeneca (AZN), GlaxoSmithKline (GSK), BAE Systems (BA.), Smiths Group (SMIN), Dairy Crest (DCG), John Menzies (MNZS), RELX (REL) and Victrex (VCT), as well as John Laing Infrastructure Fund and GKN, which have delisted. Last year we also sold out of Scottish Mortgage Investment Trust (SMT) due to its high allocation to US and Chinese tech companies, which we think are overpriced.

"However, our portfolio still has a number of direct shareholdings. We think some of these, such as Watkin Jones (WJG), Lloyds Banking (LLOY) and Whitbread (WTB), will do well over the medium term so will probably retain them for their income. And if we were to sell some of our holdings just now, for example Kier (KIE), De La Rue (DLAR), Inmarsat (ISAT) and Marston’s (MARS), it would be at a loss. So we plan to hold them until their prospects and valuations improve, and reinvest any dividends they pay out.

"Our investment portfolio is underweight sectors including financials and housebuilders, and overweight sectors such as infrastructure and commercial property. We assume that our investment portfolio is overweight equities, given our ages. But we find little to tempt us into bond markets given the likely upward drift in interest rates, although we acknowledge that bonds can protect investment portfolios.

"We also realise that a number of the funds we hold have some of the same holdings as each other, so we should review our level of diversification.

We have recently added to our holdings in John Laing Environmental Assets (JLEN) and Phoenix (PHNX), and bought Reckitt Benckiser (RB.) in April last year when it seemed cheap.

"We are holding cash in our Isas in the hope of snapping up some further bargains this year. If these do not present themselves we will probably top up holdings we consider to be less volatile such as RIT Capital Partners (RCP), Personal Assets Trust (PNL) and Troy Trojan Global Income (GB00BD82KQ40).”

“We started investing in equities on a small scale in the 1980s, initially privatisations and a demutualisation. We then expanded and diversified our portfolio through the 1990s using a high-street investment management service as we were both in full-time employment. This was broadly successful, but the fees were quite high.

“We sold a large portion of the portfolio in 2007 to purchase a buy-to-let property near London to supplement our retirement income, but the purchase fell through. We also realised that the likely returns after management costs and associated overheads would not be as attractive as we had thought. So we reinvested the cash in bonds and equities in 2012 via lower-cost DIY investment platforms, as my husband had retired and had more time available for research.”

 

Pamela and her husband's portfolio

Holding Value (£)  % of the portfolio
3i Infrastructure (3IN)            7,5000.37
British Land REIT (BLND)            5,8000.29
De La Rue (DLAR)            4,6000.23
Lloyds Banking Group (LLOY)            5,0000.25
Royal Dutch Shell (RDSB)            9,4000.47
Aberdeen Standard Equity Income Trust (ASEI)            8,5000.42
Artemis Global Income (GB00B5N99561)            8,8000.44
BBGI SICAV (BBGI)            6,1000.3
European Assets Trust (EAT)            4,9000.24
Fidelity Strategic Bond (GB00BCRWZS59)            3,1000.15
HICL Infrastructure Company (HICL)          12,8000.64
Inmarsat (ISAT)            4,1000.2
JP Morgan Claverhouse Investment Trust (JCH)          13,7000.68
Kier (KIE)            8,1400.4
Law Debenture Corporation (LWDB)            5,5000.27
Marston's (MARS)            3,0000.15
Personal Assets Trust (PNL)            9,9000.49
Phoenix (PHNX)            9,3000.46
DS Smith (SMDS)            6,5000.32
SPDR S&P Global Dividend Aristocrats UCITS ETF (GBDV)            7,0000.35
Janus Henderson Multi-Manager Income & Growth (GB00B88HSJ33)          12,4000.62
City of London Investment Trust (CTY)          19,7000.98
International Public Partnerships (INPP)            9,3000.46
Invesco Global Targeted Income (GB00BZB27K80)            4,5000.22
Jupiter Strategic Bond (GB00B544HM32)            6,4000.32
Murray International Trust (MYI)            7,5000.37
Rathbone Income (GB00BHCQNL68)             5,5000.27
RIT Capital Partners (RCP)          19,9000.99
TR Property Investment Trust (TRY)          11,5000.57
Tritax Big Box REIT (BBOX)          13,7000.68
MI TwentyFour Dynamic Bond (GB00B57TXN82)            4,7000.23
Witan Investment Trust (WTAN)            8,1000.4
Baillie Gifford Japanese (GB0006011133)           10,3000.51
BlackRock Continental European Income (GB00B3Y7MQ71)          10,4000.52
MI Chelverton UK Equity Income (GB00B1FD6467)            5,0000.25
MedicX Fund (MXF)            7,5000.37
Standard Life Aberdeen (SLA)            6,7000.33
TB Evenlode Income (GB00BD0B7C49)            6,4000.32
Watkin Jones (WJG)          11,1000.55
Whitbread (WTB)            9,1000.45
Invesco Physical Gold ETC (SGLP)          33,8001.68
CLS (CLI)            3,9000.19
John Laing Environmental Assets (JLEN)            7,4000.37
Jupiter Distribution (GB00B4WDT300)          10,4000.52
Pennon (PNN)            7,4000.37
Perpetual Income & Growth Investment Trust (PLI)            9,7000.48
Primary Health Properties (PHP)            5,4000.27
Reckitt Benckiser (RB.)            9,9000.49
Secure Income REIT (SIR)            6,8000.34
SEGRO (SGRO)          12,0000.6
UK Commercial Property REIT (UKCM)            5,8000.29
Vodafone (VOD)            7,7000.38
Bluefield Solar Income Fund (BSIF)            7,2000.36
Fidelity Global Dividend (GB00B7778087)            7,6000.38
First State Global Listed Infrastructure (GB00B24HK556)            6,5000.32
LF Miton UK Multi Cap Income (GB00B4M24M14)            1,1000.05
LF Woodford Equity Income (GB00BLRZQB71)            5,5000.27
LF Woodford Income Focus (GB00BD9X7109)            5,6000.28
Regional REIT (RGL)            7,0000.35
Renewables Infrastructure Group (TRIG)            5,6000.28
Troy Trojan Global Income (GB00BD82KQ40)            3,2000.16
Prudence Establishment Charge Bond          35,5001.76
Aviva Portfolio Bond          21,8001.08
Pamela stakeholder pension        140,0006.95
Residential property     1,200,00059.57
NS&I Premium Bonds          10,0000.5
Cash        104,2005.17
Total     2,014,340 

 

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

 

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You think you are overweight equities given your age, but age is irrelevant. The only valid reason as to why older investors should own fewer shares than younger investors is that they have retired and have no income from work with which they can diversify equity risk. But you are still working so do have that diversifier.

Rather, the question is whether anybody should have around 80 per cent of their investment portfolio in equities. This is probably feasible for somebody happy to take risk. Lead indicators such as the dividend yield and foreign buying of US equities point to decent returns in the next 12 months – although there is a danger that markets might take fright at rising US interest rates.

What I really don’t like is that you’re hanging on to stocks that have lost you money in the hope they’ll turn around. There are many reasons why stocks can rise, but these do not include your shares having fallen since you bought them. History tells us that stocks that have fallen often continue to fall, partly because their holders’ reluctance to sell keeps them overpriced. Evaluate stocks such as Kier as though you didn’t own them and consider whether their prospects are good. If they aren't, get rid of them. Just because you own a stock is not a reason to be bullish on it.

 

Rosie Bullard, partner and portfolio manager at James Hambro & Partners, says:

Your overall weighting to equities is not excessive and all is right in current circumstances. You also appear to understand and be prepared for further market falls. But this weighting will need to be reviewed when you and your husband want to draw down from the investment portfolios.

We agree that bond markets don't look particularly attractive at present, and are wary of corporate bond funds because there could be liquidity constraints if there is an aggressive sell-off in bond markets. However, index-linked gilts and US Treasury inflation-protected securities (Tips) offer value in a portfolio.

Your weighting to gold seems appropriate, although we always check how exchange traded commodities (ETCs) get exposure to the asset they track as our preference is for physically backed ones. 

You have a fair amount of cash – something we favour at this point in the cycle. When you retire fully, consider always holding at least a few years’ worth of expenditure in cash so that you will not have to draw from your investment portfolios when markets are in more challenging periods.

 

Kay Ingram, director of public policy at LEBC Group, says:

If your investment portfolio yields a 4 per cent income yield then the £1,000 of net income needed to replace your earnings is achievable. You are also increasing your tax-efficiency by adding to your Isas each year, and have additional pensions, investment bonds and a healthy cash reserve. So meeting costs such as replacing cars should not be a problem.

Much of your current income comes from occupational and state pensions, but this may change when one of you dies. Finding out what will be payable then is essential to your long-term security. With state pensions started before 2016 this is usually 50 per cent of the earnings-related component. With occupational pensions this depends on the individual scheme rules. And with private pensions, you choose how you wish the payments to be made throughout both your lifetimes and when you start drawing on them.

Leave your pension plans invested for the longer term to supplement your income later. This could be when one of you dies, if either of you need care funding or if other investments fail to keep pace with inflation. You can dip into them flexibly or buy a guaranteed lifetime income. Increasing age and higher interest rates should provide a higher level of guaranteed income at that point and - if your health deteriorates - you may qualify for more, although you will need to shop around to find the best rates.

Private pensions opened before 2015 may need an upgrade to give you all the additional options available since then. Not all pension providers have changed their rules to include investment beyond the age of 75, flexible payments and inheritability of the pension on tax-advantageous terms.

You could take advantage of the tax relief you can claim, for the current year and up to three previous years, to top up your pension funds further. When you are retired the maximum that can be saved with the benefit of tax relief will fall to £3,600 per year until you are 75.

An audit of the realised and realisable gains and losses on the investments you hold outside tax-efficient wrappers such as pensions and Isas, before 5 April, may give you scope to realise more gains within the annual £11,700 CGT allowance. Don’t be afraid to realise losses, which can offset other gains in the same tax year or be carried forward indefinitely to offset against future gains.

Your taxable investments are mostly owned by your husband, whose investment income could exceed the £2,000 tax-free dividend allowance. Your taxable dividends are well below this figure, so if he passes some of these investments to you, between the two of you it may be possible to earn all your dividends free of tax in future.

You have no children, so if your health or capability deteriorate you have no obvious source of support. If you haven't already, make provision for someone else to take charge of your financial affairs in the event that you lose capacity temporarily or permanently. As most of your investments are in self-directed accounts no one can access your money or make decisions on your behalf without a valid power of attorney.

 

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

This portfolio is both under- and overdiversified. 

It’s underdiversified in that it seems more UK-focused than most, and you have relatively little US or emerging markets exposure. The latter is reasonable because emerging markets are prone to momentum, which is against them for now. But you are, in effect, betting that the UK will outperform global markets. This is possible because the UK is relatively cheap, but it is far from certain given our poor economic prospects.

You are overdiversified in that you hold far more funds and shares than you need to spread UK equity risk. And your funds do indeed have some of the same holdings as each other. For example, JP Morgan Claverhouse Investment Trust (JCH), City of London Investment Trust (CTY) and Perpetual Income & Growth Investment Trust (PLI) all hold BP (BP.) and Royal Dutch Shell (RDSB), adding to your exposure to them.

There is a case for such funds. History tells us that big defensive stocks have on average tended to outperform over the long run. But if you must be overweight in them, do so as a result of a conscious decision.

Your overdiversification also means you are paying the charges of actively managed funds but diluting away their performance. This gives you something like the return of a tracker fund but with higher charges.

There’s also a paradox about your equity choices. You are overweight infrastructure funds, and underweight financials and housebuilders. But you’re bearish on bonds as you expect interest rates to rise.

However, a world in which interest rates and bond yields are rising is also one in which the economy is growing and appetite for risk is increasing. This environment might be helpful to financials and builders, as long as rates don’t rise so much that they choke off the expansion. Such an environment might also be less beneficial to infrastructure funds as the cost of financing projects would rise, and investors might shift out of them in favour of riskier assets.

I suspect the housing market might stagnate for a long time, so I find it hard to be enthusiastic about housebuilders. But you should consider whether infrastructure funds could cope with rising yields.

 

Rosie Bullard says:

Your investment portfolio appears well diversified, but the significant number of holdings makes it difficult to monitor newsflow on them and ensure there are no hidden biases. Our preference is for direct shareholdings to account for 1 per cent to 2 per cent of investment portfolios, so that each one can make a meaningful contribution on the upside, while still allowing for a sufficient number of direct equities to be held.

With funds, our preference is for them to account for 3 per cent to 4 per cent of investment portfolios. This is so we do not hold too many individual funds, as it would be difficult for us to monitor them and risks too much overlap in their underlying holdings.

Your direct equity holdings are UK-listed, so consider looking at overseas markets as the UK is dominated by energy companies and banks, and gives very little exposure to technology companies.

You hold a number of real estate investment trusts (Reits), but be careful of the quality of the underlying assets and the impact interest rate rises may have on property values. We have a small weighting to property in a number of our client portfolios, but this is through a single vehicle. If you want to retain some property exposure for income or diversification, consider consolidating your holdings in this area to two or three high-quality funds.