Time for a later-life portfolio tidy-up

“I want to sell the investments in my individual savings account (Isa) over the coming years, and invest the proceeds in Isas for my wife, daughter and granddaughter,” says Nicholas. “But I would like to maintain a growth-orientated approach, rather than selling everything immediately and holding it in cash. With the current asset allocation, I expect our investments to grow by around 6 per cent to 8 per cent a year, and yield around 3 per cent. I have no intention of adding to them.

"I am aware that our overall assets, as they stand, will attract inheritance tax (IHT), so getting professional advice on this is essential. It's likely that I’ll have to seek professional advice on the management of our investments in the next year or so.

"But in the meantime our investments could do with a massive tidy. Over the past two years I missed the opportunity to sell holdings such as ITV (ITV) and British American Tobacco (BATS). I like to buy and hold for as long as possible, but think that I have held on to some positions for too long. And I've lost out by not buying London Stock Exchange (LSE), Unilever (ULVR) and Impax Environmental Markets (IEM), although if I took a longer-term view these securities might still offer buying or selling opportunities.

"I recently sold Standard Chartered (STAN), and am wondering whether to continue holding Royal Dutch Shell (RDSB) and or BP (BP.). ITV, J Sainsbury (SBRY), Electra Private Equity (ELTA), Lloyds Banking (LLOY) and Royal Bank of Scotland (RBS), meanwhile account for only a small part of our portfolios. And I have ethical concerns about BAE Systems (BA.) because it sells arms to Saudi Arabia.

"I’m also fearful that if there is a no-deal Brexit the UK market will be trashed, so should I trim and add positions now or wait until the form Brexit will take becomes clearer? I could tolerate a loss on our investments of up to 10 per cent in any one year.

"I recently bought Gabelli Value Plus+ Trust (GVP) but it has fallen 15 per cent since then so I thought it might be better to get exposure to US equities via an exchange traded fund (ETF). US equities seem expensive, but I think I’m underweight that market and would never underestimate its strength. Also, if there is a resolution to the China-US trade war it could provide a boost to world markets, so now could be a good time to buy and I have recently invested in Microsoft (MSFT:NSQ).

"I like investing along the lines of themes because my investments in biotech and technology have made gains of over 400 per cent over long time periods. I’m looking for up-and-coming investment themes, and thinking of switching into investments that offer exposure to robotics, artificial intelligence and clean energy as they seem like good long term bets. I am also thinking of getting exposure to investments that provide solutions to environmental concerns, emerging markets and Japan.

"I started investing 35 years ago, mainly in open-ended funds. But over the years I have increasingly favoured investment trusts because you can buy their shares at a discount to their net asset value, although I have never purchased one just because of a large discount. I also like that they can gear (take on debt) to invest more than the value of their assets.

"I have only ever bought two exchange traded funds (ETFs) but both have done very well for me. I am thinking of investing in a number of other ETFs including Invesco EQQQ NASDAQ-100 UCITS ETF (EQQQ) that has risen over the past year.

"I am happy to invest in any regulated vehicles, but am concerned about the costs of running my family’s portfolios because of management fees and platform charges."

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

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You don't intend to add to your portfolio. This means that you cannot benefit from a form of insurance available to younger investors – time diversification, and the ability to put more money into the market when prices have fallen and expected returns are higher. In this sense, your portfolio is riskier than those of investors who do add to them. So consider whether you have sufficient non-equity assets to diversify the risk of a bear market.

But you don't need to rush to do this. Bonds are expensive and only insure against certain types of stock market falls. And lead indicators such as the dividend yield suggest that the chance of a big fall in prices in the near term is small, although this will change.

I am concerned that you are kicking yourself over missing out on increases in some shares and Invesco EQQQ NASDAQ-100 UCITS ETF. Don’t – everybody misses some big gainers. And the fear of missing out can lead us astray into assets that are too expensive. Accept that you’ll miss some good stocks and buy some bad ones.

Freddie Cleworth, chartered wealth manager at EQ Investors, says:

Your financial circumstances are good in so far as you do not rely on your Isas for retirement income. So concentrate on how best to pass assets to your daughter and granddaughter, and ensure that you do it as tax-efficiently as possible.

Your wife could inherit your Isa allowance and contents as a surviving spouse so you do not need to run down your Isa to fund hers. But you could fund your daughter’s Isa and granddaughter’s Junior Isa each year. However, keeping a record of these gifts would be important.

The first £325,000 you give away will use up your nil-rate IHT band, so any gifts on top of this would count towards the value of your estate and potentially be liable to IHT at 40 per cent. If you survive for seven years from the date of making the gifts they will fall outside your estate for IHT purposes. You and your wife could both use your annual exemption entitlement via which each of you can give away gifts worth up to £3,000 each tax year without them being added to your estates. You and your wife could also pass on your pensions IHT-free.

In future, consider further estate planning such as making sizeable gifts or investing in portfolios of Alternative Investment Market (Aim) shares. These are high risk, but IHT-free after you have held them for two years.

[See the Portfolio Clinic in last week's Investors Chronicle for more information on estate planning]

[Listen to the podcast of 26 July for more information on estate planning]

Heather Owen, financial planner at Quilter Private Client Advisers, says:

Your estate appears to have a liability to IHT. Even after all available nil-rate bands are used – currently £950,000 in total for you and your wife if you leave your home to your daughter – you have an additional £443,204 exposed to IHT at 40 per cent. Although your pensions don’t fall into your estates, beginning to fund these to reduce the value of your estate would be likely to raise questions with HM Revenue & Customs. And it’s unlikely that you would be able to put much into your pensions because you are in receipt of them.

But there are other ways to reduce your IHT liability. Consider switching some of your Isa assets into Aim shares. This is the UK index for early-stage and smaller companies, many of which qualify for business relief after two years of ownership. If they still qualify for this relief at the time of your death they will be exempt from IHT. Aim investments are high risk but you can appoint a professional manager to run an Aim portfolio for you. They would conduct the complex research and analysis that is necessary, and diversify your investments appropriately.

Another way to reduce your estate is to gift parts of it away to your daughter and granddaughter. There is no limit on how much you can give away, but anything you give above certain personal gifting allowances could fall back into your estate if you die within seven years of giving it. Also remember that your daughter and granddaughter can currently only invest £20,000 and £4,260 per year, respectively, in their Isas.

When it comes to estate planning, consulting an independent financial adviser (IFA) who can get to grips with your individual situation can be beneficial. It’s worth shopping around for an IFA with whom you can have an in-depth conversation about your specific investment needs and wider financial situation. The cornerstone of receiving advice is being able to trust your adviser.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

Your concern about the US market is widely shared – it does seem expensive by conventional standards. This, however, reflects the fact that the US economy is doing astoundingly well, and a 50-year low in the official unemployment rate isn’t sparking much higher inflation. As long as this remains the case US equities are fairly valued.

My concern isn’t US equities' valuations, but rather that this economy's amazing economic performance might not last. The yield curve is inverted which has traditionally been a portent, with a variable lag, of recession.

If you want exposure to US equities I think that an ETF is the best way to get it. The US market is more efficient than others so offers fewer opportunities for active stock pickers. So get the benefits of a fund with very low charges. [See the Big Theme in last week's issue of Investors Chronicle for more on the prospects for US equities and how to access them.]

You are not sure whether to hold both Royal Dutch Shell and BP. The chances of them diverging greatly in performance are small. But you need to hold that type of stock – large, global defensive companies.

One reason for this is the danger of a no-deal Brexit. This would be bad for smaller companies because these would find it more difficult to cope with the extra bureaucracy and uncertainty. A no-deal Brexit would add to overheads which are a bigger burden for smaller companies with fewer administrative staff to react to change. 

But it wouldn’t be wholly bad for the general market. As sterling would probably fall overseas earners would gain. This is one reason why Brexit uncertainty hasn’t so far affected the market much – the pound is a shock absorber.

It’s reasonable to try to get exposure to up-and-coming investment themes by investing in companies involved in robotics, artificial intelligence and clean energy. History tells us that bubbles occur in new assets, whether railway stocks in the 1840s, tech stocks in the 1990s or cryptocurrencies in recent years. So it’s not unreasonable to look for stocks where there’s lots of hype and buzz. You can ride bubbles by buying them when prices rise above their 200-day moving average and selling them when they fall below this.

For the genuine long-term, I prefer tracker funds and perhaps some private equity funds. In 20 to 30 years’ time, many of today’s listed stocks won’t exist, and many of what will be the big stocks of the 2040s aren’t yet listed on public markets.

Freddie Cleworth says:

Your investment approach seems fairly cost effective because you mainly hold large international companies, and get specialist or thematic exposure via investment trusts. ETFs could provide further low-cost diversification and are a sensible way to get exposure to US equities – a market that has been notoriously difficult for active managers to beat.

If you have concerns on the oil majors and armaments, consider impact investments instead. These investments are made with the intention of generating positive social and environmental change, as well as financial returns. These companies are often in emerging growth sectors, providing opportunities to make money and improve the world for younger generations. Impax Environmental Markets is a global equities investment trust that focuses on some of these areas. Or if you want something more directly exposed to such assets, options include NextEnergy Solar Fund (NESF), which invests in UK solar renewable energy assets. The trust aims to deliver a strong yield and some capital growth.

We are also concerned about the UK market, but a globally diversified portfolio with a suitably long time horizon should be able to withstand any no-deal chaos. After one of the longest bull markets in history we know that at some point the next market downturn will come, but in what shape and size is anyone’s guess. We want to be positioned with enough risk on the table to capture late-cycle gains but have an eye on the crest of the wave, so hold enough defensive and uncorrelated assets to be able to weather the next storm.

Heather Owen says:

Your portfolio, most of which is in tax-efficient Isas, is invested in direct shareholdings and investment trusts alongside some cash. This means that overall it is fairly high-risk. The problem with direct share holdings is that their value is incredibly vulnerable: account reporting, media exposure, geopolitical tensions, economic concerns, systemic volatility, the price of a company and the dividend it returns to investors can alter the share price in the blink of an eye.

You’re an experienced investor and over the years have seen holdings go up and down, and this strategy has clearly suited your needs up until now. However, your needs have changed.

You are comfortable with falls of up to 10 per cent of the value of your investments in any given year, but your current asset allocation means they are likely to experience far greater volatility than this. So consider having a wider mix of assets to temper this volatility.

Multi-asset funds offer diversification, and some are risk or volatility targeted so you can get one that fits your investment needs. Several asset managers, including Jupiter, BMO and Aberdeen Standard Investments, offer funds that carefully blend together a range of different assets to meet specific risk targets.