You have an unwieldy tracker fund

"Our pensions are very large and more than enough for us to live on comfortably, so we don't need to take income from our investments,” says Sam. “We intend to pass them on to my son and his family, and other relatives. Therefore we are only aiming to preserve our investments’ capital value, after taxes. We would like to make an annual total return of 2 to 3 per cent a year in real terms – probably the best we can hope for in the next five years.

"Over the past 20 years we have put as much as we can into trusts without attracting inheritance tax (IHT). The trusts have also recently lent nearly £1m to my son and his wife to help them buy a home. 

"Almost all of the securities that are not held in individual savings accounts (Isas) or self-invested personal pensions (Sipps) are held by my wife, who does not pay as much tax as me, although does incur capital gains tax (CGT). We have many securities that we have held for a long time that I would like to reduce to rebalance the portfolio, but doing this would result in substantial CGT. However, I did recently reduce our holding in Royal Dutch Shell (RDSB) by £40,000 as there was only a small taxable profit.

"I do hold some venture capital trusts (VCTs) and a half-share in the stocks listed outside the UK, which mostly do not pay much in terms of dividends.

"I believe that taking investment risk is essential as the biggest risk is inflation, so the investments are mainly in equities. I estimate that the investments are 20 to 30 per cent ahead of the FTSE All-Share index over the past decade. We also have a very high capability to absorb losses as we do not rely on the investments for income, so could tolerate a fall in their value of up to 50 per cent in any given year.

"I have always been concerned about costs, so almost never invested in active funds. When I started investing 56 years ago I tended to buy direct shareholdings and over the past 15 years I have mainly put money into low-cost exchange traded funds (ETFs) to diversify the portfolio. But I have avoided capitalisation-weighted ETFs where possible, because investors piling into certain shares and driving up their prices means that they can become a far greater proportion of indices, significantly reducing their diversification.

"I have always tried to diversify my investments geographically. I estimate that they currently have roughly the following geographic allocation: UK 29 per cent, Europe 26 per cent, US 17 per cent, Asia 10 per cent, emerging markets 10 per cent and cash 8 per cent. Although this is a bit heavy on the UK and Europe, I am not too concerned because many of the holdings listed in these regions are multinationals or exporters. And I will increase the US exposure if that market falls from its highs.

"I try not to add any new holdings as I think we have too many and I may clear out some of those worth less than £10,000. That said, I have have recently invested £47,000 in The Royal Mint Physical Gold ETC Securities (RMAP), and I am considering adding to some of our sector-specific ETFs such as iShares Automation & Robotics UCITS ETF (RBTX) and iShares Ageing Population UCITS ETF (AGES). I am also thinking of adding iShares Digitalisation UCITS ETF (DGIT), and infrastructure ETFs or low-cost active infrastructure funds."

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:

It’s reasonable to have low expectations for returns in a low-growth environment, and you’re right to minimise management charges and tax. Geographical diversification is also sensible if you're a longer-term investor as returns can vary a lot across markets over such time periods.

But I don't agree that the biggest risk is inflation. This has been very stable in developed economies for almost 30 years – despite huge volatility in commodity prices and economic activity. While the past might not be a guide to the future it alerts us to other dangers such as more disappointing economic growth and recession – big risks for equities.

And even if inflation is a risk I’m not sure that equities would protect against it. They didn't in the 1970s and there’s reason to think that they won’t again. If inflation rises, markets will fear that central banks will raise interest rates. This would reduce expected growth to the detriment of equities and the higher returns on cash might trigger selling of shares as the reach for yield goes into reverse. The best protection against such dangers is cash.

US market-cap-weighted indices give you big exposure to monopoly-type stocks such as Apple (US:AAPL), Amazon (US:AMZN), Alphabet (US:GOOGL) and Microsoft (US:MSFT), and it’s possible that these have become overpriced. But if investors start to believe that they are overpaying for monopoly-type stocks, some of your direct shareholdings such as Reckitt Benckiser (RB.), Diageo (DGE) and Heineken (HEIA:AEX) might also do badly. ETFs that track equal-weighted indices are one way to hedge against such a situation, but so too are smaller companies funds, of which you do not have many.

Colin Low, managing director of Kingsfleet Wealth, says:

My primary concern is the potential future taxation of your estate. You want to leave your investments to your son, his family and other relatives, so are putting as much as possible into trust without attracting IHT. I assume that you are referring to the 20 per cent lifetime tax rate for discretionary trusts, which is charged if the cumulative amount put into them exceeds the lifetime allowance of £325,000.

Assets held within Sipps are not assessed for IHT as long as they are a trust-based arrangement, which most are. But it is very important to ensure that you have an up-to-date nomination of beneficiaries to facilitate payments after your death.

Regular gifts into trust or made directly to beneficiaries are usually exempt from IHT as long as they are given from surplus income.

You could buy a whole-of-life assurance policy to mitigate any current IHT liability. The policy could be put in trust and ensure that the proceeds would be payable to the beneficiaries so that they could settle any IHT liability at the point of probate.

And a swift way of reducing the value of your estate for IHT purposes would be to switch the Isa holdings into Aim shares. There are a number of wealth managers who run portfolios that seek to hold qualifying Aim stocks, which are exempt from IHT two years after purchase. However, these would increase the risk of your portfolio.

You could also create capital gains that are liable for tax and then defer them with Enterprise Investment Schemes (EIS). These offer income tax relief of 30 per cent of the value of the investment and permit deferral of CGT liabilities on the same amount. These are also higher-risk but benefit from Business Relief exemption two years after the date of investment. So with these you could benefit from income tax relief, CGT deferral and IHT exemption via one solution.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You are overdiversified. You have, in effect, a global tracker fund, which is unwieldy and acquired at a greater cost. You could tidy it up by selling some holdings within your Isas, or selling holdings on which you’ve made a capital loss. Selling losers is often a good idea even if you don’t need to reduce your number of holdings.

But this highlights a problem with trying to minimise tax – some people hold on to stocks that are overpriced because they are reluctant to realise a capital gain.

You also shouldn't only invest in VCTs for their tax breaks, although there is a justification for holding these. Investment growth in the coming years might come from companies that aren’t yet quoted on markets. VCTs and private equity investment trusts offer exposure to these. I find it odd that many investors are keen to diversify country or sector risk, but neglect the danger that listed shares in companies might not be the right ownership structure.

Paul Derrien, investment director at Canaccord Genuity Wealth Management, says: 

You have an exceptionally diverse portfolio which has served you well in terms of performance against the FTSE All-Share index. Your global focus has enhanced the return in recent years and you have done well to invest the majority of your investments in low-cost tracker funds. I especially like your selection of non-market-capitalisation weighted ETFs, which make sense when you consider how markets have performed over the past year and how some markets are dominated by very few companies.

Your investments should be able to deliver the returns you want while not providing any stock-specific shocks, and are in keeping with your assessment of risk.

However, I am struggling to see what your investment strategy is and while diversification is always sensible in portfolio construction you can have too much of a good thing. You have too many collective investments and don’t seem to follow any specific themes, which could hinder future performance. So I would focus on correcting this as what you have is like one big tracker fund. You could just switch everything into a Vanguard LifeStrategy fund, and reduce a lot of the time and effort you put into investing. But if you enjoy investing it would reduce a lot of the fun too.

You are going to review holdings with a value of less than £10,000, but this is basically rearranging the deckchairs. A holding worth 1 per cent of your assets (minus your home) is nearly £50,000 and holdings need to make a difference, so think big.

If you are not willing to put up to 3 per cent of your assets (minus your home) into one individual stock and at least twice that into a fund, you shouldn’t hold it. See if you can rebalance your investments with half the number of holdings, as this exercise will help you decide what is important and help you focus the portfolio, even if it is just a paper-based simulation. For example, you have several European tracker funds, but two or three would be enough.

How do you see the markets playing out over the next six, 12 and 18 months, and does your portfolio reflect this view? I don’t think it does. I suggest consolidating the geographical holdings, increasing your cash allocation and using it to buy specific themes via ETFs that reflect your view of the world, for example, infrastructure, healthcare, technology and income. 

Don’t be too obsessive about charges because there are many active funds that have consistently outperformed some of the trackers you have.

You have relatively low overall exposure to direct equity holdings, although have more than 30 of these. It is fine to have around this number as long as you have the time to do the necessary ground work on them and follow them. But I would have a smaller number of direct equity holdings that I like with meaningful amounts invested in each.