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We are worried about a sharp market fall

These investors are considering some form of exposure to gold to mitigate downside
October 8, 2020 and Rosie Bullard

Jethro and his wife are 81 and 76, respectively, and have been retired for 15 years. They receive £50,000 a year from their state, former workplace and private pensions. They also receive dividends of about £20,000 a year, but this year these may fall to between £11,000 and £15,000. Their home is worth about £550,000 and mortgage-free. Jethro has three daughters and five grandchildren.

Reader Portfolio
Jethro and his wife 81 and 76
Description

Funds and shares within Isas and unwrapped, cash, residential property. 

Objectives

Supplement pensions income to fund discretionary spending, cover possible care home costs, leave assets to beneficiaries, invest cash, mitigate downside, reduce UK exposure.

Portfolio type
Investing for income

“We are still active and in good shape, and if our family genes are anything to go by we can expect to stay healthy and live for another 15 to 20 years,” says Jethro. “We are comfortable with investment risk as our pensions cover our basic living requirements and we may still get some dividends. So to a certain extent we view our investments as a long-term, rewarding and interesting hobby.

"However, we still hope to preserve enough of our investments’ value to cover any future care home expenses and in the meantime to enable us to live well and travel. We would also like to leave some assets to our heirs. I have elected my daughters as heirs, and my wife has elected five nieces and nephews, and a cancer research charity, as hers.

"Two-thirds of our investments are held within individual savings accounts (Isas) into which we move unwrapped investments every year using as much of our combined annual allowance of £40,000 as possible. The remainder are held via certificates.

"We started to think that a correction or a recession might come two or three years ago, so hold more cash than normal. We have £60,000 in a couple of bank accounts that don't pay interest and £65,000 of dividend income, which we will invest when the time is right. We also hold £10,000 in a separate bank account as contingency money.

"We should have moved some of the money into an active savings scheme two or three years ago instead of parking it in ordinary bank accounts. We would have plenty of time to invest the money, even if it was in six-month notice accounts, as recovery after a crash does not happen overnight, and can be delayed with markets fluctuating up and down for some considerable time. And we believe that it is more likely that there will be a deep and lengthy worldwide depression rather than a correction or ordinary recession. So we wondered if investing some of the cash in physical gold or gold mining shares, or a combination of both, might be a way to mitigate a sharp fall in the value of our portfolio?

"We also want to reduce our exposure to the UK, as we soon will no longer benefit from being a member of a bigger organisation with more power and influence. As a small isolated nation we now have to negotiate new trade agreements. And this will not just be with countries next door to us but also ones in distant time zones, trading with whom will involve more sea and air miles, and increased delivery times and freight costs.

"We started to invest in investment trusts, including via savings schemes, at the bottom of the market after the crash in 1987, and rode the wave up during the recovery. We have replicated this approach with varied levels of success after each subsequent market crash or correction, although have also invested directly in shares at other times during the past 10 to 15 years. We prefer to buy shares that pay a dividend and rarely sell our holdings, keeping them for the long haul."

 

Jethro and his wife's portfolio
HoldingValue (£)% of the portfolio
Antofagasta (ANTO)73,652.049.52
Baillie Gifford Shin Nippon (BGS)4,006.800.52
BHP (BHP)5,298.150.68
BlackRock Greater Europe Investment Trust (BRGE)14,868.001.92
BlackRock Smaller Companies Trust (BRSC)5,851.300.76
BlackRock World Mining Trust (BRWM)3,715.000.48
Burford Capital (BUR)1,737.400.22
GlaxoSmithKline (GSK)9,491.041.23
Great Portland Estates (GPOR)3,090.960.4
Hargreaves Lansdown (HL.)31,642.904.09
IQE (IQE988.730.13
ITV (ITV)4,815.060.62
JPMorgan Japanese Investment Trust (JFJ)10,116.851.31
London Stock Exchange (LSE)16,960.002.19
Rio Tinto (RIO)6,218.800.8
Royal Dutch Shell (RDSB)9,196.501.19
Scottish Mortgage Investment Trust (SMT)19,619.002.54
SEGRO (SGRO)10,611.211.37
Aberdeen New India Investment Trust (ANII)2,512.640.32
Aberdeen New Thai investment Trust (ANW)4,729.500.61
Baillie Gifford European Growth Trust (BGEU)14,726.401.9
Bioventrix (BVXP)3,360.000.43
F&C Investment Trust (FCIT)19,099.202.47
JPMorgan Emerging Markets Investment Trust (JMG)4,845.000.63
Law Debenture Corporation (LWDB)12,095.101.56
Worldwidw Healthcare Trust (WWH)4,600.000.59
Alianz Technology Trust (ATT)2,943.000.38
Berkeley (BKG)7,056.000.91
BlackRock Latin American Investment Trust (BRLA)12,961.281.67
BP (BP.)13,817.251.79
JPMorgan European Smaller Companies Trust (JESC)10,440.001.35
JPMorgan Japan Smaller Companies Trust (JPS)6,336.500.82
Lloyds Banking (LLOY)9,297.001.2
Premier Oil (PMO)2,045.440.26
Standard Life Aberdeen (SLA)15,800.002.04
3i (III)4,262.750.55
Advanced Medical Solutions (AMS)5,258.000.68
American Express (US:AXP)52,810.006.82
Ameriprise Financial (US:AMP)25,832.003.34
BMO Global Smaller Companies (BGSC)6,549.000.85
Computacenter (CCC)1,652.000.21
Hikma Phamaceuticals (HIK)5,050.800.65
Murray Income Trust (MUT)4,241.520.55
Murray International Trust (MYI)5,787.440.75
FW Thorpe (TFW)6,336.400.82
Tristel (TSTL)5,880.000.76
HSBC (HSBA)19,930.332.58
Invesco Asia Trust (IAT)25,705.603.32
JPMorgan China Growth & Income (JCGI)70,803.509.15
JPMorgan Indian Investment Trust (JII)16,066.402.08
JPMorgan Russian Securities (JRS)4,104.400.53
Cash to invest125,000.0016.15
Cash savings10,000.001.29
Total773,814.19 

 

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 are holding more cash than usual. But this is only equivalent to around 16 per cent of your investments, which is quite low. This is especially true because your equity portfolio is rather risky due to a hefty weighting in emerging markets and mining stocks – two segments of the market that traditionally rise and fall together, and by more than many stocks.

Such an allocation is great if we get a global recovery because these segments are more cyclical than others so would do very well in such an event. But if we get the deep and lengthy depression that you fear these areas would suffer a lot. In terms of how you can protect your assets from this, gold mining shares are most definitely not the answer. Almost all shares are positively correlated with the global market so would fall if there is a significant downturn, and mining shares perhaps more than most as they are sensitive to investor sentiment.

Gold itself, however, is an entirely different asset class and it could do well in a serious downturn. Its price moves almost inversely with bond yields, which would fall in a depression as investors seek safer assets and anticipate central banks doing more quantitative easing. And that would raise the price of gold.

Also, because sterling is a risky asset that tends to fall when investors become more nervous, UK investors profit from holding foreign currency at such times. And gold, which is priced in US dollars, would rise in sterling terms.

But although gold is great insurance it comes at a price. In normal times, it is likely to do badly, a reason for only holding moderate amounts of it.

[Read more on how to hold gold in 31 July issue]

And you should think of your state and private pensions as being the income from a bond. As this is your biggest asset you have, in effect, massive holdings in safe assets.

If you want to take further precautions against a bear market follow the 10-month or 200-day moving average rule, which involves selling equities when their prices fall below it. This strategy has worked especially well with emerging market equities because these are more prone to momentum effects than other shares. This investment strategy doesn’t get you out at the top or bottom – nothing does that. But history tells us that it protects against long bear markets by getting your money out before big losses occur.

 

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

You have experienced a significant fall in dividend yields since you started investing in the late 1980s and expect your dividend income to fall materially this year. So consider making withdrawals from your investments to support your lifestyle on a total return basis – from both capital and income. The days of living solely on income generated from assets have perhaps passed – at least for the time being.

We often suggest that clients keep six months of their expenditure in cash. 

Think about investing the £65,000 of dividend income within an Isa so that the assets you purchase can grow tax efficiently. The majority of your current investments are in Isas, but you hold the remainder via certificates. Consider reviewing this because from a practical and administrative perspective holding investments electronically can make the reporting simpler, and dealing easier and faster. And, although it may be some way off, doing this would also reduce administration for the executors of your will.

You have a long-term investment time horizon of hopefully at least 15 to 20 years, and your investments need to support discretionary spending such as travelling and, maybe later, care home fees. As you approach the point of needing care consider reducing your equity exposure in favour of lower-risk assets.

 

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You want to reduce your exposure to the UK, which from one perspective is wise. You are underweight eurozone and US equities, and it is highly unlikely that a disproportionate number of investment opportunities are in the UK. However, many UK stocks are exposed to the global market so if this falls, UK stocks will too. And the UK market is now very cheap relative to overseas ones so don't entirely neglect the domestic market.

This portfolio seems overdiversified. Having more than 50 holdings means that it will perform much like a tracker fund with a slant towards emerging markets. This isn’t a disaster, as the direct shareholdings at least don't incur asset managers’ fees. But you’ve got little chance of significantly outperforming equities in general.

 

Rosie Bullard says:

Diversification is important, and gold can be an attractive long-term store of value, particularly in periods of challenging markets. Our preference is for gold itself accessed via a physically-backed exchange traded commodity (ETC). We would avoid buying gold miners as this adds another layer of complexity if the exposure we are targeting is the precious metal itself.

We agree with investing for the long term and not selling good companies as a result of short-term noise. But an element of portfolio turnover is healthy. A company’s successful position can be eroded over time so holdings need to be adjusted accordingly. A good example of this is the UK oil & gas majors, which historically provided investors with capital growth and an attractive income stream. The rise in demand for alternative energy sources, fall in oil prices, and cuts or suspensions of dividends have meant the investment case for these is no longer as compelling.

It is a similar story with the UK banking sector as regulation, falling interest rates and cuts to dividends have reduced their attractiveness.

We would also be wary of holding onto a stock for such a long period of time that it becomes dis-proportionally large in the context of the wider portfolio, leading to a high level of stock-specific risk. An example in your case is Antofagasta (ANTO), which accounts for over 9 per cent of the investments' value.

But, equally, there is limited benefit in having positions that account for less than 0.5 per cent of your investments because even if one of these doubled in value it would have a minimal impact on their overall value.