Portfolio Pruning Advice

[snowy38]

Hello All

I am currently some 10-12 years away from my planned retirement age with a SIPP with a current value of £245k. I make contributions of circa £16k.5k p.a, and would expect total regular contributions over the period to be in the order of £200k. I don't have access to any other pensions beyond the state pension in due course. In common with many investors, my objective is to accumulate as much as possible without taking too much risk with the aim of drawing natural yield in retirement.
My current allocation is shown below. The weightings shown are target allocations with actual allocations below these percentages with a high cash level of circa £75k. I am not proposing to hold high cash levels in future (using PNL, CGT & RICA plus the M&G bond fund & physical gold).
I would like to reduce the number of investments in order to make monthly investment easier to manage.

Pruning advice would be welcome!

Thanks in anticipation.

TIGT 7.00%
SLET 5.00%
TMPL 5.00%
ASL 5.00%
PNL 7.00%
CGT 6.00%
RICA 6.00%
M&G Global Macro Bond 5.00%
SGLN 5.00%
TRY & BBOX 8.00%
MYI 7.00%
FRCL 7.00%
Trojan Global Income 7.00%
UEM 5.00%
SOI 5.00%
SJG 5.00%
TEMIT 5.00%
Total 100.00%

[tjh290633]

Would you like to spell out your acronyms? I only recognise FRCL and TMPL.

I don't see any point in having more that 10 or 12 IT.

TJH

[Peter1B1]

Snowy

IT names always help, of course. Much depends on your acceptance of risk: with 10-12 years to run you may be seeking to assuage the risk of sudden decreases in value, though even these will be partly offset by continued dividend income which is likely to be sustained rather than eroded to the same extent. I would expect one or possibly more sharp corrections during that period but hope that they will be restored across a diverse pf in the course of normal market movement.

It may help to work out what compound annual growth rate you need to reach your target SIPP amount at a point in the future. Given that, and working out to what extent it exceeds/matches or is less than the historic CAGR of a 'favourite' index can give you a steer as to the 'riskiness' that you need or may need to accept in order to potentially reach your goal.

This is a very personal thing. For me, pedestrian performers such as Personal Assets and Capital Gearing Trust have a role to play in pf stability and protection against declines; but they are not showing track for growth at the rate you may be looking for in your SIPP.

Which, of your current holdings, do you warm to; and which do you think have not measured up to your expectations? Maybe this will give you a steer toward which to reduce/remove and where to reinforce. Keep a weather eye out for potential contenders for a place in your portfolio - but set the bar high and don't just become a collector of more ITs!

There is a limit to the number of trusts you can reasonably track and, like the farmer, it is right to cull and sow to reap the good harvest.

[Bluestone77]

You can see how much overlap there is between the trusts by using the Morningstar X-Ray tool.
The free version allows upto 10 trusts to be analysed together so you may have to play around with some permutations but it should give you a feel if two trusts are close enough to to allow them to be combined into one or the other.
You can also get info on the geographical spread. Sorry I cannot post links but put http in front of the last 2 lines:
://tools.morningstar.co.uk/uk/xray/
editholdings.aspx?LanguageId=en-GB

[snowy38]

Hello again

Apologies for tickers rather than names. The names are as follows:
Troy Income & Growth
Temple Bar
Standard Life Equity Income
Aberforth Smaller Companies
Personal Assets
Capital Gearing
Ruffer Investment company
M&G Global Macro Bond
Gold
TR Property
Big Box REIT
Murray International
Foreign & Colonial IT
Troy Global Income
Utilico Emerging Markets
Templeton Emerging Markets
Schroder Oriental Income
Schroder Japan Growth

They produce varying degrees of income (divis will be reinvested) & hopefully a degree of reduced correlation in the form of gold, the multi asset trusts & property. Probably should hold only one multi asset trust though!
Also made the mistake mistake of buying Blackrock Gold & General rather than the Gold ETC. Intend to swap at some point.

Thanks

Snowy

[Dod1010]

You have far too many ITs I think. Inevitably a lot of overlap. Personally I dislike ITs that are specific to one commodity or to one region and thus would be going for more generalists. Then you let the manager do the asset allocation, otherwise you have to decide whether to come out of say Japan or gold or whatever.

I like Troy Income and Growth. Tends to be conservative but dependable
Temple Bar. Somewhat contrarian. Not been too good over the last few years but acceptable and Alastair Mundy is thoughtful and a bit different.
Murray International. A very good internationalist trust with an emphasis on emerging markets. Bruce Stout is very good.
Foreign and Colonial is a good generalist with a mix of asset classes

You do not need all of Personal Assets, Ruffer and Capital Gearing, in fact I do not think you need any. They are in the business of capital preservation and that is not your aim surely? In any case there is exposure to gold at least with Personal Assets and yet you have a direct holding as well? They are a decent proxy for cash I suppose so if you are happier with them , choose one only.

I do not know enough about the others to comment sensibly but I would add Scottish Mortgage, probably Alliance or Witan (they both now have the same multi manager approach, Rothschild IT and maybe one or two others such as Finsbury Growth and Income. I am now up to 9/10 I think which in my book is quite enough for your numbers, but they would give you a spread of managers and styles without your having to do very much at all. The beauty of an IT portfolio is that you can let the manager get on with it in terms of management and asset allocation. In the main you are paying a lot in fees. Let them earn them.

Dod

[Nocton]

I agree 100%, Dod. 10 ITs is plenty and if you don't want to spend to much time managing then stick to more generalist trusts with no specific country or topic. Your selection is good - it overlaps substantially with my 10 "invest and forget" ITs.

[richfool]

Snowy, I actually hold a few more IT's than you in my IT portfolio. I see your holdings/spread as quite reasonable, though would concur with Dodd in that by holding all three PNL, RICA and CGT you have 3 similar defensives there. I previously toyed with those 3 and ended up with just one - PNL.

I hold slightly more UK G&I trusts (TMPL, CTY, SLET, FGT & ASCI), and Global G&I's than you, (MYI, JPGI, SCAM & HINT).

I like and hold Witan from the Global Generalists (and SOI & AAIF from Asia Pacific).

I don't hold any bond or gold (trusts) directly, apart from whatever the likes of PNL or other trusts hold within their holdings.

I note you don't hold any Environmental, Infrastructure trusts or Private Equity trusts. From those sectors I hold JLEN (John Laing Environmental Assets) and SLPE (Standard Life Private Equity), but currently no infrastructure.

[snowy38]

Thanks to all who have replied, some useful observations.

Dod - you are correct to say that my objective is not capital preservation as I need to accumulate. However, I have been battling with my own investor psychology over the last few years. I am a nervous investor and the result of this is I have held far too much cash over recent years, constantly thinking the market is expensive and missing out on gains. Having decided to "get a grip", I'm also conscious of the fact that these remain highly valued markets and consequently I have tried to construct a target portfolio with circa 30% in less correlated assets (being the capital preservation, bond and property holdings).

I think I need a core portfolio for the monthly contributions with satellite holdings around the core as appropriate. I am thinking in terms of a maximum of 10 trusts for the core.

I have considered RIT Capital and Scottish Mortgage as part of the list, but both seems expensive at present.

I'm wondering whether to hold just UK & Global Generalists in the core thus sub-contracting the asset allocation decisions to the managers? The asset allocation percentages in the accumulation stage causing me some angst to be honest e.g. % to cash / multi-asset & bonds (indeed whether to hold bonds). I would be interested in the approach taken by others.

Regards

Snowy

[LooseCannon101]

It seems very complicated to me. A much simpler approach like 90% in a low-cost world equity fund and 10% in cash to start with, and allow the equity to grow with dividends re-invested and monthly saving, would be my choice.

The equity could be provided by an index tracker or one or more highly-diversified global growth investment trusts e.g. Foreign and Colonial (FRCL), Alliance or Witan. Doing nothing for 20+ years has delivered returns of about 9% per annum for FRCL which I own.

The market is always going to be above or below fair value, sometimes to a large extent. Why worry when you are investing for the long term and you have chosen a winning formula?

[snowy38]

That sounds nice & simple & there is an argument that by holding multiple trusts you end up with an expensive global tracker. However, 90% exposure to one trust seems a little too concentrated & on 90% equity exposure, a serious upset close to retirement may cause problems.
Having said the above, FRCL fell 25% in 2008, not comfortable, but no catastrophic (assuming you are not a forced seller).

Cheers

[scotia]

I'm also conscious of the fact that these remain highly valued markets

And my concern is that ITs purchased at the moment may suffer a double whammy of falling equity prices and premiums fast becoming discounts. Maybe Open Ended investments, without the premium/discount risk may prove less volatile at the moment.

[GJHarney]

I actually don't think you necessarily have too m any IT's at all, nor would I worry about overlap, in fact sometimes overlap is preferred. It is why, after all, Luni's old IT baskets on Motley Fool had huge levels of overlap for things like UK centered income and that was based on a number of factors which included hedging against the risk that an individual IT may run into some short or long term problems (loss of a 'star' fund manager, board disputes, serious accounting fraud etc.).

But what I think you (and others) have missed (unless I have missed it myself in my quick read through the tread) are the two things of what age do you intend to retire at (are you 10-12 years away from 50, 65, 80 etc.?), and what are you going to use the SIPP pot for (regular income, drawdown, annuity or other purchase, or a combination?), as that would perhaps indicate what any potential portfolio transformation process might involve, and also how long the 'pot' is hoped it will last for (i.e., would you still need a decade or more of growth to it rather than 100% income based around life expectancy?).

The current portfolio looks pretty diversified for equities, but are you looking at a more wider asset allocation to diversify further (bonds, property other asset classes etc.) to try and ride out volatility in the next decade? Or within the equity sphere are you thinking of more generalist solid performing global IT's (Monks, Witan. F&C etc.) to take the worry of geographical allocation out of your hands and into someone elses?

[snowy38]

You haven't missed it - I didn't cover this point. I am currently 52 and hoping to retire between 62 & 64. The current intention is to draw an income via the portfolio natural yield. I do not have a DB pension and my current state pension age is 67 (assuming this does not move).

I am seeking to diversify beyond equities in the hope of smoothing volatility and the suggestion of global generalist Investment Trusts is to sub-contract the geographical allocation decisions.

Regards

Snowy

[Hariseldon58]

I would address the issue of avoiding volatility whilst you are still growing the portfolio and suggest you should welcome a major fall in asset prices , you don't need to smooth the path.

You are a long term investor, take advantage of that status, you don't have to report quarterly or annual results!

I take stock at the end of each tax year but don't sweat what happens in a single year, as long as the trend over a multi year period is good then all is fine!

[ModernMicawber]

I think I'd be tempted to do some pruning, but it might also be an idea to start with some "mental" pruning, which is much cheaper.

My portfolio is mostly passive, and I don't have anything like the number of holdings you do, but I do have a few "tilts" on top of the global tracker that is the biggest holding.

Some of these are from "legacy" holdings, and I suspect all of them will gradually disappear over the years, as I have a "rule" that anything that gets to <1% of portfolio gets sold or topped up, as it isn't making any meaningful difference to the outcome.

One example is "UK Smaller Cos", which I have down mentally as a single "bucket", but is in fact three holdings (River & Mercantile, Herald, BlackRock Smaller). Another is "Emerging Markets", which is mostly ETFs plus JP Morgan Brazil (yeah, I know).

I'm not using any official classification to do this, just my own "broad brush", and on the occasions when I can be bothered I do look at allocation using my own buckets.

So, in these cases it's the "bucket" that would get the rule applied rather than the individual holding.

[snowy38]

Hi Hariseldon

When you say "address the volatility", do you mean embrace it and not bother holding the likes of multi asset funds & the like in an effort to preserve an element of capital in the event of a market crash?
Do you not hold cash or a certain number of years' income in liquid assets?
Micawber - intrigued by what you mean by "mental pruning"? Also I would be interested in your portfolio breakdown if you would be prepared to post it?

Regards

Snowy

[Hariseldon58]

Snowy

Yes embrace the volatility it is your friend ! When I was growing the portfolio I was working and piling surplus cash away into equities through regular savings schemes, regardless of whether markets were high or low, I did not have to report or benchmark my returns every year and this is a huge advantage over a professional, provided you are comfortable, I have experienced two 50% market crashes and come through bother better off. You need to be understand the reasoning and be happy, it you panic at the bottom and capitulate that is disastrous.

Warren Buffet has famously compared someone acquiring equities for the future to someone who buys hamburgers on a regular basis, do they want the prices of hamburgers to go up or down ?

The preservation of wealth is for those who have it, and either cannot afford to lose it or see themselves as having won the saving race and do not wish to participate further.

Personally I retain some cash for opportunities and living through "bad times" generally less than 10% of the portfolio, with many years to go having an emergency cash fund makes sense but trying to smooth the interim portfolio value does not make sense if you have capacity to deal with the risk because to reach your goals you are likely to require a level of risk.

The basics of investing are a mixture of assets, diverse equities and a mixture of low risk assets , the mixture reflects your need for risk and your ability to tolerate it. There is very strong argument that most investors would do just great by picking a Vanguard Life Strategy Fund, my experience suggests we have an interest if we are participating on boards such as these and feel we can do better ( that may not be so though....)

Its worth remembering that luck plays a part, I am comfortable with risk and it works for me but that may only be because I have been lucky and gotten away with it.

[snowy38]

Hariseldon

Thanks for the reply. The last few years were an excellent period for the Life Strategy funds, whether that is sustainable going forward, I don't know. However, the ridiculously strong performance of gilts & other sovereign debt has resulted in both equities & bonds performing strongly in tandem.
When bonds are so highly valued and cash yields so little what constitutes low risk assets?
You are quite correct on the capitulation point. There is another behaviour which is almost as damaging and that is market timing. A confession- I went substantially into cash in advance of the 08/09 crash. That was the easy bit, reinvesting was extremely hard. I would have been much better off staying put - keep calm & carry on

[ModernMicawber]

By "mental pruning", I mean ignoring the fact that something I count as a single "holding", or rather a single Asset Allocation "bucket", might consist of two or more individual shares/funds.

My portfolio is roughly:

50% VWRL (Vanguard Global Tracker ETF)
15% "Emerging Markets"
15% "UK Smaller Cos"
10% Gilts
10% "Other"

The Emerging markets "bucket" is mostly the iShares Global EM ETF (IEEM?), but also contains JP Morgan Brazil, The latter has declined somewhat in value, but I haven't sold it as together with the ETF it is still a meaningful portfolio contributor. Notably I've never "topped up" JPB, I'm of the view that it's probably a bit of a lame duck, but I'm not sure enough of this to sell. So, what I did was keep it but direct new money into the ETF instead.

Likewise UK Smaller Cos - I hold BlackRock Smaller Cos (BRSC) River and Mercantile Micro, and Herald Investment trust. Note that the last of these isn't in the "official" UK Smaller Cos sector, this is my own personal classification. So, even though there are three funds here, I don't worry that any of them are too small, as they all make up part of a single "investment bucket", or "mental holding". There are no "lame ducks" here so far, I'm sure the allocation % was less than 15% when I bought these.

"Other" is currently Syncona and a gold miners etf, this is another "personal" sector I made up myself! Syncona has gone up a fair bit, and the gold mining ETF has "fluctuated".

Remember that buying and selling to consolidate, particularly in less liquid trusts, will cost you a spread that might take a year or two to recover.

My "long term" strategy is that eventually everything will be in either the global tracker or the gilts, but I'm not taking any immediate action to make this happen; merely diverting new money and dividends exclusively into these two holdings.