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Shelford 2017 Pension review

A helpful place to also put any annual reports etc, of your own portfolios
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Shelford 2017 Pension review


Postby Shelford » April 18th, 2017, 5:22 pm

Dear All

I posted a review of my HYP portfolio on the TMF HYP share strategies board in August 16. This appeared to be popular with its readers then so, as promised, I’m posting a related post here, but looking at my HYP in the context of a maturing, relatively large, pension. This portfolio review board seems to be the most appropriate place to put this analysis.

Depending upon your feedback, I’ll continue to provide annual updates until such time as I start my pension, which is roughly in 3 years’ time.
I’ve posted the data relating to the portfolio at the bottom of the post.

I’m hugely grateful to the more vigorous & frequent posters, particularly on this board, the HYP and Fixed Income boards. By contrast, each of my posts has the gestation of an elephant.

The reason for the posting is I suspect I’m not the only person on Lemon Fool who is contemplating retirement in the next 10 years and needs to rejig their portfolio, so I’d welcome your input.

I also hope there might be something here for younger investors to learn from – if only to avoid my mistakes. I’ve listed a few lessons below.

Apologies for poor formatting. :o

Some personal context

I’m 3 years off retirement, by which time I expect to be mortgage-free. I’m married, but my wife is younger than me and anticipates working a bit longer. I have children whose longer term needs are provided for.
I am no longer actively paying into my SIPP, due to the lowering of the tax threshold to £1m from April 17. I am continuing to fund my ISA however over next 3 years, ideally up to the annual limit of £20K.
Anticipated method of taking the pension: drawdown
Platform provider: Hargreaves Lansdown
Annual platform fees: £300 (0.03% of portfolio value).

Major changes this financial year: The major change this year has been to move away from actively-held funds almost entirely, and reinvest in lower cost ETFs & low maintenance investment trusts. The reason for this are (in probable order of importance to me):
a) proven poor long term performance against relevant indices by the vast majority of active managers
b) lower platform costs
c) lower running costs
d) desire to spend relatively little time in retirement fiddling with investments.
We have income from a BTL of £11,000 against a property worth £300,000. My aim is for the mortgage on this to be zero by retirement. Two other small final salary pensions will increase our income by £9000, but not for another 8 years. We are in reasonable health, and I will continue in some part-time employment beyond ‘Retirement’. I mention these four facts as these inform in part my attitude to portfolio risk and asset allocation.

The portfolio
The portfolio has been built up over the past 9 years within a SIPP and ISA, with a transfer in of a private pension from Standard Life in 2008.
Its current value: £1,034,000 (excluding DB pensions & BTL). It comprises c.55 holdings. Its Annual Organic growth over past 7 financial years:
These percentages are inclusive of any platform charges and fund charges. This works out at a compound annual growth rate of 12%. This is a reasonable rate of growth and compares well with IUKD/FTSE All Share and frankly, is rather a lot more than a few overpaid fund managers. However, the portfolio has been buoyed hugely by growth in UK equities since 2009: I’m not claiming to be Warren Buffett.
I don’t pretend to have an investment ‘philosophy’. My HYP is constructed on a non-tinkering basis. Instinctively, I’m a longer term buy and hold (LTBH) investor, with an innate preference for income-bearing shares. The logic behind this is historically over 2/3rd of UK share growth comes from dividends and this incidentally informs the popularity of equity income funds. My experience to date over the last 16 years of being a private investor has born this out, for what it’s worth.
With regard to individual investments, none has >5% of portfolio value. In terms of individual equities, the max is capped at 2%.

Estimated annual Income breakdown (excluding BTL)

UK equity 17,942 37%
US equity 299 1%
Asia equity 2,918 6%
Global equity 4,489 9%
Other 4,283 9%
DB Pensions 7,500 15%
Fixed income 9,515 20%
Property 1,688 3%

Total 48,634 100%

By 2016, my portfolio had grown into a mad aunt’s attic of investments, with over 70 holdings, split between a SIPP and an ISA. So I needed to rebalance and derisk the portfolio to include more fixed income/other sources of revenue.

My target is to move closer to a 50:50 equities/non-equities split by the time I start drawdown in 3 year’s time. I have been doing this in two ways: a) allocating any new income from payments into my ISA into fixed income
b) selling some active share funds and diversifying. The current allocation to equities is now 53% in terms of income, so not far off my target. Note: I treat the two small DB pensions as fixed income/bond proxies.

I’m happy with the size of my HYP portfolio (note there are a few other shares: HL, RMV, HLMA which are not HYP candidates but which I’ve picked up on the way) and won’t be investing further in individual shares, given my rebalancing priority above. I’ve redacted the name of one share in the interests of my anonymity.

Opinions will differ on the extent and likelihood of a downturn in the Trump world we now live in, but it’s both reasonable and prudent to assume that future growth will be more volatile and is likely to be more muted by comparison with past six years. Together with the lower returns from a more mixed portfolio, I’m projecting therefore no more than 5% growth p.a. until retirement.

I’m relatively underweight in investments outside UK. This is partly mitigated by the fact that many of my individual shares are FTSE 100 defensive multinationals, and a large percentage of their revenues expressed in denominations other than sterling. The bounce upwards in their capital value in 2016 is evidence of this.

Portfolio goal

My aim is to take the ‘natural yield’ from the portfolio which, with my wife’s income and other investments, should be OK in relation to our current income. I’m targeting 4% per annum, but can afford to take only 3.5% which has the virtue of providing some safety margin. My intention is to build at least 24 months of income as cash as a primary safety buffer prior to retirement, with a view to building to 36 months over the first few years of drawdown. In terms of income/capital growth, I’m looking for RPI+1% per year. Any income growth above that rate will be reinvested.

Some recommendations to younger Fools based on what I’ve learned (I hope not all ‘motherhood and apple pie’ – many are heart-felt)

• There is a wide range of passive funds/ETFs now out there with low charges, allowing for excellent diversification at very little effort. I wish there had been more/I’d known more about these when I started; I used to have some funds attracting higher charges which a more active investor would have divested.
• For newer investors, the Monevator blog is an excellent starting point in selecting passive funds.
• Choose your platform provider with great care. There were fewer providers when I chose Hargreaves Lansdown. Their costs add up with bigger portfolios. I’d probably not choose them now, albeit their service is very good. Monevator blog has an excellent and unbiased comparison tool. I’m now saving £1500 per year simply by not investing in active funds.
• High fund management charges are simply the devil. The majority of fund managers fail to beat their index over 5 year basis; even fewer after ten. Given your portfolio is a longer term investment, why bet on individuals’ ability to beat the mean? They so often don’t: ignore their hype.
• What this also means is that your stock-picking skills are likely to be no better than average either
• There are some excellent HYP posters like Gengulphus, TJH, Dod inter al. And of course PYAD’s original posts. I don’t agree with them more than 80% of the time. However, this is a better success rate than I have with my wife….
• Diversification makes huge sense across sectors and investment types. I’ve not spent enough time on rebalancing my portfolio and it now shows. Look and learn from my mistakes!
• Don’t try to time the market. Regular monthly investments mean you benefit from pound cost averaging (google this if you don’t know what I’m talking about). Time in the market is more important than one’s questionable ability to guess whether sectors or shares are going up or down.
• Compound growth is a thing of extraordinary beauty. If you don’t know what I mean by this, research it. The long term effect is awesome.
• To adapt a phrase: share-trading is vanity; long term share price growth is sanity; dividends are reality.
• As dividends are less volatile than share prices, I sleep easier in my bed.
• It is easy to chase yield through indiscriminate and ill-informed use of stock screeners (I did). As my portfolio has grown, and I approach the sunny uplands of retirement, the sustainability of dividends has featured as a higher criterion in my stock selection. I wish I’d considered this complex-to-analyse aspect more carefully in previous years. Better a great share at a fair price than a fair share at a great price: longer term, quality of earnings always will out. As a case in point, the recent Kraft/Unilever engagement had me rooting for the Dutch, as a takeover would have meant me looking for a new good quality home to provide dividends.
• Any truly-diversified portfolio will have some stocks or funds in negative territory at any one point. Live with the noise, or buy a good mattress to put your cash under.
• It is difficult not to be swayed by daily share news, noisy opinionated posters, and share price fluctuations. Try to ignore and hold-fast to your longer term aims.
• I never got round to unitising. PYAD thought it wasn’t worth the effort; neither do I. Please no lectures on the subject.
• With hindsight, I’ve undervalued the flexibility and tax benefits of ISAs in favour of the tax benefits of my SIPP, especially with the recent lowering of the life time pension allowance. Both have excellent but different values as investment vehicles.
• Investing is simply a means to an end. I’ve been guilty of reviewing performance on a daily basis, when true success is gauged in years, if not decades. The ease with which we can access information online relating to our investments is both a good and a bad thing. Take the kids for a nice walk instead.

A question for those more knowledgeable than me!
Since I have a BTL, I’m happy not to invest in more property shares. What fixed income funds might I target beyond those I’m not already investing in? Bonds are at an all-time high; the yield from gilts at an all-time low. There is clearly a price to be paid for a sense of security.

Thanks to you all for reading this far. And thanks to the Fool community for giving me the confidence to take my personal finances into my own hands. I would never have dreamt in 2000 that I’d be managing a seven figure portfolio in 2017, enabling me to contemplate a comfortable retirement five years earlier than I expected. I hope this may be an inspiration to some of you!

Stock/Value (£)
Note: where stocks are listed more than once, it's because they're included in both the SIPP and ISA

Royal London Sterling Extra Yield Bond Class Y - Income (GBP) *2 11,588
Royal London Sterling Extra Yield Bond Class Y - Income (GBP) *2 16,867

AstraZeneca plc Ordinary US$0.25 15,341
Aviva plc Ordinary 25p 10,013
BHP Billiton plc Ordinary US$0.50 12,205
Anon plc Ordinary 1.25p Shares 6,848
Anon plc Ordinary 1.25p Shares 16,175
BP Plc Ordinary US$0.25 13,971
British Land Co plc Ordinary 25p 10,042
BT Group plc Ordinary 5p 9,770
Centrica plc Ord 6,14/81p 9,031
Compass Group plc Ordinary 10.625p 15,946
Diageo plc Ordinary 28 101/108p 12,836
FirstGroup plc Ordinary 5p 4,589
GlaxoSmithKline plc Ordinary 25p 12,807
Halma plc Ordinary 10p 9,407
Hargreaves Lansdown plc Ordinary 0.4p 4,508
HSBC Holdings plc Ordinary USD0.50 18,118
Informa plc Ordinary 0.1p 14,102
ITV plc Ordinary 10p 12,432
Lloyds Banking Group plc Ordinary 10p 12,908
Marks & Spencer Group plc Ordinary 25p 6,037
National Grid Ordinary 11,17/43p 15,761
Princess Private Equity Holdings Ord EUR0.001 *R 34,313
Reckitt Benckiser Group Plc Ord 10p 13,498
Rightmove plc Ord 1p 7,640
Royal Dutch Shell Plc B Shares EUR0.07 16,707
RSA Insurance Group Ordinary 100p 4,781
Severn Trent Plc Ordinary 97 17/19p 11,404
Sky plc Ordinary 50p 9,355
SSE plc Ordinary 50p 13,012
Standard Life Investment Property Income Trust Ord 1P 11,692
Standard Life plc Ordinary 12.22222p 16,329
Tate & Lyle plc Ordinary 25p 15,250
Tesco plc Ordinary 5p 6,568
TUI AG Ordinary Shares NPV 10,464
Unilever plc Ord 3.11p 14,755
Vodafone Group plc USD0.20 20/21 10,963
William Hill plc Ordinary 10p 8,033

Exchange traded funds
iShares II plc FTSE EPRA/NAREIT Developed Markets Property Yield 30,257
iShares plc DJ Asia/Pacific Select Dividend 30 10,409
iShares plc FTSE UK Dividend Plus 10,506
iShares plc MSCI USA Dividend IQ 15,089
iShares VI plc Global High Yield Corp Bond GBP Hedged UCITS ETF 49,738
Vanguard Funds plc FTSE All World High Dividend Yield 51,386
Vanguard Funds plc UK Gilt UCITS ETF GBP 25,263

Investment trusts
BlackRock Commodities Income Investment Trust Ordinary 1p 18,013
BlackRock World Mining Trust Ordinary 5p 20,692
CQS New City High Yield Fund Ltd Ord NPV 52,723
European Assets Trust Nv EUR 0.46 (Regd) 35,754
Henderson Diversified Income Ord Npv 15,356
Henderson Far East Income Ltd Ordinary NPV 42,125
HICL Infrastructure Company Ltd Ordinary GBP 0.0001 31,052
INVESCO Perpetual Enhanced Income Limited Ordinary 5p 50,693
Murray International Trust plc Ordinary 25p Shares 53,626
Henderson Far East Income Ltd Ordinary NPV 15,040
Woodford Patient Capital Trust PLC Ordinary Shares GBP 0.01 12,260

Cash: 8,000

Total: 1,024,044

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Re: Shelford 2017 Pension review


Postby OLTB » April 18th, 2017, 8:35 pm

Thank you Shelford - as a younger (ahem) investor and new to the self-select investment / retirement journey, this has been an excellent post to read and digest. The compounding effect comment has always been a reassuring one and yet again, you have alluded to it once more - I can't wait to experience the effects (15 years to go before I aim to take a step back from the daily grind).

I will wait in anticipation for the Shelford 2018 Pension Review!

With all good wishes, OLTB.

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Re: Shelford 2017 Pension review


Postby Kantwebefriends » April 19th, 2017, 9:50 pm

Shelford wrote:
I’m relatively underweight in investments outside UK. This is partly mitigated ...

Your DB pensions, and eventual State Pension, are British. Your house and your BTL are in the UK. Your future earnings will presumably be in GBP.
Does it make sense also to have your financial portfolio underweight in Abroad?

I thought the return on your BTL looked rather dismal. Is that a net income i.e. after subtraction of mortgage interest?

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Re: Shelford 2017 Pension review


Postby nicster » April 21st, 2017, 4:34 pm

Hi Shelford,

Thanks for the very informative post. I'm quite a way off where you have reached, but currently aiming for a similar mix of shares/ETFs/IT's (although who knows what may change in the future).

One question though. You have Henderson Far East Income listed twice under your IT's, is that a typo?

regards, nicster

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Re: Shelford 2017 Pension review


Postby Gengulphus » April 21st, 2017, 7:47 pm

Kantwebefriends wrote:
Shelford wrote:
I’m relatively underweight in investments outside UK. This is partly mitigated ...

Your DB pensions, and eventual State Pension, are British. Your house and your BTL are in the UK. Your future earnings will presumably be in GBP.
Does it make sense also to have your financial portfolio underweight in Abroad?

Depends on something you haven't mentioned: where your spending is. Ideally, your income and your outgoings are matched on 'abroadness'.

Of course, that's quite hard to assess, because most 'UK-based' spending is quite dependent on foreign imports and so has a quite significant 'abroad' element. Then again, large numbers of 'UK-based' companies make most of their earnings from foreign subsidiaries, so the same can be said for them, unless the investor makes a special effort to only buy investments in companies that are heavily UK-based in terms of where their markets are, not just where their headquarters are...


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Re: Shelford 2017 Pension review


Postby peter666 » April 22nd, 2017, 1:49 pm

Hi Shelford

Excellent post. I am in a similar position (but slightly closer to retirement - though my contract keeps getting extended)

My target is to move closer to a 50:50 equities/non-equities split by the time I start drawdown in 3 year’s time. I have been doing this in two ways: a) allocating any new income from payments into my ISA into fixed income

I find it hard to find any fixed income investments which provide a decent income and are not correlated to equities, so hope you get some feedback on this

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