Reducing risk in my SIPP & ISA portfolios

[MartynC27]

I am a 65 year old homeowner with no mortgage and I have just retired with a DB pension as well as the State pension which together provide £26K income which covers basic living and needs.

I also have a SIPP and ISA on the HL platform which are almost 100% invested in Vanguard ETFs - VUSA, VUKE, VMid, VERX, VAPX, VJPN and VFEM to reduce platform costs. The ETFs provide a spread which roughly covers the Global equity market (but with a 20% UK weighting). These two ETF portfolios have done quite well since the 2008/9 recession and have built up to a value of £250K (SIPP) and £450K (ISA)

I would like to reduce the risk of my SIPP and ISA portfolio’s and bring the equity asset allocation down to say 60% or lower in order to preserve the value I have accumulated while staying invested. I will also want to start to draw an income in the future from either the SIPP or ISA (or both) to supplement my pensions and I was wondering which are appropriate investments to use ?

I note that John Baron has Bond ITs such as NCYF, IPE and, HDIV (some of these use leverage) as well as property ITs such as SLI and RGL and AEWU to complement the equities in his income portfolio.

Are these ITs appropriate to reduce the current High equity risk in my SIPP and ISA portfolios ?

I would be very grateful for any comments ?

MartynC

[Alaric]

Are these ITs appropriate to reduce the current High equity risk in my SIPP and ISA portfolios ?

If you are essentially buy and hold and looking for income, do you have to be particularly bothered by volatility in equity values? If you were buying individual shares, there's the risk of buying into asset catastrophes such as Carillion, but collectives mitigate that risk.

Generalist ITs would have the majority of their investments in equities, so much the same level of volatility and catastrophe risk as a parallel ETF. That does also vary by IT though, there was a graph on another thread quite recently comparing Monks to City of London. City of London, being more income orientated showed lower volatility but also lower return.

[MartynC27]

Are these ITs appropriate to reduce the current High equity risk in my SIPP and ISA portfolios ?

If you are essentially buy and hold and looking for income, do you have to be particularly bothered by volatility in equity values? If you were buying individual shares, there's the risk of buying into asset catastrophes such as Carillion, but collectives mitigate that risk.

Generalist ITs would have the majority of their investments in equities, so much the same level of volatility and catastrophe risk as a parallel ETF. That does also vary by IT though, there was a graph on another thread quite recently comparing Monks to City of London. City of London, being more income orientated showed lower volatility but also lower return.

Thankyou for the reply,

I was considering either:-

1. Keeping my ETFs for the Global equity allocation and introducing some Bond ITs (such as IPE or HDIV) or the new Vanguard bond ETF (VAGP) to reduce the overall portfolio risk and volatility by bring the equity allocation down to 60% or lower.

or

2. Replacing the ETFs with several income producing ITs ?

[JNC3]

I would not bother with Bonds or as they are too expensive.

I favour an allocation based on Warren Buffets direction for his bequest funds for his wife :-

90% Global Equity Trackers / 10% "Cash" like assets

[AsleepInYorkshire]

I would not bother with Bonds or as they are too expensive.

I favour an allocation based on Warren Buffets direction for his bequest funds for his wife :-

90% Global Equity Trackers / 10% "Cash" like assets

Noting that the US has just dropped it's interest rate and there is some evidence beginning to form that may indicate recession is looming.

Why the Fed's interest rate move matters
https://www.bbc.co.uk/news/business-49733118
That said, there have been some warning signs in the financial markets that often do signal a recession is not that far away.

Both India and China are struggling too. India's lowered its corporate tax rate to encourage investment which could boost their faltering economy. China has a huge debt pile and really needs to stay above 7.5% annual growth to pay for it. Some economists suspect the Chinese may be manipulating/massaging their growth figures. Closer to home Germany is bumping very close to recession, France is trying to get there and the UK isn't doing much better. These are large economies which have an influence over world markets.

If you're going to invest cash into anything try and do it over a four year period. This will defend against any volatility by "pound cost averaging". However, if there is an outbreak of hostilities in the Middle East and stocks tank then wade in with your cash.

Good luck in your retirement. If you've got it planned right you should be quite busy.

AiY

[Dod101]

I would like to reduce the risk of my SIPP and ISA portfolio’s and bring the equity asset allocation down to say 60% or lower in order to preserve the value I have accumulated while staying invested. I will also want to start to draw an income in the future from either the SIPP or ISA (or both) to supplement my pensions and I was wondering which are appropriate investments to use ?

I note that John Baron has Bond ITs such as NCYF, IPE and, HDIV (some of these use leverage) as well as property ITs such as SLI and RGL and AEWU to complement the equities in his income portfolio.

Are these ITs appropriate to reduce the current High equity risk in my SIPP and ISA portfolios ?

I question the desire to reduce risk because reducing risk also of course reduces potential returns. You have your basic income needs in more or less guaranteed form so what I guess you want is a supplementary income and some real growth. To do that you need some form of equity exposure. I think therefore that your idea of using the John Barron IT portfolios as a base is good. Stay with equities and simply ride out any problems, but try to find income producing ITs as that will surely be your basic requirement. Aim to get a yield of somewhere between 3.5% and 4% and then try to ignore capital values. They should look after themselves.

I live entirely off my investment portfolio and have no DB or other pension except the State pension,. I am I think around 85% in equities. The fact that you have a DB pension means to me that you can afford to go a bit higher quite comfortably.

Dod

[Aminatidi]

I think you posted on another forum so this is a bit of a duplicate answer but you may want to look at the "safer" mixed asset ITs such as Capital Gearing Trust, Personal Assets Trust, and Ruffer Investment Company (each has an OEIC equivalent too).

[MartynC27]

I question the desire to reduce risk because reducing risk also of course reduces potential returns. You have your basic income needs in more or less guaranteed form so what I guess you want is a supplementary income and some real growth. To do that you need some form of equity exposure. I think therefore that your idea of using the John Barron IT portfolios as a base is good. Stay with equities and simply ride out any problems, but try to find income producing ITs as that will surely be your basic requirement. Aim to get a yield of somewhere between 3.5% and 4% and then try to ignore capital values. They should look after themselves.
I live entirely off my investment portfolio and have no DB or other pension except the State pension,. I am I think around 85% in equities. The fact that you have a DB pension means to me that you can afford to go a bit higher quite comfortably. Dod

Thanks for your reply,

As I am currently using ETFs as my equity allocation I assume I will be getting more capital growth but less income. I suppose with ITs you need to monitor the performance closely as you are paying higher charges, however with ETFs or trackers I will be getting 'the market' Total Return.

Although John Baron's Income Portfolio Asset allocation equity allocation is about 52% the rest of the portfolio is all producing income.

Do you use IT's for 15% which is not in equities ?

Just one or two collective investments for this portion would be preferable. I must admit that I would find Gilts, Treasuries ,Corp Bonds, HY, TIPS, precious metals and alternative's difficult to manage.

MartynC

[MartynC27]

you may want to look at the "safer" mixed asset ITs such as Capital Gearing Trust, Personal Assets Trust, and Ruffer Investment Company (each has an OEIC equivalent too).

Thanks for the reply,
Yes "safer" mixed asset ITs like Capital Gearing Trust, Personal Assets Trust, and Ruffer Investment Company could be a good one shop and easier than holding - Gilts, Treasuries ,Corp Bonds, HY, TIPS, precious metals and alternative's.

Cheers,
MartynC

[Dod101]

[Do you use IT's for 15% which is not in equities ?

Just one or two collective investments for this portion would be preferable. I must admit that I would find Gilts, Treasuries ,Corp Bonds, HY, TIPS, precious metals and alternative's difficult to manage.

My 15% is about 5% in bond funds and the other 10% is in NS & I Index Linked Certs, no longer available but a cash equivalent I guess. My ITs are included in equities because that is what they are and are anyway themselves invested in equities. The great thing about ITs are that they can invest anywhere in the world in almost anything. All you need to do is to choose. I have a few ITs mostly invested in stuff that I would find difficult or troublesome to do myself such as Henderson Far East, Caledonia, RIT Capital Partners, Finsbury Growth and Equity and Scottish Mortgage,

Were I to choose two in your situation, they would probably be Caledonia Investments and Finsbury Growth and Income. Neither have much of a yield but at the same time neither is as boring as some of the so called wealth preservers and have dividends which have grown quite well with decent capital appreciation.

Dod

[Dod101]

Reading my latest post this morning, you will not I think get 3.5/4.0% from those two ITs so you would need to widen your search a bit.

Dod

[MartynC27]

My 15% is about 5% in bond funds and the other 10% is in NS & I Index Linked Certs, no longer available but a cash equivalent I guess. My ITs are included in equities because that is what they are and are anyway themselves invested in equities. The great thing about ITs are that they can invest anywhere in the world in almost anything. All you need to do is to choose. I have a few ITs mostly invested in stuff that I would find difficult or troublesome to do myself such as Henderson Far East, Caledonia, RIT Capital Partners, Finsbury Growth and Equity and Scottish Mortgage, Dod

Thanks for the reply,

Does your 15% include the Bonds and alternative investments held in mixed asset ITs such as Caledonia and RIT Capital Partners ?

I suppose it is best to have a basket of several ITs as some will produce a good income such as CTY without losing capital value and some may lose Value such as one of the long term holdings in John Barons Income Portfolio - (Aberdeen Standard Equity-ASEI)

Thanks, MartynC

[Dod101]

My 15% is about 5% in bond funds and the other 10% is in NS & I Index Linked Certs, no longer available but a cash equivalent I guess. My ITs are included in equities because that is what they are and are anyway themselves invested in equities. The great thing about ITs are that they can invest anywhere in the world in almost anything. All you need to do is to choose. I have a few ITs mostly invested in stuff that I would find difficult or troublesome to do myself such as Henderson Far East, Caledonia, RIT Capital Partners, Finsbury Growth and Equity and Scottish Mortgage, Dod

Thanks for the reply,

Does your 15% include the Bonds and alternative investments held in mixed asset ITs such as Caledonia and RIT Capital Partners ?

I suppose it is best to have a basket of several ITs as some will produce a good income such as CTY without losing capital value and some may lose Value such as one of the long term holdings in John Barons Income Portfolio - (Aberdeen Standard Equity-ASEI)

No my 15% is simply four directly held bond funds and the NS & I Certs that I have mentioned above. I regard the shares in RIT and any other IT as part of my equity portfolio. That is after all what these shares are. What the ITs themselves are invested in is something else altogether and I choose my ITs carefully depending on what I want from them. For instance, both RIT and Caledonia are multi asset funds and many of the assets I could not access myself very easily. I see both of these ITs as giving me capital growth as well as relatively low volatility. I have held both for more than 20 years. Scottish Mortgage I also hold although it has quite different characteristics, being quite volatile but with a great track record, and mostly invested overseas. It also as we might expect from such a large fund, has very low charges. I do not hold City of London because it reflects pretty much my own portfolio of individual income shares, and there is no point in duplication. For income, I hold Murray International, Murray Income and Henderson Far East as well as Edinburgh IT. The latter is similar to City of London in that it is a UK income fund. I would ditch it except that it is held in certificated form and I have held it for about 25 years so have a big capital gain despite its recent woes.

Yes I think it best to have a reasonable spread of ITs with different characteristics. This has been discussed I think on the HYP Boards in recent times and it may be worth your while taking a look.

Like any equity, IT share prices will rise and fall but that is something you need to accept with any equity investment. It simply goes with the territory. No one can afford to get hung up about say a 15% or more drop in capital. That will happen but over time the general trend of equity based investments (including ITs) is upward. They do not though move on a one way escalator unfortunately.

Dod

[PrefInvestor]

Hi MartynC27, Congratulations, you sound like you have done very well with your SIPP and ISA investments to date.

Regarding reducing risk I’m guessing that you are worried about the impact of a large market correction should that happen ?. As I’m sure you are aware many Investment Trusts are just collections of shares so if you invest in those you still have the equity risk, just less volatility probably.

Personally I wouldn’t bother with bonds or bond funds ATM if you don’t hold any already, with rates so low bond prices are high so I don’t see it as a good time to buy, could be wrong as always !. I would have thought that you should be looking for things that are not directly correlated with the equity markets, perhaps things like renewable energy trusts, preference shares, debt ITs, gold ETFs and things like Personal Asset Trust which invests in US TIPS, treasuries and gold amongst other things. Normally I’d include commercial property ITs and /or REITs too but I’m not sure that they are a great idea while brexit is such a major factor. Ideally a diversified mix of all those things maybe ?.

Some ideas for you to think about there anyway. All just my personal opinion and as with all investing there can be no guarantees, DYOR etc.

ATB

Pref

[MartynC27]

Personally I wouldn’t bother with bonds or bond funds ATM if you don’t hold any already, with rates so low bond prices are high so I don’t see it as a good time to buy, could be wrong as always !. I would have thought that you should be looking for things that are not directly correlated with the equity markets, perhaps things like renewable energy trusts, preference shares, debt ITs, gold ETFs and things like Personal Asset Trust which invests in US TIPS, treasuries and gold amongst other things. Normally I’d include commercial property ITs and /or REITs too but I’m not sure that they are a great idea while brexit is such a major factor. Ideally a diversified mix of all those things maybe ?.

Thankyou for your reply,

I have looked at renewable energy trusts but they all seem along way above their NAV - perhaps I should ignore the NAV.
I would hope Commercial property ITs and /or REITs would improve if the 'Brexit' problem is solved but there is also a Global slowdown happening. Are Debt ITs trusts things like IPE and HDIV which John Baron uses which I understand contain corporate bonds and High Yield Bonds ?

Do you thing Trusts like Personal Assets (PNL) and Capital Gearing (CGT) can offer the required diversification in one Trust ?

Regards, MartynC

[PrefInvestor]

Personally I wouldn’t bother with bonds or bond funds ATM if you don’t hold any already, with rates so low bond prices are high so I don’t see it as a good time to buy, could be wrong as always !. I would have thought that you should be looking for things that are not directly correlated with the equity markets, perhaps things like renewable energy trusts, preference shares, debt ITs, gold ETFs and things like Personal Asset Trust which invests in US TIPS, treasuries and gold amongst other things. Normally I’d include commercial property ITs and /or REITs too but I’m not sure that they are a great idea while brexit is such a major factor. Ideally a diversified mix of all those things maybe ?.

Thankyou for your reply,

I have looked at renewable energy trusts but they all seem along way above their NAV - perhaps I should ignore the NAV.
I would hope Commercial property ITs and /or REITs would improve if the 'Brexit' problem is solved but there is also a Global slowdown happening. Are Debt ITs trusts things like IPE and HDIV which John Baron uses which I understand contain corporate bonds and High Yield Bonds ?

Do you thing Trusts like Personal Assets (PNL) and Capital Gearing (CGT) can offer the required diversification in one Trust ?

Regards, MartynC

Hi Again MartynC,

1. Yes the renewable energy trusts are mostly trading at significant premiums, if that bothers you then you need to keep an eye out for the new shares issues that they all make (typically at a lower uplift to NAV) and try and buy then. TRIG is supposed to have a new issue coming up, only a matter of time till they all do I think.
2. Some commercial property ITs and REITS are doing much better than others - I would take care in that space if I were you.
3. Have you you discovered the AIC website which is an enormous help in finding and comparing ITs. See link https://www.theaic.co.uk/aic/find-compa ... -companies. I confess I dont hold either IPE or HDIV but I do hold NCYF, SWEF, RECI and SEQI which are all debt ITs of various flavours. DYOR etc.
4. Regarding gaining all the required diversification in a one or two trusts. Personally I believe in putting my investment eggs in as many baskets as possible, so I would never do that. But a personal choice I guess.

ATB

Pref

[BusyBumbleBee]

Hi Again MartynC ... 1. Yes the renewable energy trusts are mostly trading at significant premiums, if that bothers you then you need to keep an eye out for the new shares issues that they all make (typically at a lower uplift to NAV) and try and buy then. TRIG is supposed to have a new issue coming up, only a matter of time till they all do I think.

Yup - sure enough TRIG has announced today a fundraise (no PIs though) which has knocked the price down by about 4% at time of writing. Could go a penny or so lower, so one to keep an eye on. Don't forget that they are trying to increase dividends by RPI each year so should get an inflation linked income.