Diversified income portfolio

[rm41sm8]

Good morning all,

First post on lemon fool but I did post on motley fool a little several years back.

In the fortunate position of having a defined benefit pension becoming available later this year and looking at investing the 25% lump sum myself to generate extra income. Looking at doing the investments myself rather than going through an adviser, and doing a lot of reading in readiness.

The issue I have is around proper diversification. I look at a lot of the income portfolios and I see two problems
1) UK bias
2) Equity bias

I would like to put together an income portfolio that is internationally diversified and diversified through multiple asset classes (equity, bonds, infrastructure, property, alternatives, cash). I feel more comfortable with funds than with single company equities, just because I know that if there is a problem with a single company, I will be the last in the chain to be able to react.
A lot of the portfolios I see here have either large UK high yielding companies, or UK investment trusts with a little bit of Murray International, Black Rock North American Income or Artemis Global Income thrown in.

I'm not optimistic about the UK moving forwards (don't want to get too political on this forum but for me Brexit marks the start of a slow decline for the UK), though not necessarily for big FTSE 100 global companies. I'm also concerned about UK commercial property fund liquidity, as well as some of the more high yield type bond funds (though I do like strategic bond funds).


Do I have a point here or should I only be focussing on UK income streams and forget diversification (even if I don't end up living the rest of my years in the UK) ? Does anyone else have similar concerns. Is a retirement income strategy necessarily going to leave me over exposed to UK large cap equity ?

Final question, is John Baron the guru in this area, and is it worth subscribing to his portfolios ?
Welcome your thoughts.

[daveh]

Good morning all,

First post on lemon fool but I did post on motley fool a little several years back.

In the fortunate position of having a defined benefit pension becoming available later this year and looking at investing the 25% lump sum myself to generate extra income. Looking at doing the investments myself rather than going through an adviser, and doing a lot of reading in readiness.

The issue I have is around proper diversification. I look at a lot of the income portfolios and I see two problems
1) UK bias
2) Equity bias

I would like to put together an income portfolio that is internationally diversified and diversified through multiple asset classes (equity, bonds, infrastructure, property, alternatives, cash). I feel more comfortable with funds than with single company equities, just because I know that if there is a problem with a single company, I will be the last in the chain to be able to react.
A lot of the portfolios I see here have either large UK high yielding companies, or UK investment trusts with a little bit of Murray International, Black Rock North American Income or Artemis Global Income thrown in.

I'm not optimistic about the UK moving forwards (don't want to get too political on this forum but for me Brexit marks the start of a slow decline for the UK), though not necessarily for big FTSE 100 global companies. I'm also concerned about UK commercial property fund liquidity, as well as some of the more high yield type bond funds (though I do like strategic bond funds).


Do I have a point here or should I only be focussing on UK income streams and forget diversification (even if I don't end up living the rest of my years in the UK) ? Does anyone else have similar concerns. Is a retirement income strategy necessarily going to leave me over exposed to UK large cap equity ?

Final question, is John Baron the guru in this area, and is it worth subscribing to his portfolios ?
Welcome your thoughts.

Yes I think you have a valid point and I think it sensible to diversify outside the UK, but you are adding Fx risk. Of course that cuts both ways and if the pound falls investments that pay out in Euro or dollars for example will pay you more in pounds just form the Fx change. You also need to bare in mind that a lot of UK listed companies will give you exposure to foreign income in foreign currency eg BHP is an international miner reporting in and paying divis in dollars. AZN is an international drug company and it reports in dollars. So you can get a lot of foreign exposure without leaving the LSE.

I have most of my high yield investments in UK listed shares, but have also invested in the ETFs: EMDV, IDVY and IAPD for exposure to high yield investments from emerging markets , Europe and Asia Pacific regions. Other possibilities are investment trusts that invest for income in overseas markets.

[Dod101]

You have opened up a huge subject. The first thing to do is to remember that many of the big FTSE100 companies gain most of their income from overseas anyway and so you are not reliant on the UK economy. Irrespective of Brexit I think most would agree that the UK economy has been in decline for many years now. Certainly the relative strength of sterling would suggest so.

It depends how big your 25% lump sum is but I would be chary about too much diversity especially if you are seeking income rather than long term growth. I do not have a pension except for the State pension which I use as a travel fund so it does not come into the investment equation. I live off my investment income and am about 85% in equities, including some Investment trusts, 10% in cash and 5% or so in corporate bond funds. That has been the case for about 18 years or so (since the tech crash of 2000/1) and I have never regretted it. My portfolio is easy to run, all in shares quoted in London and mostly protected from tax either in a SIPP or an ISA. Although I want and need income, I have a few shares and ITs which are for long term growth, which I think is a useful diversification in itself.

Bear in mind also that excessive diversification can become diworsification and the more asset classes you have the more work it will take.

As to John Barron. He is no doubt a good guide although I do not follow many of his suggestions. If there are similarities it is more coincidence than anything else. If you are not very familiar with ITs then he would be very helpful.

I have no doubt that others will chip in with different ideas but keep it simple!

Good luck to you whatever you do.

Dod

[tjh290633]

You will probably be happier with a portfolio of Investment Trusts. F&C, for example, has a wide geographic spread with a small percentage UK oriented. With income in mind, you will be drawn to those ITs with slightly higher yields such as City of London.

You may find reference to the Baskets of 7 and 8, B7 and B8, which are a good starting point, but go to the AIC website and look of the details of the various ITs to make sure that you are happy with your choice.

TJH

[Darka]

Agree with the comments regarding Investment Trusts.

I run a HYP portfolio and in addition have some IT's to help smooth the income and provide some additional diversification, so far I have:

70% HYP
18% IT's
10% S&P Tracker (work pension)
2% Cash

But aim to build up the IT part of my portfolio, and the 10% S&P tracker will be added to my SIPP and reinvested in IT's at some point in the future.
So, I'm aiming more towards:

45% HYP
45% IT's
10% Cash

regards,
Darka

[SalvorHardin]

TLF’s “High Yield – Practical” board is all about UK listed operating companies with high yields (or which used to pay high yields but don’t any more). You won’t find any discussion of bonds or funds there (it’s frowned upon to put it mildly).

Investment trusts (and ETFs) are the easiest way to diversify internationally whilst avoiding single company equity risk.

An investment trust that’s popular with many people who operate HYPs (but aren’t as dogmatic as some) is Henderson Far East Income, which currently yields 6.4% and provides excellent diversification away from the UK (most recent portfolio allocation is China 24%, Australia 16%, South Korea 13%, Singapore 12% and Taiwan 12%).

I can't comment on bonds. My inflation hedge is gold and although I live off my portfolio I'm fortunate to not require a high yield (I've never bought a fixed income investment). Foreign exchange risk for me is having too much in sterling rather than too much overseas; nine of my ten largest investments are American and Canadian operating companies (plus Unilever and Diageo). I'm long term bearish on sterling and the Euro, long term bullish on America, Canada and India.

Property funds can be awkward because of their poor liquidity. When markets are doing badly they can become forced sellers as they tend to get more redemption requests than they can meet out of income. This can be very painful for all holders. Consider property investment trusts and/or property companies instead. For example, TR Property invests in property companies, yields 3.2% and its allocation is UK 36%, rest of Europe 64% (about 10% of its assets are directly owned properties).

Every time I look at one of the UK quoted infrastructure funds there’s usually something that puts me off (big premium to NAV, concerns over political risk, etc.). My infrastructure investment is an operating company; Canada’s Brookfield Asset Management. Globally diversified, yields 1.4% after withholding tax. Brookfield is one of those large companies which goes under most investors’ radars; I’ve held it for ages and it’s been an excellent performer.

City of London Investment Trust gets mentioned around here from time to time. I've never looked at it closely but from the comments it seems to be quite close to a TLF HYP portfolio in one fund. Yield is 4.4%

Two good performing international trusts are Bankers and Witan, both yielding 2.3% which might be a bit too low for you. Both have roughly 25% to 30% in the UK, most of which is FTSE100 multinationals, so their UK exposure is relatively low.

[EssDeeAitch]

I would like to put together an income portfolio that is internationally diversified and diversified through multiple asset classes (equity, bonds, infrastructure, property, alternatives, cash).

I have similar needs to those you express here and I have some allocation to Kames Diversified Monthly Income
Geo spread: Europe 40% (UK 20%) | Asia 35% | Americas 25%
Asset type: Equities 54% |Bonds 20% |Other (specialist like infrastructure & property) 20% | Cash 6%
Yield: 5%

Of a similar nature are Seneca Diversified Income (33/33/33 split between equities, bonds and infrastructure) and then Schroder High Yield Bonds (80/20 bonds/equities). Yield: 5%

I like Kames and Seneca very much and hold both, no doubt there are other worthy candidates as well.
Hope this helps.

[Alaric]

I'm wondering whether we shouldn't start using the term DIP (Diversified Income Portfolio). Although it sounds as if it should be much the same thing, the term HYP as interpreted by at least some regular posters and the site admin is a restricted form of DIP.

[EssDeeAitch]

I'm wondering whether we shouldn't start using the term DIP (Diversified Income Portfolio). Although it sounds as if it should be much the same thing, the term HYP as interpreted by at least some regular posters and the site admin is a restricted form of DIP.

I agree, DIP is good.

[Urbandreamer]

Final question, is John Baron the guru in this area, and is it worth subscribing to his portfolios ?
Welcome your thoughts.

I don't subscribe to his portfolios, but do subscribe to the Investors Chronicle for which he writes.

It might be wrong to claim that he is THE guru in this area, but he does have a respectible following. He doesn't just report on DIP, but runs growth portfolios as well.

Another alternative to consider is the portfolios picked by MoneyObserver.
https://www.moneyobserver.com/money-obs ... amped-2019

I believe that II make it easy to invest in those portfolios.

[SalvorHardin]

I agree with using DIP to distinguish from HYP. Most of the aggro concerning HYP arises because some people on "HYP Practical" get very irritated if non-HYP qualifying investments are even mentioned there. That said TLF is mild compared to the bunfights which used to break out on TMF

I've just had a text message from a friend asking what I meant in the following paragraph in my earlier post on this thread:

I can't comment on bonds. My inflation hedge is gold and although I live off my portfolio I'm fortunate to not require a high yield (I've never bought a fixed income investment)

Slight error, my browser deleted part of the paragraph and I didn't spot it (in a rush to get to the pub for an early lunch). It should have read:
"I can't comment on bonds. Growing up in the early 1970s has given me a strong aversion to inflation so I avoid fixed interest almost as a reflex. My inflation hedge is gold..."

I'm not convinced that inflation is dead, or rather stuck at low levels. The rising levels of government debt, and unfunded future spending commitments which don't appear in the balance sheet, are a major incentive for future governments to print money. Which won't be good for fixed interest investments.

[Alaric]

I'm not convinced that inflation is dead, or rather stuck at low levels. The rising levels of government debt, and unfunded future spending commitments which don't appear in the balance sheet, are a major incentive for future governments to print money. Which won't be good for fixed interest investments.

There's a counter balance which wasn't there in the 1950s, 60s and 70s etc when governments realised the benefits of using inflation to write down debt. That's inflation linked borrowing. In money terms that would become extremely painful for any Government that allowed 1970s levels of inflation to return. It wouldn't be too healthy for anyone living on a defined benefit pension either, given the caps on revaluation.

[Wmnr]

The issue I have is around proper diversification. I look at a lot of the income portfolios and I see two problems
1) UK bias
2) Equity bias

I agree, so I started with deciding upon my asset allocation, and then found investment trusts to meet the categories. I decided on

20% fixed interest
15% UK equities
15% US equities
15% European equities
15% Asian equities
15% global equities
5% property

There is some overlap with global equities and the others, but I want to hold Murray international, Scottish American and Bankers.

Cash is calculated separately.

[Lootman]

The issue I have is around proper diversification. I look at a lot of the income portfolios and I see two problems
1) UK bias
2) Equity bias

I agree, so I started with deciding upon my asset allocation, and then found investment trusts to meet the categories. I decided on

20% fixed interest
15% UK equities
15% US equities
15% European equities
15% Asian equities
15% global equities
5% property

There is some overlap with global equities and the others, but I want to hold Murray international, Scottish American and Bankers.

Cash is calculated separately.

To be fair to HYP, there is nothing in it that prescribes how much you should allocate to HYP. It merely deals with whatever portion of your net worth you allocate to it.

So for instance whilst I manage a portfolio that is devoted to UK dividend-paying shares, it is just one of about six portfolios and strategies that I run. The allocation to UK HY shares is perhaps 10% of the total. For balance and diversification I also run a growth strategy, an AIM portfolio, a US portfolio, an options strategy and various trackers, using a blend of ETFs, ITs and individual shares.

I don't think there is any rule in HYP that says that you should not have or need other investments as well. It is agnostic rather then dismissive of other strategies.

[Alaric]

To be fair to HYP, there is nothing in it that prescribes how much you should allocate to HYP.

The original material suggests it would be suitable for someone looking to get extra income from the pension commencement lump sum (as it is now known). So for a total fund of 100%, 75% is in annuity form and 25% in HYP.

[Lootman]

To be fair to HYP, there is nothing in it that prescribes how much you should allocate to HYP.

The original material suggests it would be suitable for someone looking to get extra income from the pension commencement lump sum (as it is now known). So for a total fund of 100%, 75% is in annuity form and 25% in HYP.

I can understand that. Although since there is now no longer a requirement to buy an annuity with a pension pot, some might regard that advice as in need of updating.

[rm41sm8]

Final question, is John Baron the guru in this area, and is it worth subscribing to his portfolios ?
Welcome your thoughts.

I don't subscribe to his portfolios, but do subscribe to the Investors Chronicle for which he writes.

It might be wrong to claim that he is THE guru in this area, but he does have a respectible following. He doesn't just report on DIP, but runs growth portfolios as well.

Another alternative to consider is the portfolios picked by MoneyObserver.


I believe that II make it easy to invest in those portfolios.

Thank you Urbandreamer, I wasn't aware of this

[rm41sm8]

The issue I have is around proper diversification. I look at a lot of the income portfolios and I see two problems
1) UK bias
2) Equity bias

I agree, so I started with deciding upon my asset allocation, and then found investment trusts to meet the categories. I decided on

20% fixed interest
15% UK equities
15% US equities
15% European equities
15% Asian equities
15% global equities
5% property

There is some overlap with global equities and the others, but I want to hold Murray international, Scottish American and Bankers.

Cash is calculated separately.

Thanks you Wmnr. Would you care to post the investment trusts you have selected ? Particularly interested in fixed interest, property and US selections

[rm41sm8]

I would like to put together an income portfolio that is internationally diversified and diversified through multiple asset classes (equity, bonds, infrastructure, property, alternatives, cash).

I have similar needs to those you express here and I have some allocation to Kames Diversified Monthly Income
Geo spread: Europe 40% (UK 20%) | Asia 35% | Americas 25%
Asset type: Equities 54% |Bonds 20% |Other (specialist like infrastructure & property) 20% | Cash 6%
Yield: 5%

Of a similar nature are Seneca Diversified Income (33/33/33 split between equities, bonds and infrastructure) and then Schroder High Yield Bonds (80/20 bonds/equities). Yield: 5%

I like Kames and Seneca very much and hold both, no doubt there are other worthy candidates as well.
Hope this helps.

Thank you EssDeeAitch. I wasn't aware of these two trusts and will look into them

[rm41sm8]

Just as a general observation. What a great community. Some excellent suggestions in a matter of a few hours.
I don't remember Motley Fool being this friendly. I will be spending some time here.