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IT Portfolio For Mum

A helpful place to also put any annual reports etc, of your own portfolios
Allitnil
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IT Portfolio For Mum

#447760

Postby Allitnil » October 4th, 2021, 3:16 pm

My mother is 82, in decent health and recently widowed. She has ample index-linked pension income to more than meet her needs and a portfolio of around £770k worth of shares & funds of which £570k is in ISAs. She has sufficent cash to cover any unexpected expenses. The portfolio comprises a ragbag selection of 50 individual holdings, most quite small (less than 1% of the total). I have her broad agreement to simplify and rationalise these. My advice to her is going to be to gradually sell the non-ISA holdings and give away the money to hopefully avoid IHT and to switch the ISA ones to a portfolio of ITs.

Since any substantial capital growth in the ISAs is liable to ultimately attract 40% IHT, I'm focussing on mostly income generating ITs. The income can then be given away without incurring any IHT since it will be ongoing gifts out of surplus income. That said, I want to try and at least keep the capital growing with inflation in case it is needed later on for expensive care.

I would welcome any comments on the selection of ITs I'm currently considering:


Overall portfolio yield: 4.78%

These have been chosen to fulfill the following criteria:

1. Diversification of asset sector, geographic region and management company
2. Overall yield well in excess of the market
3. All the ITs have a record of at least 10 years of dividend growth (*)
4. Consistent overall capital growth (see below)

* - ICGT doesn't meet the dividend growth criteria but its not far off and it provides extra diversification. It's also one of her current largest holdings and was one of my Dad's best picks!

The capital growth of the above portfolio has been: (INPP and NCYF only included in returns since 2010)



The capital growth has been remarkably consistent - I only calculated it after making the selections so there's no back fitting.

DrFfybes
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Re: IT Portfolio For Mum

#447793

Postby DrFfybes » October 4th, 2021, 4:46 pm

I did something very similar with mum's portfolio in 2009, a range of funds and ITs trying to avoid overlap. Like you surplus income was given away each month to the great Grandchildren (plus the annual £3k and £250 allowances at Xmas to children/grandchildren) until the care bills started getting a bit bigger.

I believe some of the ITs showing decades of divi growth are at a stage where it is coming at the expense of reserves/capital, but to freeze or cut the divi would be too much for the manager to bear. I bought equal amounts of CTY and ATST for mum and whilst much lower yield the ATST dividend payout is now about 60% of the CTY due to ATST having more than trebled in value compared to CTY about 50% up (1.5% of 35k ATST versus 5% on £15k CTY).

I realise you want to use the "gifts from surplus income" route, but at 82 a few large gifts could be made (as we did when mum downsized) and it sounds likely the 7 years would lapse.

If you want to mitigate IHT, have you looked at some of the IHT exempt funds, such as those by Octopus?

Paul

Newroad
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Re: IT Portfolio For Mum

#447908

Postby Newroad » October 4th, 2021, 10:48 pm

Hi Allitnil.

If I've understood correctly, then you appear to have an optimisation challenge, which seems to me to contain

1. Maximise pre-IHT gifts
2. Minimise IHT (related to the above)
3. Maximise Total Return
4. Minimise Risk

You don't explicitly mention ease of management, but I would have thought that "Minimise Management Effort" might make a useful (5).

My natural instinct would be to focus on (3), (4) and if relevant to you both (5), with your mum then extracting what she wishes to gift (or can legally get away with gifting) for (1). After that, let (2) and/or care later in life - look after itself. However, you appear to place quite a focus on yield. This may be because there is some aspect of gifting pre-IHT that I don't understand, a personal preference or something else.

The whole total return vs yield (and related/similar perspectives/methodologies) is the source of much angst on the forum and best not repeated again here - you can look for, find and read about it should you wish - if you haven't already.

Anyway, whichever way you and your Mum go, for whatever underlying rationale(s) - good luck!

Regards, Newroad

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Re: IT Portfolio For Mum

#447911

Postby sizzors » October 4th, 2021, 11:18 pm

newrod as i understand it if you gift out of capital gain it can be taxed for up to seven years after been gifted. however if you gift out of excess income it cannot thus i think the opening poster has got it just about right.

Newroad
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Re: IT Portfolio For Mum

#447917

Postby Newroad » October 4th, 2021, 11:55 pm

Hi Sizzors.

Perhaps. IMO however, that's just a different parameter in the optimisation challenge.

If income were viewed the be and all end all for this scenario, then you can yield higher than 4.8%. At the other end of the spectrum, £770K could give considerable income (for gifting) even if targeting total return. However, if for some reason around 4.8% yield on a starting c£770K is a magic number in context for some reason, then yes, the OP may well be there or thereabouts.

I'm casting no aspersions above - and I'm not saying I have the right answer - I'm more trying to understand the correct question.

Regards, Newroad

Allitnil
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Re: IT Portfolio For Mum

#447955

Postby Allitnil » October 5th, 2021, 9:45 am

DrFfybes wrote:I believe some of the ITs showing decades of divi growth are at a stage where it is coming at the expense of reserves/capital, but to freeze or cut the divi would be too much for the manager to bear. I bought equal amounts of CTY and ATST for mum and whilst much lower yield the ATST dividend payout is now about 60% of the CTY due to ATST having more than trebled in value compared to CTY about 50% up (1.5% of 35k ATST versus 5% on £15k CTY).

I realise you want to use the "gifts from surplus income" route, but at 82 a few large gifts could be made (as we did when mum downsized) and it sounds likely the 7 years would lapse.

If you want to mitigate IHT, have you looked at some of the IHT exempt funds, such as those by Octopus?

I agree with you that for some of those ITs there will only be nominal divi increases for the next couple of years or so. Only time will tell how long before they get back to any sort of "normal" increases.

I reckon she can give away about £120k of the non-ISA shares immediately without incurring CGT (which would be at 20%). The rest will take a little while to dispose of to avoid exceeding the CGT allowance. And for some of them I will ony want her to sell them in a year where there is definitively no need to report disposals at all - zero or little documentation about when they were originally bought and DRIP is a nightmare for CGT! (eg she has over 30 valid certificates for Lloyds, all at a loss but certainly don't want to have to include any sale in a tax return...)

Octopus is a fund that makes use of BPR, I assume? I'm aware of the concept but haven't looked at them in any detail. Will do so, thanks!

Allitnil
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Re: IT Portfolio For Mum

#447962

Postby Allitnil » October 5th, 2021, 10:12 am

Newroad wrote:If I've understood correctly, then you appear to have an optimisation challenge, which seems to me to contain

1. Maximise pre-IHT gifts
2. Minimise IHT (related to the above)
3. Maximise Total Return
4. Minimise Risk

You don't explicitly mention ease of management, but I would have thought that "Minimise Management Effort" might make a useful (5).

My natural instinct would be to focus on (3), (4) and if relevant to you both (5), with your mum then extracting what she wishes to gift (or can legally get away with gifting) for (1). After that, let (2) and/or care later in life - look after itself. However, you appear to place quite a focus on yield. This may be because there is some aspect of gifting pre-IHT that I don't understand, a personal preference or something else.

The whole total return vs yield (and related/similar perspectives/methodologies) is the source of much angst on the forum and best not repeated again here - you can look for, find and read about it should you wish - if you haven't already.

Yes, minimise management effort is definitely an additional factor. My mother is more than capable of looking after her everyday finances and has been treasurer of local clubs, but she professes to not understand investments at all (my Dad handled all that). My sisters have no experience of buying individual shares either. So if anything were to happen to me, I would want her to be able to just take the income and not to have to think about the capital.

She's a Yorkshire lass, brought up in WW2 and then rationing so is thrifty by nature. A fair chunk of her shares were inherited from her own mother who lived very modestly and I'm not sure she ever sold any to make her own life easier in later years. We have managed to persuade my Mum to start spending some cash on making her home more comfortable and living well, but she's still very much of the mindset that expenditure should come from income rather than capital. That's a key driver for aiming for income over absolute TR.

IHT is then an addiitonal push towards income. As sizzors says, regular gifts from surplus income are free from IHT. Gifts from capital made within 7 years of death attract at least some IHT. Any assets she has over £1m at death will incur 40% IHT (they are currently above that). Detailed IHT discussions are obviously off topic for this board, but I hope that explains that tax-free income from ISAs can have advantages over TR in later life.

Newroad
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Re: IT Portfolio For Mum

#447977

Postby Newroad » October 5th, 2021, 10:52 am

Hi Allitnil.

I sounds like you've thought it through well enough, so good luck with whichever way you go. As an alternate approach, have you considered something like the following two ETF's (perhaps 50% each)

    VHYL (Global Equity High Yield) - current yield 2.87% (according to Vanguard)
    IUKD (FTSE 350 High Yield) - current yield 4.42% (according to Google/MorningStar - though 12 month trailing is 5.82% according to Blackrock itself)

That would give you a synthetic yield ( at least c3.64%) at or just above FTSE100 levels (c3.53%) - and be pretty low cost and very easy to manage, including the receipt of the dividends/distributions (a nice quarterly heartbeart for these). It also gives you a management company split (Vanguard vs Blackrock), not that I think either of these will be a problem - if they are, we'll have bigger issues on our hands!

If that interests you, I would suggest using TrustNet to compare both performance and volatility to your own selection (though the ETF's haven't been around as long as the IT's, limiting the history). It will give you a sense though.

Regards, Newroad

Allitnil
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Re: IT Portfolio For Mum

#447990

Postby Allitnil » October 5th, 2021, 11:16 am

Thanks, I'll take a look at those.

moorfield
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Re: IT Portfolio For Mum

#448146

Postby moorfield » October 5th, 2021, 6:51 pm

Thanks for posting that portfolio Allitnil, very interesting, this is the sort of IT portfolio I am giving thought to gravitating to getting closer to my reirement.

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Re: IT Portfolio For Mum

#448574

Postby wanderer101 » October 7th, 2021, 4:11 pm

Hello Allitnil

You have 3 UK Equity Income selections in your portfolio. Even if you think that the UK is going to hugely outperform the rest of the world economy over the next decade (I don't but that's OT) that's massively disproportionate compared to its share of the world economy.
You have NAIT and HFEL but may wish to consider further geographical diversification.
My mother (86) holds (in the IT portfolio that I manage) Blackrock Sustainable American Income (current yield 4.26 percent, 5 year capital growth 58.1 percent according to Trustnet) and JPMorgan European Income (yield 4.53, 5-year cap 40.7).
Given your interest in some capital growth you might also look at JPM Global Growth and Income (yield 3.22, 5-year cap 109.8) in preference to MYI in the Global income sector - on the capital front it has outperformed MYI (3.94 yield, 5-year cap 18.8) very significantly, while its yield is not that much lower.

Here's a link to a Trustnet IT search for the Europe, Global Equity Income and North America sectors, sorted by yield:
https://www.trustnet.com/fund/price-per ... order=desc

HTH

wand

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Re: IT Portfolio For Mum

#448578

Postby Dod101 » October 7th, 2021, 4:38 pm

I would substitute something like Schroder Oriental for HFEL. You would be sacrificing some income but HFEL has actually gone backwards in terms of its capital and I prefer to see some capital growth. Of course if you are intent on income at any cost then HFEL has a big yield. I have just ditched it.

Dod

Allitnil
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Re: IT Portfolio For Mum

#448685

Postby Allitnil » October 8th, 2021, 10:00 am

wanderer101 wrote:You have 3 UK Equity Income selections in your portfolio. Even if you think that the UK is going to hugely outperform the rest of the world economy over the next decade (I don't but that's OT) that's massively disproportionate compared to its share of the world economy.
You have NAIT and HFEL but may wish to consider further geographical diversification.
My mother (86) holds (in the IT portfolio that I manage) Blackrock Sustainable American Income (current yield 4.26 percent, 5 year capital growth 58.1 percent according to Trustnet) and JPMorgan European Income (yield 4.53, 5-year cap 40.7).
Given your interest in some capital growth you might also look at JPM Global Growth and Income (yield 3.22, 5-year cap 109.8) in preference to MYI in the Global income sector - on the capital front it has outperformed MYI (3.94 yield, 5-year cap 18.8) very significantly, while its yield is not that much lower.

Thanks, I think I probably will swap out one of the UK Equity ones for something else. That said, I'm actually in favour of being overweight in UK Equity for a couple of reasons that have nothing to do with relative performance:

1. If your spending is mostly in GBP then it makes sense for income to be overweight in GBP, otherwise you are taking on currency risk that could easily outweigh the investment performance. And whilst the ITs themselves all pay out dividends in GBP, the totally non-UK sector ITs' underlying income has that currency risk.

2. Although they are nominally "UK Equity", the underlying holdings are typically multinationals who earn a lot of their income from outside the UK. So 30% in "UK Equity" is probably more like 15% at most direct exposure to the UK economy. Granted, that's still very much overweight!

Thanks for the comments.


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