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Shelford Portfolio Review May 2021

A helpful place to also put any annual reports etc, of your own portfolios
Shelford
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Shelford Portfolio Review May 2021

#412524

Postby Shelford » May 16th, 2021, 6:32 pm

Shelford portfolio review 2021



As a number of you were kind enough to appreciate the ones in previous years, here is my annual update relating to the year ending April 21. You can find out more about the history and 'philosophy' behind the retirement portfolio here:

viewtopic.php?f=56&t=4636&p=46690&hilit=Shelford#p46690
viewtopic.php?f=30&t=18514


This post will be more of interest to readers who are approaching retirement, or who have recently done so, and my 'lessons learned' are more relevant to them possibly than those at earlier stage of their investment journey. Though see my 'regrets' below.

In terms of priorities, my concerns now are less about capital appreciation, & more around preservation, reallocation of assets/diversification, sustainability of income, and tax optimisation.

I attach at bottom the portfolio breakdown by capital and income. The fixed income portion is overstated insofar as it includes two small company pensions. For convenience, I'm treating these as 'fixed income'. In practice, they will grow with RPI.

Some personal context

I hit the FIRE button in August 2020 (see link above for background), age 55. I'm mortgage-free other than a sum against a BTL which I expect to pay off this year. 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, up to the annual limit of £20K.
Anticipated method of taking the pension in first few years: drawdown or UFFPLS or mixture of both, or delay due to taking on some part-time work which will cover essentials
Platform provider: Hargreaves Lansdown
Annual platform fees: c £400 (0.03% of portfolio value).

Changes since last review

It has been eventful year: it is not unreasonable to assume that a combination of a global pandemic, Brexit fallout and stopping full-time work in August 2021 should have resulted in a diminution in portfolio value. However, because of the timing of the review (30th April 21), my annual comparison is with the market at the height of ‘Chicken Licken’ market panic viz. 30th April 2020. This itself is instructive: anyone investing in equities needs to take a longer term view better measured in decades, and to be prepared for bumps in the road.

Value of portfolio: has increased by just under 47% over the year to £1.7m. However, this figure includes £170K in shares which I received when leaving my company. Without this one-off, overall ‘organic’ increase would be 32%. As comparators, I look at the FTSE All share index and Vanguard World Index, which grew by 22% and 31% respectively over this 12 month period. Given my portfolio includes a range of assets which are intended to counterbalance the volatility of equities, this performance is satisfactory. With hindsight, I’ve been underweight in international equities, especially USA and shows I should have rebalanced earlier in the decade when I had the opportunity. This bias to the UK reflects a focus on income rather than growth – not uncommon on these boards. The importance of regular rebalancing of portfolios (or putting your money into global ETFs/trackers) is a key lesson I’d like to pass on to younger investors.

The SIPP increased by 25% to £1.13m. Over the past 9 years, average annual growth before pension contributions has been 10% per year. My ISA increased last year by 29% from 144K to 206K. The latter figure includes a £20K contribution during the year.

Overall then, a good year. But it needs to be seen in the context of the previous financial year, where the performance was overall portfolio (-6%), SIPP (-10.5%), ISA (-23%).

The principal lessons I’ve taken from this are to look at the longer term performance when conducting such reviews; to ignore where possible the latest fads (Battery or robotics ETF anyone?); to retain a low opinion of my ability to pick successful individual ‘winners’.

As an aside, in terms of cock-ups, I made the mistake of investing in a small investment trust called ‘Secure Income Trust’ (see SQN ticker). This proved to be a complete misnomer as it provided neither secure nor an income. It was going pear-shaped before the pandemic, and the latter accelerated the decline. It is now being wound-up. I retain my holding in the fund as much to remind me of the fallibilities of human nature, the importance of investing in bigger funds/trusts when it is in an area you don’t understand (company debt), and to treat professional advice with scepticism (the trust was recommended at one time as part of http://www.johnbaronportfolios.co.uk winter portfolio). The fact that I kept the investment size to 2% of portfolio holdings at time of purchase meant that the impact overall has been relatively small. If painful at the time. Other disasters over the years inter al: Woodford Patient Capital, Centrica, BT. I retain all to remind me I have feet of clay.





Current issues on my mind

Cash: I’ve built a reserve fund to ensure that when I take an income from the portfolio there's a cushion to absorb any stock market falls. This is currently £127K. It comprises roughly 2.5 years of ‘essential’ spend. Clearly there is a wide range of acceptable cash buffers, and this sum may appear high to some readers at a time of very low interest rates. What I’ve found though from a psychological point of view is that having two years of income in deposit accounts means less day-to-day worry about market movements, and it ensures I remain focussed on longer term goals rather than falls (or rises) in the FTSE. I will be topping this cash buffer this year by selling some shares in my former company. The long term aim is to retain a cash buffer of 2 years.


Asset allocation: overall, I am happy with the level of income generated by the portfolio, particularly in the context of savage cuts from individual UK dividend payers. My decision in 2018 to top-slice my individual UK equity holdings in favour of a diverse range of investment trusts was, with hindsight, fortuitous. The investment trusts in general have maintained their payouts. It has meant that overall dividends paid declined by 10% to £59K or 3.7% of portfolio excluding cash. I’m expecting this year to be better as many resume dividend payments. Changes in the portfolio this year will include reducing my reliance on UK equities (driven largely by ownership of shares in my company which, as a company director, I’ve been obliged to retain for a period after resignation); increasing the allocation to fixed income/other asset areas. I remain over-weight in UK equities, and over the next two years, I will correct this. The portfolio would be categorised as ‘risky’ by a pension fund, given the higher percentage of equities to fixed income assets. As I get closer to drawdown, I imagine I will get more focussed on capital preservation rather than growth, and the implications of IHT. We’ll see.

Changes in the way I think about my portfolio since FIRE in August 2020: it is fair to say that retiring during the midst of a pandemic is not an ideal time (note: I handed in my notice in 2019 before it started). But I can’t complain about the period of enforced house arrest that followed. I decided to go for a ‘mixed economy’ in terms of post-FIRE life – I have 5-6 ‘jobs’ which are mainly charity/education focussed, including 2-3 paid non-exec roles, equating to about 3 days ‘work’ per week. What this has meant from a financial point of view is that I’m not dipping yet into either my ISA or SIPP, but using the cash buffer subsidised by ongoing income. Given the uncertainties over the next 3-5 years in terms of equity performance, and the dangers inherent in sequence of risk at early stages of pension drawdown, I’m happy to be now in a state of semi-retirement, rather than full-blown economic inactivity. The work has mitigated also the sense of loss of identity that can attend a big change. It has proven to be fun so far.



Regrets

I've had a few. But not many. I've never regretted wrenching away my pension from Standard Life to run it myself - the best financial decision I've ever made. Frankly, a muppet could have done a great job with my capital over the past decade given the benign conditions. But given it's a reasonable long term performance, I'm glad that any benefit in terms of reduced fees has been to my benefit, rather than an over-paid adviser.

I have regretted not being more beady-eyed about the LTA limit. The combo of Brexit and Trump caused a big bump in the capital value of my portfolio, so I expect to be paying a higher tax rate on a portion of the pension in retirement. I appreciate this limit is not a concern for many readers. It is surprising however how many middle-class professionals will be affected longer term - any headteacher or GP for instance with 20 years service investing a sensible level of their income in their pension - we are not talking Bill Gates wealth levels here.

I have regretted not maxing out the ISA limit (and PEP before). I am now. Whilst I did use these vehicles, I have cashed them out in the past to buy a house etc. With hindsight, I would have retained them, and borrowed more at the ultra low level of interest rates. However at the time I was not to know that Lehmans would go bust and UK mortgage rates would go to a 200 year low, so I shouldn't cry over spilt milk.


Pension breakdown by asset class | Value | % DC
Asia Equities | 72,400.40 | 4%
Property | 115,642 | 6%
Infrastructure | 84,169 | 4%
DB Pension | 217,813 | 11%
Fixed Income | 379,873 | 20%
Europe Equities | 53,289 | 3%
US Equities | 36,852 | 2%
UK Equities | 520,137 | 27%
International Equities | 157,365 | 8%
Private Equity | 62,059 | 3%
Renewables | 109,399 | 6%
Cash | 129000 | 7%

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wanderer
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Re: Shelford Portfolio Review May 2021

#412595

Postby wanderer » May 17th, 2021, 12:59 am

Thanks for taking the time to update. I am hoping to retire at a similar age to you, hopefully with a similar pot. I also regret cashing in ISAs with past house moves, but what's done is done.

To what extent are you planning to live off the running yield vs selling down holdings, or are you too far away from that for a decision right now? When I think about firing, I struggle to envisage selling anything to spend the proceeds so always want to imagine myself living off dividends. Not sure if that is realistic though.

Interesting that you call out Robotics as a fad; rightly or wrongly this is one area where I actively invest regular amounts into Robotic themed ETFs on the basis that there is a clear secular growth story. They've done well for a number of years (though not as well as Scottish Mortgage, much to my regret) although they have certainly dropped off a bit recently.

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Re: Shelford Portfolio Review May 2021

#412803

Postby Shelford » May 17th, 2021, 6:52 pm

Thanks for your question Wanderer.

In brief, I was intending to live off the running yield, albeit starting at a relatively cautious 3.5%. In practice the running yield has been closer to 4% for the majority of my investing years, and I have a large amount of the portfolio in higher yield investment trusts. As you know, there's any amount of advice on safe withdrawal rate on sites like Monevator, and also 'dynamic' SWR. As I'm kind of covering living costs via part-time work - probably for next 3 years minimum - I'm postponing the decision on the actual rate I will take - and putting the annual earnings from both SIPP and ISA into a world tracker. Also I have a couple of small DB pensions which will pay out when I'm 60 and I don't yet know what the value of these will be Per annum. What is clear though is I wish to keep at least 2 years worth of my starting annual withdrawal in cash. This sounds like a lot, but will provide peace of mind in the event of a stock market fall - and there will be I'm sure plenty of these in my retirement.

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Re: Shelford Portfolio Review May 2021

#412975

Postby Trent » May 18th, 2021, 2:15 pm

Great read and interesting post for me as I am roughly in the same position having built up a portfolio of shares and ITs in both my Sipp and Isa. I too am looking to invest new money into a world tracker. Which one did you go for? Did you go for high yielding or growth?

Shelford
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Re: Shelford Portfolio Review May 2021

#413170

Postby Shelford » May 19th, 2021, 9:51 am

Hi Trent

I currently put 'new' money into an ESG tracker (i.e. avoiding Oil companies, guns etc) iShares SUWS. There are a number of new ETF launches with an ESG theme (if this is a concern for you). This has a smaller number of companies than VWRL but is good enough for me. I also have a historic holding in VWRL which is as good a world tracker as any. Monevator has a handy list of these btw if you are searching.

In terms of Income, iShares has a world HY tracker - currently yielding around 3%. I also have a historic holding in this.

J


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