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Core and Satellite approach for SIPP portfolio

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
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tgboswell
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Core and Satellite approach for SIPP portfolio

#430333

Postby tgboswell » July 25th, 2021, 8:21 pm

I'm 28 years old. I currently hold the Vanguard Target Retirement 2055 (Accumulation) Fund as my core holding within a SIPP. I'm looking to futher diversify by investing in satellite funds/ investment trusts.

I am wondering what sectors are best suited to supplement my core holding of Vanguard Target Retirement 2055 Fund?

I was thinking of investing in satellites of sectors including Global Smaller Companies, Emerging Markets, Global Property, Global Technology, Infrastructure and Health. However, I'm unsure of whether these sectors offer further diversification with minimal duplication. The majority of my capital will be invested in the core holding and small percentages allocated to the satellites.

I'm therefore also wondering what percentages would you allocate to different sectors of the satellite Funds/ Investment Trusts aswell as the core holding?

tjh290633
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Re: Core and Satellite approach for SIPP portfolio

#430340

Postby tjh290633 » July 25th, 2021, 9:45 pm

I know nothing about that Vanguard Funds, but assume that it follows the shift towards fixed interest as you near retirement. This is a strategy which I contemplated in the mid-90s, as I approached retirement. It became obvious that it was totally unsuited for purpose. It implied a move towards a fixed income and away from any hope of escalation. Not only that, the immediate result would be a reduction in income.

I have stuck with 100% equities, veering towards higher yields. Reasonably diversified between sectors and limiting the exposure to any one holding. I have contemplated converting to Investment Trusts as I near my 90s, but have not yet done so. I have put my daughter on that route as she nears retirement with a portfolio of ITs, looking at an eventual source of income.

In your situation I would probably look at a mixture of global ITs, some commodity oriented, some REITs with differing objectives, and possibly one or two geographically oriented ITs. I reckon that would give you the possibility of capturing some extra growth in both capital and income. They will not all move in synchronisation, which may provide some comfort in market turndowns, but you need to persevere. Limit your exposure to any one holding or sector. Likewise to any one fund manager. There will be changes along the way, there always are. If you find that you have picked an absolute lemon, do not shy away from dumping it. As to what you choose to do, that decision can be yours alone. Do your own research is a time worn and valuable mantra. I have told you what I would do. Now you have to decide what you will do.

TJH

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Re: Core and Satellite approach for SIPP portfolio

#430343

Postby vagrantbrain » July 25th, 2021, 10:00 pm

FWIW thats the approach I took a couple of years ago - keep the majority in low cost global trackers and supplement with thematic investment trusts where I thought sectors might outperform.

My current portfolio is:

62% Global trackers (HMWO and VWRL) - core holding
13% Tech (ATT)
10% Far East/Asia (SDP)
15% Growth (SMT)

I've got no hard and fast rules but Scottish Mortgage getting to 15% is probably as high as i'd feel comfortable with for one of the supplementary holdings. Having said that I think you need a decent % in something to see a meaningful benefit from the extra risk; having 2% (say) of your portfolio in satellite holdings would likely make little difference to your overall return.

I think global tech would probably duplicate a lot of the holdings from the Vanguard fund. At one point Tesla was unexpectedly my 2nd largest holding when I added up the positions in all my investments, certainly more risk than I was aware I was taking!

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Re: Core and Satellite approach for SIPP portfolio

#430396

Postby Urbandreamer » July 26th, 2021, 8:37 am

At 28 you have pleanty of time to refine your ideas. I too question the idea of Target retirement funds, but I wouldn't argue that you should be in too much of a hurry to change your core holding. Take a year or two to think about it.

As for satelite holdings. I fear that's not how I run my portfolio. My bigest holding is SMT at 9.5% but I have 6.5% in BGSC ( a global smaller companies IT). I recently topped up TEM (emerging markets) and bought MYI (an IT aimed at providing income).

If your satelites are too small, what's the point in investing in them? It could be for entertainment or to learn about investing. If so then it's actually yourself and not others you are attempting to learn about.

As has been pointed out, you should be aware of what you hold. You might choose to be heavy in Tesla, or RIO, but it should be a choice, not something that happens by accident.

hiriskpaul
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Re: Core and Satellite approach for SIPP portfolio

#430444

Postby hiriskpaul » July 26th, 2021, 10:59 am

Well done for having a SIPP. My children are your age and don't have the slightest interest in investments, relying on me as fund manager.

The Vanguard Target Retirement funds are good for those like my children who want to save into a pension but have no interest in asset allocation. With the low charges, diversification and prudent use of fixed income they are very likely to give very satisfactory results. Potentially far better than most people who think they know what they are doing but get it all wrong.

However, they are very much a one size fits all solution. Not necessarily the best asset allocation for you. For one thing the target funds all overweight the UK. I think they allocate 25% to the UK instead of the market weight of about 4%. The 2055 fund has 20% in fixed income and judging by the other funds this will increase to 25% in about 15 years time.

Fixed income punches above its weight as part of a portfolio because of a "Rebalancing Bonus". If you have 50/50 fixed income/stocks rebalanced annually and the FI returned 2% over 30 years, stocks 6%, then instead of the what might be expected 4% portfolio return, you might get 4.5% to 5.0%. The extra 0.5% to 1.0% is the Rebalancing Bonus. Even so, 20% in fixed income is too high when you have a 30 year target retirement date. The Target Date fund is designed to save the portfolio should we see truly awful stock market returns over that period. It might happen, but the chance is small. Off the top of my head I would say historically 20% in FI would have outperformed 0% FI in less than 5% of 30 year periods.

You could perhaps supplement your target date fund with a global tracker to reduce the FI allocation, or simply hold a global tracker and global bond fund instead.

FWIW, I give 4k per year to my children to put into LISAs and target a core of cap weighted trackers, 25% each in US/Canada, Europe, developed Asia Pacific/Japan, global emerging markets. I then have satellites of global value and global small cap ETFs. Historically, over most 30 year periods the small cap and value tilts have paid off.

GrahamPlatt
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Re: Core and Satellite approach for SIPP portfolio

#430471

Postby GrahamPlatt » July 26th, 2021, 12:39 pm

Well done for being so sensible as to be planning now. I truly applaud you for it. But a note of caution - don’t forget to have fun along the way... James Boswell (of The Life of Samuel Johnson fame) died 5 months before his 55th birthday.

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Re: Core and Satellite approach for SIPP portfolio

#430480

Postby vrdiver » July 26th, 2021, 12:59 pm

vagrantbrain wrote:... having 2% (say) of your portfolio in satellite holdings would likely make little difference to your overall return.


It's an interesting viewpoint I often hear, yet whenever I look at an IT, the largest holdings can be quite small. Take Murry International (MYI) whose top 10 holdings* represent about 31% of the portfolio, and the 10th largest being 2.35% (at the time of posting). Looking at SMT** the IT holds well over 100 different holdings, so an average holding is less than 1% of the total value. I doubt anybody here would say that SMT's performance has been held back by having lots of small holdings!

I don't get why it can be good for an IT manager, but bad for an individual (other than transaction costs, but I'm assuming the money was drip-fed into the portfolio over time, so even that argument is week). Hopefully somebody can explain...

VRD


* https://markets.ft.com/data/investment- ... ?s=MYI:LSE
** https://www.bailliegifford.com/en/uk/in ... -may-2021/

Urbandreamer
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Re: Core and Satellite approach for SIPP portfolio

#430495

Postby Urbandreamer » July 26th, 2021, 1:41 pm

vrdiver wrote:I don't get why it can be good for an IT manager, but bad for an individual (other than transaction costs, but I'm assuming the money was drip-fed into the portfolio over time, so even that argument is week). Hopefully somebody can explain...

VRD


Well, it would be equally bad for an IT manager, IF he had to do all the work himself. Most companyes employ a large number of staff researching the investments.

Here is a quote from the website for Murray International.

Funds are managed on a team basis as there are no 'star' fund managers in Aberdeen Standard Investments: investments managers do their own research and analysis and all ideas are shared via formal committees and common databases; consistency is implemented across the group’s offices worldwide by the Investment Committee, led by the Chief Investment Officer. A continuous watch is kept over critical factors that influence investment decisions, so that when views change, action is taken swiftly and decisively to reposition portfolios.


https://www.murray-intl.co.uk/en/investment-approach

You also mentioned that Scottish mortgage has over 100 holdings and some of them must have been quite small when they were over 12% invested in Tesla. However the point there is that they can invest significant amounts in really small private equity companies who may grow to become huge. You know like ANT group or Alibaba.

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Re: Core and Satellite approach for SIPP portfolio

#430503

Postby ADrunkenMarcus » July 26th, 2021, 2:21 pm

tgboswell wrote:I am wondering what sectors are best suited to supplement my core holding of Vanguard Target Retirement 2055 Fund?


I'm a similar age and have half my SIPP in Smithson Investment Trust. Global smaller and medium sized companies with a focus on quality and growth.

Best wishes


Mark.

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Re: Core and Satellite approach for SIPP portfolio

#430533

Postby vagrantbrain » July 26th, 2021, 5:36 pm

vrdiver wrote:
vagrantbrain wrote:... having 2% (say) of your portfolio in satellite holdings would likely make little difference to your overall return.


It's an interesting viewpoint I often hear, yet whenever I look at an IT, the largest holdings can be quite small. Take Murry International (MYI) whose top 10 holdings* represent about 31% of the portfolio, and the 10th largest being 2.35% (at the time of posting). Looking at SMT** the IT holds well over 100 different holdings, so an average holding is less than 1% of the total value. I doubt anybody here would say that SMT's performance has been held back by having lots of small holdings!

I don't get why it can be good for an IT manager, but bad for an individual (other than transaction costs, but I'm assuming the money was drip-fed into the portfolio over time, so even that argument is week). Hopefully somebody can explain...

VRD


* https://markets.ft.com/data/investment- ... ?s=MYI:LSE
** https://www.bailliegifford.com/en/uk/in ... -may-2021/


I was thinking more of the total contribution an outperforming small holding would make (or not):

e.g. £100k portfolio in a tracker returning (say) 10% = £10k gain
or
£95k in a tracker and £5k (5%) in something racy returning (say) 15% = £10.25k gain

So a delta of +0.25% for the year. Add in any additional dealing costs, platform fees or even your own admin time and I think the gain would be pretty marginal - personally i'd just take the easy option and put that 5% in the tracker instead.

I'm presuming a similar thing with bonds, e.g. 95:5 equity:bond portfolio would have such a marginal effect on volatility it might not be worth the effort. Although i'm half-expecting someone to pop up with a graph proving otherwise!

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Re: Core and Satellite approach for SIPP portfolio

#430705

Postby 1nvest » July 27th, 2021, 1:13 pm

hiriskpaul wrote:Fixed income punches above its weight as part of a portfolio because of a "Rebalancing Bonus".

Across a Bull market stocks will tend to win, across a Bunny (sideways) market 50/50 rebalanced will tend to win, across a Bear 50/50 will also tend to beat all-stock.

There are alternatives to straight 50/50 yearly rebalancing such as Robert Lichello's AIM that does overbalancing. Across US 2000 to end of 2009 for instance whilst all-stock total real returns were close to 0%, 50/50 gained 40% whereas AIM yielded 60%.

When you lower volatility that uplifts annualised gains - as annualised gains are a function of annual average gains along with volatility (standard deviation). https://www.gummystuff.org/CAGR.htm Image

Considering risk as a loss rather than volatility and subjectively the least losses tended to arise out of 75/25 stock/bonds if you were for instance drawing a 4% SWR (inflation adjusted income)
Image
4% SWR for 30 years (average retirement years) and 75/25 had a 99% success rate historically compared to 97% success rate for all stock, 95% for 50/50. But that is subjective i.e. to the typical 30 year period and 4% of initial portfolio value amount uplifted by inflation each year withdrawal rate. And is backward living (assumes forward time might rhyme with the past).

Whether all stock will yield more or less than 75/25 stock/bond is also subjective according to whatever time period you select. All stock tends to pull ahead for a while only to then drop back/align again. If you bought in when relatively up, ended after a pull-back, then you could end up with worse results than 75/25 over the same period. But equally if you bought into all-stock after a pull-back, ended at or near a peak, then all-stock can resulted in significantly greater gains than 75/25. Again the likes of AIM can help there, at it can shift into all-stock at the lows, be relatively bond heavy at the highs, and repeatedly so for most/all of those cycles.

Personally I more favour UK stock, US stock, gold thirds. Stocks for Bull, gold for Bear, rebalancing for Bunny. US$ and gold 50/50 hard currencies alone pretty much offset most of UK inflation but in a volatile manner, swapping out US$ hard currency for US stocks helped smooth down the volatility. To me that is 'cash'. Add some stock to a otherwise all cash position was better than not. Small cap (UK FT250 is small cap in US scale), combined with large cap (US S&P500) and gold. VMID, CSP1, SGLN ETF's. Maybe this sort of historic difference


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