Is now the time to buy into the markets again?

  • An investor wonders whether to put money in or wait for a downturn
  • He also asks about the best asset allocation calls

reader portfolio

Paul

69

description

£500,000 sipp, £2m property and £200,000 land on top of pension and state pension income

Goals

Generate 10 percent growth each year as a source of additional funds

portfolio type

Invest for growth

Paul is 69 and retired. He receives around £35,000 a year from pensions, while he and his wife together receive £20,000 a year from the state pension. The couple have land worth £200,000 and a property worth £2million less a £250,000 equity release mortgage. Paul has around £500,000 in a self-invested personal pension (Sipp), while his wife has £32,000.

Now he wants to get more out of his portfolio. “I would like £12,000 a year to top up my state pension and retirement income and ideally up to £20,000 as fun money,” he says. “I want to see growth after extracting 5 percent or more per year, so ideally I want to see a 10 percent return year over year.”

Paul sold some of his investments earlier this year and now has around £190,000 in cash within the Sipp. However, he’s not sure whether to reinvest it now or wait for the markets to drop further.

“I sold 35 percent and went cash in July 2022,” he says. “The key question now is whether we reinvest or wait for a downturn.”

In terms of his investment approach, Paul tends towards a 50/50 split between active funds and trackers. He avoids what he describes as “high-risk” investments, including bitcoin and emerging market equities, and has invested more outside the UK over time due to concerns about Brexit. He chooses funds over equities and believes the “low-risk stability” of his retirement and state pension income allows him to focus on equity exposure within the Sipp.

As for risk-taking, Paul notes that he “could lose 50 percent and survive, although he would prefer not to lose more than 10-15 percent in any given year.”

He also wonders if he can improve the portfolio’s geographic mix and if he should have proportionally more in the US. He reduced his UK allocation from 40% of the portfolio to 10% three years ago, reduced his Asia exposure from 20% to 10% last year due to erratic performance, and put more money into US funds and dollar strength due to their strong returns. The portfolio has had relatively strong performances in 2019, 2020 and 2021, but is down around 10 percent so far this year.

Outside of the Sipp, Paul has £30,000 in cash reserve from the Equity Release Mortgage and £40,000 in his Management Advisory business that can be drawn on in a tax efficient manner over the next few years.

Paul’s clan
Keep Value (£000) % of portfolio
Artemis US Select (GB00BMMV5105) 45 8.5
FundSmith Equity (GB00B41YBW71) 43 8.1
HSBC American Index (GB00B80QG615) 45 8.5
Royal London RLP American Tilt (GB00BGDYFT45) 12 2.3
iShares Dow Jones Industry Average (IE00B53L4350) 43 8.1
BlackRock European Dynamic (GB00BCZRNN30) 16 3.0
European HSBC Index (GB00B80QGH28) 16 3.0
Jupiter European (GB00B5STJW84) 16 3.0
Vanguard FTSE Developed Europe ex-UK Equity Index (GB00B5B71H80) 16 3.0
Royal London RLP Europe (GB00BGDYFF09) 10 1.9
Royal London UK Equity Income (GB00B3M9JJ78) 50 9.4
Invesco Asia UK (GB00BJ04DS38) fifteen 2.8
Schroder Asian Alpha Plus (GB00B5BG4980) fifteen 2.8
Cash 190 35.7
In total 532

NONE OF THE COMMENTS BELOW SHOULD BE CONSIDERED AS ADVICE. IT IS GENERAL INFORMATION REFERRED TO A SNAPSHOT OF THE CIRCUMSTANCES OF THESE INVESTORS.

John Moore, Investment Manager at Brewin Dolphin says:

I would separate the two requirements: £12,000 from natural income and £20,000 from (hopefully in time) capital gains or bond maturities or any balance of the above.

I think some balance would be helpful not only in terms of the personal circumstances outlined, but also in terms of inflation and volatility, which are likely to be more persistent than many of us would like. As such, I would suggest reviewing allocations to both fixed income and alternative space.

One of the positives of the inflation and interest rate sell-off is that many government bonds and bonds are trading below their redemption value, offering natural upside potential should you be concerned about the short-term cap of the immediate downtrend. You could buy:

  • 1% government bonds 2024
  • 2% government bonds 2025
  • 0.375% government bonds 2026
  • 1.25% government bonds 2027

For an average of 93.75p in £1, you’ll be repaid, and on top of that the capital raise will generate income of 1.2 per cent – a rate above what most high street banks are offering in interest on cash on hand . Gilts with shorter maturities could provide a source of capital to satisfy the £20.00 fun money. This could also keep equity exposure longer (should a recovery be needed) or indeed when momentum is so great that you may not want to disrupt it. Alternatively, this could also provide the firepower to reinvest should these opportunities arise.

They could add additional exposure to broaden things out, trackers for US TIPS (inflation-protected securities) and global investment grade bonds.

Let’s move on to the alternatives. I would suggest there are three areas to consider here: infrastructure, real estate, and absolute returns. There are many opportunities in the infrastructure space, but two of the big plus-class institutional assets are HICL Infrastructure (HICL) and Greencoat UK Wind (VHF).

HICL has a range of assets ranging from public-private partnerships/private funding initiatives to digital infrastructure and power transmission connections. The company is also building geographic diversification, which I think fits the essence of what you’re trying to achieve.

HICL offers a yield of around 4.75 percent, and there are prospects of this increasing over time. Fortunately, the correlation to stocks is low.

Greencoat UK Wind is one of the largest independent wind farm owners in the UK and has a mix of contract and wholesale revenues, the latter offering volatility which can provide a form of hedge against rising electricity prices. Greencoat’s yield is slightly lower at 4.6 percent, but the trust has reinvested its excess earnings into additional assets, which offers potential for income growth over time.

Real estate has historically been a source of inflation protection and I believe this remains relevant given the replacement/new construction costs that offer pricing power, although there are of course challenges ahead of a recession. They like Abrdn UK Property Income (API) offer brick and mortar exposure across the UK with a focus on industrial assets and some interesting ESG potential.

TR property (TRY) owns ownership interest and some physical property; The former often leads to more volatility in the short term, but over time returns tend to correlate with physical ownership and there have been periods of significant outperformance. TR Property has a highly experienced management team and a flexible mandate which are proving valuable at this point and while the focus is more on capital growth the 4.1% yield is helpful.

As for the absolute rate of return, Capital Gearing (CGT) and Personal Wealth Trust (PNL) offer experienced management teams, diverse underlying exposure and below average volatility and correlation to markets over time. Both offer a yield of just under 1 percent, which helps with natural income generation.

Finally, I would withhold around £35,000-40,000 in cash to cover immediate income and leisure requirements until the Gilt 2024 falls due.

Michael Lapham, director of financial planning at Mercer & Hole, says:

We would use lifetime cash flow modeling to determine the level of lifetime income that is sustainable from an investment portfolio. We believe that using cash flow models is more accurate as it takes longevity and taxation into account. It is very important to take taxes into account as it is a net income that needs to be provided. We generally assume survival to age 90 to account for longer than expected mortality.

We would always consider inflation when considering the level of income that a portfolio would support if the price of the things you spend money on are going to increase.

You said you don’t want to lose more than 10 to 15 percent in a year. Based on that, we’d suggest not investing in more stocks for the 35 percent you hold in cash, but rather keeping a “balanced” portfolio. We could expect such a portfolio to deliver a long-term compound annual net return of 4.5 percent.

Based on our assumptions we would suggest that an additional annual inflation-linked income of £32,000 is unsustainable for the rest of your life if your portfolio was fully invested, provided that a reasonable growth rate of the fund is assumed. We have calculated that the maximum sustainable additional annual income is £20,000 per year.

So an extra £12,000 a year to cover daily bills should be extremely sustainable over your lifetime. You could still pull another £8,000 a year for ‘fun’. In any case, you may find that your need for fun money decreases as you age, so you may not need the full £32,000 a year for the rest of your life anyway.

We expect your current partially invested portfolio to return around 3.5% per year after fees. This should be enough to meet your basic £12,000 extra income needs, but no fun expenses.

We don’t have the expertise to call the market and decide when to invest. We believe in time in the market, not market timing. We would therefore suggest that you invest the money you have to have the greatest possible growth opportunity, which should mean you can afford some fun spending.

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