Friday, 20 January 2017

Scottish Mortgage Trust - New Portfolio Purchase

SMT has been on my watch list as a possible purchase for quite a while as I have waited for a pull-back in the share price and a suitable entry point. However my wait has been in vain so despite the share price rise in recent months mainly as a result in the fall in the pound, I have decided to take the plunge - my initial purchase price is 338p.

The trust is an actively managed, low cost investment trust, investing in a fairly concentrated global portfolio. As at 31 December 2016, Scottish Mortgage had total net assets of more than £4bn, making it one of the UK's largest investment trusts.

The managers, James Anderson and Tom Slater run a conviction portfolio of around 70 shares. The result is a portfolio dominated by big holdings in some of the companies involved in the new world of social media, the internet, healthcare, eco-friendly energy and gene therapy.

The top ten holdings account for 48% of the portfolio and include Amazon 10%, Baidu 5% (China's equivalent of Google), Alibaba 5%, Facebook 5%, Tesla Motors 5% and Alphabet (Google) 4%. Some 10% of the portfolio is invested in unquoted companies - Dropbox and airbnb to name a couple I am familiar with.

Largest holding Amazon has become a giant in global retail. Over just 10 years it has grown 20-fold from a market cap of  $18bn to currently £375bn.

Some of the largest holdings in the portfolio have recently released strong operational results, showing a re-acceleration of their growth rates. These include Alphabet, Facebook, Amazon, Alibaba, Baidu and Tencent. The long standing common elements contributing to their success include: strong corporate cultures, driven by their founder/managers; a focus on providing what their customers either want or need; and a willingness to invest for the long term to enable them to adapt to, and increasingly to anticipate, their customers' evolving demands.

These network businesses now seem to have reached a critical tipping point, whereby their sheer dominance and scale become a reinforcing competitive advantage. This stems from the developments within machine learning and artificial intelligence (AI). The increased level of global connectivity, through the combination of the relatively new infrastructure of the mobile internet, social media and smart devices, has produced an explosion in the proliferation of data. The volume of this is now so great that no human could hope to curate the content. It will require machine learning and AI to process it. The leaders in these fields need access to the best data sets, produced by the largest networks. It is no accident that Baidu, Alphabet, and Facebook are leaders in this area.

Scottish Mortgage offers a clear, consistent and simple proposition: a portfolio of long term investments in what the Managers believe to be the best growth businesses, operating in any industry and anywhere around the world.

Over the past ten years, the trust has delivered a return of 286%  (second only to Linsell Train). Although this is essentially a global growth trust, it is worth noting it has increased its dividend every year for the past 32 years. However, due to the share price appreciation, the current yield is 0.9% (about the same as an average savings account!).

3 Yr Chart -v- FTSE All Share Index
(click to enlarge)
I am hoping that, amidst all the gloom and worry surrounding Brexit and the fall in value of sterling and also the controversy surrounding the election of Donald Trump, this is still a good time to be a long term global growth stock picker.  For me, SMT will form a small percentage of my portfolio as I consider it as a higher risk global equity option but I share the managers’ long-term perspective on the sort of companies which are shaping the future. It should complement some of my other more cautious trusts as part of a wider, diverse portfolio.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Tuesday, 17 January 2017

A Logical Investment Strategy Revisited

Over the past year or so, I have been reviewing my investment strategy. When I first started this blog in Feb 2013, I wrote a number of articles which reflected my basic approach to the investing process. These are essentially a collection of guidelines which should benefit most investors - keep costs low, keep it simple, a diversified portfolio, start early etc.


These basic principles of investing gain traction because they produce a good result when used over a longer period and also because they make sense to most reasonable investors.

* Create a Plan - a unique road map and strategy which broadly sets out some of the basics of why you are investing - time frame, what would define success and how you are going to go about it.
Do you select active or passive, possibly a mix of both?
What is your asset allocation and how will it change over time?
ISA, Lifetime ISA or SIPP?
Which low cost broker/platform will be used?

There is no perfect strategy. Different plans will suit different investors with different circumstances. I suspect the best plan is one which is more likely to ‘fit’ with the individuals psychological make-up and is therefore most likely to keep them in the game and get them to their destination.

* Low Costs - it seems to be logical that if you invest in a fund charging 1.5% p.a., it is likely you will get less return for your investment than a fund charging 0.15% - this is hardly rocket science. Indeed all the research I have seen in recent years supports this. Here’s a link to a report by Vanguard which is typical of many.

* A diverse portfolio - We all like to make a little extra money - but if you are anything like me, you hate losing money even more. The best investment strategy of all is the one that guarantees never to lose money - only one problem, such a strategy has yet to be devised.

The next best option therefore would be to limit any potential loss by selecting a diverse range of investments. As we probably all know, as a general rule, its not a good idea to put all your eggs in one basket.

Investors can diversify their portfolio in several ways but the most common would be :

Holding funds or investment trusts rather than a few individual shares;

Diversifying assets between different classes - equities, bonds, property etc.,

Geographic - a global spread of holdings. As can be seen from the chart - courtesy of Novel Investor, limiting your portfolio to just one country may not have provided the better returns - far better then to have a wide global mix.

* Keep it simple - “Everything should be made as simple as possible - but not simpler”  Albert Einstein.

As it is an option to hold a wide variety of diversified assets in a low cost tracker, why would you want to hold the same assets in 10 different funds?

Vanguard founder John Bogle says “Simplicity is the master key to financial success. When there are multiple solutions to a problem, choose the simplest one.”

Years ago, a journalist asked Charlie Munger why more investors hadn't copied Berkshire Hathaway's approach to investing. "More investors don't copy our model because our model is too simple," he said. "Most people believe you can't be an expert if it's too simple."

* Start Early and stick with it for the long term - those who embrace the idea of investing, and I suspect this may well be a small minority of the population, will come to it at different times. The earlier we can get going, the better as our investments will compound over time - also, the longer the period of investing, the better chances of a successful result.

The ability to see it through over the longer periods could well be the most challenging aspect of the investing process. Investing will involve equities and these can be volatile - some investors, myself included, can become irrational during periods of market volatility. Asset allocation and rebalancing is an important part of the strategy to deal with this aspect.

* Know Yourself.  I believe this is one of the most important aspects of the process but possibly the least understood by newcomers. The longer the time frame for the investing journey, the better the probability of a good return. However, one of the hardest aspects of investing is sticking with the plan when markets are volatile - especially equities. You will need a plan which you can stick with through the ups and downs and which meshes well with your personality.

Are you naturally cautious or do you like the thrill and spills? Do you seek instant gratification or are you patient? Are you more skillful than the average investor? Can you accurately predict the direction of the markets? Are you overly influenced by ‘experts’ or do you ‘do your own thing’? How would you react to losing 10% of your portfolio value?…25%?…40%….?

Charlie Ellis from ‘Winning the Loser’s Game’
“The hardest work in investing is not intellectual, its emotional. Being rational in an emotional environment is not easy. The hardest work is not figuring out the best investment policy; its sustaining a long term focus at market highs or market lows and remaining committed to a sound investment policy. Its hard especially when Mr Market always tries to trick you into making changes“.

The basic idea is that the best strategy for most people is not only one that makes sense, but also one they can also stick with - (Joel Greenblatt)

* The Art of Doing Very Little. We need to give careful consideration to our strategy - asset allocation, low cost broker, active/passive etc. All this is probably best done before we start investing. The plan may need a few tweaks along the way but I believe, over the longer term, the better outcome will result from doing not very much once the plan is up and running.

This aspect of investing for me personally is possibly the most difficult to achieve and I am sure my returns have suffered due to the itch to tinker and constantly monitor.

Sometimes there is a good reason to make a portfolio change but in my experience, 9 times out of 10 it will be better to do nothing. Successful long term investing is developing a habit of saying ‘no’ over and over and doing nothing at times when doing ‘something’ could be a big mistake.

Apply the Logic

I hold quite a diverse portfolio - a few remaining individual shares, a dozen or so investment trusts, some fixed interest holdings and some UK income and global index funds.

Lets look at each in turn in relation to the logical basics outlined above:

For many years I have held individual shares in my portfolio mix however, when I came to analyse the contribution of these compared to my collectives in 2015, it was clear that they were clearly the weakest link in my strategy

Individual shares are probably the most volatile assets to hold in any portfolio - and the logical implications of this are the emotional rollercoaster makes it more likely that some shares will be traded too frequently which in turn increases costs.

I can have access to a wider range of shares in collectives such as investment trusts and low cost trackers. This offers diversity and reduces volatility.

It can be quite fun to hold individual shares but from a logical point of view, I was struggling to justify a case for their retention and this led to a review of strategy.

* * *

Investment Trusts - they offer diversity both in the number of shares and other holdings in each trust but also give access to global markets. The costs vary, some are reasonably low at ~0.45% with the likes of City of London, others are nearer to 1.0%. .

I find them less volatile than individual shares however, they do use varying amounts of gearing and can trade at a premium or discount to their NAV so they are a little more complex. Against this is the advantage of their ability to pay a steadily rising income stream due to their being able to hold back excess income in reserves.

The fortune of the trust is dependent on the manager making consistently good calls - some appear to be reasonably competent and some a little more average.

I think, on balance, there is a logical case for holding a diverse basket of the lower cost trusts, particularly where the manager can demonstrate a consistently good performance relative to an appropriate benchmark over time.

* * *

Index Funds - it more or less goes without saying that these are all low cost.

They are diversified, fairly simple to understand and implement - although with the funds you don’t quite know what quantity you have purchased and at what price until a couple of days later. A little while back I reinvested some of the proceeds from share sales into the Vanguard LifeStrategy funds which offer a diversified low cost one-stop strategy which could not be much simpler.  My Lifestrategy 60 fund is a blend of stand alone equity and bond funds which together comprise around 20,000 holdings.

The income distributions from my UK Equity Income fund are unpredictable as it merely pays out all the income received over the intervening period.

There can be little doubt, on most fronts, these are the most logical way to invest.


I have been trying to take some of the complexity out of my strategy - make it more simple, reduce some costs and hopefully generate a little better return.

Given the underperformance of my shares, it seems logical and sensible to reduce these and replace them with one or two global index funds.

The review of strategy seems to be working out. Over the past year, the index funds returned 17.3% compared to 14.4% for my basket of investment trusts and just 1.5% for the remaining shares.

It would be good to further simplify my investment portfolio… as they say, slow & steady steps - provided they are heading in the right direction!

Feel free to leave a comment if you have any thoughts.

Tuesday, 3 January 2017

Collectives Income Portfolio Review - End 2016

This started off in 2013 as my investment trust income portfolio. Over the past year or so, it has morphed into a collectives portfolio as its scope broadens to include my low cost index funds. Also this year, as I have been selling down my individual shares portfolio, I decided to merge the two.

The starting capital for the shares portfolio was £36,000 and the starting capital for this portfolio was £28,000 - a combined total therefore of £64,000.

Although this is demonstration income portfolio, it largely mirrors my own holdings..


My demonstration portfolio has now been running for 4 years. Here's the corresponding review for 2015. Many of the investment trusts have been there from the start - City of London, Aberforth, Edinburgh etc.

The main development over the past 18m or so has been the introduction of the passive Vanguard funds and the decision to abandon the individual higher yield shares, although a few still remain (and one recently repurchased)!

The portfolio has seen a few ups and downs over 2016 but post Brexit it has been mainly on the up. The dramatic fall in the value of the pound gave a boost to my global equity ETFs and as I needed to rebalance my personal portfolio following the redemption of my Coventry PIBS, I decided to sell my 2 Vanguard ETFs as I had not been overly impressed with performance. Over the 3 years to June, VHYL had returned 4% p.a compared to 8.6% from my Vanguard LS fund. In the period post Brexit, it received a boost from the fall in sterling.

What would have been the odds at the start of this year on Leicester winning the premiership, a vote to leave the EU and Trump winning the US elections? I am not a betting man but if I had placed a £1 wager on the above, I would now be a multi-millionaire.

So, how have the various investments fared over the past few months and are my investment trusts adding additional value compared against my Vanguard trackers? In June I compared performance of a basket of 12 investment trusts -v- index funds over the past 5 years and which showed the trusts had the edge.


The managed trusts have mostly provided a decent returns, particularly post Brexit. Leading the gainers unsurprisingly are Blackrock Commodities Income which has posted gains over 69%.

In August, I decided to reduce my holding in UK income trusts which resulted in the sale of Murray Income. In early September after a stellar run and gaining almost 50% since the start of this year, I also decided to off-load the remainder of my holding in Murray International.

My largest holding, Edinburgh has been fairly flat however there have been solid contributions from  Temple Bar +20%, New City +13% and Finsbury Growth +12%. The only trust in the red for the year is Aberforth Smaller -5%.

The drag on performance has been the remaining individual shares which are collectively showing a total return of just 1.5% (Next -29%, and Berkeley -18%).

Several shares have been sold - Unilever, Sky, Tesco and BHP Billiton however IG Group has been recently repurchased. I fully anticipate the remaining shares will be sold at some point over the coming year.

There has therefore been a little progress since 1st January. The value of the combined portfolios at the start of 2016 was £75,554 compared to the current value of £85,398 - a rise of £9,844 and total return of 13%.

The total return for the FTSE All Share index is 16.5%.

I decided to top slice my VLS holding when the value of sterling reached $1.20 and there is currently quite a large amount of cash awaiting more favourable opportunities and/or market conditions in 2017. I am struggling to find areas of value, particularly with regard to the fall in the value of sterling combined with the level of the UK and US equity markets. However I did use the proceeds from the sale of Sky to purchase Tritax Big Box in October and the proceeds of Billiton to purchase TR Property trust in November.


In July following the fall in sterling and the corresponding boost to the VLS fund price, I took the opportunity to sell 13.46 units @ £155.32 to give £2,078 ‘income’ and representing 8% of my total holding. This has provided my 4% income requirement for this year and the additional 4% has been added to my 10% cash buffer.

Over the 12 month period, I have received natural dividends totalling £2,127 plus ’income’ of £1,039 from the sale of 4% of my VLS fund making a total of £3,166 which compares to £2,957 from the combined portfolios in 2015 - an increase of 7%. The yield is ~3.7% based on current valuations.

The portfolio now reflects the value of the cash buffer - a total of £3,400 which has been made up by taking £2,361 from the sale of my Vanguard ETFs together with the second portion of ‘income’ of £1,039 from the sale of units in my LifeStrategy fund.

The cash buffer is held in my Coventry BS accounts which has recently seen a reduction in interest to 1.15%.

Here is the combined portfolio
(click to enlarge)

Good Enough

I drifted into early retirement at the age of 55 yrs and have been living off the income from my savings and investments for the past 8 yrs.

To retire early I think you either have to:

1. Have accumulated lots of money.
2. Have very little need for lots of money.

The ideal situation is obviously a combination of the two but at the most basic level, leaving aside any inheritance or winning the lottery, those are the only two things that matter.

Unfortunately I only seriously started saving/investing in my mid 40s which was far too late to amass lots of money so I am very firmly in the second category - frugal Freddie!

I am continuing to edge slowly away from the rollercoaster of individual shares and entering the relative calm waters of the 60/40 Lifestrategy option. Over the coming decade, I am thinking a steady 3% or 4% real return on average (after inflation) will be good enough for me.

The average annualised return for this demonstration portfolio after 4 years is ~7.5% - possibly around 5.5% or 6% after inflation - so far, so good. Having said that, the average return from my VLS 60 fund over the past 4 yrs is over 10% p.a. - how simple would it have been to invest the £64,000 in that from the very start? The portfolio would now be valued at £94,000!

Friday, 30 December 2016

End 2016 - Personal Portfolio Review

As ever, an interesting year on the markets which have been dominated by our decision to leave the EU following the referendum in June.

The other main event for me this year was my house move which was completed in November after quite a long wait to find a suitable buyer. However, I am pleased to report the wait has been worth it and I am now settling in to my new home and thinking about the various jobs required to make it more how I want it to be for the longer term.

In 2015 I decided to review my whole investing strategy. The outcome was to begin to simplify and diversify - wind down my individual shares portfolio and reduce some of my managed funds. The proceeds were diverted towards an increasingly passive strategy - in particular, using the Vanguard LifeStrategy index fund.

Over the past year, I have sold a few more individual share holdings and a couple of investment trusts which did not seem to be contributing much to the basket. However, earlier this month I repurchased IG Group which now makes 6 remaining share holdings.

In the past year, I have also started to operate a more flexible approach to taking income from my investments which involves the sale of capital units from my VLS 60 fund. The fall in the value of sterling post Brexit gave a boost to the price of my VLS and I took the opportunity to sell 8% of my holding to provide income for this year and next.

Benchmark Returns

Turning to my portfolios and following on from my half year review at the end of June, I have just completed a review of my actual investments - sipp flexi drawdown and ISA - for the full year to the end of December.

The FTSE 100 started 2016 at 6,242 - after a few twists and turns, it has finished the year up 900 points closing at an all time high of 7,142 or 14.4% - if we add on say a further 3.5% for dividends paid, this will give a ballpark  total return figure of 17.9% for the full year. The second line FTSE 250 have not done as well as 2015 and the FTSE All Share index is up 16.5% for the year.

In the past I have used the return from the FTSE 100 to compare the performance of my diy portfolio returns. However as the portfolio has become more globally diversified and includes around 40% fixed interest and bonds so I now use an average of my remaining Vanguard funds. 

Total returns for these over the past 12 months are as follows :

LifeStrategy 60    18.6% and 
UK Equity Income  12.1%   
Average     15.3%

So far as cash deposits go, returns must surely be the lowest in a generation and the Bank rate has again been reduced to a new record low of 0.25% and the savings rate on my instant access account with the Coventry BS has fallen 0.35% to just 1.15%. Its really tough for cash savers out there!


As mentioned last year, my individual shares portfolio has been the main area of change following my review of strategy and is now reduced to just 6 holdings. This past year I have sold Unilever, Tesco, BHP Billiton and Sky and expect to offload some remaining shares in the coming year. Next raced ahead in 2015 reaching the heady heights of £80 per share but, almost inevitably, the higher valuation was susceptible to the slightest inkling of bad news and the price has retreated in 2016 by ~30%.

The total return including income on my individual shares has been a disappointing 1.5% which has put a damper on the overall portfolio return.

Investment Trusts

Over the 12 month period, I decided to sell the remaining holdings in Murray Income and Murray Intl. and I have added a couple of property trusts to provide a little more diversity to my basket.

The better returns came from Blackrock Commodities (unsurprisingly) with 69%, Murray International (prior to sale) +50%, Temple Bar +20% and Finsbury Growth & Income (again) up 12%   The only trust that has struggled for me this past year have been smaller companies specialist, Aberforth -5%

The total return for my basket of trusts over the year was a respectable 14.4%.

Income yield from the trusts portfolio has been steady at 4.0%. The highest increases were Finsbury 8.2%, City of London 4.9% and smaller companies specialist Aberforth 25.4% (incl. special divi).

Index Funds and ETFs

Over the past year I decided to take profits from my Vanguard All World High Dividend ETF and Asia Pacific ETF both of which were boosted by the fall in sterling post Brexit.

In March 2015, I added the Vanguard UK Equity Income fund to my portfolio. The fund gives me access to a broad range of around 130 dividend-paying securities from across the FTSE 350, while reducing the risk of being overly invested in a small number of high-yielding shares or particular industry sectors by limiting the percentage of the index invested in any one company or industry.

I have just received my second half-yearly dividend of 403.14p per unit which makes a total of £7.76 for the year and very similar to 2015. The current yield is 4.5%.

This fund is probably the nearest proxy for a higher yielding shares portfolio but obviously far more diversified.

Finally, a significant percentage of my redistribution has been invested in the Vanguard LS 60 index fund. The intention is to sell down units each year to provide ‘income’ and I have also set aside a cash buffer reserve representing 10% of the funds value from which I can draw upon for income in bear market years when returns on the index fund are negative.

Over the past year, the fund has advanced by 18.6% so I took the opportunity in July to draw the equivalent of 2 yrs income by selling 8% of my units.. The 10% cash reserve has therefore increased with an additional 4% plus interest on the 10% for the past year in my building society.

Due to the fall in sterling I have also top-sliced my holding with a sale of 30% in September and hope to repurchase at a more favourable price when the pound eventually recovers against the dollar and/or the markets retreat from their current high points.

The contribution from my index collectives has therefore been positive over the year with a total return of 17.3%.

In his book  “The Index Revolution” Charley Ellis suggests individual investors will be most likely to succeed if they stick with a straightforward buy-and-hold, long-term strategy and make few moves.
They will be rewarded, Ellis said, by joining the index revolution only to the point where they are capture market returns over time, using a few funds in a mix reflecting their age, time horizons, and risk tolerance.

There’s nothing particularly revolutionary about that thinking, except for its simplicity in an era when complexity is the norm. “A simple portfolio that has few funds, but that inspires confidence that you can reach your goals is very freeing,” Ellis explained. “It allows you to focus on the things that are really important, and we all have something better to do than to be managing our mutual fund portfolio every day.”

Fixed Interest

As ever, the PIBS and fixed interest sector has provided a steady and predictable income of 6.1% however capital values have only edged up slightly providing a total return of 6.7% for the year. 

The better returns came from my two investment trust holdings - New City +12% and City Merchants +11%.

My largest holding was the Coventry BS PIBS (held in both ISA and SIPP) and these were redeemed in June 2016 and the proceeds remain in cash. 

Likewise my Nationwide PIBS were redeemed earlier this month. I have used the proceeds to add HICL Infrastructure Trust and also iShares Corp Bond (ex financials) ETF (ISXF) to my income portfolio.

The Complete Basket

As a whole, the portfolio has delivered a total return of 11.4% over the past  year. This compares well with my portfolio returns in previous years 

2013 13.3%, 
2014   5.4%, 
2015   2.7%  


In these times of ultra low interest rates and corresponding low returns from cash deposits, for a little more risk, an average annualised return of over 8% over the past few years is for me very acceptable. Return on my investments have been positive in 7 of the past 8 years and I am thinking the wheel may be about to turn!

I am starting to feel comfortable with my revised strategy - less individual shares means less monitoring of dividend receipts, annual reports etc. The move to index funds provides more global diversity and in particular the equity/bond balance provided by the LS60 fund provides less volatility and more stability and makes life very simple as it is automatically rebalanced to maintain the 60/40 ratio. I hope this addition will make it easier to leave alone and avoid the tinkering.

I have no particular goals for the coming year. My needs are fairly modest so I do not need a fortune.

I really do not subscribe to a get-rich-quick philosophy - it seems to me the easiest way to grow wealthier is learning to live with less, because living with less has a higher success rate than attempting to earn a fortune, and fortunes tend to push aspirations and desires higher anyway. Some 50 years ago, my grandparents had much fewer possessions and much less income, they experienced two World Wars and the intervening depression of the late 1920s but they appeared just as happy. 

I will repeat my patient, stay in the game and keep it simple....

Finally, wishing all readers a healthy and prosperous New Year!

As ever, I would be interested to hear how others have done over the past 12 months - leave a comment if you keep track of your portfolio.