SIPP Drawdown - Year 7 Update

Wild Honeysuckle (Clunton, Shropshire)

It's June, another 12 months has rolled by so it must be time to review my SIPP drawdown portfolio at the end of its seventh anniversary. Here’s a link to the previous update of June 2018.

The original plan when I started drawdown in 2012 was to generate a rising natural income from which I would withdraw 4% income which I calculated should be sustainable over the longer term without depleting the capital. This would bridge the 10 year gap between early retirement at age 55 yrs and state pension.

Last year my state pension kicked in so I am no longer reliant on income from my SIPP which means I have more flexibility on investment choices.

Portfolio Changes

My efforts to move towards a more climate-friendly portfolio are well documented and this includes my drawdown portfolio so there have been a quite few changes over the past 12 months. My main considerations are to avoid fossil fuel companies - and therefore the sale of Vanguard LS 60 (high weighting to FTSE), City of London, Aberforth Smaller and Edinburgh - and also to support renewable energy and other environmentally friendly funds which are more aligned with my values. Hence the introduction of Bluefield Solar, TRIG, iShares Clean Energy ETF and also Vanguard SRI Global.

I am currently mulling over the sale of Scottish Mortgage Trust as I see from the latest annual report that it has recently acquired a holding in Elon Musk's SpaceX.

As I no longer need to take an income from my SIPP, I can now dispense with the cash buffer of around £4,000 or 10% of the Vanguard fund and this has now been fully invested.

Performance

So far this year the markets appear to brush aside the political uncertainty of Brexit and the tensions arising from trade wars between USA and China <cue market correction>. There was a brief dip in the FTSE below 7,000 in December/January followed by a quick rebound but this is nothing more than normal market volatility. Over the 12 months, the FTSE 100 has seen a modest decline of 2.5% from 7,631 to currently 7,443...but maybe a gain of 1.5% total return including dividends. My SIPP portfolio is now more fully invested and it is pleasing to see a modest gain of 4.4% over the year. This includes all transaction costs resulting from portfolio churn.

With so many sales/purchases, it's difficult to compare the years performance for individual elements however HSBC Global Strategy Balanced made a gain of 5.0%, Vanguard LS 40 a gain of 5.7% and Capital Gearing a gain of 6.7% including dividends.

Here is the portfolio

(click to enlarge)

Comparisons

In June 2012 when I started this series on my drawdown journey, the FTSE 100 was 5,500 and has risen to 7,443 - a gain of 35%. If we add in average dividends of say 3.8% each year, this gives a rough total return of 62%

When I started my drawdown in June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £191 - a gain of 82% or annualised average of 8.9% p.a.

Taking account of the income withdrawn over the past 7 years of £19,400, the total return including income is 84.7% which is very satisfactory and works out at an average annualised return of 9.2% p.a.

State Pension

For most of the past decade I have relied upon income from my SIPP to supplement my ISA income and bridge the 10 year gap between early retirement at age 55 yrs and state pension. This part of the journey is now 'mission accomplished'.

My state pension has now been in payment for just over a year which is long enough for me to know that I do not need to continue with drawdown from my SIPP...although I can always dip in at any time for a lump sum withdrawal if required. I will therefore be less reliant on the income from my SIPP for essential living costs and it will become more for discretionary spending or more likely remain invested. Unlike an annuity which, once purchased means the capital lump sum is lost forever, any residue in my SIPP will pass on to my children and grandkids...tax free if I go before 75 yrs and thereafter possibly 20% or tax free depending on circumstances. For those interested here's a link on the AJ Bell site.

Conclusion

Obviously I am reasonably happy with my first few years of self-managing a flexi-drawdown sipp portfolio. For the first few years, the dividend income predictably rolled in much as planned and importantly, increased each year a little ahead of inflation. During the next three years I have withdrawn significant lump sums tax free and placed the excess which I did not require for income in my ISA. Of course, there are no tax liabilities for all monies subsequently withdrawn from my ISA.

I now need little or no income from my SIPP in the future and will therefore focus on longer term growth combined with environmentally responsible options. As I am no longer depleting the capital, this should hopefully grow much the same as during the accumulation phase before drawdown and in the knowledge the pot can be inherited by children and grandchildren possibly tax-free at some point in the future.

For me, the big advantage of the SIPP is the flexibility it offers. I started off with a portfolio of income-generating investment trusts and PIBS. I then introduced the multi-asset, globally diverse index funds such as Lifestrategy and now I can sell the funds which are not required and replace with more climate-friendly options to satisfy my desire to do my bit for the environment. I can also withdraw as much or as little cash as needed.

What's not to like!

If you are managing your SIPP - accumulation or drawdown - or you are planning to do this, feel free to share your experience in the comments below.

TR Property - Final Results

I hold this property trust in my ISA and also my Sipp drawdown portfolio. It is a little different to most property funds in that it mainly holds the shares of other property companies and has just 8% of the portfolio in property directly. This has advantages regarding flexibility and lower costs.

The fund is managed by Thames River and aims to maximise total return by investing in international property shares and direct property mostly in the south east of UK. Manager, Marcus Phayre-Mudge has been involved in property investment since 1992 and has been involved in running the Investment Trust since 2004.

At the end of April the largest geographic exposure was a 39% weighting in UK property shares and a further 8% in direct property, then property shares in European companies - France making up a further 15%, Sweden 9% and Germany 30%. 

Retail and office space accounted for 22% and 31% respectively, with another 33% in residential and the remainder divided between industrials and diversified such as student accommodation and storage.

Results

The trust has recently published results for the full year to end March 2019 (link via Investegate). Net asset total return has increased by 9.1% (last year 15.5%) and share price by 6.2%.

Commenting on the results, chairman Hugh Seaborn said:

"In an environment where investors are seeking income, property benefits from the characteristic of offering relatively high income returns, often growing with inflation. Our Manager continue to focus on real estate businesses in areas and sectors which offer the likelihood of rental growth. The divergence in performance between companies with those attributes and the remainder has widened to record levels. This does create the risk of the most popular names becoming overbought and the least popular are at risk of being oversold. Our Manager remain vigilant, keeping a very close eye on earnings - the bedrock of this asset class.

Our confidence in the stability of earnings and the relative attractiveness of the asset class versus other risk assets offers little succour in the event of broader market weakness. The impact on the UK, and to a lesser extent Continental Europe, inflicted by unprecedented levels of political uncertainty may well only become apparent in years to come. What we do know, at the time of writing, is that we remain in a period of great political uncertainty and I take the opportunity to remind shareholders of the broad pan European spread of our assets". 

Income

Revenues have increased and as a result the final dividend will be increased to 8.6p (last year 7.55p) making a total of 13.5p for the year, an increase of 10% compared to the previous year (12.2p). It has produced compound annual dividend growth of 12.5% p.a. over the past 5 years and this has been fully covered by property revenues. The shares yield 3.3% at the current price of 408p.

 

5 Yr Comparison v FTSE All Share

This trust has so far been a very positive addition to my portfolio - the share price is up 40% on my purchase price at the end of 2016, plus the dividend has increased by 80%. Obviously off to a good start but I expect a little volatility in the share price until the Brexit saga is resolved...could be a while yet. However, the income seems fairly secure and I am happy to continue with my current holding as property offers diversity to my 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!

Capital Gearing - Final Results

The aim of this trust is firstly to preserve capital and then to achieve capital growth in absolute terms rather than relative to a particular stock market index, principally through a wide variety of investments including variable weightings of investment trusts, cash, bonds, index-linked securities and commodities when it is considered appropriate.

It is just over two years since the trust was added to my portfolio as a 'safe house' for some of the proceeds from various sales. After several years of above-average returns from equities, it seemed like a good plan to shelter the profits and de-risk the portfolio.

There are a few trusts which offer to preserve capital such as Ruffer, Personal Assets and RIT Capital Partners. They all work on the principle that accepting a more solid but lower return from a diverse asset mix is a price worth paying for the peace of mind from not suffering potential losses from riskier or more concentrated assets.

Results

The trust has recently announced results for the full year to 5th April 2019 (link via Investegate). Total return per share has increased by a respectable 7.9% with net assets increasing to £40.82.

Income

The focus of this holding is capital preservation rather than income. Last year the dividend was 27p however this year revenues have again increased to 51p and the board have proposed an increased payout of 30% to 35p which includes a special dividend of 12p. The yield however is still less than 1.0%.

Asset Allocation

The portfolio is currently very defensive with 35% in cash or short-dated gilts and a further 25% in US inflation linked government bonds. Then there is 18% allocated to preference shares and corporate debt. A further 15% is allocated to property and then a similar percentage to equities.

I was particularly pleased to note that new positions have been opened in renewable energy infrastructure with the additions of John Laing Env. Assets Trust, TRIG, Greencoat UK Wind, Foresight Solar and Greencoat Renewables. The combined returns from these additions was 20% so I hope this will encourage the management to increase their weighting over the coming year.

  

Commenting on the year, manager Peter Spiller said

"With real rates set to remain at historically low levels, it is not easy to identify a short-term catalyst that will bring an end to the current business cycle and the associated powerful equity bull market. The fragile macro-economic backdrop, combined with elevated equity and bond valuations, suggest that portfolio returns will be modest over the medium term and could be negative if there is a period of recession. 

As with the past year, capital preservation remains the key objective of portfolio allocation, until valuations return to more attractive levels. An objective of merely preserving capital sounds modest. But, if it can be delivered over a period of normalising asset prices it will represent a significant achievement and lay the foundation for potentially more exciting returns in the future".

3 Yrs Comparison v FTSE All Share
(click to enlarge)

I am reasonably content with my first couple of years. Certainly I would be happier if the trust did not have 2.2% holding in a FTSE 100 ETF and maybe that positition will be reduced in due course. The current share price is £42.50 which is 10% up on my purchase price. In addition there is a further 2% in dividends so an average of 6% p.a. is not too bad for a very defensive portfolio. I am also encouraged to see the ongoing charges have reduced from 0.77% to 0.70%...every little helps.

The trust provides a good counter-balance to some of my racier holdings such as Scottish Mortgage and Mid Wynd and the proof of the pudding will be the combined return on the whole basket at the end of 5 years.

So, back to the bottom drawer with this one and review again at the same time next year.

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!

Brexit Revisited

Well, here we are, almost 3 years on since we voted to leave the EU and not only have we not left, we have actually taken part in electing even more MEPs to Brussels! How on earth has it come to this?

In my article on the Brexit fudge last July, I covered the situation following the Chequers gathering and suggested the PM would struggle to get the agreement through parliament and would end up resigning. It took a little longer than I thought - three failed attempts to get the bill through the Commons, but inevitably Mrs May conceded defeat and will step aside on 7th June.

We have seen a number of indicative votes on a range of options discussed by MPs - customs union, no deal, revoke Article 50, second referendum - but nothing has a clear majority. The reality is that we have a remain parliament which does not really want us to leave the EU in any meaningful way and which has therefore been at odds with the country which voted 'leave'. There are many millions of people who are naturally frustrated and angry that the referendum result has not been delivered. There are also many on the remain side who continue to call for Brexit to be cancelled or at least for the chance to have a second referendum.

It is therefore no surprise that, with parliament in deadlock and unable or unwilling to deliver Brexit on 29th March coupled with the requirement for us to take part in more EU elections, we have the re-emergence of Nigel Farage and his new Brexit Party.

The EU Elections

So, we had another vote last Thursday and it's fairly clear that people are rejecting the half-in/half-out compromise of the past couple of years dished up by the main two parties. The ruling Tories slumped to 5th place behind the Greens and lost 15 of their 19 MEPs and managed just 9% of the national vote - their worst ever election result in almost 200 years. Labour did slightly better losing 10 of their 20 MEPs mainly to a resurgent Lib Dems who gained 15 MEPs.

2014 EU Elections

The new Brexit Party were the outright winners however both 'remain' parties, Lib Dems and Greens also did well and therefore I suggest the battle lines are now clearer leading to the new deadline:

a) 'leave' come what may by 31st October, or

b) go back to the people to reverse the referendum and 'remain'

The results were:

1. Brexit Party        32%  (29 MEPs)

2. Lib Dems           20%  (16 MEPs +15)

3. Labour              14%  (10 MEPs  -10)

4. Greens              12%  (  7 MEPs   +4)

5. Tories                 9%  (  4 MEPs  -15)

6. SNP                    4%  (  3 MEPs   +1)

2019 Results

For someone who voted to leave back in 2016, my decision has not changed. The politicians gave us the referendum. It was billed as a 'once in a generation decision'. The question on the ballot was 'leave' or 'remain' and parliament promised to implement the outcome. We chose to leave with a majority of 1.3 million people. The problem has not been with the people who voted but with the remain politicians and civil servants entrusted with delivery of the decision.

If the result had gone the other way, I would not be jumping up and down demanding we withdraw a bit more from the EU to satisfy the 48% who voted to leave. No, I would have accepted the decision to remain - that's how democracy works...the losers have to accept the decision and move on. In the final analysis, democracy isn't really democracy if our politicians decide to just ignore the results they don't agree with.

We voted to leave and the wishes of the majority must be respected and those who voted remain should now accept the decision. Regardless of how the new PM and cabinet proceed, the simple fact endures that we cannot move forward as a country until the 2016 vote has been respected and we have left the EU. Therefore, the referendum outcome must now be delivered - deal or no deal.

Call me old fashioned but for me, it's all about integrity and democracy. I honestly do not believe a second referendum would resolve this issue. People would quite rightly ask "What did you not understand about the instruction we gave last time?" It would prolong the agony and would create more uncertainty and divisions.

We now need decisive action from the politicians to respect the result of the 2016 referendum...I'm not holding my breath.

Feel free to have a say on Brexit in the comments below. What do you make of the past three years? Has your position changed or does it remain the same? How do you see it being resolved?