Saturday, 23 September 2017

City of London Trust - Full Year Results

City of London is one of my steady, predictable, middle-of-the-road income trusts. It feels like a dependable, faithful old carthorse. I first purchased CTY for my personal equity plan (PEP) in 1995 - it has served me well enough over the past two decades and it represents the largest weighting in my IT portfolio (ISA and SIPP drawdown).


City have just announced full year results for the year to 30th June 2017 (link via Investegate). Share price total return has increased by 16.7% over the year and moved from marginal discount to a premium of 1.8% above net assets. The performance was however less than the FTSE All Share benchmark of 18.1%.

Dividends have increased by 5.0% from 15.9p to currently 16.7p giving a yield of 3.9%. This represents over 50 years of rising dividends - quite an achievement if you think back to the start of this run when England last won the World Cup in 1966 - I remember it well! Dividend reserves were bolstered by the addition of a further £4.7m which translates to an increase of 0.8p per share to 14.3p.

Earnings per share rose by 2.3% to 17.8p, mainly reflecting the underlying dividend growth from investments held of 4.6%.

This is a UK income trust and therefore the majority of holdings are listed on the FTSE. Large companies (FTSE 100) now account for 69% of the portfolio, medium companies 19% and overseas-listed companies 12%.

Ongoing charges are 0.42% and remain the lowest in the sector.

Passive Index

For the first time, there is a comment on the rise of competition from passives. "There has been much recent comment extolling the virtues of passive investment strategies, on the basis that active managers charge much higher fees and rarely outperform their benchmark index over the long term".

Although the trust has underperformed the benchmark index over the past year, the Chairman responds :

"This is not an accusation that can validly be levelled against City of London. Our ongoing charges ratio of 0.42% is the lowest in the AIC UK Equity Income sector and is very competitive with the OEIC market, with most other investment trusts and with other actively managed funds. 

City of London has outperformed the FTSE All-Share Index over each of the last three, five and ten year periods. If you had invested £10,000 in the Company ten years ago and reinvested the dividends, your investment would be worth £21,908, compared with the £16,847 that same investment would now be worth had you tracked the FTSE All-Share Index over that period.

While investors may be content to replicate an index in a rising market, they may not be so sanguine when share prices are falling: there is a danger that the automatic buying and selling of stocks which is inherent in index tracking aggravates extremes in share price valuations.

It also remains to be seen whether passive funds such as Exchange Traded Funds provide sufficient liquidity in a bear market because they have not been tested in their current size. By contrast, City of London's gross assets now exceed £1.5 billion and its market capitalisation stands at just under that figure. Our size means that we provide investors with a ready liquid market in our shares and our closed end status enables us to ride out market setbacks without being forced into selling sound investments at inopportune moments."

The fact that such comments have to be made suggests the actively managed sector are worried about the threats posed by the rapidly growing market share of index funds.

CTY v Vanguard UK All Share Index 2010 to 2017
(click to enlarge)

I have been reducing my exposure to UK equity over the past year (shares/ITs) however, given the track record of this trust under the stewardship of Job Curtis, I am happy to continue holding CTY for the foreseeable…

As ever, please DYOR

Sunday, 10 September 2017

The Emotional Investor

There is a widely held perception that investing on the stock market is very risky . I often read comments in the popular press money pages which suggest it is akin to gambling at the casino where the odds are heavily stacked in favour of the house. 

There must be a good reason for this - some will result from having a poor understanding of finance generally but others may have ventured into investing without understanding the nature of the risk they were undertaking or how they would react to a sudden fall in the markets. Many new investors are sucked in to making easy money when there has been a prolonged bull market (such as now!) but are totally unprepared for a 20% loss when the bull run ends and fear grips the market.

A little while back I set out some of the elements to becoming a successful investor. For me, this would include :

·                     having a simple plan - a good idea of what you want to achieve & how you will get there;
·                     an understanding of compound returns and the importance of patience/time; 
·                     the importance of keeping costs low; 
·                     maintaining a diverse portfolio and balanced allocation of assets; 
·                     understanding market volatility and mean reversion; 

We may spend a great deal of time researching our investments, maybe looking into some individual shares, comparing funds to ETFs, the costs of active funds v passive etc. without a thought on whether we possess the right emotional attributes to carry through a long term project.

Whilst all the above are important, the end result of a carefully researched plan may fall short without some understanding of your emotional/psychological make-up and ensuring this is a close match with your chosen investing strategy.

Emotions will play a large part in our lives - work, relationships etc. and it would be surprising if they did not come into play during the investing process. At times, the markets can be a rollercoaster ride - it can be just as challenging to stay with the plan during the upswings as when the markets head south. We may be driven by greed to maximise returns from our portfolio when markets are rising and then gripped by fear at the prospect of losing any gains during a bear market which seems to appear from nowhere.

Get to Know Yourself

"We have seen much more money made and kept by 'ordinary people' who were temperamentally well suited for the investment process than by those who lacked this quality, even though they had an extensive knowledge of finance, accounting, and stock market lore"  Warren Buffett.

We therefore need a plan which takes into account our personal capacity and reaction to loss and then put in place a realistic allocation of assets to closely match the degree of risk and volatility we are prepared to take. Some people are natural risk takers and may be temperamentally well suited to a higher exposure to equities, whilst others are naturally cautious and require a more balanced allocation which may include a higher percentage of bonds, fixed interest and property.

However, staying calm when the markets take a tumble will present a challenge for the most relaxed investor. It is therefore important to have a robust plan for the long term so that your strategy does not collapse during the rough seas of market volatility.

Your Personality

We all possess unique personality traits and preferences combined with a range of emotional and cognitive biases which all impact on the way we invest - or even prevent us from engaging in the investing process completely. There are many academic studies of this aspect of investing known as behavioural finance.

An assessment of our emotional make-up does not need to be complicated. Most people will know whether they are naturally cautious/reserved or carefree/outgoing. Some people are natural risk-takers, others prefer the slow & steady option.

Knowing these basic types will help to select the most appropriate asset mix. You can use an online tool such as Vanguard's AssetMixer to show how various allocations of equities/bonds/cash perform over a set period.

(click to enlarge)

As a general rule, the anxious/cautious personality will be more suited to a steady, low volatility portfolio with a higher percentage of bonds and cash in the overall mix and correspondingly lower proportion of equities.

Wealth managers can try to understand their clients personality type by identifying four basic profiles - Preservers, Accumulators, Followers and Independents.

Preservers place more emphasis on preserving what they already have and do not feel comfortable taking risks to accumulate more wealth. They will keep a close eye on short term performance and will become anxious about losses. They may even have difficulty taking action for fear of making a wrong call...making no decision is better than making the wrong decision.

On the other hand Accumulators are confident risk takers who typically believe the path they have chosen is correct. They may have been successful with business ventures and believe they will also make a success of investing. The over-confident type typically believe they have an edge over others and will be attracted to active management and stock picking which are higher risk strategies.

Followers will typically latch on to the latest investing trend or pick up investing tips from friends or discussion boards. They do not work out their own plans and may follow the bandwagon without any real understanding of the financial markets or risks involved.

Independents take great interest in the process and can analyse a situation and then trust their own judgment to make confident and informed decisions. Independent thinking and having confidence in what you believe is much more important than being the smartest person in the market.

So, are you naturally cautious or do you like the thrills and spills?

Do you seek instant gratification or are you patient?

Are you more skilful than the average investor?

Can you accurately predict the direction of the markets?

Are you overly influenced by the so-called experts or do you do your own thing?

How would you react to losing 10% of your portfolio value?…25%?…40%….?

Stay the Course

Having a little insight on how you may react in certain situations will be a big advantage in the process of investing. It could make the difference between reaching your long term objective or falling at the second hurdle.

Personally, it has taken some time for me to understand the links between my investing strategy and behavioural biases and psychological temperament. I can well understand the whole process intellectually, but implementing a well-thought out plan for the longer term has involved coming to terms with my tendency towards over confidence and under-estimating of the risks involved.

I also have a tendency to over-activity which leads to tinkering. I am slowly coming to terms with the concept that doing nothing 9 times out of 10 is probably the correct course.

As a result of this increased awareness, I have made a few adjustments to my strategy in recent years. These include the moving away from the constant monitoring of my portfolio; deciding a basket of individual shares was no longer suitable; a gradual move from actively managed to passives;  simplifying the strategy by incorporating Vanguard Lifestrategy as a core holding.

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.

…the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness. (Warren Buffett)

What emotional aspects of investing cause difficulties to you? Feel free to leave a comment and share your thoughts and experience with others.

Monday, 21 August 2017

A Look at UK Robo Advisors

It's a couple of years since my first post on the so-called Robo Advisors and there have been a few developments to the market so I thought I would take another look at some of the current options for the would-be investor.
Robo advisors (RAs) are very widely used in the US via the likes of Betterment and Wealthfront but they are still in their infancy in the UK, but as we all know, new technology is rapidly changing the way we live and work and so we should not be surprised that it will have a significant impact in financial services. Some people are predicting that the traditional roles of doctors, lawyers and accountants could be replaced by artificial intelligence over the coming decade and therefore the role of the financial adviser could easily be added to this list. In the future, increasingly personalized and calibrated apps and personal assistants may be perceived (not just by millennials) as more trustworthy, objective and reliable than in-person advisors.
Around half the population just simply do not have any savings to invest. For the other half however, whilst many people are wanting to save for the future and exploring the options of investing in the stock market, for many complex reasons the majority do not actually do so. Many have a cash ISA but only around 1 in 7 hold a stocks & shares ISA and most of these will have been arranged by a financial advisor. Maybe for some they do not have the confidence or experience to do it themselves, others cannot afford the fees of a traditional financial adviser. For many, they perceive this area as difficult, mysterious, complex or just plain boring so are turned off by the thought of ISAs, investing and pensions.
Robo advice platforms therefore provide an opportunity for the majority of these people to invest for the future in a reasonably cost-effective way without having to put in a lot of time and effort themselves. Whilst many would probably prefer to sit down with a financial adviser, when it comes to paying their upfront fees of £150 per hour, not many can afford to do this.
Obviously, the big attraction for the novice or less confident investor is a solution which does not involve upfront fees and maybe more important, you don't have to research and select your own investments - they do this for you which makes it very simple to make a start in an area which may be very unfamiliar.
RAs aspire to fill the role of a traditional investment advisor. Using technology they can create an optimised, low-fee portfolio based upon your personal circumstances and tolerance to risk. For those with moderate savings, fees are generally much lower than they would be to employ a financial or investment advisor to do this for you face-to-face.

How It Works
In general, when you first register they ask you to fill out an online questionnaire to understand your investment goals and tolerance for risk. Age, experience and time horizon will be factors. They then use the information to build an investment portfolio for you. Very roughly, if you have a lower tolerance for risk they would assign you a larger proportion of bonds, gilts and less volatile investments. If you were young, with a long investment timeline and high tolerance for risk, you may be assigned a higher proportion of equities, perhaps more emerging market or higher ‘risk-return’ options.
In general, RAs then buy low-cost ETFs to invest your money according to your risk profile and charge you a small percentage of the amount invested which is less than you would pay a traditional financial advisor. 
In the world of personal finance, the RA could be considered to be good news for those who have felt priced out of traditional investment advice - or who want to tap into new technology to invest. The fees for traditional advice from an IFA or wealth manager would typically work out at 2% or 2.5% on the value of your investment compared to less than 1% with a RA.

The actual services provided by each robo investor differ widely and it's therefore worth exploring their websites to get a feel for the company ethos as well as their approach to investing before you commit any capital. Some provide an app for your phone so that you can monitor your investments on the go. Some have a minimum investment, typically £500 but others allow you to invest as little as £1.

Some Providers

Nutmeg is the most established RA in the UK and is a recognisable name to some Londoners, who have been exposed to the brand through its countless tube adverts.  They offer a full range of options including ISA, Pension, Lifetime ISA and General account. They have two options, the lower cost fixed allocation portfolio with charges of 0.45% and the managed portfolio with fees of 0.75%.

MoneyFarm and Scalable Capital are just two of its best known rivals, but there are many more robo-advice challengers entering the market place.

Moneyfarm was established in Italy in 2011 and launched in the UK in 2016. They offer a general investment account, ISA and Pension. They are particularly attractive on costs for those with limited finances as there are no fees on the first £10,000 of investment. The next £90K however is charged at 0.6%. The fees on the underlying funds are slightly higher than most others at 0.30%.

Scalable Capital launched in 2016 and has its operation in both the UK and Germany. they have a fixed fee of 0.75% plus an average of 0.25% cost of ETFs. They currently only offer an ISA but plan to introduce SIPPs in the near future. One drawback is their minimum sum starts at £10,000.

evestor are the new kids on the block set up earlier this year by Moneysupermarket founder Duncan Cameron and Anthony Morrow, most recently of Paradigm Group. Their mission statement is to make financial advice available to everyone regardless of their circumstances and to lower the costs of this advice.

The costs are competitive with an all-in offering of just under 0.5%. In addition they offer the opportunity to discuss any recommendation with their financial advisor at no extra cost.

Moneybox is another new start up aimed at the younger crowd and passive investor and markets itself as the app that “invests your spare change.” It works by linking up a bank account and rounding up your purchases and investing it in a portfolio. It has three portfolios to chose from, with tracker funds through BlackRock, Vanguard and Henderson.
The platform has no minimum amount but charges a £1 a month subscription fee, a yearly 0.45 per cent platform fee and fees charged by the fund providers, which average ~ 0.23%.

IG Group now offer their customers a range of 5 ready-made' Smart Portfolios' covering ISA, SIPP or General. Charges are tiered according to the amount invested - up to £50K is 0.65% and then to £250K is 0.35% plus average ETF fees of 0.22%. Clients with other types of account with IG such as CFD or spread bet may qualify for a small reduction.

(click to enlarge)

Is This Advice?

Robo advisor is a misnomer because most of these firms are not authorised to provide financial advice in the traditional way. If a company in the UK gives financial advice they have to be (a) authorized to give investment advice by the Financial Conduct Authority and (b) have to know your financial circumstances ​intimately. That's why the term robo advisor is misleading.

If you take fully regulated advice or simplified advice and it turns out it was bad advice for you, you can make a claim against the adviser and are eligible for compensation from the Financial Services Compensation Scheme in the event the adviser is unable to pay. 

The qualified 'guidance' offered by RAs doesn't offer this provision - you take responsibility for the investment decision you make and if it turns out to be a poor one (for example putting all your savings into one high risk investments that then goes under) you have to bear that loss yourself.


There is clearly a large gap in the market for the many people who cannot afford a financial adviser and who do not wish to or cannot diy.

RAs are certainly cheaper than the traditional wealth manager or financial adviser and will appeal to those who lack confidence in a diy approach or just can't be bothered to learn. However the diy investor who is prepared to do some research and use a combination of low cost index funds such as Vanguard Lifestrategy together with a low cost platform will almost certainly get a better return at every level of risk.

Based on the limited time investigating some of these options, my general impression is that RA has much to offer. My reservations would be whether the RA initial online questions can accurately establish the investors true risk level and secondly I guess it will not be too long before the big banks want a piece of this market and as the customer bears all the risk, there is the possibility of these products being mis-sold...time will tell.

I would be interested to hear if anyone has any experience of using a RA...feel free to leave a comment below.

Tuesday, 1 August 2017

AJ Bell Passive Funds - New Purchase

I have been taking things easy over the past month or so and getting into holiday mode. I enjoyed the two weeks of the tennis and had a small (£1 e/w) wager on Cilic getting to the Wimbledon final so the return from the bookies made up for a rather disappointing men's final. I was also fortunate to back Jordan Spieth to win the golf at Royal Birkdale at good odds before the start so its been a rewarding couple of weeks.

I have also been catching up on reading - just finished 'A Place Called Winter' by Patrick Gale which is based upon actual events from the author's family history and which I can thoroughly recommend.  Secondly I have just started Andrew Craig's best seller 'How to Own the World - A Plain English Guide to Thinking Globally and Investing Wisely'...I will write a review when finished.

As we are in between Test matches, I have time to update on just one new portfolio purchase. Earlier this year I flagged up the range of new passive funds from AJ Bell.

For some time now I have been looking to reinvest some of the cash which has remained on the sidelines following various sales and redemptions. In July, I decided to take advantage of the offer of no platform fees on these funds and purchased the 'moderately cautious' version for my ISA with AJ Bell.

I had been also looking at the Vanguard Lifestrategy 40 as another option but the property element of the AJ Bell fund worked in its favour.

The Fund

This version holds a mix of equities (33%), bonds (52%), property (11%) and cash (4%) via a range of ETFs and passive funds from several providers. It seems to be a mirror image of the moderately adventurous fund which holds 52% in equities and 33% in bonds. Here's a link for the latest factsheet (pdf)...

The equity element is held in :

iShares Core S&P 500 ETF
iShares UK Equity Index Fund
Vanguard Dev. Europe ex UK Fund

The bonds are held via :

SPDR Barclays Sterling Corp. Bond ETF
iShares GBP Corp. Bond ETF
iShares Global High Yield ETF
Vanguard UK Govt. Bond Fund
Vanguard Index-linked Gilt Fund

The property element is :

iShares UK Property ETF


AJ Bell will not levy their platform charges (0.25%) until 2019 and there are no transaction charges for sale/purchase. Therefore the costs of ownership are merely the ongoing charges of the fund at 0.50 % which includes the charges of the underlying funds/ETFs - these range between 0.07% for the iShares S&P ETF to 0.4% on their Property ETF.

The funds were launched in April and the purchase price was 100.3p - just a tad over the launch price so nothing lost by waiting  few months.

The only option currently on offer is the accumulation fund - I assume they will introduce an income version at some point however as there are no charges for selling units it does not make much of a difference to me.

The price of the Vanguard LS 40 (acc) at the time of this purchase was £158.50 so it will be interesting to compare progress.

Enjoy the rest of the Summer!

Sunday, 2 July 2017

Half Year Personal Portfolio Review

Just time for a brief review before I settle down for my annual tennis-fest! There's not much quality live sport available on Freeview these days. I well remember the many years when life was dominated by work and earning a crust - watching the tennis was limited to the evening highlights and the finals at the weekend.

I really do appreciate now having the time to please myself. Tomorrow I will be off to explore the canals of Cheshire with a few friends.

Following on from my end of 2016 review, I have just reviewed my actual investment portfolios - sipp drawdown and ISA - for the 6m to the end of June.

The Markets

On the markets, the FTSE 100 started the year at 7,142. The index ended the 6m period at 7,312, having pulled back from a high point of 7,550 in May - a gain of  2.4% - if we factor in say 1.8% for dividends paid, this will give a figure of 4.2%  total return for the period.

Of course, the UK listed market makes up less than 10% of the global market place so focussing on just the FTSE 100 for example can give a distorted picture. The total return on world equity markets in GBP terms for the 6m to end June was 6.2%.


The portfolio of individual shares has reduced from 6 to just 2 following the sale of IMI, Berkeley Group, Amec Foster and IG Group. This leaves just Legal & General and Next which is going through a bad patch and is down 20% since the start of the year.

Fortunately I have had a good run from the other shares and the total return from this sector for the past 6 months is 11.0% which includes dividends received of 1.8% which makes it my best performing section of the portfolio so far.

Investment Trusts

With the exception of Blackrock Commodities, all trusts have provided decent gains over the half year. The better returns came from Aberforth 16%, Finsbury Growth 12%, TR Property 15% and recent addition Scottish Mortgage 16%. In recent weeks I have been gradually reducing my equity holdings and have sold Invesco Income and Dunedin Income trusts and also top-sliced others including Aberforth, Edinburgh, City of London and Finsbury. With an eye on preserving capital I added Capital Gearing to my ISA portfolio in May and have HSBC Global Strategy (cautious) on my watchlist.

Share price total return from my basket of trusts has been a very handy 8.5%.

Scottish Mortgage v Blackrock Commodities 6m to June 2017
(click to enlarge)

Index Funds

Vanguard LifeStrategy 60 is now my largest portfolio holding and, although held in check  by the rise in the value of sterling, it has risen from £164.50 to currently £169.85  - an increase of 3.2%. My UK Equity Income fund has gained 4.5% which includes a half year dividend of 2.3%

The total return for my index funds has been 4.1%.

Fixed Interest

As ever, the bonds and fixed interest sector has provided a steady and predictable income of 3.5% and a total return of 7.5% for the half-year.

My holding in Skipton BS PIBS were redeemed in April and the proceeds are currently in cash.

The Combined Portfolio

Total return for the entire portfolio of shares, investment trusts, index funds and fixed income is 7.9%  which includes income of 2.1%.  

Since the crash of 2008/09, I have had positive returns from my investments and I am hoping this will be another decent year although my expectations are not high. As I posted recently, I am expecting a downturn at some point - maybe later this year or next, I don’t really know. I have reduced my equity holding by around 25% in recent months and will hold the proceeds in cash and await developments in the market.

As ever, I would be interested to hear how others have done over the past 6 months - feel free to leave a comment if you keep track of your portfolio.

Wednesday, 28 June 2017

FCA Look Into Asset Managers

In its final report (pdf over 100 pages) into the UK's financial asset managers, the FCA has raised a number of concerns about the way the industry is failing investors.

Here are a few aspects from the report which may be of interest.

1 The asset management industry plays a vital role in the UK’s economy. Asset managers manage the savings and pensions of millions of people, making decisions for them that will affect their financial wellbeing. The UK’s asset management industry is the second largest in the world, managing around £6.9 trillion of assets. Over £1 trillion is managed for UK retail (individual) investors.

2 The services offered to investors involve searching for return, risk management and administration. The investor bears virtually all the investment risk. There are around 11 million savers with investment products such as stocks and shares ISAs. These investors are willing to put their money at risk to generate potentially greater returns than they can get through cash savings.

3 We find weak price competition in a number of areas of the asset management industry. We confirm our interim finding that there is considerable price clustering on the asset management charge for retail funds, and active charges have remained broadly stable over the last 10 years. We  found high levels of profitability, with average profit margins of 36% for the firms we sampled.

4 We looked at fund performance, and the relationship between price and performance. Our evidence suggests that, on average, both actively managed and passively managed funds did not outperform their own benchmarks after fees. This finding applies for both retail and institutional investors.

5 We looked at whether some investors, when choosing between active funds may choose to invest in funds with higher charges in the expectation of achieving higher future returns. However, our additional analysis suggests that there is no clear relationship between charges and the gross performance of retail active funds in the UK. There is some evidence of a negative relationship between net returns and charges. This suggests that when choosing between active funds investors paying higher prices for funds, on average, achieve worse performance. Similar academic studies of the US mutual fund industry have typically found a negative relationship between fund charges and fund performance.

6 We find that it is difficult for investors to identify outperforming funds.

7 We estimate that there is around £109bn in ‘active’ funds that closely mirror the market which are significantly more expensive than passive funds.

8 There are a significant number of retail investors who are not aware they are paying charges for their asset management services.

9  Our analysis suggests that retail investors do not appear to benefit from economies of scale when pooling their money together through direct – to – consumer platforms.

Having identified some of the problems, investors should not expect any significant changes anytime soon. The FCA are now setting up working groups and further consultations and hope to report back some time later this year. 

They have to consider what impact any changes will have on the attractiveness of the UK as a place to continue ripping off small investors doing business.

I will continue with my low cost index funds and investment trust and my low cost platforms. I would not rely too heavily on the ability of the FCA to give the best deal to the consumer but then I am a cynic!

The best way to keep fund manager on their toes is via competition from the likes of Vanguard as more and more ordinary investors switch from the expensive underperforming actively managed funds into low cost index funds. The FCA can tinker around the edges but I believe the industry will always find ways around whatever changes are brought in.

Leave a comment below if you have any views on this report.

Monday, 26 June 2017

Preserving Some Gains

The markets both here in the UK and also in the US have reached all time highs in recent months. This is obviously good for small investors but we all know that markets do not rise in a straight line - the upswings are inevitably followed by the downturns. In broad terms, the markets have been on the up since the dramatic crash of 2008.

This has accelerated over the past year or so and the US market has risen 30% since the start of 2016. The CAPE ratio is now over 30, almost double its long term average. It has only been higher on two previous occasions - 1926 and 2000, just prior to the dot-com bubble and subsequent crash.
(click to enlarge)

With a few blips along the road, the bull market has marched onwards and upwards for the past 9 years. This situation gives rise to much media speculation as to where the markets are heading next. Some say the boom will continue - Prof. Robert Shiller suggests a 50% rise from here - and others are more cautious. Sebastian Lyon at Personal Assets said in his recent annual report "...the valuation of asset classes are more stretched than ever, particularly after the 'Brexit boom' in UK share prices, and it all feels very 'late cycle'..."

In the UK we also have the weak level of sterling post June 2016 which gave a boost to global investment priced in USD. The pound has recovered from a low point of ~$1.20 to currently $1.27 but it remains way below its longer term mean average of ~$1.60.

Cashing In Some Chips

Until the market surge in the second half on 2016, I was more or less fully invested however in recent months I have been gradually reducing my equity holding and moving more towards defensive investments such as Capital Gearing and also cash. It seems to me sensible to reduce risk as the markets get higher.

I'm not suggesting current levels represent the top of the market bull run as I know it is impossible for anyone to predict the top (...or bottom). However, at this point in the cycle, my preference is to hang on to the some of the capital gains accumulated since 2009 rather than stay fully invested in the hope of squeezing out even further gains.

The problem with holding cash however is obviously the ultra low interest rates on offer and also the possibility of missing out on further market gains. The markets may well be over valued but that could easily continue for another year or two.

There is also the question of when to re-enter the market when they do swing down.

In the past 6 months I have moved around 25% of my portfolio from equities to cash. Some more of my individual shares have been sold - IMI, Berkeley, Amec Foster for example. Also I have sold some of my investment trusts - Dunedin Income, Murray International and Invesco Income and I have top sliced others - Aberforth Smaller, Edinburgh, City of London and Finsbury Growth.

Mean reversion suggests the markets will fall at some point and sterling will recover back to its long term average of ~$1.60 but this is unlikely to happen in an orderly manner and the markets and exchange rate may well continue to move against the tide for some time.

Investing during the prolonged bull run of the past 7 years has provided me with above-average returns of ~10% p.a. The longer term average for a 60/40 asset allocation would be nearer to 6% and at some point the tide will turn and when it does I fully expect a period of below-average returns. The average however will be well above the meagre returns from cash over the past few years. It is just over 8 years since the Bank of England reduced rates to a 300 year low of 0.5% (and currently 0.25%) during which period savers have struggled to get more than 2% on their savings.

I am probably being overly cautious with my recent sales of equity holdings but it just feels right in the current climate.

Tuesday, 20 June 2017

SIPP Drawdown Update - 5th Anniversary

It's  June, another 12 months has rolled by and time to review my SIPP drawdown portfolio at the end of its fifth anniversary. Here’s a link to the previous update of 2016.

The original plan was to generate a rising natural income from which I would withdraw 4% which I calculated should be sustainable over the longer term without depleting the capital. This plan was revised following the introduction of pension freedoms in April 2015. The new strategy is to remove the value from my sipp up to my personal allowance each year - currently £11,500 - and surplus cash not required for income is transferred into my tax-free ISA.

Rather than focus on investments which can generate a natural income of at least 4%, I am moving the portfolio more towards lower cost, globally diverse index funds and a focus more on total return. Therefore the Vanguard Lifestrategy funds have replaced some of my investment trusts over the past two years

Portfolio Changes

As a result of the revised strategy I have made a few changes. Last year I sold Dunedin Income, Murray Income Trust and New City High Yield and purchased Vanguard Lifestrategy 60 (acc) fund.

Over the past 12 months I have sold Murray International Trust, Aberdeen Asian, Invesco Income Growth and Law Debenture. My Coventry BS PIBS were redeemed last June and half the proceeds (£14,000) were used to purchase Vanguard Lifestrategy 40 (acc). In addition I have recently sold one third of Aberforth Smaller Cos. Trust and also City of London. The smaller companies trust has had a good run and returns over the past 5 years are well over 100%. Finally there was a speculative purchase and subsequent sale of two shares - Unilever and IG Group, which has helped to boost returns.

The other additions to my drawdown portfolio have been HICL Infrastructure, Tritax Big Box including a top-up following the recent rights issue, iShares Corp. Bond ETF and finally a holding in Scottish Mortgage Trust.

The value of the investment trust sales and Coventry PIBS redemption exceeds the value of purchases by £24,207. In addition there was a surplus from the previous year, also there are accumulated dividends over the past 12 months. As a result I am still holding quite a large percentage of cash for the time being and will await a recovery in sterling and a pull back in the markets before looking at reinvesting the cash.

In any event, I plan to hold a cash buffer of around £4,000 or 10% of Lifestrategy value which I can draw down for 'income' during bear market periods. I would not feel comfortable selling down units in my LS funds for income when their value was less than the previous year.


My report last year was just before the Brexit referendum and returns had been checked by the doom and gloom merchants warning of the dire consequences of Britain leaving. Of course, we did vote to leave but after a brief dip, the markets soon recovered and have surged ahead to reach new all-time highs over recent weeks. I expect some volatility until the outcome of exit negotiations becomes clearer.

Article 50 was eventually triggered in March followed by a snap general election earlier this month which was supposed to strengthen the position of the prime minister but it did not quite go according to plan and the Tories ended up losing seats and now hoping for a deal with the the DUP to cling on to power. This has weakened the governments negotiating position and there is a strong possibility of yet another change of leader and also yet another general election. Hardly the ideal backdrop to the start of Brexit negotiations with the EU over the coming couple of years. I am thinking the markets will take a dive if the talks end in deadlock but I think it will be in everyone's interest to reach a sensible agreement.

So far the markets appear to brush aside the political uncertainty. Over the 12 months, the FTSE 100 has risen 25% from ~6,000 to currently 7,524. My SIPP portfolio is now more defensively structured with a larger proportion of bonds and cash, however it is pleasing to see a gain of 16% over the year. The starting value in June 2012 was £62,000 and taking account of monies withdrawn, the portfolio is above £90,000 for the first time.

My holding in smaller companies specialist Aberforth has, once again put in a very strong performance and return of 35% over the past year - the average return remains high at over 20% p.a. over the past five years. At the start my smaller companies trust comprised just 6% of the portfolio but had increased to over 10% so I have trimmed the holding by selling 290 shares. City of London has also had a solid year with a return of ~20% and I have top-sliced with a sale of 1,010 shares.

The total return including income after 5 years is 50.6% (last year 43.1%) which is very satisfactory and works out at an average annualised return of 8.5% p.a.

Here is the portfolio

Sipp Portfolio to June 2017
(click to enlarge)


In June 2012 when I started this series on my drawdown journey, the FTSE 100 was 5,500 and has risen to 7,520 - a gain of 36.7%. If we add in average dividends of say 3.7%, this gives a rough total return of 55%

In June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £173 - a gain of 64.7% or annualised average of 10.5% p.a.

The overall annualised return of the SIPP portfolio after 5 years is 8.5% p.a.


The original aim of the sipp drawdown was to generate and withdraw a steadily rising natural income from my investments trusts to keep pace with inflation.

Under the new 
pension freedoms which took effect from April 2015, I am no longer restricted by the GAD rules and I am now able to drawdown as much or as little as required. As my pension is my main source of taxable income, it makes sense to reduce the pot by transferring the capital tax free to my ISA. Over the past couple of years I have taken out £21,000 and I intend to withdraw a further £11,000 for the current tax year.

A big percentage of income in previous years came from my Coventry BS PIBS however these were redeemed last June and this will reduce the natural income by £1,700. Furthermore there is now less revenue from the income trusts which have been sold and replaced by my Lifestrategy funds - both accumulation versions.

I have relied upon my SIPP to supplement my ISA income and bridge the gap between early retirement and state pension. This part of the journey will become 'mission accomplished' next year. In 2018 my state pension will commence and I will be less reliant on the income from my SIPP for essential living costs and it will become more for discretionary spending. My recent forecast suggests I should receive a sate pension of ~£8,500 and as this is taxable, it will limit the tax free sums I can take from my SIPP to around £3,000. Any money withdrawn above this amount will be taxed at 20%.

I retired from paid employment at the age of 55 yrs and obviously at the start of the process there is some uncertainty on the big question of what is a sustainable level of income to draw down. My starting point was ~4.0% and so far this has been well within the level of growth generated by the portfolio over 5 years which gives me more confidence that this level of drawdown can continue longer term. The next question is whether, over the remaining period, I could increase the withdrawal to maybe 5%. Having been a saver all of my adult life and living well within my means, I find it quite a challenge to become a 'spender' now the funds are available!

I am reasonably happy with my first five years of self-managing a flexi-drawdown sipp portfolio. For the first 3 years, the dividend income has predictably rolled in much as planned and importantly, increased each year a little ahead of inflation. Now I am able to withdraw significant lump sums tax free and place the excess which I do not require for income in my ISA. Of course, there are no tax liabilities for all monies subsequently withdrawn from my ISA.

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