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!

Shares

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%  

Conclusion

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 mantra...be 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.