SIPP Drawdown - Year 8 Update

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 eighth anniversary. Here’s a link to the previous update of June 2019.

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.

In 2018 my state pension kicked in - currently £9,000 p.a. - I also have tax-free income from my ISA if required and 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 over the past 18 months and this naturally includes my drawdown portfolio so there have been a quite few changes. 

My main focus over the past year has been to move to fossil-free investments - and therefore the sale of the global multi-asset index funds which all hold significant percentages of the oil majors such as Exxon, Shell and BP as well as the big banks which finance their operations. I want my investments to support more sustainable solutions such as renewable energy and other environmentally friendly funds which are more aligned with my values.

It looks like the penny is starting to drop for the big oil companies. BP have scrapped their $75/barrel 30 year projection and will now work on $55, which I suspect is still overly optimistic. They have acknowledged that the pandemic will probably accelerate the pace of transition to a lower carbon economy. This excellent YouTube video by Carbon Tracker "You Can't Burn It All - A Tale of Two Investors" is well worth watching and a reminder of the growing risks of investing in fossil fuels.

Last year I introduced Bluefield Solar, TRIG, iShares Clean Energy ETF and this 'green' sector has expanded significanly over the past 12 months to include more renewable infrastructure trusts as well as a couple of stand alone company shares.

(click to enlarge)

The best (and luckiest) addition was ITM Power last August - the share price has really taken off in the past couple of months and is now worth 7x what I bought them for and this has given a significant boost to the portfolio value.

However, the sharp downturn in March reminded me to pay more attention to asset allocation and I have added some government bond ETFs to partly replace the bond element contained in the multi-asset Lifestrategy/HSBC holdings.

Performance

The big story dominating the news these past few months has been the coronavirus pandemic which started in China in January and quickly engulfed the whole world bringing it to a near shut-down. The markets took a sharp downturn in March but have recovered much of the lost ground over the past couple of months. I am expecting more volatility when the effects of the lockdown are fully realised and I think this may take some years to unravel and is likely to have far more impact on the global economy than I originally thought at the start.

Over the past 12 months, the FTSE 100 has seen a significant decline of 15.5% from 7,443 last June to currently 6,292. Following the sale of significant holdings in my global multi-asset funds last Autumn I was sitting on large cash proceeds for a while however my SIPP portfolio is now more fully invested and it is pleasing to see a gain of 33% over the year. Much of this is down to just a couple of individual shares - ITMPower adding £19,000 and Orsted adding £6,000.

I probably need to scale back my holding in ITM and diversify some of the gains into the wider 'green' market. One option would be Baillie Gifford Positive Change which I hold in my ISA and which will compliment the Trojan Ethical Fund. I probably should also increase the proportion of my government bond funds which currently account for just over 20% of the portfolio.

Here is the current portfolio

 

19th June 2020  (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 6,292 - a gain of just 14.4%. If we add in average dividends of say 3.8% each year, this gives a rough total return of 45%

In June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £199 - a gain of 89% or annualised average of 8.3% p.a.

Taking account of the income withdrawn over the past 8 years of £19,400, the total return including income is 135% which is very satisfactory and works out at an average annualised return of 11.3% 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 became 'mission accomplished' in 2018.

My state pension has now been in payment for just over two year which is long enough for me to know that I do not need to continue with drawdown from my SIPP. As it is a flexi-drawdown arrangement, 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 the age of 75 yrs and thereafter possibly 20% or tax free depending on circumstances. For those interested here's a link on the AJ Bell site.

Obviously I am really 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 if not needed for care home fees!

For me, the big advantage of the SIPP is the flexibility it offers. I started off with a portfolio of income-generating investment trusts. I then introduced the multi-asset, globally diverse index funds such as Lifestrategy and now I can focus on more climate-friendly options and do my bit for the planet. It certainly feels much better to have aligned my investments with my values and lifestyle and know I am no longer investing in fossil fuels which are continuing to add to global warming and undermine efforts to tackle the climate crisis.

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.

SSE - Full Year Results

SSE (formerly Scottish & Southern Energy) is a FTSE 100 company operating in the energy business across the UK and Ireland. Tackling climate change is at the centre of their operations and their aim is to be a leader in a low carbon world through significant investment in renewable energy.

At the start of this year they disposed of their Energy Services arm to Ovo and going forward the bulk of operating profits will be generated from regulated electricity networks and renewables which are core elements of their low carbon strategy.

SSE Renewables

In late 2018, the company announced it would consolidate its renewable energy assets under the single entity of SSE Renewables. The current portfolio has around 4GW of both offshore and onshore wind as well as hydro which includes 300MW of pumped storage and 750MW of flexible hydro. It has the largest offshore wind pipeline of future projects in the UK and Ireland of over 7GW.

SSE in partnership with Equinor are engaged in the construction of the world's largest offshore windfarm at Dogger Bank in the North Sea which will generate 3.6GW of clean electricity, sufficient to power 4.5m homes and using the world's most powerful turbines, the GE Halidade-X. The windfarms are due to start operations in 2022.

Over the coming decade they plan to treble renewable output to 30TWh per year which would be enough to power the whole of Scotland. This is the main reason for adding this company to my green portfolio earlier in the year.

Results

The company have today released results for the full year to end March 2020 (link via Investegate). They appear to be making progress in restructuring the business to focus on the core electricity networks and renewable energy.

Adjusted profits before tax are up 49% to 1.0bn and adjusted earnings per share up 35% to 83.6p which supports the full year dividend of 80p. A final dividend of 56p will be paid in September (xd 23rd July). They confirm a target of 80p plus inflation for the coming year which gives a fwd yield of just under 6% based on the current share price.

It is pleasing to note that profits from the renewables arm increased by 24% to £567m (2019 £456m) due to more favourable weather conditions and the additional capacity from Beatrice offshore wind farm. This represents around 38% of the total compared to 30% in 2018. Renewables are on track to generate the lion's share of profits in the future.

Richard Gillingwater, Chair of SSE, said:

"2019/20 was a year of progress for SSE.  Financially, there was a solid recovery from the previous year.  Strategically, we reshaped the Group with the sale of Energy Services and increased our focus on our core businesses of regulated electricity networks and renewable energy.  Operationally, these businesses made significant progress towards our strategic priorities and ambition to be a leading energy company in a net zero world.

Climate change remains a critical issue and we see significant opportunities to create sustainable value for shareholders and society through contributing to a much-needed green economic recovery and supporting the transition to net zero emissions."

Share Price past 3 years  (click to enlarge)

Covid is expected to have some impact on profits over the coming year and the current assessment is in the range of £150m to £250m before mitigation. However, the management are fully aware that the consequences of failing to tackle climate change will be far greater than those of the coronavirus. They have published their 'greenprint' for a cleaner more resilient recovery from Covid and are pressing the government for greater ambition and an increase in offshore wind to 75 GW by 2050.

Conclude

SSE will be pleased to have disposed of its retail energy service arm to Ovo following the failed attempt to offload to nPower last year. The plans to wind down coal and gas, decarbonise the business model and focus on renewables is clearly the way to go in my book - I would not have added to my portfolio otherwise!

The new Government have pledged to increase the UK's offshore wind capacity from 8.5GW to 40GW over the coming decade. This is a very significant shift in our approach to energy as we move away from fossil fuels and should give confidence to the renewables industry and provide profitable opportunities for the established operators such as SSE and Orsted.

SSE have pledged to invest £7.5bn in new and upgraded infrastructure over the coming 5 years. 90% of this will be allocated to the core business of renewables and electricity network. Spend on renewables infrastructure projects include Seagreen, Dogger Bank and the new 443MW Viking onshore wind farm in Shetland - the largest in the UK. They have increased the target for cuts in carbon emissions from 50% to 60% by 2030.

It is clear SSE will play a significant part in the UK's transition to a net zero emissions economy and I am hoping the increasing share of the core business moving to SSE renewables will provide value for its shareholders.

The share price has been under pressure in recent years and certainly during the past few months but these results appear to have received a good reception from the markets with the shares up 9% to £13.82 at the close.

The shares were added to my ISA in two tranches earlier this year at an average price of £15.00. My timing was not great and had I waited just a couple more weeks I could have picked them up for £11.00 per share!

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!

myFC - Portfolio Addition

This is a small technology company founded in 2005 and listed on the Swedish First Growth North Market (similar to our AIM) in 2014. The company has a strong commitment to a fossil-free world. Its focus is micro fuel cells. The technology is modular as well as versatile and can be adapted to a wide range of applications from small hand-held devices to larger applications such as ebikes, drones and larger mobility solutions such as cars and boats.

The company has recently undergone a major organisational restructuring and has refined its strategy to position itself as a systems supplier and will cease the development and sales of its consumer products such as the JAQ charger.

myFC is at the cutting edge of a completely new solution to electric mobility and seeks to address the hybrid relationship between fuel cells and battery. The focus from this year will be as a world leader in fuel cell technology for the automotive industry as it transitions towards zero emissions solutions to replace petrol and diesel.

Expansion

The company will need further cash to push forward with growth and further commercialisation of the technology. They are proposing a new share issue next month at 2 SEK per share to raise 52m SEK. This will include a major new European investor who will acquire 9.3m shares.

The EU has recently announced ambitious plans for a cleaner and greener Europe targeting net zero emissions by 2050. This additional funding will be used to further this ambition and secure the company's position as a global leader in the field of micro fuel cell technology.

The company have recently announced a joint collaboration with Qatar-based RahRah Technologies to evaluate the feasibility of integrating the fuel cell tech into their e-tuktuks and e-scooters. It will be interesting to see whether this leads to more profitable opportunities.

Conclusion

Some of my speculative acquisitions in the renewable hydrogen sphere have paid off handsomely over the past few months - AFC Energy, ITM Power, Ballard Power etc. - so I have used some of the proceeds from a partial sale of Proton Power to fund this addition to my portfolio. 

It is a small company which has gone through a period of restructuring in recent months, pays no dividend and has yet to deliver any profits so the purchase is again speculative. The market in which the company operates is likely to expand rapidly as global economies transition away from fossil fuels to renewable forms of energy but this does not necessarily mean myFC will be a beneficiary. I am spreading my net a little wider to diversify holdings in the niche sector and mitigate risk.

The shares were purchased earlier this week in my ISA with AJ Bell at the price of 1.82 SEK (equivalent to 16p per share).

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation... investing in smaller companies can be rewarding but is higher risk - always DYOR!

NIBE Industrier - Portfolio Addition

NIBE is a heating technology company based in Sweden with a current market cap of SEK 95bn (£8bn). It has three basic business areas - Element, Climate Solutions and Stoves. 

Climate is the fastest growing segment and over the past year accounted for around two thirds of sales and contributed 72% of the groups profits. Clearly climate change is rising to the top of the political agenda on a global basis and the company are well positioned to take advantage of the opportunities this provides - especially in the field of heat pumps which will become an option for heating our homes as an alternative to fossil fuels such as natural gas. It is one of the leading companies in Europe and North America in the area of sustainable solutions for domestic heating.

The company has been trading for over 70 years and has a long-standing ethos of working on sustainable solutions and energy efficiency. It was floated on the stock market in 1997 and has grown sales at an average of 18% p.a. over the past 20 years building an ever increasing global presence.

Climate

Climate change is the greatest challenge of our time. We need to reduce greenhouse gas emissions by 50% by 2030 compared to 2010 levels to keep on track for net zero by 2050. All of the products offered by the company are designed to make a significant contribution to tackle climate change. They offer sustainable, energy-efficient solutions such as heat pumps that reduce energy consumption by up to 80% and reduce GHG emissions in all types of buildings both domestic and commercial.

Earlier this year, the EU announced their 'GreenDeal' and proposals to target net zero carbon emissions by 2050. A central part of the strategy will be the goal to decarbonise the energy sector and prioritise energy efficiency and transition to a power sector based on renewable energy.

Heat Pumps

Heat pumps and related technology are tried and tested solutions for space heating in Scandinavian countries but relatively unknown in many parts of the world. Many countries, including the UK are actively looking at ways to decarbonise the domestic heating sector which accounts for around 40% of carbon emissions.

The largest sector for the group is climate solutions and within this sector, the largest element is heat pumps. These pumps extract the stored energy from the sun contained in the soil or air and transfer this energy indoors to provide indoor heat as well as hot water. The two main types of heat pump are ground source where pipes are laid under the soil and air source where heat is extracted directly from the air.

In the UK (and much of Europe) around 90% of our homes are heated by gas central heating. However we have legislated for net zero emissions by 2050 and will need to find alternative ways to heat the nations homes as gas (a fossil fuel) will not be an option. We have already ruled out gas central heating for all new homes built from 2025 so electric heat pumps (as well as green hydrogen and battery storage) will likely play a big part in the huge transition of our energy use.

The UK still offers financial incentives to install a heat pump via its Renewable Heat Incentive. This covers a period of 7 years from installation and will provide payments for a typical home of £1,300 p.a for air source heat pump and a higher figure of £3,300 p.a. for a ground source heat pump. In addition there will be a significant saving on heating bills. These incentives will go a long way towards the costs of installing a heat pump system which range between £6,000 for air source and maybe up to £20,000 for a ground source heat pump. The scheme currently runs until March 2022 but it is hoped this will be extended.

Obviously the demand for solutions which support the switch from fossil fuels to renewables will grow and grow. As the market grows so prices fall which in turn creates greater demand. Companies like NIBE who have a clear commitment to sustainable solutions will be the likely beneficiaries of the transition to a new way of doing things. This is why I have decided to add this company to my portfolio.

Results for 2019

Combined sales increased by 12% to SEK 25.3bn and profits of SEK 2.2bn which suggests a margin of ~10%. The company pays dividends which increased by 7.7% this year to SEK 1.40 per share (subject to FX considerations for UK shareholders!). However this is a yield of under 1.0% of the current share price.

Here's a link to the results (pdf) from the company website.

Results for Q2 to end June will be available on 19th August and should give a clearer picture of progress in relation to Covid-19.

2 Yr Chart NIBE v FTSE All Share Index
(click to enlarge)

The share price has been a little choppy due to Covid over the past few months but recovered momentum from a low point of SEK 120 in March to hit an all-time high of SEK 216 at the end of May. The shares have been added to my green portfolio at the price of 201 (£17.00 at current exchange rates) earlier this week and I will look to build a larger holding over the coming few months when more funds are available.

This addition expands the number of stand-alone companies in my 'green' portfolio to 14.

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!

McPhy Energy - Portfolio Addition

In January I took a look at the global potential for green hydrogen and suggested it could transform the global economy.

Some of these companies which turn hydrogen made from water into a clean form of energy are having a stellar year and I expect there is much more to come from this sector.

I think the investing world must be waking up to the potential of hydrogen and the implications for the transition to a global economy which is no longer based on fossil fuels. Best performance over the year-to-date has been ITM Power which started the year at 71p and this week rose above 350p. Others in my green portfolio include Proton Power up 150%, AFC Energy up 90% and Ceres also up 95%. So far they have ridden out the Covid storm better than most other sectors.

Just in the past week, the EU announced a huge new deal totaling 750bn EUR which aims to transform Europe to a low carbon economy and the goal of net zero emissions by 2050. This will involve a 50% reduction in carbon emissions by 2030. The plan includes a central role for renewables, green hydrogen and zero emission vehicles. I have seen figures mention an allocation of 10bn for green hydrogen infrastructure and a further 30bn for production stimulus which would be truly transformational.

This prompted me to take a closer look at the sector in Europe and I decided to acquire a small holding in French company McPhy Energy.

The Company

This is a relatively small company - market cap approx £100m - listed in France. It also has manufacturing bases in Germany and Italy as well as a distribution network in Asia and the Americas. Since formation in 2008, its main area of business has been hydrogen production and storage solutions. Its products include a hydrogen electrolyser to split water and produce clean hydrogen and also sells solid-state hydrogen technology.

Earlier this year it was selected to provide the equipment for a 20MW green hydrogen production plant - the largest of its kind in Europe. The plant will produce 3,000 tons of clean hydrogen per year and reduce CO2 emissions by 27,000 tons.

In April the company secured two major contracts to provide zero-emissions mobility projects in the west of France. These projects will enable regional hydrogen mobility and convert surplus renewable energy to partially replace petrol/diesel in these regions. The projects underline the strength of the company's McFilling "starter kit" model which has previously been used in projects in major cities such as Paris and Rouen.

Results

In January the company reported strong revenue growth of 43% in 2019 - up to 11.4m EUR from 8m EUR in 2018. The company is well capitalised with a share placement boosting cash reserves to 13m EUR.

As can be seen from the chart, the share price has been volatile these past few months due to the Covid effect however, after a sharp dip in March, it seems to be on an upward path again. The shares were purchased in my ISA last week at 5.60 EUR. They reached a high of 7.95 in February and I am hoping the shares can soon get back to this level and beyond.

12 month share price  (click to enlarge)

This has expanded my holdings in hydrogen companies to six with the largest holding in ITM Power. There is naturally a lot of hype being generated around renewable energy and hydrogen but also some of the big players are getting involved. For example Electricite de France has a stake in McPhy, German giant Linde acquired a stake in ITM and Bosch has a stake in Ceres Power.

For me, I think the world is now starting to take climate change more seriously and there seems to be more of a real commitment to achieving net zero emissions by 2050. In my opinion, this simply cannot be achieved without the use of renewable green hydrogen on a large scale.

It will be interesting to see how the sector develops over the coming year or two as we come out of the coronavirus pandemic and look to build back better.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation... investing in smaller companies can be rewarding but is higher risk - always DYOR!

TR Property Trust - Full Year Results

I hold this property trust in my ISA and I also my Sipp drawdown portfolio.

The fund is managed by Thames River and aims to maximise the 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 the 36% weighting in the UK, with France making up a further 13.5%, Sweden 9% and Germany 37%. Retail has been reduced and accounts for 15% of the portfolio (down from 22% in 2019) and office space 28%, with another 37% in residential and the remainder divided between industrials 23% and diversified such as storage, healthcare, supermarkets and student accommodation. 

The majority of the portfolio consists of UK and European shareholdings with a small allocation of 8% in UK direct property.

Results

The trust has recently published results for the full year to end March 2020 (link via Investegate). It was all going so well until mid February...the Covid-19 pandemic had a dramatic impact on the European property markets in March and as a result net assets fell by 20% in the matter of just 3 weeks with the share price down over 30%. Over the past year, net asset total return has decreased by 11.5% reversing most of the previous year's gain of 15.5%. The share price declined by -16.8% ... although it has recovered by 15% during the past month.

Commenting on the results, outgoing chairman Hugh Seaborn said:

"Looking back over the last decade, the Trust has delivered a share price total return of 171% and a NAV total return of 157% versus a benchmark figure of 97%. This performance compares well to the FTSE All Share total return of 53% and the STOXX Europe (in EUR) total return of 72%. Income remains a crucial element of property's total return and our dividend payments over the same 10 year period (and including the final dividend announced today) have recorded a compounded annual growth rate of 9.3%.

Rarely has any 12m reporting period been so dominated by the events of the last six weeks of the financial year...

The low costs of borrowing and skinny yields on fixed income will remain a feature of the financial landscape, increasing the value of income particularly where it is index-linked. This will support the attractiveness of property as an asset class although not necessarily protect it against market fluctuations caused by macro events that move global equity markets, such as that which we have witnessed in the closing weeks of this financial year".

The crisis caused several companies in which TR invests not to pay dividends as expected. The company said it expected earnings to fall in the current financial year but that it expected to use reserves to pay its own dividends. "The company has a healthy level of revenue reserves which have been accumulated over time to provide resilience in the event of a crisis. These are used to supplement short to medium term falls in earnings until such time as conditions settle..."

 

Share price past 12 months

Income

Revenues have increased slightly and as a result the final dividend will be increased to 8.8p (last year 8.6p) making a total of 14.0p for the year, an increase of 3.7% compared to the previous year (12.2p). It has produced compound annual dividend growth of 9.3% p.a. over the past 10 years and this has been fully covered by property revenues. The trust yields 3.8% at the current price of 365p.

So, Covid has impacted my holding in this company - having said that, the share price is still up 20% on my purchase price at the end of 2016 plus an additional 12% from dividends so mustn't grumble too much. I said last year that I was expecting a little volatility in the share price until the Brexit saga was resolved...but was unprepared for the coronavirus curve ball. However, the income seems fairly secure even if reserves may well be required over the coming year or two. 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!