SIPP Drawdown - Year 9 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 9th anniversary. Here’s a link to the previous update of June 2020.

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.

Three years back and my state pension kicked in - currently £9,300 p.a. - so I am no longer so 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 SIPP drawdown portfolio so there have been a quite few changes since last June. My main focus over the past year has been to continue the move to fossil-free investments - and therefore the additions of the likes of Plug Power, Enphase and NIBE, a top up of the iShares Clean Energy ETF and the addition of the iShares fossil-free global index ETF which was flagged up by a reader this time last year.

The government bonds have been sold as well as the more cautious funds, Personal Assets and Trojan Ethical. I have also reduced my holding in the renewable infrastructure sector as I am not convinced the model is as robust as I thought last year, especially in relation to future power prices. Therefore NextEnergy, Greencoat UK Wind and Octopus have been sold and TRIG reduced.

My portfolio basically consists of a mix of green investments and technology. In the past year I also added the Allianz Technology Trust (recent 10:1 share split) to complement Polar Cap Technology.

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Performance

The big story over the past year has obviously been the coronavirus pandemic which has impacted the global economy and people's lives in a most profound way. I think this will obviously take some time yet to fully unravel but with the vaccine roll out starting earlier this year, we can see the prospect of things starting to open up.

Over the past 12 months, the FTSE 100 has moved ahead by 11.5% (plus dividends) from 6,292 last June to currently 7,017.

I have seen some spectacular returns from some of my clean energy holdings over the year. For the year to December 2020 my green portfolio returned over 50% but the sector has reversed in recent months and the SIPP portfolio is showing a gain of 21% since last June. Much of this is from £8,000 profits on the sale of 6,000 ITM shares.

Plug Power is up 75% since purchase, NIBE 33% and Enphase 35%. My iShares Clean Energy ETF is showing a share price gain of 60% over the past 12 months however my top-up was at a higher level than today.

Here is the portfolio

 

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Comparisons

In June 2012 when I started this series on my drawdown journey, the FTSE 100 was 5,500 and has risen to 7,017 - a gain of just 27.5%. If we add in average dividends of say 3.8% each year, this gives a rough total return of 62%

In June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £223.50 - a gain of 113% or CAGR annualised average of 8.8% p.a.

My self-managed SIPP portfolio including income has risen from £62,000 to £154,500. Taking account of the income withdrawn in the early years of £19,400, the total return is 149% which is very satisfactory and works out at an average annualised CAGR of 12% p.a.

State Pension

I 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 three 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 but more likely remain invested. I recently took a look at inheritance tax and realised it would be more tax efficient to take money from my ISA in future as the SIPP value does not currently count towards the £325,000 tax-free allowance for IHT.

Also, 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 almost a decade of self-managing a flexi-drawdown sipp portfolio. For the first few years, the dividend income predictably rolled in much as planned. During the next three years I withdrew significant lump sums tax free and placed the excess which I did not require for income in my ISA.

Since 2018 I have needed little or no income from my SIPP and will therefore continue to 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.

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.

A Good Plan and the Right Temperament are Key Factors

I've been investing since the late 1980s when I received my free shares in Abbey National BS following their demutualisation. I started this blog in 2013 after moving into early retirement a few years earlier and have since written and self-published several books. Of course, like most small investors, I have had mixed fortunes along the way...last year was my best for actual returns with just over 50% from my green portfolio...this coming year could well be shaping up to be my worst year! But my long term average over the past 20 years is 9% p.a. which, whilst not outstanding, is very acceptable especially compared to returns of less than 2% from cash savings in recent years.

Legendary investor Benjamin Graham suggests "to achieve satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks".

I thought it might be useful to pass on a few of my thoughts on what I believe it takes to become a half-decent investor. For sure I don't discount all the usual aspects of good practice...a diverse portfolio, keep costs as low as possible, an understanding of market volatility in relation to different asset classes etc. but here are my top three:

Temperament

For me, this is probably the most important aspect...the ability to know yourself, your ability to evaluate and understand risk, to know what level of market volatility is acceptable. On a personal level, I tend to be fairly unemotional in most aspects of life as a result of being someway along the aspergers spectrum, which is good for investing but not so good for personal relationships! I don't tend to prevaricate so when my I decide on a course of action I will go for it 100 percent.

Are you impulsive or can you play the long game and exercise a high degree of patience? Do you get dispirited and give up when things don't turn out as expected? Does making more and more money from your investments make you happy? On the flip side, would the sudden  loss of a large percentage of your investments make you very unhappy?

Some people are natural risk takers and will be well suited to a portfolio of individual shares and a higher weighting to equities. Others are more cautious and will be more comfortable with a more balanced portfolio including a mix of lower volatility assets such as bonds and property.

Therefore an appreciation of your psychological make up will be essential in selecting the most suitable asset allocation. We are all different, have individual goals and time frames; we have our individual values and ethical considerations - for me in recent years it has been climate change and therefore a radical shift of strategy to avoid the fossil fuel companies.

The reality is that DIY investing is not for everyone.

"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.

A Sound Plan and Strategy

With any long term adventure or project, it's always a good idea to have a plan of what you want to achieve and how you are going to get there. When I was starting up a new business venture in the early 1990s, I spent the first 6 months putting together a comprehensive business plan to persuade the bank manager to provide the initial funding followed by a further 6 months of market research before the business was launched.

Successful investing is all about the long term so it is important to have a strategy which will give you the best chance of riding out the inevitable market shake-outs and volatility and to remain 'in the game' for many years. It is therefore essential to develop a plan that meshes well with your temperament and personality and this will influence asset allocation.

With an understanding of your basic personality type, developing an investment plan can be fairly straight forward. In my book "DIY Simple Investing", I suggest the average small investor can achieve a good outcome with a very simple strategy based on the use of low-cost, multi-asset index funds. For many, this should be relatively easy to understand, simple to set up and involves a minimum of ongoing maintenance.

I suspect that many small investors will move to a simpler strategy as they gain more experience.

Be Aware of the Big Picture

For me over recent years the big picture has increasingly become climate change and how this will impact the global economy.

The world is starting to take the threats posed by global warming more seriously and there are now some significant policy changes from governments and the business community to address the climate crisis. These changes will impact the way we live our lives and the way our global economy is managed. This will inevitably have an impact on our investments as we move towards a more sustainable economy and reduce our dependence on fossil fuels.

The EU has pledged to reduce carbon emissions by at least 55% by 2030 (previously 40%) whilst Germany will now aim for net zero emissions by 2045. The US rejoined the Paris agreement in January and is aiming for net zero by 2050 and to decarbonise its energy sector by 2035. The world's largest CO2 emitter China has pledged to become carbon neutral by 2060.

The energy sector accounts for around 75% of warming so a shift away from fossil fuels in this area will be critical in the fight against climate change. For the past century or longer, the global economy has been dependent upon fossil fuels such as coal, oil and gas so the rapid transition to clean energy will be one of the most significant industrial developments of our time.

In recent weeks we have seen a ramping up of action against the oil majors; Blackrock and Vanguard voted against two of Exxon's board members in favour of climate activists. In Holland, Shell were ordered by the court to cut its carbon emissions by 45% by 2030 whilst at Chevron, 60% of investors voted in favour of climate resolutions forcing the company to cut emissions. The credit rating agencies have now warned that the financial risk for investors has increased. The big global banks are now coming under increasing pressure to cut off the supply of money for new operations in the fossil fuel sector.

Investors need to be aware of these changes and make provisions for climate factors in their long term investment plans and strategy.

On a personal level, I decided to move my portfolio into more climate-friendly investments in 2018 and this involved the sale of my multi asset global index funds as I wanted to divest away from fossil fuels. I am still waiting for the industry to provide an climate-friendly alternative to the likes of Vanguard Lifestrategy range but for the time being I have switched to a range of individual shares and some funds such as the iShares Global Clean Energy and their global fossil-free ESG index. Here's an article I posted back in May 2019.

Conclusion

So, I guess investing is not suitable for everyone and for those who don't have the time, inclination or temperament they would be better employing a financial professional or maybe considering the robo-advice route.

Of course, for those who decide to give the DIY route a go, there is much more to making a success of investing - some great books and blogs are worth reading/following, starting early and allowing gains to compound, avoiding switching in and out of strategies, avoiding high charges etc. - these are all important elements in the mix. But I believe investors will have a big advantage if they have a clear plan at the outset, they are aware of their psychology and temperament and they keep an eye on the big picture.

These are some of my thoughts but what has worked for you, what has been the main factors for your success so far and the pitfalls to avoid? Feel free to leave a comment below.

McPhy Energy - Update

In January 2020 I took a look at the global potential for green hydrogen and suggested it could transform the global economy.

Last month the IEA released its pathway to net zero by 2050. The report called for an end to all new fossil fuel production and a radical shift to renewable energy to limit global warming to 1.5C. They suggest that hydrogen will play a big part in the transition and increase from 10% today to 70% by 2030 and that half of this increase will be green hydrogen from electrolysis of water.

Since deciding to move to a more climate-friendly portfolio in 2018, I have added several clean hydrogen-focused companies to my green portfolio including Powercell, Nel Hydrogen, ITM Power and Ceres Power. McPhy Energy was added in May 2020.

The Company

McPhy Energy is based in France and specialises in the manufacture of clean hydrogen storage and production solutions. Their focus is centered around helping clients in the transport and energy sectors to transition to business models based on zero-carbon emissions using green hydrogen.

The company has grown very rapidly over the past year - market cap approx €735m (listed in France). It has manufacturing bases in Germany and Italy as well as a distribution network in Asia and the Americas. Its products include a hydrogen electrolyser to split water and produce clean hydrogen and also sells solid-state hydrogen technology.

Results

In March the company reported strong revenue growth of 20% in 2020 - up to €13.7m (€11.4m 2019). The company raised €180m via an over-subscribed share placing last October which means they are well capitalised for their growth plans with cash reserves to €197m. 

Laurent Carme, CEO of McPhy, said: "The year 2020 marked a decisive turning point for the entire hydrogen industry. The launch of major public projects in Europe with the hydrogen strategy unveiled by the Commission in June, and in France with the announcement in September of the €7 billion investment plan, made clear the fantastic potential of renewable hydrogen to succeed in the energy transition.

However, despite a 75% increase in orders and the increase in revenues, this has not yet translated into profits with a net loss posted for the year of -€9.3m (-€6.3m for 2019).

H2 Filling Station

By the end of 2020 the company had over 44MW of electrolysers and 35 hydrogen stations installed or in the process of being installed. Some large deals look promising...McPhy has recently been selected by Nouryon and Gasunie, two leading industrial players, to equip one of the largest zero-carbon hydrogen production units in an industrial environment in Europe. Also they have secured a contract with the project company Hympulsion to equip the largest zero-emission hydrogen mobility deployment project in France and one of the most ambitious in Europe. 

The company are in the final planning stages for a new gigafactory for the production of electrolysers with a capacity of 1GW and which is due to start production in 2024.

McPhy One Year Share Price
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The shares were purchased in my ISA last year at €5.60 . I took profits on half of the shares at €25 to release funds for my house purchase which completed last November. The remaining holding went on to reach a high of €40 by January but have since fallen back sharply along with most other clean energy stocks and currently stand at €26.50 and account for 4% of my green portfolio. I am hoping the shares can soon get back on an upward trajectory but I am expecting some volatility along the way.

There is naturally a lot of coverage being generated about clean energy and climate change generally. The big oil companies are under fire over their carbon emissions and are looking to transition to a cleaner, more sustainable business model. EDF has a stake in McPhy, German giant Linde acquired a stake in ITM and Bosch has a stake in Ceres Power.

Clearly the world is now starting to take climate change seriously and there is a real commitment to achieving net zero emissions by 2050. This simply cannot be achieved without the use of renewable green hydrogen on a large scale.

It will be interesting to see how the European hydrogen sector develops over the coming year as we start to 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 individual companies listed on a foreign exchange can be rewarding but is higher risk compared to collective investments - always DYOR!