Three model portfolios for retirement income

Published by Rob Griffin on 11 April 2017.
Last updated on 19 June 2017

The outlook for the rest of 2017 doesn’t appear any calmer. Political uncertainty is still at the top of the list with a string of elections across Europe, while it’s unclear what approach central banks will adopt over the coming months.

In the fifth issue of Moneywise's How to Retire In Style, we unveiled three portfolios – for £100,000, £200,000 and £400,000 pots – designed by financial gurus for those wanting consistent incomes. Six months on, we look at their performance.

£100,000 portfolio

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The second half of 2016 was as unpredictable as the previous six months, according to Ben Willis, head of research at Whitechurch Securities, who put together our £100,000 portfolio, primarily aimed at investors seeking income.

Sterling weakening significantly in the wake of the Brexit vote, the subsequent strong rally of the FTSE 100, and the Bank of England announcing another rate cut down to 0.25% have all been big topics.

“It’s hard to position a portfolio when markets are driven by short-term political events and ongoing central bank policy,” says Mr Willis. “Shock events such as the EU referendum result and Donald Trump’s US election win were quickly shrugged off by the markets.”

He believes this shows the importance of putting the right building blocks in place: create a diversified portfolio; investment with a medium- to long-term outlook; focus on your objective; and never compromise on the risk you can take.

“There was a diverse range of returns from the underlying funds in the portfolio, with most of the equity positions contributing a positive return, while most of the bond positions lost value over the six months,” he says.

Two very different funds were the star performers: Artemis Global Income (+12.6%) and L&G All Stocks Index Linked Gilt Index (+6.6%). “You could argue that both benefited from the reflationary environment that built up towards the end of 2016,” he suggests.

Mr Willis explains Artemis Global Income adopts a so-called “value investing” approach, which sees it favour large companies that are cheap because they are undervalued by the stock market.

“These came back into favour with investors as inflation expectations increased, which led to a more favourable growth outlook and the demand for a higher real return,” he adds.

The L&G holding, meanwhile, is a hedge for Mr Willis, who points out that the index is very long in duration, pays virtually no yield and, with demand having pushed prices up so much, it only provides any inflation proofing if held for 20 years.

“However, whenever there are inflation spikes and/or wholesale risk aversion, these assets are in demand,” he says. “As such, we hold them as a hedge against the risk and the positioning we are taking elsewhere.”

His most high-profile disappointment has been CF Woodford Equity Income fund (-2.4%), although Mr Willis notes it doesn’t hold any oil majors, miners or banks, all of which were at the vanguard of index performance over the past six months. “You also can’t ignore his impeccable long-term track record, so we’re prepared to give him ample time for the fund to start performing again,” he adds.

In recent weeks, Mr Willis has trimmed some of the bond exposure to take a position in the Invesco Perpetual Global Targeted Income fund. “This is a multi-strategy absolute return vehicle that is aiming to produce a consistent income and carefully manage risk,” he explains.

“We’re aware of the headwinds facing bond markets, and so introducing this incomeproducing, non-cyclical position should aid the overall diversification of the portfolio.”

Elsewhere, he notes that commercial property still offers relatively attractive yields, but is waiting to see how it may be affected by the Financial Conduct Authority’s decision to look into illiquid assets and open-ended funds.

£200,000 portfolio

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Jason Hollands, managing director at The Tilney Group, points out that positive returns were seen across equity markets – especially the overseas markets, due in large part, to the impact of sterling depreciation on these holdings.

“Fixed income was marginally positive and the UK property holdings were particularly strong as bearish sentiment in the immediate aftermath of the EU referendum subsided and the discounts on the two investment companies selected narrowed,” Mr Hollands explains.

Conversely, he says absolute return funds were the main weak spot, as was the position in physical gold which declined 5% as “bearish clouds disappeared and risk assets climbed higher” as excitement about Donald Trump’s presidency reflating the US gathered pace.

“Standout performers in terms of individual positions included the CF Morant Wright Nippon Yield fund, chosen for exposure to the Japanese market, which delivered a 17% return, in part due to exchange rate movements,” he says.

Artemis Global Income I (+15%), F&C Commercial Property Trust (+12%) and Bluefield Solar Income (+12%), which invests in alternative energy infrastructure, were other positions that enjoyed big success.

“The weakest links were two absolute returns funds, JPM Global Macro Opportunities fund (-7%) and Aviva Multi-Strategy Target Income 2 (-1%),” he says. “ETFS Physical Gold (-5%) and Royal London Corporate Bond (-1%) were down as bond prices adjusted to rising inflation expectations.”

Although returns were positive for equities, it was a tough period for many actively managed funds, chiefly those positioned too defensively after the EU referendum and the US elections.

Mr Hollands says the markets saw a shift in sentiment in the latter part of 2016 in favour of previously unloved cyclical businesses, such as mining companies. He believes that hurt the relative performance of most UK equity income funds that invest in reliable dividend payers, compared with the FTSE All Share Index.

“This included the four funds in this portfolio, all of which underperformed the broader UK market over this period,” he says. “However, the cyclical upswing in late 2016 seems to have run out of steam and I continue to have a very high conviction in these funds.”

He believes the fund’s construction shouldn’t change. “The portfolio was designed for the long term, is well diversified and has high-quality constituents with no big changes in our views on the individual funds,” he says. “The position in gold is purely an insurance policy in the event of a collapse in confidence.”

He argues that most asset classes look expensive and there has been too much euphoria about President Trump’s plans to accelerate growth. While the president may be successful, Mr Hollands says that a lot of optimism is already priced in to markets.

He also believes there’s potential for sterling to claw back some of the sharp depreciation seen last year which bolstered returns on overseas assets – with the Bank of England potentially reversing its last rate cut by the end of the year.

“This would signal a stronger pound, so I would be careful about pouring more cash into dollar assets,” he adds.

£400,000 portfolio









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Adrian Lowcock, investment director at fund management group Architas, is pleased that all bar one of the funds in his £400,000 portfolio have defied a tough market to deliver positive returns.

“With a concentrated portfolio of 11 funds it’s easy to see which are contributing to performance,” he says. “Having a mix of income and growth also helped protect the portfolio as investors rotated out of fixed income and bond proxies [equities with similar characteristics to bonds – delivering consistent returns with less volatility].”

The biggest challenge has been the political landscape. “Even if you got the call right, the market’s reaction was against expectations,” he says, highlighting the shift from defensive growth companies to out-of-favour value stocks which followed the election of President Trump.

“Such changes in sentiment are difficult to predict and happen so quickly they are also hard to profit from – and this is why it’s always important to have a diverse range of strategies in a portfolio,” Mr Lowcock adds.

He points out that bonds were also hit as expectations for inflation and rising interest rates caused yields to rise and prices to fall.

“The difficulty in these situations is to maintain focus and avoid trying to chase performance when markets have rallied.” Against this backdrop he is satisfied with the performance of all UK funds.

“The smaller and mid-cap nature of the PFS Chelverton UK Equity Income fund (+12.45%) helped protect it from investors selling out of the bond proxies sector, while Franklin UK Smaller Companies recovered well from the post-Brexit slump,” he says.

The Newton Real Return fund (-6.06%), however, has been the most disappointing. “It was the only fund to deliver a negative return as interest rates rebound from record low levels, hitting gilt prices,” he explains.

“This fund is supposed to offer capital protection and to lose so much value in six months is not what I would expect.”

There’s little he would change in the portfolio, apart from reducing exposure to UK equities by cutting investment in Schroder Recovery (+15.23%) and Franklin UK Smaller Companies (+14.44%) by a few percentage points each.“This is due to taking some profits after a strong run but also to provide some capital to go into real assets, which should benefit from a return of inflation,” he says.

For this, he would use an in-house fund: Architas Diversified Real Assets, which invests in a broad range of alternatives such as infrastructure, student accommodation and airplane leasing. “The yield is 3.10%, so the addition of this fund to the portfolio would boost the income generated by a small amount, and offer diversification and protection,” he adds.

Looking ahead, Mr Lowcock says that although markets are enjoying a good spell, not all sectors or asset classes are performing. “Stock selection is increasingly important and investors need to keep calm if there are any sell-offs in markets,” he says. “Having a focus on the long-term returns should help investors navigate these markets.”

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there's no pie chart for the

there's no pie chart for the £400,000 portfolio! therefore advice is not usable.

Many apologies for the

Many apologies for the missing image, due to the website relaunch we have experienced some issues in the transition. The correct pie chart has now been inserted into the article, thank you for bringing this to our attention. Regards, The Moneywise Team.

The £400,00 pie chat is not

The £400,00 pie chat is not being shown, instead it is displaying the £200,00 pie chart. Can you please fix this?