We asked three financial advisers to construct hypothetical portfolios for investors with different requirements.
Knowing where to start with constructing an investment portfolio to see you through retirement can be tricky. There is no one-size-fits-all solution, because different investors have different needs, levels of engagement, appetites for risk and portfolio sizes. However, it can be useful to take some ideas from appropriate model portfolios, so we asked three financial advisers to provide them.
One financial adviser was asked to construct a model portfolio consisting of investment funds and trusts for an investor approaching retirement but still in work and therefore hoping to continue growing their capital without too much risk. A second adviser was tasked to provide a selection for an investor already in retirement and wanting to draw an income. A third adviser was invited to produce an income-focused model portfolio with a greater emphasis on asset allocation.
Cautious growth-focused option
First up is an investor in his 60s who doesn’t yet want to draw income. Let’s call him Chris. There could be a number of reasons for Chris’s preference: he might still be working, for example, or living off the tax-free lump sum element of his pension to enable the rest of it to keep growing.
According to Patrick Connolly, a chartered financial planner at Chase de Vere, Chris is likely to invest with both increasing and protecting his capital in mind. Connolly says: ‘For someone in his 50s or 60s who doesn’t yet need to generate income from his portfolio, the focus is likely to be on a combination of capital growth and capital protection.’
At his age, assuming he is in good health, Chris needs to ensure that his pension will see him through several decades. For this reason he will need capital growth to stay ahead of inflation, but without too much risk, for fear of suffering uncomfortable losses at this relatively late stage of building a pension. Connolly adds: ‘Chris will want his portfolio to grow at least in line with inflation. But at the same time, he will be wary of possible losses.’ To achieve this, Connolly suggests, he would be best served by equities, which have long-term growth potential.
Connolly selects L&G International Index Trust as the portfolio’s core holding, accounting for 25% of the total. The fund tracks the performance of the FTSE World (ex UK) index and, as is typical of trackers, has low ongoing charges (just 0.13%). It will give investors a large exposure to the US, which accounts for half of the index tracked, and to tech giants such as Apple, Microsoft, Alphabet (Google) and Amazon.
Connolly includes another low-cost tracker, HSBC FTSE All-Share Index, which constitutes 20% of the portfolio. He says: ‘UK investors will typically want exposure to their home market, and this fund provides this by tracking the performance of the FTSE All-Share index.’ The tracker also has a low ongoing charge of just 0.16%. With the fund’s largest holdings being those with the highest market cap among UK-listed stocks, Chris gains exposure to stalwarts such as HSBC, Royal Dutch Shell, BP and British American Tobacco, among other companies.
As an actively managed equity fund offering prospects of out-performance, Liontrust Special Situations is recommended by Connolly as a 15% allocation. The fund invests in a blend of large-, mid- and small-cap UK-listed companies. Connolly is a fan of the fund’s investment approach, which is termed the ‘economic advantage process’. He explains: ‘It uses robust risk controls and adopts a defensive style. The fund tends to perform especially well when stock markets are volatile.’
Alongside these equities, however, Chris should hold other asset classes, including fixed interest and property, says Connolly. These will ‘provide some protection when stock markets fall’.
To provide this diversification, he gives Royal London Short Duration Global High Yield an allocation of 10%. ‘This fund invests predominantly in short-maturity high-yield bonds and is managed by an experienced team that typically takes a conservative approach to running money,’ he says. ‘It focuses on a small segment of the market, but this is an area that can offer a disproportionate level of income, currently of 5.5%, relative to the risk and level of volatility.’
He gives M&G Property Portfolio a 15% weighting. By investing in commercial property, the fund should be able to ‘provide additional diversification and consistent returns within an investment portfolio.’ He adds that at the same time, ‘the fund is more diversified than many other property funds, having a lower weighting in London and the South East’.
On page 2: two more model portfolios