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Ideal Diversification of an Income Generating Portfolio
Nigel Meek
Posted: 28 September 2017 18:05:10(UTC)
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Evening All,

I currently get 14% of my income from Renewables ITs, and a further 11% from Property REITS.

One of my Renewables holdings, (UKW), (as well as a REIT), looks as though it might be offering additional shares on a discounted basis shortly. If I participate, the % income I receive from Renewables will increase, so I was wondering peoples' thoughts on a "good" balance for diversifying income streams.

Currently total income is about £25k annually and is derived thus:

UK Large Cap (ITs) = 15%
UK Large Cap (direct holdings) = 13%
UK Small Cap (ITs) = 4%
UK Small Cap (direct holdings) = 4%

Global Equity ITs = 4%
Asian/FE Equity ITs = 5%
Europe Equity ITs = 3%
Global Private Equity ITs = 5%
EM ITs = 2%

UK Bonds = 2%
Global Bonds = 6%

AltFin ITs = 9%
Property ITs/REITs = 11%
Infrastructure/Renewables ITs = 14%
Commodities = 3%

I appreciate that Global, Europe and Emerging Markets are under-represented, am am slowly dripping into these ITs I already hold.

If I subscribe to the potential discounted offers to teh Renewable and REIT ITs, am I going to be over-represented in these 2 sectors?

All investments are in ISAs and SIPP so I think I have the tax angle covered, but would appreciate any views on the above.

Many thanks in advance for any thoughts.
King Lodos
Posted: 28 September 2017 21:08:23(UTC)
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An as-good-as-any suggestion on a portfolio to hold going forwards is this, from Mohamed El-Erian's When Markets Collide:



You might be somewhat overweight renewables and REITs – not that that's necessarily a bad thing.

My perspective would be that a regular stocks fund will be able to pick the best infrastructure or REIT opportunities, whereas a specialist fund is stuck investing in that sector .. So you generally hold the specialist fund, not to cover bases (which are already covered by having market exposure), but for a specific tactical purpose – such as holding extra infrastructure as protection against a downturn (which might be met with infrastructure spending) – and a plan to rebalance regularly to take advantage of downturns in certain sectors, offset against gains in others.

You might overweight EM because growth and valuations are better – and if you had a 15+ year horizon, there's a good chance you'd be rewarded for your patience (while the market's stuck having to think about the short-term much more).

What I might do is set up a separate mini-portfolio of a FTSE World index, and Total Bond at maybe 10% (or just a Vanguard Lifestrategy 80), and use that as your benchmark .. If you find the benchmark doing the same, or better, it might make things a lot easier
3 users thanked King Lodos for this post.
Nigel Meek on 28/09/2017(UTC), Guest on 01/10/2017(UTC), Guest on 01/10/2017(UTC)
Nigel Meek
Posted: 28 September 2017 21:18:31(UTC)
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King Lodos;51517 wrote:
An as-good-as-any suggestion on a portfolio to hold going forwards is this, from Mohamed El-Erian's When Markets Collide:



You might be somewhat overweight renewables and REITs – not that that's necessarily a bad thing.

My perspective would be that a regular stocks fund will be able to pick the best infrastructure or REIT opportunities, whereas a specialist fund is stuck investing in that sector .. So you generally hold the specialist fund, not to cover bases (which are already covered by having market exposure), but for a specific tactical purpose – such as holding extra infrastructure as protection against a downturn (which might be met with infrastructure spending) – and a plan to rebalance regularly to take advantage of downturns in certain sectors, offset against gains in others.

You might overweight EM because growth and valuations are better – and if you had a 15+ year horizon, there's a good chance you'd be rewarded for your patience (while the market's stuck having to think about the short-term much more).

What I might do is set up a separate mini-portfolio of a FTSE World index, and Total Bond at maybe 10% (or just a Vanguard Lifestrategy 80), and use that as your benchmark .. If you find the benchmark doing the same, or better, it might make things a lot easier


Many thanks KL. I should have added that I am practically, (albeit not technically), retired, so am concentrating on income rather than capital growth - whilst accepting that "total return" is a perfectly acceptable goal. I just don't need the hassle of checking capital growth and selling part-holdings of growth stocks to simulate income. Rather just take the natural income generated.

I have had an aversion to US markets for years now, always thinking they cannot continue hitting new highs all the time! Ha, got that one wrong!!
1 user thanked Nigel Meek for this post.
King Lodos on 29/09/2017(UTC)
Alan Selwood
Posted: 28 September 2017 22:16:07(UTC)
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Nigel,

You mention UK large caps and UK small caps, but there is no mention of UK mid caps. Perhaps by small caps you mean 'non-FTSE 100'.

Given the past track record, I would want mid caps and small caps rather more than FTSE 100 stocks myself, and the latter does unfortunately derive a lot of its dividends from a very narrow base of companies and sectors, many of which are not really making enough profit to justify current dividend levels (i.e. dividend cover is typically under 2x and sometimes barely 1x). Small and mid cap companies with 2+ x cover are more common than in the FTSE 100.
5 users thanked Alan Selwood for this post.
Tim D on 28/09/2017(UTC), martin hargan on 29/09/2017(UTC), Nigel Meek on 29/09/2017(UTC), Guest on 01/10/2017(UTC), Guest on 01/10/2017(UTC)
Mr Helpful
Posted: 29 September 2017 08:21:06(UTC)
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If it sheds light as a fellow retiree cum income investor, current targets for liquid portfolio, presently under review and may therefore change :-

Stocks 25%
UK 12%
Global 40% (includes PE and hedge funds)
US 12% (intend to increase at some stage)
Asia/Pacific 12%
Europe 8%
EM 8%
Commodity Income 8% (may reduce)

Defensives 25%
Debt US 26% (may increase)
Debt UK 28% (may reduce)
Ground Rents 6% (may reduce)
Real Estate 22%
Renewable Energy 6%
Infrastructure 12% (savagely reduced this week and may reduce further)
Some of these positions offer -ve real yields, but in aggregate they achieve +ve real yields.

Being something of a 'market timer' (prefer 'valuation driven investor'), balance in cash type instruments for the time being, including much beloved NS&I IL Certs. Hopefully one day some/most of these reserves will be re-deployed into Stocks.

"I appreciate that Global, Europe and Emerging Markets are under-represented, am am slowly dripping into these ITs I already hold."
Noted. This seems main difference in our approaches to date (ignoring the 'market timing' Cash).
There may be no 'ideal diversification' but then many if not all roads lead to Rome.

"If I subscribe to the potential discounted offers to teh Renewable and REIT ITs, am I going to be over-represented in these 2 sectors?"
The bigger issue might be whether the price is considered genuinely attractive.
Maybe buy at a time when price is considered attractive rather than when others are trying to sell to the investor?
3 users thanked Mr Helpful for this post.
Nigel Meek on 29/09/2017(UTC), Tim D on 29/09/2017(UTC), Guest on 30/09/2017(UTC)
King Lodos
Posted: 29 September 2017 11:52:29(UTC)
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Nigel Meek;51518 wrote:
Many thanks KL. I should have added that I am practically, (albeit not technically), retired, so am concentrating on income rather than capital growth - whilst accepting that "total return" is a perfectly acceptable goal. I just don't need the hassle of checking capital growth and selling part-holdings of growth stocks to simulate income. Rather just take the natural income generated.

I have had an aversion to US markets for years now, always thinking they cannot continue hitting new highs all the time! Ha, got that one wrong!!


I've had the aversion to the US too .. But the valuations picture is complicated .. While bond yields were so low, US stocks were comparatively very cheap – and it's always debatable whether cheaper things are cheap for a reason.

The US has been dominated by Facebook, Amazon, Apple, Google – which tend to justify much higher valuations than the kind of things our FTSE100's full of (banks, mining and energy) .. Neil Woodford's recent run of appalling luck is sometimes the risk of buying cheap, because risk is this invisible metric that makes some companies worth paying 5x more for.

Also worth looking at long-long-term stock market returns, and realising how much of the time markets do spend making new highs (esp. on a total return basis) .. My opinion on income is that it's the most crowded trade today – another reason Woodford might be suffering .. I love income – but *really* it's just earnings companies are paying out rather than reinvesting – it's an illusion that it's creating value .. If we all held Accumulation funds, and didn't know whether they were on 7% yields, or 0.1%, it would be much simpler: we'd just focus on total return and draw an income from capital .. But I love the ease of an organic income – it's much more satisfying

https://www.vanguard.com/bogle_site/images/gr20011115_2.gif


4 users thanked King Lodos for this post.
Nigel Meek on 29/09/2017(UTC), Guest on 29/09/2017(UTC), Tim D on 29/09/2017(UTC), Guest on 01/10/2017(UTC)
Nigel Meek
Posted: 29 September 2017 12:40:55(UTC)
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Alan Selwood;51519 wrote:
Nigel,

You mention UK large caps and UK small caps, but there is no mention of UK mid caps. Perhaps by small caps you mean 'non-FTSE 100'.

Given the past track record, I would want mid caps and small caps rather more than FTSE 100 stocks myself, and the latter does unfortunately derive a lot of its dividends from a very narrow base of companies and sectors, many of which are not really making enough profit to justify current dividend levels (i.e. dividend cover is typically under 2x and sometimes barely 1x). Small and mid cap companies with 2+ x cover are more common than in the FTSE 100.


Hi Alan, yes I meant mid/small caps rather than just small. In fact of that 8%, only 2% is in "small caps".

I agree with your comment re. large caps, and have been caught out badly in the past (BP, Lloyds, Centrica, RSA, Tesco etc), so now try to concentrate on ITs rather than individual stocks. Still hold GSK, Lloyds, Phoenix and ITV, but will be looking to shed ITV into Global ITs or a decent UK mid-cap IT - any ideas on which?
Alan Selwood
Posted: 29 September 2017 17:19:51(UTC)
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For UK mid-cap, my own favourites are JM Morgan Mid Cap [JMF] and Old Mutual Mid Cap. I hold the former, but have noticed some good results from the latter.
2 users thanked Alan Selwood for this post.
Nigel Meek on 29/09/2017(UTC), Guest on 01/10/2017(UTC)
Nigel Meek
Posted: 29 September 2017 19:40:27(UTC)
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Alan Selwood;51548 wrote:
For UK mid-cap, my own favourites are JM Morgan Mid Cap [JMF] and Old Mutual Mid Cap. I hold the former, but have noticed some good results from the latter.


Cheers Alan I'll take a look at those.
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