Getting Minted

From the end of 2012 until early in 2020 I acted under an enduring power of attorney (EPA) to manage my father’s property and financial affairs. In my previous post I explained the actions I took and the lessons I learned. I now want to analyse the results achieved.

My key performance indicators in this review are capital, income taken versus expenditure, and total return. My key comparisons are with an inflation index and an equity index.

Inflation (RPI)

My chosen inflation index is the retail price index. This index has the longest history, is more inclusive than others, and tends to be higher than these rivals. In seven years the RPI index has increased by 18.27%.

Equities (FTSE UK All Share)

My chosen equity index is the FTSE All Share total return index. I have chosen this one because my family live in the UK and the majority of this portfolio is invested in UK equities. After seven years the FTSE UK All Share total return index has increased by 77.48%. Funds that attempt to passively replicate and track the index return less than the index because of fees and tracking errors. A typical unit trust tracker (M&G Index Tracker Fund Sterling A Acc) had a total return of 72.17%.

Capital

Capital has increased by 18.92%. This compares to an increase in RPI inflation of 18.27%. I would have been pleased to report to my dad that I maintained the value of his capital over these seven years despite the cost of his care. This was secured by the strong growth in 2019.

Year end	Capital	Growth	RPI	Growth
2012	100.00		100.00
2013	101.47	1.47	102.67	2.67
2014	106.57	5.03	104.34	1.62
2015	105.64	-0.87	105.59	1.20
2016	105.14	-0.47	108.23	2.49
2017	113.03	7.49	112.68	4.12
2018	102.17	-9.59	115.72	2.70
2019	119.05	16.51	118.27	2.21
2020	118.92	-0.10	118.27	0.00

Income taken versus expenditure

Income included a company pension, the state pension, an Attendance Allowance benefit, deposit interest, and dividend income from equity investments. Some of the dividend income was retained and re-invested so this table reflects only the income taken. Income increased as cash was invested in dividend paying equities and those dividends were increasingly paid out. Cash deposits were withdrawn in 2015 and 2016 to make up the income shortfall against expenditure. Care home costs began in August 2014 which is why expenditure trebled between 2013 and 2015. The retirement flat still incurred costs until it was sold in early 2017. Capital gains tax was paid in 2016. Costs in 2017 were mostly for the care home. 2018 and 2019 costs were wholly for the care home.

Year end	Income	Expenditure	Spend %
2013	100.00	52.37	52.37
2014	102.67	82.77	80.62
2015	121.55	153.89	126.61
2016	161.39	191.57	118.70
2017	165.48	137.88	83.32
2018	163.36	148.00	90.60
2019	173.29	159.29	91.92
2020	4.35	13.44	309.26
Total	992.08	939.21	94.67
	as % of 2013 income

Total return

The total return of 32.64% was well below the 77.48% from the FTSE All Share total return index and the 72.17% from the M&G Index Tracker Fund Sterling A Acc, a typical index tracker fund.

Year end	Total Return	Growth	Index	Growth	Tracker	Growth
2012	100.00		100.00		100.00
2013	99.75	-0.25	120.81	20.81	121.26	21.26
2014	104.34	4.60	122.23	1.18	120.89	-0.31
2015	106.00	1.59	123.43	0.98	122.83	1.61
2016	109.86	3.64	144.10	16.75	141.32	15.05
2017	120.06	9.29	162.98	13.10	159.41	12.80
2018	110.82	-7.70	147.54	-9.47	145.15	-8.95
2019	132.17	19.26	175.82	19.17	171.67	18.27
2020	132.64	0.35	177.48	0.95	172.17	0.29

The main reason for the shortfall was the retirement flat. This was eventually sold for 47% of the price paid for it. I included the original price within the opening capital value. This asset also missed out on equity returns of 44% between 2012 and 2016. The second reason was the cash drag from being under invested in equities in 2013 and missing out on most of the 20% gains in that year. A third factor was missing out on the compounding of those missed gains in later years such as 2017 and 2019. There was a small cash drag in the later years as a cash reserve was held. One positive was that the assets held in equities outperformed the index by a small amount. This table analyses the percentage split of the total return shortfall.

• Retirement flat -51.30
• Cash drag 2013 -25.84
• Compounding shortfall -28.70
• Cash drag after 2013 -6.52
• Equity result +12.36
• Total Return shortfall -100.00

Alternative scenarios

Of course, if I had been ultra-cautious and not bought any equities and sold the existing ones then the current capital would be much reduced. The low interest available on bank deposits would not have covered the funding needed for the care home or compensated for the loss on the flat. In this situation the capital would be lower than it was in 2012. I suspect that this is the reality for many or most families in this position of self-funding, and they could eventually spend all the assets on funding care. If I had invested more quickly and avoided any cash drag the capital could now be over 20% higher. In an unrealistic situation of not holding the flat then capital could be 37% higher. This table compares these alternative scenarios.

• Cash, no equities 66.77
• Actual 2012 84.09
• Actual 2020 100.00
• Equities, no cash drag 122.81
• Equities, no cash drag, no flat 137.36

as % of capital in early 2020

Conclusion

Overall, I feel positive that I did a good job of managing my father’s property and financial affairs. The value of his capital was maintained in line with RPI inflation. This would have been important to him and will now be helpful to his family. There was sufficient income produced to supplement the existing pension and benefit income so as to meet care home fees. Indeed, we could have dealt with more above inflation rises and contemplated more expensive care. The loss of value of the retirement flat was more than covered by growth in the equities held.

I’m conscious that this portfolio of up to 96% in equity income investment trusts is not likely to be recommended by any adviser as it would be viewed as far too risky. I took the view that investing in equities was the best way to secure sufficient income and give the prospect of growth in both income and capital. This worked out over the seven years up to early in this new year, although two months later markets have now taken a turn for the worse.

I’ve recently had a family bereavement. It’s been a sad time for the family and is the end of an era. It also brings to a close my role as an attorney looking after the financial affairs of my late father. Since the end of 2012 until early in this new year of 2020 I have acted under an enduring power of attorney (EPA) to manage his property and financial affairs. This followed a deterioration in his health and his being assessed as no longer being able to make financial decisions as he entered his tenth decade. I would now like to look back on what I did in this role and what lessons I take from it.

Actions taken

I was fortunate in that I was one of two appointed attorneys but we were appointed jointly and severally meaning that we could act together or independently. If we had been appointed jointly then we would have needed to act together and always agree before doing anything. I think this would have also made dealing with banks and investment platforms more complicated. We decided, as attorneys, that I would take the lead on managing financial matters, and my brother would assist the situation in other ways. They lived close to my dad’s retirement flat and I lived in another part of the country.

The financial position was good in that current income exceeded current living expenses. These expenses included living in a warden assisted retirement flat with a small amount of daily carer visits. Income included a company pension, the state pension and an Attendance Allowance benefit. There were no debts and substantial cash was held on deposit following the sale of a larger home a few years earlier. Unfortunately, this cash had been allowed to languish in accounts paying very little interest. A “high interest” account that had once paid 4.00% was now paying only 0.10%. A relatively small portfolio of ex-privatisation shares was also held and paid some dividend income.

It was clear, however, that residential care was likely to be needed in the near future and the current income would not support the expected costs for that. It was my view that the cash deposits would need to be invested in income producing assets.

The first thing to be done was to get the banks to recognise the enduring power of attorney that had been registered in November 2012. This required a visit to a bank branch with the registered EPA document and the required identity documents. In 2013 I was still working full time and I wasn’t living near these bank branches. I had to make a trip in March 2013 in order to get this done and to get online access to the main bank accounts. I had to make a second trip in January 2014 in order to close the account at the second bank and move the cash there to the main bank.

The second thing I did was to open a new investment dealing account in October 2013 and a new investment ISA account in March 2014. I gradually transferred cash from the bank to the investment accounts and invested in equity income investment trusts. The bank interest had been as low as 0.10% and no higher than 1.60%. The dividend yield on the trusts I chose averaged 4.05%. By July 2014 equity investments in trusts and shares had been increased to 62% of total assets and cash reduced to 17%, with the balance being the retirement flat.

These steps meant that when residential care started, in August 2014, we were better placed to fund it mostly from income. We were fortunate in finding a care home close to other members of the family, where his particular care needs could be met and where he felt at home, and where costs were below the average in what is a lower cost area of the country. My father, frugal by nature, was unreceptive to the appeal of a nearby care home that sought to emulate a luxury hotel, and was 31% more expensive!

On entering the care home and after me completing a long form a higher level of Attendance Allowance was payable, although this only covered a tiny fraction of the additional costs.

The third thing I did in January 2015 was to sell all of the ex-privatisation shares and reinvest the proceeds in more equity income investment trusts. This increased the dividend income but also provided for a better diversified portfolio. This process involved selling certificated holdings via the share registrars. It also incurred payment of capital gains tax and the preparation of a tax return.

The fourth thing I did was to sell the retirement flat. This required a collective family effort to clear the flat of items dating in some cases back to the 1930’s and was quite a challenge. After also making the flat ready for sale it was put on the market in July 2016 almost two years after being vacated. but it was March 2017 before the sale was completed. The proceeds were re-invested in more equity income investment trusts. Thus, it was only in April 2017 that I was able to achieve my preferred asset allocation of 96% in equity income investment trusts, with a dividend yield of 3.86%, and 4% in cash, earning interest of only 0.31%.

I was prepared to have such a high allocation to equities because of the dividend record of my selected trusts. I expected that the share prices would suffer volatility but that the dividend payments would continue to be increased or at least not reduced. Many of the trusts are recognised as dividend heroes by the AIC, or else they aspire to that status. That means they have increased their dividend every year for many years. Investing in such equity income investment trusts was, I thought, the best way to achieve and maintain a high level of income. This would also allow the portfolio to grow as and when stock markets rose.

The dividend income from these investments ensured that there was sufficient funding with which to top up the pension and benefit income in order to pay the care home fees for over five and a half years. By investing in investment trusts that aimed for income growth, and by tilting towards higher yielding but still mainstream trusts, I was able to grow that income by 22.90% (8.03% per annum) between April 2017 and December 2019.

Lessons

It would have been better to have had the power of attorney in place earlier, and it would have been better if I had been able to move more quickly to invest in shares. The cash had been placed on deposit before 2008 when 4% interest could be earned but as the ability to make financial decisions declined it was not managed thereafter until the EPA was in place and recognised by the bank. Being insufficiently invested in the stock market in 2013 meant that most of the gains in that year were missed.

The retirement flat was a very poor investment. It provided a convenient home for over six years from 2008, but was eventually sold in 2017 for 47% less than was paid for it. Such a retirement flat with an on-site warden was a necessity but, with hindsight, it would have been better to have tried to find an opportunity to rent rather than buy.

By contrast the ex-privatisation shares were a better investment and they made a gain of 28% between December 2012 and their sale in January 2015, and had already enjoyed higher gains since their original purchase in the 1980’s and 1990’s such that CGT was payable. Selling them in 2015 meant that I was not concerned by re-nationalisation proposals at recent general elections.

We were fortunate in our choice of care home. Starting with lower costs meant that we were better placed to deal with rises in those costs. Over nearly five years the care home fees increased by 30.18% in total with annual rises of 4.08%, 2.61%, 5.00%, 7.50% and 8.00%. This compares to the retail price index (RPI) increasing by 12.12%, and the minimum wage increasing by 30.11%. The state pension, the Attendance Allowance benefit, and the company pension (net of tax) increased by only 13.46%, 7.81% and 5.43%. This income covered 77% of the care home costs in 2015, but only 65% in 2019, because of these different rates of increase.

Actively managing the available assets by investing in income producing equities has meant that some of the available income can rise, ideally to meet rising costs, whilst the assets could also grow when markets were favourable.

Results

At the end of 2019 the available income was more than sufficient to meet the current costs and to allow for above RPI increases in the care home costs. If a higher level of care, in a more expensive care setting, had been needed that could have been a challenge. As it was events took a different turn.

I will consider more fully in a follow up post how well I did in managing these property and financial affairs over these seven years.

Twelve months Summary

This is an update on my previous reviews of four and six months ago.

A total return for the year of 20.24% growth, slightly above the FTSE All Share total return index growth of 19.17%, results after draw down expenditure in a capital uplift of 15.87%.

Six years of drawdown results

As I am not earning any income from employment any more, I am in draw down in that I am drawing down some of my financial assets each month to cover our spending. I have been in draw down since December 2013 so the six years since then will be the main time period under review. My five key performance indicators in this review are capital, income, expenditure, total return, and income growth. My key comparisons are with an inflation index, an equity index, and the “safe withdrawal rate” (SWR).

Inflation (RPI)

My chosen inflation index is the retail price index. I have chosen this one because it has the longest history, it is perhaps more inclusive than other rival indices, it tends to be higher than these rivals, and is favoured less by politicians.  In 6 years the RPI index has increased by 15.23% (I have estimated the figure for December).

Equities (FTSE UK All Share)

My chosen equity index is the FTSE All Share total return index. I have chosen this one because I live in the UK and the majority of my portfolio is invested in UK equities. This index also has a history that extends back to when I started investing in 1986. In 6 years the FTSE UK All Share total return index has increased by 45.53%. If I chose to invest in funds that attempt to passively replicate and track the index these would return less than the index because of fees and tracking errors. A typical unit trust tracker (M&G Index Tracker Fund Sterling A Acc) had a total return of 41.56%.

“Safe Withdrawal Rate” (SWR)

This approach suggests taking an income, or drawing down, only 4% of your available capital in year one and then increasing that amount by inflation each year.

Capital

My capital has increased by 22.69%. This compares to an increase in RPI inflation of 15.23% (I have estimated the RPI figure for December).

Year end	Capital	Growth	RPI	Growth
2013	100.00		100.00
2014	100.18	0.18	101.62	1.62
2015	96.05	-4.13	102.84	1.20
2016	106.87	11.27	105.41	2.49
2017	117.30	9.77	109.75	4.12
2018	105.88	-9.74	112.71	2.70
2019	122.69	15.87	115.23	2.24
	as % of 2013 assets

Income

My income has increased from 3.53% to 5.38% of my original capital. This compares to the income according to the “safe withdrawal rate” which has increased from 4.00% to 4.61%, based on inflation from December 2013 to December 2019.

Year end	4% Rule	Income
2013		3.43
2014	4.00	3.53
2015	4.06	3.81
2016	4.11	3.92
2017	4.22	4.63
2018	4.39	4.89
2019	4.51	5.38
2020	4.61
	as % of 2013 assets

Expenditure

My expenditure has increased by 32.87%. This is more than double the inflation increase and reflects some choices made in 2015/2016. I would be prepared to undo some of those choices in the future if that were needed. In the meantime I take comfort from the fact that income growth has exceeded this expenditure growth.

This year my spending as a percentage of my income is 78.10%. Expenditure is running at an annual rate of 3.67% of the average asset value during the 2019 year.

Year end	Income	Expenditure	Growth	RPI	Spend %	Expenditure
2013	108.40	100.00		100.00	92.25	-3.52
2014	111.58	92.27	-7.73	101.62	82.69	-2.91
2015	120.61	104.79	13.58	102.84	86.88	-3.38
2016	124.12	122.16	16.58	105.41	98.42	-3.81
2017	146.58	123.34	0.97	109.75	84.14	-3.48
2018	154.75	126.19	2.31	112.71	81.54	-3.57
2019	170.13	132.87	5.29	115.23	78.10	-3.67
	as % of 2013 expenditure					as % of year average assets

Total return

The portfolio total return has been 51.17%. This compares to 45.53% from the FTSE All Share total return index and 41.56% from the M&G Index Tracker Fund Sterling A Acc, a typical index tracker fund. I can’t compete with the total return of global and US equity indices because of my preference for UK and Asian equities.

Year end	Total Return	Growth	Index	Growth	Tracker	Growth
2013	100.00		100.00		100.00
2014	103.14	3.14	101.18	1.18	99.69	-0.31
2015	102.28	-0.83	102.17	0.98	101.29	1.61
2016	118.24	15.60	119.29	16.75	116.54	15.05
2017	134.39	13.66	134.91	13.10	131.46	12.80
2018	125.72	-6.45	122.13	-9.47	119.69	-8.95
2019	151.17	20.24	145.53	19.17	141.56	18.27

Income growth

Income has grown by 56.94%. The portfolio income yield has increased from an annual rate of 3.82% in 2013 to 4.70% in 2019. This is calculated on the average asset value during the year.

Year end	Income	Growth	RPI	Growth	Income Yield
2013	100.00		100.00		3.82
2014	102.93	2.93	101.62	1.62	3.52
2015	111.26	8.10	102.84	1.20	3.89
2016	114.50	2.91	105.41	2.49	3.87
2017	135.22	18.10	109.75	4.12	4.13
2018	142.75	5.57	112.71	2.70	4.38
2019	156.94	9.94	115.23	2.24	4.70
	as % of 2013 income				as % of year average assets

Conclusion

My current main objective continues to be income growth rather than total return. Compound income growth is running at about 8% per annum. This is derived from increases in the dividends paid per share, from re-investing any unspent income, from re-positioning the portfolio towards higher yielding investments, e.g. high yield bonds and commercial property, and from remaining focused on the higher yielding stock markets in the United Kingdom and Asia. I have had to steer clear of lower yielding markets such as the USA.

Markets seem buoyant since the election but some concerns are ongoing and volatility in capital values is always a possibility. If that were to happen then I will aim to stay invested on the basis that any volatility would be short lived and the investment trusts I hold should be able to maintain or even increase their dividends.

Income growth has stalled a little in the last two months as I took the precaution of going global and also increased my cash holdings. I currently want to further raise my portfolio income but I expect to move towards more of a total return objective in the years ahead.