An end and a beginning, September 2022

September saw the end of the Queen’s reign and the beginning of the new King’s reign. Alongside that we saw the end of one Prime Minister’s time in office and the beginning of the new Prime Minister’s government. The combination of a new fiscal budget, monetary policy changes (quantitative easing), interest rate rises, and changing perceptions in financial institutions has led to much turbulence in the financial markets, especially for UK government bonds. Is this the final ending of the post lockdown bull market in the UK and the beginning of a new bear market?

I know that the world stock market, and especially the United States stock market, and the price of growth shares has suffered steep declines in recent months, but in 2022 the UK stock market and my portfolio had suffered much less. The FTSE All Share total return was only down -2.11% and my portfolio total return was a loss of only -1.62% for the eight months to the end of August. Including drawdown spending my portfolio capital was only down -4.02% from its peak in March. That changed in September.

September

The FTSE All Share Total Return index, my chosen benchmark, fell by -5.88% in the month, and has now fallen by -7.87% for the nine months of the year to date. My investment return for the month was a loss -7.20%. Cumulatively I have a loss of -8.64% for the year so far.

My individual holdings recorded an unweighted average share price movement of a loss of -14.79% for the year so far. My worst performers are a UK small company investment trust (-46.79%), a commercial property REIT ( -31.95%), and a UK equity income trust (-21.43%). My best performer is a global equity income trust that is up by +1.21%. The share prices of my other holdings have all fallen.

Capital

Starting from an index value of 100.00 at 31 December 2013, my capital is now 125.06, as shown in the graph above. This is a return to where I was in February 2021. It is -11.31% down from March’s peak, the high-water point for my portfolio. My capital value is now -8.50% below its ten-month average. There has been a decrease of -10.79% in the year to date. This is comprised of the following elements. Investment return of a capital loss of -12.21% and dividend income of +3.67%, totalled an investment return of a loss of -8.54%. Draw down expenditure deducted -2.25% during the year so far.

Income

Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach 6.88% at this month end, as shown in the graph above. This is a small dip from last month’s peak. My current portfolio dividend income yield is 5.50%, i.e., 6.88 divided by 125.06.

Investment changes

Unfortunately, one trading day after that budget and at a time of falling prices I had to sell some shares to fund my drawdown spending. The sale amounts to about three months spending and is about 0.8% of my portfolio. When sold the share price was down about 17% since the start of the year, so my realised loss amounts to only about 0.16% of my portfolio. Unrealised losses at present are much higher! This was my first sale to raise cash since April and could not be postponed for much longer. As it was those shares fell a further 4% before the month end, and a further 3% since then, at the time of writing.

Also, during the month dividends received in my tax-sheltered accounts were re-invested.

Portfolio

The table below shows the composition of my portfolio at the end of the month. Income yields on my property holdings are especially high, but I’m not sure that I want more exposure even at current low prices.

	Yield %	Capital %	Income %
UK	4.55	37.72	31.17
Asia Pacific	5.48	25.97	25.89
Global	4.62	18.46	15.48
Property	9.35	8.08	13.73
Bonds	8.62	8.67	13.58
Cash	0.73	1.09	0.14
	5.50	100.00	100.00

I also analyse the portfolio by the income or growth category of each holding.

	Yield %	Sectors
High Income	above 6%	Property, Bonds, Asia Pacific
Income	4.5% to 6%	UK, Global, Asia Pacific
Income & Growth	3% to 4.5%	Global, Asia Pacific
Growth	below 3%	UK, Asia Pacific

Dividend income yields have increased such that more holdings are in the 4.5% to 6% income category at this month end. In fact, 83.86% of my portfolio is now yielding 4.4% or higher. They give me 93.66% of my portfolio income.

	Yield %	Capital %	Income %
High Income	8.97	24.26	39.55
Income	5.16	45.83	43.01
Income & Growth	4.44	13.77	11.10
Growth	2.27	15.05	6.19
Cash	0.73	1.09	0.14
	5.50	100.00	100.00

Cash

My annual drawdown spending is now around 3.76% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are now sufficient to cover about four months of spending. In addition, dividends being paid out in cash each year from my dealing account are sufficient to cover about three months of spending. Not having much of a cash position means that I will need to sell some shares to raise cash again in the next few months.

Expenditure

Draw down spending was 63.12% of my portfolio income in the last twelve months which is consistent with the figure of 64.90% for the previous twelve months. Portfolio income rose by 1.57%. Expenditure fell by -1.22%, so was not much changed. Grocery costs were up only 2% up. Electricity and gas costs were lower because of overestimated bills in the previous year. Discretionary choices remain the dominant factor in our spending at present.

RPI and CPI inflation reached annual rates of 12.30% and 9.81% at the end of August. This is beginning to impact on our grocery bills. This September was 11.46% higher than last September. Energy bills are rising but the main impact on us will begin with the November bill for October charges after the increase in the price cap. We have put on the heating but are aiming to keep the temperature at 18 degrees Celsius. Currently we are paying for energy on a month-by-month basis according to our actual meter readings. We expect annual costs in the year from 1 October 2022 to be more than double our costs for the 2019. This includes the impact of government capping prices and providing £400 of support. Without that it would have been at least treble our 2019 costs.

Conclusion

It was disappointing to have to realise a loss on selling shares to cover our drawdown spending. That is the price of staying fully invested with only a minimal cash holding. After a difficult month my portfolio capital value is at a twenty-month low with probably more difficulties ahead. I am hopeful that my portfolio dividend income will continue to be sustained but I will need to be ready to respond if any of my dividends are cut. We spend less than the current portfolio income and we can spend a bit less if we choose to. Given all that I am not overly concerned about a hopefully temporary fall in share prices. I have seen that happen before on many occasions.