Last month I wrote about reviewing the situation. I was reviewing my 58% exposure to the UK against some possible alternatives. I was doing this because of the unstable political and economic situation arising from the Brexit impasse and the prospect of a general election. I wanted to have a plan ready in case I decided to reduce my UK exposure as events unfolded.
The general election could result in a change of government to one that is much less supportive of business and of investors. I’m surprised that there has not been much commentary in the mainstream media about the possible need to diversify away from the UK because of this. Maybe there is some complacency there. The odds of a Labour government may be 20/1 at present but I believe I should consider this as a possible black swan event.
UK equities are still relatively cheap compared to global and US equities. As at 13 November 2019, I calculate that buying £1 of income is 33% cheaper in the UK than it is globally, and 37% cheaper in the UK than in the US. This is based on the dividend yield of selected income investment trusts. These show an average yield of 4.60% for UK trusts (EDIN, CTY), 3.10% for global trusts (HINT, STS, SCAM), and 2.90% for a US trust (NAIT). I am still persuaded that UK equities offer good value but I don’t want too many of my eggs in that basket.
At the end of September my draw-down portfolio looked like this:
| Investment Trust Sector | Portfolio % | UK % | Non-UK % | NDY % |
|---|---|---|---|---|
| UK Equity Income | 50.05 | 42.74 | 7.31 | 3.96 |
| Asia Pacific Income | 19.72 | 0.27 | 19.45 | 4.86 |
| Global Equity Income | 14.77 | 1.33 | 13.44 | 4.50 |
| Property - UK Commercial | 8.83 | 8.31 | 0.52 | 8.00 |
| Debt - Loans & Bonds | 5.77 | 5.45 | 0.32 | 7.50 |
| Total | 99.14 | 58.10 | 41.04 | 4.79 |
Note: Data is from my portfolio and from the AIC website as at 26 September 2019.
Trusts can hold some investments outside of their sector, e.g. a UK trust can hold up to 20% outside of the UK, which is why I needed to look into the geographical distribution of each trust in preparing this summary.
My first actual step just over three weeks ago was to reduce UK equity income and increase bonds. Last week I made further reductions in UK equity income and increased global equity income and Asia Pacific equity income. Some of my global and Asia Pacific selections had lower dividend yields but the increase in bonds has maintained my dividend income at about the same level. I was constrained in these actions by about 26% of the portfolio being in non-ISA accounts and all invested in the UK equity income sector where I didn’t want to incur capital gains tax on some substantial unrealised gains. Also, these non-ISA holdings that I have retained are in lower yielding trusts so my UK dividend yield percentage is now lower.
The portfolio now looks like this:
| Investment Trust Sector | Portfolio % | UK % | Non-UK % | NDY % |
|---|---|---|---|---|
| UK Equity Income | 38.78 | 33.09 | 5.69 | 3.67 |
| Asia Pacific Income | 21.90 | 0.32 | 21.58 | 4.98 |
| Global Equity Income | 21.09 | 1.68 | 19.41 | 4.11 |
| Property - UK Commercial | 9.02 | 9.02 | 0.00 | 7.67 |
| Debt - Loans & Bonds | 8.42 | 7.39 | 1.03 | 7.65 |
| Total | 99.21 | 51.51 | 47.70 | 4.76 |
Note: Data is from my portfolio and from the AIC website as at 7 November 2019.
There have also been some dividends re-invested and some small movement in share prices that is reflected in this table.
The changes between late September and now are analysed in this table:
| Investment Trust Sector | Portfolio % | UK % | Non-UK % |
|---|---|---|---|
| UK Equity Income | -11.27 | -9.65 | -1.62 |
| Asia Pacific Income | 2.18 | 0.05 | 2.13 |
| Global Equity Income | 6.32 | 0.35 | 5.97 |
| Property - UK Commercial | 0.19 | 0.71 | -0.52 |
| Debt - Loans & Bonds | 2.65 | 1.95 | 0.70 |
| Total | 0.07 | -6.59 | 6.66 |
These changes represent about one-third of what I was contemplating. Overall the reduction of UK equity income sector by 11.27% has resulted in a reduction of only 6.59% in my UK exposure. Total UK exposure of 51.51% rather than 58.10% does give me more comfort against the possible headwinds. I also maintain good exposure to the UK in case my concerns prove unfounded. I am not yet ready to reduce my UK exposure to below 50%.
This exercise has forced me to widen my investment trust holdings in the Asia Pacific income and global equity income sectors and leaves me poised to increase these holdings in the future if necessary. The difficulty in future may be in selling the non-ISA UK holdings and incurring capital gains tax, and in selling the UK property and bond holdings and thereby reducing my portfolio income. I don’t want to take these steps if I don’t feel that they are absolutely necessary.
Depending on the situation after the election on 12th December I could be making further increases in my global exposure or alternatively increasing my UK exposure and in effect reversing these recent changes. This is my record of my current thinking about my investment situation and it may not be suitable or appropriate to anyone else’s circumstances.