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 Cash deposits were withdrawn in 2015 and 2016 to make up the income shortfall against expenditure.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.