Investing for the tenth decade – the results

Source: Pixabay

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%.

Source: Pixabay

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 endCapitalGrowthRPIGrowth
2012100.00100.00
2013101.471.47102.672.67
2014106.575.03104.341.62
2015105.64-0.87105.591.20
2016105.14-0.47108.232.49
2017113.037.49112.684.12
2018102.17-9.59115.722.70
2019119.0516.51118.272.21
2020118.92-0.10118.270.00

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 Cash deposits were withdrawn in 2015 and 2016 to make up the income shortfall against expenditure.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 endIncomeExpenditureSpend %
2013100.0052.3752.37
2014102.6782.7780.62
2015121.55153.89126.61
2016161.39191.57118.70
2017165.48137.8883.32
2018163.36148.0090.60
2019173.29159.2991.92
20204.3513.44309.26
Total992.08939.2194.67
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 endTotal ReturnGrowthIndexGrowthTrackerGrowth
2012100.00100.00100.00
201399.75-0.25120.8120.81121.2621.26
2014104.344.60122.231.18120.89-0.31
2015106.001.59123.430.98122.831.61
2016109.863.64144.1016.75141.3215.05
2017120.069.29162.9813.10159.4112.80
2018110.82-7.70147.54-9.47145.15-8.95
2019132.1719.26175.8219.17171.6718.27
2020132.640.35177.480.95172.170.29

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.

Investing for the tenth decade

Source: Pixabay

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.

Getting Minted One Year On

Source: Pixabay

I’m a financially independent, 50-something, UK based, man who wants to share what I have learned. It’s one year on since I started this blog. I’ve been a bit quiet lately because of some distractions in the rest of my life, but I’m hoping to write more soon.

I’m pleased that I have kept it going for a year and have been able to express my point of view on certain topics. I’ve written 26 posts and garnered over 3,000 views. I’d like to think my writing has been of interest and has maybe been helpful to some readers.

On the theme of getting minted I’ve suggested vision, and commitment , and have discussed millionaires (twice ).

On personal finances I’ve discussed being minted , being a family, giving up work, owning a car , paying for utilities, and buying my first property.

On investing I’ve covered generating investment income, investing a lump sum, index tracking, the safe withdrawal rule (twice), stock market falls, manager risk , and where to invest.

I’ve reviewed my own investments at the end of June , August and December .

I’ve discussed my changing investment approach to Brexit, to the UK, to going global, and coming back to the UK.

I’ve struggled to write as much as I feel I should say, and as much as I feel I have to say. I feel I have been on the path to financial independence and beyond for over 35 years now so I have formed many views on these topics which I will try to put into words in future posts.

Financial review at 31 December 2019

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%.

Source: Pixabay

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 endCapitalGrowthRPIGrowth
2013100.00100.00
2014100.180.18101.621.62
201596.05-4.13102.841.20
2016106.8711.27105.412.49
2017117.309.77109.754.12
2018105.88-9.74112.712.70
2019122.6915.87115.232.24
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 end4% RuleIncome
20133.43
20144.003.53
20154.063.81
20164.113.92
20174.224.63
20184.394.89
20194.515.38
20204.61
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 endIncomeExpenditureGrowthRPISpend %Expenditure
2013108.40100.00100.0092.25-3.52
2014111.5892.27-7.73101.6282.69-2.91
2015120.61104.7913.58102.8486.88-3.38
2016124.12122.1616.58105.4198.42-3.81
2017146.58123.340.97109.7584.14-3.48
2018154.75126.192.31112.7181.54-3.57
2019170.13132.875.29115.2378.10-3.67
as % of 2013 expenditureas % 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 endTotal ReturnGrowthIndexGrowthTrackerGrowth
2013100.00100.00100.00
2014103.143.14101.181.1899.69-0.31
2015102.28-0.83102.170.98101.291.61
2016118.2415.60119.2916.75116.5415.05
2017134.3913.66134.9113.10131.4612.80
2018125.72-6.45122.13-9.47119.69-8.95
2019151.1720.24145.5319.17141.5618.27

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 endIncomeGrowthRPIGrowthIncome Yield
2013100.00100.003.82
2014102.932.93101.621.623.52
2015111.268.10102.841.203.89
2016114.502.91105.412.493.87
2017135.2218.10109.754.124.13
2018142.755.57112.712.704.38
2019156.949.94115.232.244.70
as % of 2013 incomeas % 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.

Back in the UK

Source: Pixabay

Last month I wrote about beginning to go global as I increased my non-UK exposure in response to the unstable political and economic situation. The impending general election could have resulted in a change of government to one much less supportive of business and of investors. In early November therefore I reduced my UK exposure from 58% to 52% as a precaution and I had plans ready to reduce this further depending on the outcome. In early December I sold a little more of my UK holdings in order to hold more cash.

As we now know such fears of a Labour government or hung parliament have proved to be unfounded and the Conservative government has won a landslide victory. In my view such a decisive outcome means that both the Brexit stalemate and the Labour threat are removed. Some Brexit uncertainty remains as to the shape of a future trade deal, but overall the UK is now a better place to be invested. Having reduced my UK exposure, I am now cautiously increasing it.

One week after the polls closed the FTSE All Share total return index is up by 4.2%. My portfolio has risen by 3.6%. This is acceptable to me given that I have some exposure to bonds and property and to international equities and that my UK exposure had been reduced to 52%.

Even after this “Boris bounce” following the general election UK equities are still relatively cheap compared to global and US equities. As at 19 December 2019, I calculate that buying £1 of income is 31% cheaper in the UK than it is globally, and 34% cheaper in the UK than in the US. The same calculation also shows the UK to be only 5% cheaper than Europe and only 9% more expansive than the Asia Pacific region. This is based on the dividend yield of selected income investment trusts. These show an average yield of 4.80% for Asia Pacific trusts (HFEL, AAS, SOI), 4.40% for UK trusts (EDIN, CTY), 4.20% for a European trust (JETI), 3.03% 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 now I do want a few more of my eggs in that basket.

The latest information on these investment trusts can be found at the AIC website under find and compare investment companies. You can then filter on a particular AIC sector or else search a trust name or TIDM code (e.g. CTY).

After my changes last month my portfolio looked like this:

Investment Trust SectorPortfolio %UK %Non-UK %NDY %
UK Equity Income38.7833.095.693.67
Asia Pacific Income21.900.3221.584.98
Global Equity Income21.091.6819.414.11
Property - UK Commercial9.029.020.007.67
Debt - Loans & Bonds8.427.391.037.65
Total99.2151.5147.704.76

Note: Data is from my portfolio and from the AIC website as at 7 November 2019.

I now intend to leave my bond and property holdings unchanged but to reduce my global and Asia Pacific exposure and increase my UK exposure. Having added certain trusts in the global and Asia Pacific sectors just last month I intend to keep all of my holdings in these sectors but to trim the size of some of them. My non-ISA holdings are all in UK trusts and will not be changing. My ISA holdings are spread across three platforms and my increase in UK exposure will ensure that each platform has some UK exposure as well as some global and/or Asia Pacific exposure. I have initiated some trades this week and am now awaiting confirmation of them, but they should result in an increase in UK exposure of about 5%. This will bring my UK exposure roughly back to where it was two months ago. Arguably I should have not made any changes before the election, and I would not then need to make any changes now. That, however, is hindsight and I don’t regret my approach to this. This situation actually served as a good prompt to review my portfolio and consider how I would go global with my portfolio if that were needed.

All these portfolio changes and the raising of cash levels will likely curb the income growth from the portfolio in the last two months of this year. Income growth has been more of an objective for me than capital growth over the last six years. In the new year I expect to make further progress on that income growth once these portfolio changes are behind me. I expect UK, Asia Pacific and selected global equities to continue to provide good income and good income growth, so I will continue to invest in them. I may add further to my UK position as further events unfold. Although subject to some Brexit uncertainty continuing as trade talks proceed, I think UK equities will continue to make progress.