October saw the implosion of the Truss-Kwarteng economic policy in the UK. Markets continued to drift mostly downwards in the first half of the month. I was, however, inspired to make some portfolio changes that further reduced my holdings in UK equities.
The FTSE All Share Total Return index, my chosen benchmark, rose by +3.11% in the month, but has now fallen by -5.00% for the ten months of the year to date. My investment return for the month was a loss of -0.13%. Cumulatively I have a loss of -8.77% for the year so far.
My individual holdings recorded an unweighted average share price movement of a loss of -15.15% for the year so far. My worst two performers continue to be a UK small company investment trust (-45.15%), and a commercial property REIT ( -28.86%). My best performer continues to be a global equity income trust that is up by +5.54%. That is my only holding where the share price has risen in the year to date.
Starting from an index value of 100.00 on 31 December 2013, my capital is now 124.52, as shown in the graph above. This is a return to where I was in January 2021. It is -11.18% down in the year to date. Investment return of a capital loss of -12.56% and dividend income of +3.90%, results in a loss of -8.66%. Draw down expenditure deducted a further -2.52% during the year so far.
Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach 6.91% at this month end, as shown in the graph above. This is a small rise to a new peak. My current portfolio dividend income yield is 5.55%, i.e., 6.91 divided by 124.52.
When you have no control or influence over political and economic events you can at least choose your own response to them. In the time between the Chancellor’s sacking and the Prime Minister’s resignation my response to the events then unfolding was to reduce my home bias. The UK stock market represents about 4% of the world stock market so if you live in the UK and hold more than that in your portfolio then you are said to have a home country bias. I used to hold over 80% of my portfolio in the UK stock market but have reduced that over the past eight years such that it was about 38% in September. One of my UK equity income investment trust holdings has continued to disappoint. It’s share price was -21.43% down in the nine months to the end of September. I sold a position in it in a tax-sheltered account that represented about 4.5% of my portfolio. I used that partly to top up a commercial property holding but mostly to add a new property holding that has investments in the UK and in Europe. This could be risky with interest rates rising. These property holdings are out of favour now, but I am hopeful for their prospects. In the meantime, I am collecting nearly an 8% dividend yield on my property holdings. I still have a position of nearly 4% in that same UK equity income investment trust in my trading account. I will sell that over the next few months to build up my cash position and maybe to fund next year’s ISA. I won’t incur any Capital Gains Tax on disposing of it given its recent performance. The losses will help reduce any Capital Gains Tax liabilities on any other trading account disposals I do. My UK equity position is now down to 34% and could soon fall to 30%.
Also, during the month dividends received in my tax-sheltered accounts were re-invested and dividends received in my trading account were paid out.
The table below shows the composition of my portfolio at the end of the month. I now have more exposure to property and less exposure to UK equities.
|Yield %||Capital %||Income %|
I also analyse the portfolio by the income or growth category of each holding.
|High Income||above 6%||Property, Bonds, Asia Pacific|
|Income||4.5% to 6%||UK, Asia Pacific, Global, Property|
|Income & Growth||3% to 4.5%||Global, Asia Pacific|
Nearly 84% of my capital is now yielding 4.4% or higher and that gives me over 93% of my portfolio income.
|Yield %||Capital %||Income %|
|Income & Growth||4.11||10.75||7.95|
My annual drawdown spending is now around 3.87% 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 only about three months of spending. In addition, dividends being paid out in cash each year from my dealing account are sufficient to cover only about three months of spending each year. I will soon need to sell some shares to raise cash again.
Draw down spending was 62.34% of my portfolio income in the last twelve months which is less than the figure of 67.73% for the previous twelve months. Portfolio income rose by 2.95% as more dividend income was received. Expenditure fell by -5.24% mainly because discretionary spending this year was less than last year. Luxury and discretionary spending are about 60% of our spending so the choices we make on this are the dominant factor in determining our total expenditure.
Essential spending was also lower because car service costs and income taxes were lower this year. Groceries are our biggest item but were only up 3% year to year. Energy costs were lower because we were overcharged by the energy suppliers last year as they went bust. Insurance costs were reduced by 27% as we changed insurers, but petrol costs rose by 119%. Neither of these two are a big part of our spending.
RPI and CPI inflation reached annual rates of 12.64% and 10.14% at the end of September. This is now having an impact on our weekly grocery bills which are up by more than 10% compared to one year ago. We are paying for energy on a month-by-month based on our actual meter readings. The heating is on but is set at 18 degrees Celsius. We are still waiting for the first big bill to arrive. The cost of living is certainly no crisis for us at the moment.
I think the events of last month were a useful prompt for me to reduce my bias to the UK and to drop an investment that had disappointed. Rather than increase my international holdings I have chosen to increase my position in property because that seemed to offer better value and perhaps a timely opportunity. I still retain enough exposure to the UK to benefit from any recovery in the UK stock market.