Reviewing the situation

Just over six months ago I wrote about the Brexit blues and how UK equities were relatively cheap compared to global and especially US equities. Since then UK equities have become even cheaper. This could be a value opportunity or a value trap. I’m now reviewing my 58% exposure to the UK against some possible alternatives.

As at 1 October 2019, I calculate that buying £1 of income is 32% cheaper in the UK than it is globally, and 39% 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), 3.13% for global trusts (HINT, STS, SCAM), and 2.80% for a US trust (NAIT).

The political and economic situation continues to be unstable as discussions about Brexit continue. There is much concern about whether we leave or postpone again, or remain, and whether we have a deal or not. There is also concern about an impending general election which could result in a change of government to one that is less supportive of business and of investors, to say the least. I don’t want to get into all that but I do want to review my investment situation. I want to have a plan ready in case I decide to reduce my UK exposure as events unfold.

I have traditionally had high exposure to the UK because I live in the UK. This could be described as home country bias. I maintained high exposure to the UK as my strategy became one of seeking income, and growth in income, because of the good availability of UK equity income investment trusts with good track records. Many are recognised as “dividend heroes” because they have increased their dividends for more than twenty years. Global trusts can also be “dividend heroes” but they are mainly growth trusts with lower dividend yields. Global equity income trusts are fewer in number, their dividend yields are mostly lower, and very few qualify as “dividend heroes”. Asia Pacific income trusts are also few in number and most do not yet have a twenty-year record.

My draw-down portfolio currently looks 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.

I wanted to have a plan that would reduce my UK exposure without overly reducing my income (net dividend yield). My highest income UK holdings are in property and bonds so I decided to leave those holdings unchanged. That meant that I would have to reduce my UK equity holdings. I decided that those could be reduced by about two-fifths and the proceeds re-invested about one-third in Asia Pacific and two-thirds in global trusts. I would sell 22% of my total portfolio. These possible changes look like this:

Investment Trust Sector	Portfolio %	UK %	Non-UK %
UK Equity Income	-21.92	-18.03	-3.89
Asia Pacific Income	7.40	0.13	7.27
Global Equity Income	14.52	0.00	14.52
Total	0.00	-17.90	17.90

The revised portfolio would then look like this:

Investment Trust Sector	Portfolio %	UK %	Non-UK %	NDY %
UK Equity Income	28.13	24.71	3.42	3.87
Asia Pacific Income	27.12	0.41	26.71	4.97
Global Equity Income	29.29	1.33	27.96	3.95
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	40.20	58.94	4.77

This revised portfolio would sustain my current income as the net dividend yield is virtually unchanged from 4.79% to 4.77%. It would reduce UK exposure to 40% and UK equity exposure to 26%. Given that the global funds would be about one-quarter invested in Asia Pacific then that would be the biggest exposure at about 34%. In seeking higher dividend yields I would need that investment in the higher yielding Asia Pacific income sector.  The three areas of North America, Europe, and Latin America and other, would each only have less than about 8% exposure in the overall portfolio. So, the portfolio would be reasonably diversified but with a greater exposure to Asia Pacific (34%) and UK equities (26%). In seeking income, I would continue to neglect North America.

These possible changes could be made in a relatively small number of trades. Some of the sales would likely incur capital gains tax but it may be best to incur that at current tax rates as these may rise. It may be that I will make some small moves to begin these changes in the next few weeks or months.

If I wanted to reduce my UK exposure any further then I would need to make more radical changes. Ignoring my current portfolio, I have prepared a possible global portfolio where UK exposure is reduced to below 15%, but a dividend yield of 4% is achieved. To create this portfolio, I would have to sell all my current UK trusts, but I could retain my Asia Pacific and Global trusts. 66% of my current portfolio would be sold.

Investment Trust Sector	Portfolio %	UK %	Non-UK %	NDY %
Global	18.00	6.32	11.68	2.30
Global Equity Income	37.00	1.71	35.29	3.96
Flexible	18.00	5.94	12.06	4.60
Asia Pacific Income	27.00	0.60	26.40	4.77
Total	100.00	14.57	85.43	4.00

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. I may have to decide whether it becomes appropriate for mine.