ISA update: How our £10,000 income fund portfolios performed

In the March 2017 issue of our sister magazine Money Observer, the challenge of trying to generate a yearly income of £10,000 from a selection of actively managed funds was set.

Three portfolios were built to cater for different risk tolerances. The asset allocation weightings were decided following consultations with financial advisers.

When we crunched the numbers to see how each portfolio had fared over the year from 23 January 2017 to 23 January 2018, we found that all three put in a respectable showing.

Higher risk

Our higher-risk portfolio’s income was £328 short of the £10,000 goal, but the capital return more than compensated. Overall, the total return stood at 14.1%, against 11.5% from the MSCI World index over the same period. With 75% in equity funds, the aim was to bring home the biggest returns in a rising market, and this weighting paid off.

Most financial advisers stress that retirees should ideally draw only the income produced by their pension investments – the natural yield – rather than strip away capital. This is a good discipline to follow, but those who don’t want their income to fluctuate from year to year can always top up any shortfall with capital in good years such as the past year. In any case, in falling just short of our target, the portfolio has largely done its job in terms of income generation.

Our higher-risk portfolio was yielding 5% last March. But that was before markets moved upwards; the overall yield will be lower this year. We would suggest a higher weighting to alternative investments, perhaps via an infrastructure investment trust, where premiums have cooled since Carillion’s collapse.

Medium risk

With our medium-risk portfolio we attempted to strike a balance with our fund choices by adopting a more diversified approach and opting for a reduced equity content. Overall, as the performance table shows, each holding pretty much did its job, although from a total return perspective Fidelity Moneybuilder Dividend, up just 5.2%, disappointed.

Another holding maybe worth replacing is Jupiter Strategic Bond. The fund has been a Money Observer Rated Fund since 2013, and we continue to like it, because of the flexible mandate and skill of manager Ariel Bezalel. But the bond’s yield of 3.4% is lower than other bond funds offer, so a fund switch could boost the income generated by the portfolio.

Lower risk

The lower-risk portfolio also delivered the goods, having generated more than £10,000 in income and produced a total return of 6.8%. It included four multi-asset income funds in order to boost diversification.

However, this raises a risk of holding overlaps, a point made by financial planner James Norton at Vanguard. Norton says many funds are similar enough to make them seem a bit superfluous. He goes on to warn: “There might not be any harm in owning similar funds, but overlapping share ownership could increase your exposure to a long list of companies, meaning that your portfolio isn’t as diversified as you may have assumed.”

Looking ahead, if this were a ‘live’ portfolio, we would consider whether each multi-asset fund is individually adding value. If too many holdings overlap, a portfolio is essentially replicating a particular market, in which case it makes more sense to buy a cheap tracker or ETF.

Source: Money Observer     Past performance is not a guide to future performance

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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