My SIP conundrum, tick tick tick, my time to save for retirement is running out! - Lets

Our last post on investing was some time ago and was about Astrazeneca, titled Astraceneca a slow motion train wreck? The company wasn’t derailed after all. Over time the big pharma stocks always go in an out of fashion, and, normally it comes down the the nagging problem of the ‘patent cliff’. Currently Astra Zeneca is riding high in the historic trading range / trend, and, GlaxoSmithKline has fallen out of favour. If I was buying either it would be some Glaxo for the big yield. This post isn’t about Pharma shares, but, self invested personal pensions (SIPPs), about my SIPP.

We’re all getting older. I decided to act accordingly and check out my retirement planning or lack there of. Luckily I had a pension that I contributed to in my early 20s that I haven’t touched in 10 years. So how have I decided to invest my very modest pension pot?

Lacking any company pension I really had two choices; either a stake holder pension or SIPP. I have chosen a SIPP because it gives me much more control over my planning, giving me the choice of investing in individual company shares, stocks, and different sorts of collective investment funds (investment trusts, unit trusts and OEICs).

So, how did I decide to spend my pot of money?

Top down or bottom up selection?

Both actually. Starting with a top down approach to allocating assets I focused on big economic trends, and the threat to the world economy from inflation or deflation. Looking from the bottom I decided to base individual stock selection on tried and tested techniques.

WORDS OF WARNING. Any financial adviser will tell you that choosing individual stocks for your pension is risky. It would be off the scale of most model portfolio analysis by financial institutions like Hargeaves Lansdown or Close Brothers. Collective investment funds are preferred by these companies, and it’s not just because the fees they receive from investment funds is how they make money. Collective investments help to reduce risk of price volatility (namely how much your pension fund value will increase or decrease in value). Selecting individual company shares increases the risk that your fund value can change rapidly due to the ebb and flow in fortunes of just one or a limited number of companies. This can also be said if you choose company shares or investment funds that focus on one particular sector or geographical region. As ever the mantra is “do your own research”.

So why am I doing this? I have some faith in my ability to get results, and, I want my fund to perform better than that of a normal pension fund. Reduced regulation in the pension industry has given us so many more options in the retirement than retirees have ever had. The DIY approach is not uncommon.

A friend of mine who has a SIPP with stock broker got financial advice on how his fund should be invested. The firm ask him some questions, ran the details through their model portfolio system, and he received a recommendation. Good so far, but, there where so many fund recommendations that any money invested would be spread between many many holdings.

Understandably the firm is being very cautious will my friend’s money as standard. So what’s the problem? With so many different holdings, with a wide geographical spread (which he had asked for), the fund performance would most likely become a closet tracker for the world economy. This risks low fund growth, but, reduces volatility. A question some people are asking is why pay fees for investment funds, or fees for SIPPs, or professional services, when a tracker of the FTSE world index or an exchange traded fund, will do the same thing for less than half the price?

I am going to have less holdings with careful asset allocation, and sector allocation, in order to juice my potential returns, and reduce risk.

Central banks have been intervening in the economy in a big way. Anyone interested in history may like to know that the current situation in the economy has be building up since President Richard Nixon dropped the gold standard in 1971 one. Money was fixed in price to the value of gold (in the beginning on a ratio of 1:1). To cut a long story short this led to the gradual and continuous increase of the use of credit in the world economy. Many other events along the road have and will affect current conditions. A consequence of the central bank economic stimulus is that the Government has money to spend on big infrastructure projects – definitely a theme that I have chosen to tap into.

The aim of central bank intervention is to stablise the economy. To prevent short lived bouts of deflation from turning into 1930’s style depression. When the rate of deflation increases the price of everything drops, but, the amount of debt does not. As inflation erodes the value of debt and helps governments reduce the value of their debts it is more likely that central banks will attempt to promote inflation.

Present economic conditions engineered by central banks are favourable to small firms with innovative ideas who will be the stars of tomorrow. A theme my SIPP needs to tap into.

Inflation / deflation
As I do not have a crystal ball I am trying to protect my portfolio against both inflation and deflation. Due to the high level of Debt among countries in Europe, the USA, and China, deflation and eventually depression are the biggest threat. Central banks have prevented this so far and will not relent until they get inflation.

The Bank of England Pension fund invested a big proportion of their assets in inflation link gilts in 2008. Now there’s an indication of their long term intentions if ever there was one.

Even after all the central bank stimulus around the world I do not think the there will be a problem with run-way inflation like six plus percent. The spectre of inflation will be kept at bay (IMHO) due to low demand caused by high debt levels, slow wage growth, excess capacity in the economy. Excess capacity is very difficult to measure and economists calculate the output gap, which is always getting revised. Something that will be having a big impact on this and potential future prospects for inflation is globalisation. People and countries are more connected than ever. Firms can outsource manufacturing production, customer service, and more to places like India and China. Excess demand can be taken up by these other countries, especially since China is going through a slow down and they have built many factories, some of which lie empty. India don’t have as many vacant factories but have a massive working age population. Political changes may affect this dynamicly, possibly Brexit or re-shoring of business activities to the UK for political point scoring.

Technology .
Technological advancement has been rapid in recent times. A rise of computing power and reduction in the size of computer chips (think Moore’s Law) has led to the use of Big Data, the rise of the robots, and advances in medical procedures. When technology meets the UK Highways Agency you get ‘Smart Motorways’. Not to mention robots (thanks DARPA) and self driving cars.

The rise of ASIA. In particular China’s rise to super power status has been well documented. They have been the world’s manufacturing base for years. China’s central bank have helped this in a number of ways. Less by intervention and more by central planning, which is more in touch with their political and economic model. A large proportion of the increase in credit originating from the USA has ended up going to China for them to make things for sale in the USA. This has led to an increase in China’s foreign currency reserves to an almost in comprehensible 3.5 Trillion dollars. It’s fair to say that they’ll be looking to protect that money as much as possible; using the powers of the central bank and by investing. A major consequence of this is that they have the cash to spend on massive infrastructure projects like the ‘one road one belt ‘ plan modeled on the trading routes of the old silk road.

Another trend developing in Asia is companies starting to share out more profits as dividends. As their markets mature this trend should continue to match the pay out levels shown by European and American markets.

Global warming is having a big impact on current and future trends. Affecting economies, demographics, social issues, health issues and geopolitics.


Macro economic threats is what I am referring to here, like, geopolitical threats that include trade wars, currency disputes, and actual war. There are also black swan events. If you are interested check out black swan theory that was developed by Nassim Nicholas Taleb. Basically in this context I am protecting my pension against unknown events (or threats) by using value investing techniques and by carefully selecting my investments. Companies with sold balance sheets that can continue to pay dividends shouldn’t go down as much as other investments, but, even if they do go down as much as the market as a whole I still receive some income.

Asset allocation

In simple terms the rule of thumb for allocating assets is one third bonds (corporate and government), one third commodities (like gold), and one third shares in listed companies.

I have adapted this model to take into account may age and time horizon. As such, I have ignored bond funds or investing in any bonds government or otherwise, as this asset class could be due for a multi year drop. Bond markets are in bubble territory due to the big trend of central bank intervention and the fact that pension funds are forced to buy a certain percentage of bonds regardless of the potential returns. Pension funds buy more bonds as you get closer to retirement, normally within 5 years.

The timing of entry and exit from bond markets would be crucial, something I don’t have the time or knowledge for. Something I would consider is inflation linked gilts or any other bond with indexation. Returns would be low but it provides good insurance against run away inflation – which could be the final outcome of central bank intervention.

I am going to avoid holding physical commodities or ETFs that hold precious metals like gold. Instead I will invest in investment funds or directly in companies involved in the commodities industry.

One third of my total pot will go into growth (where I expect prices to rise) based investments and two thirds into income and growth based investments (where I want a good dividend and some modest growth). My rational for this is that companies with solid dividend payments that should grow in times of inflation and hold ground in times of deflation will protect me nest egg. Ever heard the adage “Time in the market is more important than timing the market”, I hadn’t either until I looked at research by Barclays bank. The Barclays Gilt Study is available for free. Simply it says that it’s better to be invested in income producing assets over the long term and that they produce a better return than tryin to time markets. Timing markets is a gamble so why bother. They have 114 years of data to prove it. Although, If I have the funds available and some charts to look at I will attempt to time my entry.


Price charts for the commodities sector tell a grim story. Prices have been declining for years now, after what some coined the commodities super cycle of the early 20th century. My bet is that this could be a mid cycle down turn in a large up trend. Why? China’s cash mainly and their plans to build mag-lev trains, high ways and telecommunication from China to Europe. They will need commodities on grand scale for this.

Both Oil companies and large minding companies are out of favour currently and have high dividend yields. There could be some good opportunities in the commodities sector.

Treaties like the Kyoto Protocol have set targets for CO2 reduction that countries are starting to take more seriously. Wind power and solar do work. Some countries are doing this successfully. Other countries like China, depend heavily on coal for power stations, and needs to reduce emissions in a big way and fast. Nuclear power is one way to meet strict climate targets. Nuclear power stations need Uranium, and there will be many more Nuclear power stations coming online in the next 10 years, adding a third more depend to the Uranium market.

Uranium prices have also been in the dumps for years, especially as Japan turned their power stations off after the Fukushima disaster. Now Japan is turning their power stations back on. They have no other choice to meet the demand of their peoples’ power needs and to meet climate targets. During times of continual price reduction in commodities production drops and under performing mines are closed. When demand returns it takes time to increase production again, which causes prices to rise significantly. China and India will be a big source of Uranium demand. India has signed a deal with President Obama regarding supplying Uranium. Uranium prices will have to rise in the next 5 years and will probably start in 2017.

Individual holdings

Neil Woodford was a very good fund manager for Invesco and produced consistently good returns. My broker promoted his new funds including the CF Woodford Equity Income fund which has a similar ethos to the Invesco fund he used to run. Most investments made by the CF Woodford Equity Income fund are based in the UK and are in blue chip income producing companies, giving me income and growth. Woodford also invests a small amount of his funds into early stage businesses, some of which are listed on stock markets, others not. The Equity income fund is a unit trust and I have chosen accumulation units so that the income is reinvested into units of the fund.

Small early stage companies are the most dynamic part of the economy, with innovative products and services, potentially providing industry changing ‘flash points’. Governments and central banks are helping to nurture these companies to aid job growth whilst they begin cutting back on public spending. In the broadly supportive environment for small companies another of Woodford’s funds has made it into my portfolio. Woodford Patient Capital Trust was launched in 2015. Initially £200 was raised at launch that has gone into larger companies such as Legal & General, AstraZeneca, GlaxoSmithKline, and Rolls-Royce. The income from these investments will cover the costs of running the fund. Over time 75% of the portfolio is being invested into exciting ‘early stage’ and ‘early-growth’ companies. Another word of caution: about investing in two funds by the same manager, if Neil Woodford gets it wrong, or if he becomes ill and another manager takes over, then I am over exposed. Why did I take this risk? Woodford Patient Capital trust was just being launched and was getting lots of publicity, and I knew it was going to do well from the off (sorry for using gambling terms, but, check the website!!). Anyway, it did do well, and, I think it is the sector to be in.

Woodford Patient Capital trust is perfect for my aim of have one third of my pension invested in high growth companies. Investing in early stage and un-listed companies is massively risky. No one should be gambling your pension money except professionals working full time. Woodford is the man for the job.

So far so invested in the UK. So, how am I getting exposure to the Asian Tiger? Two funds, J O Hambro Japan Dividend Growth and Fidelity Asian Dividend. Scott McGlashan, the manager of JO Hambro Japan Dividend growth believes “out-of-favour stocks with modest valuations, strong balance sheets, high cash flows, diverse earnings and good returns on capital lead to long-term outperformance”. It is a small fund again investing into smaller companies with the ability to increase dividends. McGlashan has a good track record of delivering long term performance. Taking a top down view of this selection Japan seems like a good place to invest as it’s stock market as a whole has been very undervalued. Central bank stimulus is also helping revive markets in Japan which should bode well for future growth in dividends and capital value.

Fidelity Dividend Growth is another small fund investing mainly in emerging Asian countries like China and also in Australia. With a focus on stable but growing dividends with a long term view of capital appreciation it taps into the larger theme of Asian companies increasing dividend yields.

Next on to commodities. This has been a terrible market to invest in. Time for another adage ‘ there is blood on the streets’ in this sector. My choice of investment here has been the BlackRock Commodities Income Investment Trust which had a tempting yield at time of purchase. It hasn’t stopped the price falling further, but, it’s got me thinking about wise words from Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, who said “The time to buy is when there’s blood in the streets.” The Rothschild’s have done alright out of this, and it is the ultimate in contrarian investing, buying when no one else would. Here is why I am going to continue adding to this investment. It had a good yield before but now the yield is even better. The fund invests in mining and energy sector. It top holdings include some of the biggest and best dividend paying oil companies and mining companies who have solid balance sheets. Oil and commodities is a massively cyclical industry. Both could currently be at the bottom of the cycle. If central banks push for inflation in their domestic economies the price of commodities should go up. Catalysts for beginning the up phase of this cycle include China’s massive infrastructure spending plans and an increase in credit expansion from the banks, probably in 2019.

What about individual holdings in companies?

Warren Buffet started his investment funds by investing in Utility companies. Water, electricity and waste disposal markets are heavily regulated and also protected by government. Governments regulate the market in a way that enable the utility companies to invest in infrastructure and make profits to pay dividends. Dividends tend to be stable because of this. Following Buffet I have invested in SSE plc. They intend to increase their dividend at the same rate of inflation or above.

TT Electronics make and distribute state of the art sensors for the industrial, transportation, aerospace, defense and medical markets. Sensors are critical to the process of collecting data, for new medical devices, or for the sensors in cars that make automated parking possible. What’s more, automated cars on on the horizon and closer than you think! The USA is embracing this trend and are standardising testing regulations across the country indicating that this is something that they intend to adopt in a big way. Expect the first changes to disrupt things like the taxi industry and public transport. A town in Switzerland called Sion will be conducting a two year trial of self-driving minibuses. Canadian energy resource company Suncor Energy Inc plan to phase out human drivers almost entirely by 2021. Mercedes are testing autonomous trucks on Nevada’s highways. Mercedes is one of TT electronics customers.

Another trend mentioned earlier is the UK Government’s commitment to infrastructure spending. One example is ‘Smart Motorways’ that use technology to manage congestion. Being able to drive on the hard should, variable speed limits and gantries with displaying signs with a red ‘X’: these are smart motorways. They are being rolled out across the UK. Construction companies Morgan Sindall Group plc and Costain plc should benefit from these trends allowing them to increase their profits and dividends.

European economies performed badly the last few years. Saved from a deflationary slump by various central bank stimulus. On the whole European Stock markets are valued attractively and will hopefully respond well to the stimulus provided. I made two investments following this theme. TT Electronics, mentioned above, should benefit from increased car sales and demand for instruments in the health care sector. For instance they sensors go into high end Mercedes Vehicles. Second; is the Ossiam Shiller Barclays CAPE Europe ETF, created by Professor Robert Shiller. Using the price earnings ratio to select which European countries to invest in. Shiller’s method of calculating PE uses earnings over the last 10 years and is designed to focus on long term trends. The ETF invests funds into undervalued European stock markets, like, Spain, Greece, etc. Launched in 2015 there is not much performance history available for this fund at present and I think any expectation of returns need to be taken over the longer term. Due to the philosophy of this fund it should have limited volatility in case of crisis and help reduce risk in my pension fund.

Last word on my investment thesis

I will make use of;

‘pound cost averaging’ by investing regularly in my investments even if they have dropped in value. A type of doubling down, but, but it does work.

Albert Einstein liked it; “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” He also said it is a miracle. I gotta get me some of that. Compounding, by reinvesting my portfolio income. Automatically reinvesting dividends is something my broker does for me. Otherwise I will invest in unit trust accumulation units where possible.

Almost done. I will re-balance my portfolio regularly. If the percentage weighting of my fund in any one area, say growth investments, income investments or commodity investments goes ‘too high’ I will sell some and recycle into something else I already hold or into something new.

Only time will tell if I am going to be destitute in retirement. Either driving to the golf course in my Tesla or using a Zimmer Frame (TM) to get to the soup kitchen.

Motley Fool
My brain (sorry no link).

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