David Harman, who is in his early 60s, is looking forward to retirement. He does not imagine he will stop working completely at the age of 65, but over the next few years he’s likely to decrease his working hours.
Harman, who lives in West Sussex with his wife, has built up a portfolio of using pension and ISA wrappers over a number of years. More recently he has also invested in peer-to-peer lending.
He says: “I’ve watched this sector with interest for a few years, and decided to invest via Octopus Choice.” This is the peer-to-peer lending arm owned by Venture Capital firm Octopus Investments. The money investors like Harman put in, is used to provide the capital for property loans.
Unlike other peer-to-peer lenders this means these loans are asset-backed. However, in common with other peer-to-peer lenders this remains an unregulated sector, and this investment is not covered by the Financial Services Compensation Scheme.
Harman says: “It certainly isn’t for everyone but I am comfortable with the risks. I get a steady income stream from the money I’ve lent out, currently around 5 to 6% a year.”
Multi-Manager Funds for a Broad Appeal
When it comes to his ISA and pension allowances, Harman invests in a wide range of funds.
“I chop and change holdings quite regularly,” he admits. “Although I make many of the decisions myself, I also used discretionary fund management services, and this can help ensure I have a balanced portfolio.”
The couple, who have two grown-up children, invest in a number of the Jupiter Merlin multi-manager funds run by John Chatfeild-Roberts and Algy Smith-Maxwell.
Morningstar gives the Jupiter Merlin Balanced Portfolio a four-star rating - reflecting its strong outperformance in recent years. The fund also has a coveted Silver-medal Rating.
Analyst Randal Goldsmith says: “Chatfeild-Roberts and Smith-Maxwell’s high-conviction approach to manager selection has served investors well, providing them with significant outperformance of its category peers over time.
“They run a concentrated list of underlying managers, typically backing them for many years. The fund has outperformed consistently in the tougher years like 2008, 2011, and 2015 – doing a better job than peers of protecting investors’ capital. It has outperformed in the majority of other years.”
The Jupiter Merlin team’s investment process starts with a thorough assessment of the macro environment, which guides portfolio allocation and influences manager selection on different multi-manager portfolios.
Equity Income Star Fund Managers
Harman tries to look out for fund managers who have built up good long-term track records. He had previously invested in the Invesco Perpetual High Income fund. When manager Neil Woodford left to launch his own fund management company in 2013, Harman decided to invest in its Woodford Equity Income fund.
Woodford Equity Income has a Silver Rating from Morningstar. Peter Brunt, an analyst at Morningstar says: “Our confidence is growing in this fund. It is managed by one of the most talented fund managers in the sector and, after some initial teething problems, we are reassured to see a period of increased stability at Woodford Investment Management.”
Woodford applies the same investment approach that helped him created a strong and consistent track record during his three decades at Invesco Perpetual. Brunt says: “The approach is best described as high-conviction, long-term, and contrarian in nature.” They point out that his funds can deviate significantly from benchmarks, and are managed “with a total return mind-set”, the objective being to grow capital and income, with a keen eye on capital preservation.
“As such, investors should be aware that there may be periods where the fund is not always the highest yielding relative to peers,” Brunt warns.
While the Woodford fund is predominantly UK based, Harman has also invested some of his pension and ISA savings with Fundsmith Equity, a global fund run by Terry Smith.
This fund has a five-star rating from Morningstar, reflecting its very strong performance in recent years.
Smith’s approach is to invest in companies that are already winners rather than trying to find tomorrow’s emerging stars. He is looking for “compoundable earners” which, in theory, he can hold over the long term.
This leads to significant biases within the fund - but in performance terms it has been in a ‘sweet spot’ in recent years. Between November 2010 when the fund launched and November 2015, the fund was up by 16.7% on an annualised basis; by comparison, the MSCI World Index was up by just 10.3%.
Harman says he adopts a “similar” investment strategy with his ISA and pension. “The main difference will be how I take an income from them. It sounds counter-intuitive but it makes sense in tax-terms to take an income, and withdraw capital from the ISAs first, and other investments like the peer-to-peer lending.
“In inheritance tax terms it is far more efficient to leave surplus pensions funds than ISA funds - so these will be the last investments I cash in.”
