Andrew Bartram knows investing is about focusing on the long-term, but when markets started to tumble in March he took profits on a number of the holdings in his portfolio.
Andrew, who retired eight years ago, has a small final salary pension that provides a guaranteed income regardless of market movements. This, along with the State Pension, covers day-to-day expenses for him and his wife. But Andrew has also built up a portfolio through a self-invested personal pension (Sipp), which he uses to supplement his pension income and hopes to leave as an inheritance.
This portfolio is largely made up of holdings in individual shares including blue-chip stocks and investment trust. Crucially, unlike a final salary pension, the value of this pot is very much dependent on stock market moves.
When he retired, Andrew started to move small parts of this portfolio into cash and bond holdings, and he has picked up the pace of the transition recently. He says: “Over the past decade or so, I’ve had some decent returns on these investments, so I have started to take profits where appropriate and move the money into more cautious assets. I started to accelerate this process as markets fell and now have around 70% of my Sipp in cash.”
Gloomy Outlook
Andrew expects the volatile stock market conditions to last for several years, particularly with a serious recession looking likely in many countries, so is anticipating sitting in cash for some time. “I don’t think the recovery will be quick, and I think there may be further falls to come too,” he says.
As with any market downturn, there will be certain sectors more badly hit than others, which may not recover for many years, he says: “You only need to look at what happened to banking shares after the financial crisis to see that.”
While guessing what is going to happen next on the stock market is all but impossible, Andrew expects the plight of retailers – which were already struggling with high rents and the move to online shopping – to worsen under the current lockdown, for example. Travel is another area he expects to be hit, in particular airlines, and this could have a huge impact on investment returns in the sector. But Andrew says it is difficult to find alternative investments; bonds don’t look particularly attractive, so cash seems like the best option for now.
Despite this, Andrew mostly prefers to make his own investment decisions rather than rely on a fund manager to build a portfolio. “If I build my own portfolio and it goes wrong at least I have no-one to blame but myself,” he says. “There is also a cost in getting a fund manager to make these decisions for you and I’m not sure this cost is always justified.”
Backing Blue-Chip Businesses
While Andrew has dabbled in smaller company stocks, he is staying well clear of higher-risk areas at present and instead relying on his longer-term holdings, which include Unilever (ULVR), Royal Dutch Shell (RDSB) and Legal & General (LGEN).
Royal Dutch Shell has a five-star rating from Morningstar, indicating that its current share price is significantly below its Fair Value Estimate of 2900p. Indeed, currently the shares stand at less than half that amount, at around 1237p. Despite that, Andrew has sold the position. While total returns have been good in recent years, the economic lockdown has caused a collapse in demand for oil across the globe. And while oil giants such as Shell have always been reliable dividend payers, the outlook for shareholder pay outs now looks less positive. Shell recently announced its first dividend cut since World War II.
Over the past 10 years, investors holding this stock have seen total annualised returns of 3.53% according to Morningstar data, but this is less than the total annualised returns from the FTSE100 over this period (at 5.44%).
The effect of the recent market falls are, however, apparent in the one year figures, with investors seeing total losses of 45.97%. This is significantly higher than the 15.11% loss the FTSE 100 has experienced over the same period.
In contrast, Unilever has not been as impacted by recent market events. The conglomerate, which manufactures and distributes many well-known brands including Ben & Jerry’s ice cream, Lipton tea, Dove soaps and Marmite, has a three-star rating from Morningstar.
According to Morningstar data the stock has delivered total annualised returns of 10.61% over the past 10 years, around twice the return of the FTSE100 over the same period. And over the past year, falls have been less than the wider market, with investors seeing a total loss of 11.13%.
Andrew is keeping some exposure to the market through “steady” blue chips such as this. He says: “I have been trying to reduce risk where possible and moving to cash gives me the option of taking an income, or using some of the money over the next few years without worrying too much about market movements.
“I have retained a small exposure to equities and may start to add to it if conditions change. But at my stage of life I am content not to be checking share prices frequently and losing sleep over worries about poor performance.”
