Currently aged 62, Ken Johnson is hoping to retire within the next two years. With that in mind, he's started to move his investments away from riskier areas to defensive holdings that can protect him in the event of a market dip.
The Covid-19 pandemic and subsequent stock market crash has made Ken reassess his priorities. "I have not particularly enjoyed working from home full-time," he says. "I've realised I don't want to be doing this indefinitely so I've started thinking more seriously about when I will retire."
Ken, who works in marketing for an technology company, has a final salary pension from a previous employer as well as a pension with his current workplace and a self-invested personal pension (Sipp) with Hargreaves Lansdown. He hopes that taking income from his Sipp will allow him to retire when he turns 64.
"Over the past five years, I've been trying to maximise my contributions into my Sipp. It's more efficient now I'm a higher-rate taxpayer too," he says.
Where I Invest my Sipp
Ken invests his Sipp in funds spanning a range of regions, sectors and investment styles. Until recently, most of his holdings have been growth-oriented, but he has now started to introduce some defensive holdings into the mix.
"Although markets have been quite buoyant, even despite the Covid crisis, I can’t help feeling that the longer term outlook is more uncertain," says Ken. "Given this, I think it makes sense to have a few solid holdings that will hopefully keep their value if there is a downturn.”
One such holdings is TB Wise Multi-Asset Income, which has a two-star rating from Morningstar. As the name suggests, the fund doesn’t just invest in equities but has exposure to other asset classes, such as bonds, cash and property too. This fund has a flexible allocation, meaning the managers can adjust the portfolio allocation to different assets as economic circumstances change.
According to Morningstar data, the fund has not delivered positive annualised returns over the past three years, but its long-term record is more impressive. Over five years the fund has delivered annualised returns of 7.04% and over 10 years this is 6.85%.
Ken likes that the fund offers the option to withdraw income, and it currently yields around 3.29%.
Elsewhere, Ken invests also holds the highly rated Troy Trojan fund, another multi-asset fund, which invests in precious metals, such as gold, alongside equities, bonds and cash.
This fund, managed by Sebastian Lyon, has a focus on capital preservation and long-term capital growth. The fund has delivered annualised returns of 5.44% over three years and Lyon has built a formidable reputation as a defensive fund manager, and the fund has a coveted Morningstar Analyst Rating of Gold.
Morningstar analyst Rajesh Yadav says: “Trojan Fund has a number of positives for investors seeking capital preservation. Asset allocation is an important part of his overall framework, both to protect capital in times of stress and also to take advantage of opportunities when presented.”
An Eye on Growth
While these defensive holdings are an important part of Ken's portfolio, he still holds some funds with a more "gung-ho" appraoch, tending towards those where the manager has a strong, long-term track record. Some of his best holdings to date are those run by renowned managers Terry Smith and Nick Train, for example.
He has invested in Fundsmith Equity, a global large cap fund run by Terry Smith, for about six years and says it has delivered excellent returns. The fund, which also has a Gold Analyst Rating, has delivered annualised returns of 19.5% over five years, comfortably outperforming its benchmark.
Ken has seen similarly buoyant returns from LF Lindsell Train UK Equity, with annualised returns of 11.14% over the past five years. This is a UK-focused fund, but there are similarities in the styles adopted by the two managers: both Smith and Train have a relatively low turnover in their portfolios, and both seek to identify high-quality, cash-generative holdings that deliver value over the longer term.
This can lead to highly concentrated portfolios, which in some cases take significant bets against the index and Morningstar analyst Robert Starkey points out that the runaway success of Nick Train’s approach has the potential to create future problems.
Starkey says: “As a result of attracting a significant level of assets on the back of exceptional performance, there are some concerns over its ability to maintain the purity of the its process.” However, the strong track record and low fees means the fund retains a Bronze rating.
Ken, who lives Essex with his wife and two daughters, says the Covid-19 stock market crash of March 2020 was something of a wake-up call and made him realise he needed a more balanced portfolio. But, with an eye to maximising his retirement savings, he is reluctant to quit the market completely.
He says: "I still have slightly more of my overall portfolio in growth funds than defensive, and I'm optimistic this will produce the best returns over hte long-term. But I want to ensure my entire portfolio isn't hit if we move into stormier waters. I don’t want to panic too much if I see valuations falling and knowing that a portion of my fund might be protected gives me a bit more peace of mind.”
