Patrick Merton is hoping to fully retire within the next five years and as a result is taking a “more thorough review” of his various savings and investments.
“I am one of those people who has been squirrelling away money over a number of years, but I haven’t always had an over-arching strategy,” he says. “It was more of a case of saving what I could, when I could and picking what seemed like the best options. But I am trying to take a step back to ensure not only that I have sufficient funds to retire, but that this money is appropriately invested for my needs.”
Merton, who lives with his wife in Bath, says he has seen a financial adviser to help him with this process.
“In the past I was a little sceptical about the benefits of financial advice. I was mis-sold a pension fund that seriously underperformed back in the 1990s, so since then I have tended to make my own investment decisions.
“But at this stage I can see the benefit of someone reviewing the range of investments I have, and also offering tax advice. The new pension freedoms have certainly given investors like me a lot more options, but there are a lot of decisions you need to make too.”
Merton says he is fortunate to have a final salary pension scheme. “I worked for an insurance company for 20 years, from the mid-1980s. This should pay out a reasonable amount of money from my 65th birthday, so hopefully this will enable me to retire.”
Elsewhere Merton says he has a hotch-potch of smaller company pension schemes plus a number of ISAs.
He says: “On the advice of my adviser I am consolidating a number of these pension holdings within a SIPP. This makes it easier to manage and should help ensure I have more of a balanced portfolio.
“These were all defined contribution schemes and had been invested in a mix of different funds.”
Merton and his wife are still keeping their ISA portfolio, although they have made a few more modest changes to some of the underlying investments.
He says: “ISAs give us a bit more flexibility when it comes to withdrawing money. We can take out capital tax-free, so our plan is to use these first, as and when we need additional funds to subsidise our pension before using any assets in the SIPP.”
Merton says he hopes that this will help with his inheritance tax planning. “It is more tax-efficient to pass on a SIPP, so we are hoping there will be some surplus assets there to leave to our two children. However, this may very well depend on what our health is like as we age.”
Merton points out that his own mother is currently in a nursing home and he appreciates that this later-life care can make “a serious dent” in family savings.
When it comes to individual investments Merton says he has opted for a managed portfolio, run by L&G for his SIPP. This invests in a mix of assets, including equities, fixed income and some commercial property.
Shares and Funds
With his ISAs he has a mix of funds as well as a portfolio of direct shareholdings.
“Initially when I started investing I mainly bought shares directly. This seemed like a more cost-effective way of investing. I had a portfolio of large blue-chip shares, which I hoped would appreciate in value, and pay decent dividends. Alongside this I invested in some smaller companies, with the hope of making more impressive returns.”
Merton says this strategy has “mixed results”. “I still hold many of the larger blue chips. These have been steady performers over the years. But a a lot of the smaller ‘punts’ failed to deliver.”
Some of his longer standing holdings include BP (BP.), GlaxoSmithKline (GSK), Persimmon (PSN) and Vodafone (VOD).
BP has a four-star rating from Morningstar. According to Morningstar analysts it has a narrow moat, and its current share price is below its fair value estimate of 670p. Over the past five years it has delivered total annualised returns to investors of 8.23% according to Morningstar data.
Drug manufacturer GlaxoSmithKline is another four-star stock, according to Morningstar.
Morningstar analysts deem this company to have a wide economic moat, and its share price is currently trading below its fair value estimate of £17.90. Morningstar analysts note: “We continue to view the stock as undervalued with the firm reaching an important inflection point, moving beyond generic launch of respiratory drug Advair in 2019 to a solid position in HIV, vaccines, and consumer, along with a significantly improving pipeline with an increased focus in oncology.”
It points out that GSK’s results in the last quarter of 2018 were ahead of market expectations.
House builder Persimmon is another strong dividend payer. According to Morningstar figures it is currently yielding 9.82%, which is one of the highest yields in the FTSE100.
Strong house price growth in the past decade has helped to bolster the share price at this company, as have schemes like the Government Help to Buy initiative.
This is certainly reflected in its share price. Over the past 10 years investors has seen total annualised returns of 21.19% - although over the last year the picture has not been so rosy. According to Morningstar figures investors have seen a total loss of 8.84% over the past 12 months.
In more recent years Merton says he has looked to gain more diversification by investing in a range of funds, that offer exposure to overseas market. “I have holdings in quite a few funds, these include global investments trusts, plus a number of funds specifically targeting emerging markets.”
He says that although these remain higher risk funds, he is sticking with them for now. “It’s still a few years until I do retire, so I’m hoping for some growth over this period.
“I am also a bit concerned about UK and European markets - so I think it makes sense to have some exposure to more growth-oriented and developing markets across the globe.”
Merton says he mainly invests in active funds and investment trusts. His global investment trusts include the Silver-rated F&C Investment Trust (FCIT), while he also invests in Aberdeen Emerging Markets Fund.
Aberdeen Emerging Markets has a four-star rating from Morningstar, although it has more recently been downgraded from a Silver Rating to Bronze. The fund is managed by Devlan Kaloo.
Morningstar analyst Andrew Daniels says: “Aberdeen Emerging Markets Equity still boasts a solid investment team, but an evolving investment approach appears to be pulling the team out of its comfort zone.”
Daniels adds: “The investment approach has also been evolving, giving us pause. For more than two decades, Aberdeen has applied a patient, bottom-up approach focused on quality and value. Historically, the team preferred to get its Chinese exposure through Hong Kong names, largely because of corporate governance and transparency concerns.
“However, the team revisited its thinking on many China names in 2017 – amid poor performance –and has since been adding aggressively there. While it is promising to see the team willing to be more flexible, the rationale for the shift in thinking during a series of November 2018 meetings was weak.”
