Wednesday, 12 November 2014

My SIPP Cup Runneth Over

do not copy

The gradual recovery in value of the DIY Income Investor portfolio continues - although more slowly than I might hope for. Apart from topping up a little, I have left the portfolio alone, hoping for a continued recovery in the markets.

Essentially, the principle is to leave it alone, rather than fiddling when depressed. However, sitting back and not doing a lot can sometimes lead to some interesting observations...

To recall, the DIY Income Investor portfolio is an amalgam of the family resources I manage, including a number of different accounts, which are either ISAs (Individual Savings Accounts - the Stocks & Shares variety), and SIPPs (Self-Invested Personal Pensions). The majority of assets are in ISAs. All of the accounts are therefore tax-shielded. I use essentially the same investing principles for all the accounts - investing in securities that (primarily) have a high yield and generate, hopefully, a sustainable income stream.

Although the value of the portfolio is a couple of percentage points below its all-time high (reached in early September 2014), an interesting development is that the portion of the portfolio in SIPPs  has now hit its all-time high.

Why should this be? Is anything significantly different in that part of the portfolio? Is there a wider lesson to be learned?

Of course, the difference in performance of the ISAs and the SIPPs may be purely random - as is most performance on the Stock Market. We need to be careful not to ascribe skill to what is essentially luck: successful investors are for the most part 'Lucky Fools'.

But it may be worth looking a little at the differences between the make-up of the ISAs and SIPPs.

The first difference is the level of diversification. Being a smaller part of the portfolio, the SIPPs include smaller average amounts in different securities (compared to the larger ISAs). However, this does not mean that the SIPPs are more diversified. In fact if I multiply the average SIPP holding by the proportion of ISAs to SIPPs, it turns out that the SIPPs are less diversified.

The second difference is the reliance on ETFs (Exchange Traded Funds). When investing individually relatively small amounts for the long term - in the case of my kids, a very long time - I have chosen to rely on ETFs, because of their inherently diversified character and low cost. Out of 12 discrete holdings, 10 are ETFs - and these 10 ETF holdings are made up of only 5 different ETFs. (The other holdings are RSA Group 7 3/8% Cumulative Preference Share (RSAB)  and Friends  Life Group (FLG), both of which are doing reasonably well.)

These ETFs are (in order of value):

In addition to each ETF being made up of dozens of individual holdings that generate income they also pretty much cover the globe, as they are geographically well diversified. They also include ETFs specialising in dividend shares as well as fixed-income securities.

So the key difference of the SIPPs to the ISAs seems to be that they rely mainly on a small number of geographically-diversified, high-yield ETFs.  

Whether that means anything in the wider and longer-term scheme of things remains to be seen. But this corner of the portfolio seems to have weathered the latest market downturn surprisingly well.

For the portfolio as a whole, at the moment ETFs account for only around one-third of the total value. If the yields are attractive enough, I hope to increase this proportion over time. On that point - are there any views out there on attractive high-yield ETFs that I should consider?

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. I've no new etfs to suggest I'm afraid as I hold pretty much the same as you! This is interesting to see though and it would be great to have a follow up article on this in a years time to see if the same outperformance applies.

    Maybe you should sell up, retire the blog and go all in ETFs?! :-)

  2. You mention Friends Group (FGL) in your blog. Do you mean Friends Life Group (FLG)? I must say I enjoy reading your blog please keep up the good work.

    1. Well spotted! I've corrected that now...

    2. Well spotted in all senses of the word! I liked your statement about "lucky fools" but you (Sisyphus) make your own luck. I hope you have a lot of FLG.

  3. Thanks Peter - but not enough FLG, in retrospect!