UK Portfolio Revamp - Part 1 - Diagnosis

Recently I have spent considerable time helping a UK friend restructure an investment portfolio and thought it might be of interest to talk about how I've gone about it. Maybe someone out there would have good ideas on what else can be done.

The spreadsheet image displays the portfolio as it was about a month and a half ago, the "before" shot. This was a portfolio that had evolved by happenstance - an advisor or someone from the bank would recommend an investment, money would be put in and then forgotten, the statements being merely filed away as they arrived in the mail. The person has had, and continues to have little interest in managing the investments ... a factor that will play into the re-design as a strict KISS principle. Anyhow, my observations of the portfolio were as follows:

Equity vs Fixed Income vs Cash - the 56% in equities overall is not unreasonable, well within the range of 25 to 75% equity allocation that I think, along with many financial luminaries, is reasonable, The person is very cautious and a lower equity allocation makes sense for now. Maybe down the road that could change but there are more pressing things to fix. The life insurance components, which I have called "savings", guarantee a certain return when they mature and function more or less like fixed income. The percentage in "cash" is too much above foreseeable needs and more than a six month cushion even. The person's employment benefits and salary provide a lot of protection for unforeseeables and things like health emergencies. In the larger scheme, later the person will also benefit from an inflation-indexed pension, providing a constant guaranteed cash flow through all of eventual retirement. That means equity volatility can be endured without actual reduction in lifestyle.

Taxes - Taxes are a considerable problem area. Way too much is being paid. The bank cash deposits are generating something like 2.5-3.0% interest before tax and the 20% tax means the net return is below inflation, meaning there is a net on-going loss in purchasing power. There has been no investment in tax-exempt accounts like ISAs (similar to Canadian RRSPs, except that the withdrawals are never taxed and the annual limits are lost if not used each year). The same un-necessary tax burden applies on almost all the equity investments - nothing has been put into equity ISAs except the PEP accounts, a precursor to ISAs that haven't been available for years.

Fees - The equity investments are all in the UK version of mutual funds, called OEICs, and the annual management fess of 1.5% are a drain on the returns. UK fund managers are no less immune to the oft-observed under-performance of the majority of actively managed funds than those in Canada or the USA. It is amusing to note that the retailer Marks and Spencer offers funds, which would be like The Bay doing so in Canada! Hey, why not Mcdonalds too!

Diversification - Despite their very different sounding names, all these funds hold UK equities and if one looks at their holdings, the same large company names appear over and over - HSBC, Royal Dutch Shell, Royal Bank of Scotland etc. Only the proportions seem to differ from fund to fund. In other words, there isn't any real diversification, they might as well be one holding. There is nothing international, there are no small company holdings, there is no real estate.

So the table is set for the next phase. asset allocation within the broad groupings. Stay tuned.