How I invest: 3 SIPP millionaires talk portfolios

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

About Bhavi Alagaratnam - Senior Wealth Relationship Manager

Bhavi has been with Fidelity for ten years and has undertaken various roles within this time. Bhavi is currently a senior relationship manager within the Fidelity Wealth Management service, supporting our ultra-high net worth clients in achieving their investment goals. Clients who invest over £250k, including within pensions, are assigned a relationship manager who will work alongside them on their investment journeys to achieve their financial ambitions. Relationship managers support their clients through guidance and portfolio reviews, they also work closely with Fidelity Wealth Management financial advisers so their clients can get the right support exactly when they need it. 

Building a portfolio - tips from a relationship manager

The starting point for any successful investor is building a portfolio that’s aligned to their goals, personal circumstances and timeline. So, I was thrilled to get the chance to pose this question to Bhavi and get her expert view on the matter.   

“When I’m providing guidance to a client on their portfolio, in this case their SIPP, we look at the relationship between risk and return - taking into consideration factors such as my client’s time horizon for their investments, age, income needs, outgoings and wider wealth.

“There’s no one-size-fits-all solution. Some might be investing in a SIPP for their own retirement, while others may be looking to pass it on to loved ones to use. Their asset allocation towards equities may be very different, depending on what they’re intending on using it for and when they may wish to access it.

“As an investor is approaching retirement or needing to draw down from their portfolio, we would discuss moving away from a high-risk strategy with perhaps 70%+ in equities, to a lower-risk strategy, including more exposure to safer assets such as cash and bonds.”

What a SIPP millionaire’s portfolio looks like

To show us what this all looks like in practice, Bhavi ran a report on three clients that she feels represent a good cross-section of the type of people she supports. She’s then provided an insightful commentary as to why they’re investing the way that they are.  It’s important to note that each client has a formal annual review to check their portfolio is still aligned to their goals and circumstances. But if their circumstances change, for whatever reason, Bhavi is on hand to re-valuate their portfolio.

Portfolio one

Client profile: 56-year-old man with adult children. This client is looking to draw from his pension in the next five to six years although this may change.  While his primary source of income is from properties, he also has a share dealing account outside of Fidelity and a consultancy company which continue to provide income as well as dividends from investments along with cash outside the portfolio.

Bhavi’s comments: “My client took early retirement about five years ago and had built up final salary pensions with various employers. Looking for more control, he transferred these into a SIPP with us which he now self-manages with his background in finance. He also has income from properties as well as income from his consultancy company and dividends from investments outside of the SIPP. He has no plans to access his SIPP in the short term and is currently targeting capital growth with a view for income in the next five years or so. He’s therefore comfortable with the equity exposure. He has selected multi-asset funds as a way of diversifying across asset classes, as well as individual stocks where the client feels there is potential. We will continue our catch ups throughout the year, and again discuss de-risking as the time approaches when the client may wish to start drawing down.''

Portfolio two

Client profile: 65-year-old man, married, with no dependants. Has long-term investment horizon with no plans to draw from their pension in next 10 years. Currently living off rental income to support living expenses.

Bhavi’s comments: “This portfolio clearly has a high exposure to equity. My client and I have spoken about portfolio construction and risk vs reward, which he understands due to his background in financial services and is comfortable with this relationship. His SIPP selections lean toward long-term quality and growth - so more exposed to companies that are famed for being highly profitable and growing fast as opposed to backing undervalued stocks. These styles match his investment goal of growing the SIPP over the next 10 years.  Until the time comes, he may wish to draw upon it for living expenses. At present, he’s comfortable with the level of risk of this portfolio due to the medium to long term investment horizon, and a steady stream of income from rental property. He also has an ISA, which is also invested with a growth bias, and an investment account, focusing more on capital preservation. My client and I will carry on with our catch ups throughout the year and having conversations about the time horizon for this portfolio. If he felt he was looking to start to draw down in the short to medium, we would discuss ways of de-risking the portfolio, starting with the asset allocation and reviewing the various tools on the website we have available for fund research.”

Portfolio three

Client profile: 72-year-old woman, married, with adult children. She recently consolidated her SIPP with Fidelity to have it all under one roof and is planning on passing the SIPP to her children to use as their pension.

Bhavi’s comments: “A pension is a good way to pass on your wealth as it typically sits outside your estate. The percentage in equities is high, but with a long timeline ahead my client is comfortable with that level of risk - especially as she has other means to support her through her retirement, such as cash savings.”

Why a well-diversified portfolio is important

Every investor - whether they’re a SIPP millionaire or not - should aim to have a well-diversified portfolio. This is because asset classes act differently in the same economic conditions. Having a mix of asset classes, around the world, in different sectors can potentially help your portfolio have a smoother ride over time. The ‘manage risk’ section of our principles for good investing talks more about this. You can read up on our five investing principles here.

Here are Bhavi’s thoughts about diversification.

“Up until the pandemic, we’ve experienced ‘favourable markets’ with an abundance of central bank liquidity, moderate inflation and, therefore, low interest rates. Since the start of last year these three critical variables have been turned on their head, making it more important than ever to diversify across different markets, sectors and asset classes. For example, investors who were heavily concentrated in tech and the US, saw their portfolios take bigger hits when the S&P and Nasdaq dropped throughout 2022 (during a period which saw rising interest rates, where the value of these stocks is greater in a low interest rate environment), than those who built balanced portfolios across different markets, sectors and asset allocations.”

“When I consider the risk and diversification of a SIPP, I take in the wider wealth of my clients - which includes everything from cash savings to other investments such as property, art and collectibles. I also consider what investments they hold with different providers - if they have more SIPPs and ISAs elsewhere - as there may be overlaps. I often find that clients aren’t as well-diversified as they think, as they might have different funds, but the underlying companies may be similar.”

Is your portfolio fit for purpose? Ask yourself these questions

By now, you might be wondering whether your own portfolio is as diversified as it can be. These are the type of questions that Bhavi runs through with her clients when discussing their portfolio. It should help you reassess your portfolio and to understand how well balanced your own portfolio is. Or not, as the case may be.
 

• What’s your investment objective for this portfolio? Growth or income?
• What are your goals? What is this money to be used for (property purchase, a child’s wedding, retirement plans)
• What’s the time horizon? When do you think you’ll be drawing on this?
• What other savings and investments do you have outside of this portfolio? Do you have portfolios of different risk elsewhere?
• What’s your risk tolerance on a scale of 1-5? To help you put this in context, I’d generally say that at the lower end ‘1’ aims to marginally beat inflation (of course with the sustained periods of high inflation rates that we’ve seen this has been a tall order). Whereas ‘5’ is at the top end, where you are comfortable that you understand that markets ride in cycles and you’re happy to ride out 30-40% drops.
• How do you feel when there are big drops in the market?
• How confident are you when it comes to investing, and how did you put current portfolio together?

Constructing and managing a portfolio isn’t for everyone. If this checklist has raised even more questions than it’s answered, you might like to think if financial advice is right for you to get a personal recommendation. You can read more about financial advice here.

Our SIPP millionaires’ top 10 funds

If you’re interested in how to invest like a millionaire, here are the top funds that were most popular with our SIPP millionaires as of 6 October 2023. Of course, these customers could well hold shares as well as other accounts and investments elsewhere, so it’s impossible to draw definitive conclusions. But it gives you a glimpse into what a millionaire’s mindset looks like.

A general observation is that investors have leaned toward lost-cost index tracking funds (ranks 1, 3, 4, and 10) for the core of their portfolios. And it’s perhaps expected that on a Fidelity platform, many long-standing customers will have opted for Fidelity index funds, and actively managed funds. It is also worth highlighting Fundsmith Equity as an example of a fund with a ‘quality’ bias, as mentioned by the second SIPP millionaire above.

And the inclusion of a cash fund is probably a symptom of the times. Such money market funds invest in a portfolio of short-term cash deposits, money market instruments and high-quality bonds. It is designed to provide a return that beats or is close to short-term cash deposit rates in a bank or building society. The appeal of these funds has surged this year as interest rates have risen. The Fidelity Cash Fund here currently yields an income of 5.23%.¹ Please note this is not guaranteed.

As with any investment decision you make, please do your own research to make sure it aligns with your own goals and circumstances.

Looking for more support?

You don’t have to be a millionaire to take financial advice, but we do recommend that it’s best suited to anyone with over £100k to invest (which can include your pension) as there are other ways of investing more cost-effectively if you have less than that. We offer one-off or ongoing advice depending on your needs. You can find out more about financial advice here. You can also request a call back from a financial adviser.

If on the other hand you have over £250k to invest (including your pension) you’re automatically assigned a Wealth relationship manager - like Bhavi - or a financial adviser depending on your needs. As a Wealth Management member, you get access to an exclusive range of benefits. You can read more about Wealth Management here.

And if you’ve got a number of pensions dotted about and are struggling to keep tabs on them all, you might like to think about moving them to one provider.  It’s arguably easier to manage your investments if they’re all in one place and you can read about the pros and cons of transferring your investments here.

Got a burning question you want to ask? Why not drop us a line. Click here to ask an expert your question.

Source:

¹ Fidelity Cash Fund Provider Factsheet, 30 September 2023