5% target over 12 months

New boy here (to the site & DIY investing), would welcome some help from you good folk.

I am looking to invest the vast majority of my capital yikes (just sold up abroad & returned to UK after 20 years away) for 12 months in a portfolio targeted to produce 5% gross returns, enabling me (I hope!) to get back into the UK property ladder in a year’s time. I don’t want to put my capital at risk, & will obviously need access to it in a year (hence not interested in equities), & am ideally looking for a relatively simple solution that won’t require lots of time & attention once things are set up. Will probably use YouInvest, they appear competitive for the type of trading I envisage (30-40 buys in the space of 4-6 weeks, 30-40 sells on exit in a year’s time, hopefully not much activity in between)

Have done a fair bit of research last few weeks but completely new to this, anyhow the state of play on my portfolio idea is as follows:
35% in renewable energy vehicles (a sector I know well so not looking for help here), returns of around 6.5 - 7%
20% in cash
10% in a mix of miscellaneous higher return things (including about half of this in Peer to Peer lending, Assetz Capital, RateSetter & Zopa the ones I’m looking at, any comments welcome here as new to this too, am hoping to achieve close to 5% on the P2P’s)

That leaves the remaining 35% which is a fairly hefty chunk & the part of the portfolio I’m really looking for help on. Returns here need to be in the region of 5%, perhaps a tad more. My thinking is to aim for a mixture of corporate bonds & funds with perhaps 2 to 3 levels of returns all/mostly in the 4 – 5.5% bracket. (I could be tempted to put a little into something that yields more, if I’m confident of the issuer/track record/prospects)

From the reading I’ve done (& with the likelihood of interest rates perhaps going up some time in 2H 2014) it would appear I should be aiming at bonds with a short maturity (less sensitive to interest rate hikes) & high coupons/yields? Does that make sense, & if so where best to look at these in a way that summarises the complete picture for the item (eg including the minimum investment amount needed, how easy it will be to exit in a year’s time, & any other useful key indicators given that being away so long I’m not hugely clued up on the recent history of UK corporates )

I’ve had a quick look at the ORB index & there are 70 or so corporate bonds with a “flat yield” (?) of over 5%, so imagine my targets could be realistic, but short of sticking a pin in at random not sure how best to choose among them! Seeing as I will be exiting completely within the next year can I afford to be less worried about the company going under & just take the coupons (making sure I hold the bond when the coupon is due to be paid out)?

Some other questions perhaps some of you good folk can help clear my mind on:
1. Suggested Corporate bonds / Funds ratio mix?
2. Number of corporate bonds/funds I should be aiming to have in my portfolio? (Seeing as would like to keep things simple would say 3 individual corporate bonds & 7 funds be a reasonable proposition or will I need more to spread risk? Am envisaging 50-80k of hard earned lifetime savings so would like reasonable coverage)
3. Which funds could be worth looking at?
4. Will I be able to buy all I need via YouInvest?
5. Any other fixed/stable income or other alternatives (property funds etc?) worth considering (for the 5% target)?

Thanks very much to any & all that can help out in some way or other, Jack

Comments

  • In my humble opinion ORB bonds are overbought at the moment and with the exception of one or two are trading well over par vis a vis potential return . Although headline rates may indicate 5%+ the actual yield is going to be lower. Coupled to this you have the very real potential of interest rates rising, and there is a distinct possibility if not probability, that the current market value of the bonds will drop - Regrettably you are in the position of having to buy high, and under your time frame you may have to sell low; thus a major dent in your initial capital. You can go with potentially higher yields ( Co-op 11% for example) but I think the risk factor is not something you want to entertain and due to your desire to buy a property.

    You are probably aware that new ORB issues coming to market are as rare as rocking horse manure, so to advise anyone to wait for a new listing, and which will give you a net of above 5% may result in you waiting for god knows how long

    On the peer-to-peer also be careful of headline figures. In fairness, the major players do make it clear between gross and net margin, but since the Government has injected money into the commercial peer-to-peer market net actuals have plummet. From the halcyon days of a net approaching 8%, the average on a balanced portfolio with Funding Circle is below 5%. I also invest via Zopa and unless you are on top of your game in respect of rates, again I would find it difficult for you to maintain a risk-balanced portfolio returning 5% unless you were heavily leaning towards the risky loans assessed at 'C' grade or worse

    Thats my 2 pence worth - and apologies for all the negative noise on the matter! Hopefully others can counter balance this with their own opinions and in doing so they mightbe able to address directly some of the other questions that you have raised


    Good luck
  • Thanks AG, much appreciated.

    With you on the possible impact of interest rate hikes, that said with many feeling equities are over-priced isn’t there a possibility these could be hit harder leading to investor money flowing in to bonds as a refuge & holding their prices firmer in a downturn/scare?

    Personally I’m not bullish on the global macro economy, still frail in developed markets, emerging ones weak, QE possible/likely in EU markets, tapering in US, who knows what could happen with Ukraine/Russia.. am no expert by any means but in a very broadbrush way would think that stocks could well be hit by any number of factors & corp bonds (particularly say reasonable grade ones in a slightly firmer performing economy like the UK) may hence hold up not too badly, the money’s got to go somewhere after all. Any thoughts?

    On the P2P also fully with you, am not delving in it yet & won’t be chasing high headlines – one of the reasons I find it attractive is the cash flow it releases with the loans being (hopefully!) repaid, perhaps even early, offers flexibility to the portfolio.

    For you fixed income savvies out there, anyone willing to guess the impact of a say 1% interest rate increase over the next 12 months on the value of reasonable grade UK corporate bonds? Just as an idea of what I should be factoring in for possible losses on sale in a year’s time..

    Many thanks again AG, Jack
  • edited April 2014
    Well for what it is worth, here is my take on things

    Ukraine will kick off soon putting pressure on the Financial System as both parties try to ratchet up sanctions.

    It is "The Black Swan" on the Horizon

    Osborne and Obama has already privately warned the City and Wall Street Hedge Funds, they are going to have to take a hit.

    America will feel this is a once off chance, to hit Russian crooks in the pocket by reducing the value of their assets wherever possible (The Cyprus bail-in comes to mind).

    America will feel prosperous with fracking and shale making them self sufficient in energy and perhaps a net exporter of gas/oil

    So it will be payback time for the rest of the World as USA raises interest rates and squeezes all other economies.

    Also the UK will start raising interest rates within the next twelve months.

    The new stress test on Mortgage applicants are now demanding to see that applicants can still make repayments when interest rates rise to 7%.

    So I would suggest you sell all your bonds and equities and go into cash for 18 months.

    You will then, probably, be able to pick up equities at a much lower entry point than at present and high risk low rated ORB issues, if they come , will be launched at about a 8-9% coupon.

    Existing Bonds will fall in price to reflect the interest rate rises and you will be able to re-purchase those you have sold at a lower price

    You will lose interest from being out of the market but you will preserve capital. (or increase it if you bought at par and sell now while most recent retail Bonds are selling at a premium)



  • If you are going to exit to buy residential property, you could consider purchasing a residential property unit trust such as Heartstone Residential Unit Trust ( www.hearthstone.co.uk ). This is available through a few platforms and I know it is available via through You invest. I believe there is a 0% initial fee but you will have to make your own enquiries. If there is then your capital will rise (hopefully) or fall (watch out for a bubble) in line with residential properties. You will also receive an income based on their ability to let out the properties.
  • Thanks EJohn, appreciate the input. I had earmarked property as one thing vehicle into. Any views on the pros & cons of REITS as opposed to property unit trusts such as Heartstone?

    I could be tempted to putting in up to a few 10’s of k’s into property (in place of some of the funds/bonds I’d mentioned), if it’s something that can provide income with limited capital loss risks. Or stick to my original game plan (more funds & bonds & say just 10k of property). All depends on the relative risk, if you have experience on the property side would welcome any views.
  • Thanks to you MM. A black swan indeed Ukraine, I’m not looking for big risks/returns but sitting on cash for 12-18 months is not really an option. Personally I see the tougher stress testing for mortgage applications as a positive, may help take a bit of steam off the residential property market, reducing/delaying perhaps the need for a rise in interest rates.
  • The general principle with property is that you have to discriminate within the market. Many argue that London is overvalued and the regions are the place to be. You need to look under the bonnet of some of the REITS to find out just what they have. The safer end of the market might well be GP surgeries, but watch out for company indebtedness in some of those companies specialising in the area. Also watch out for initial costs given your time frame.

    Hearthstone is a new PAIF unit trust in the currently expanding residential market, so they have money to do bulk deals which attracted me to put them on my watch list. I am not keen on most other property sectors at present. The only shares I currently hold are Assura (one of the GP surgery companies), Target Residential Care REIT and Tritax Big Box.

    Wherever you look at the moment, I think there are risks to capital. The stock market is historically high and there is growing talk of a correction. There is an expression Sell in May and go away. It will pay to be cautious! Putting up with some low interest cash may not be a bad option. In this respect I agree with morgleman2. Good Luck!
  • Don't know if you have a wife/partner but if you have then you can open 6 accounts (2 each and one joint) in TSB account (2K in each so 12K and get 5%). Only stipulation is you transfer in 500 a month but you can immediately transfer it out.

    On Wellesley (property p2p) you can get 4.75% on a twelve month investment (backed by charges on property and also a provision fund) or 5.65% on 18 months.

    I'm not too nervous about stock market (it's not at historic highs as some have mentioned) it is still 5% off Mar 2000 high (14 years ago!!). Ukraine is not a Black Swan cos it is visible and some of the risk will be factored in already. Hedge funds will already be making money out of the Ukraine situation (it's what they are about; market uncertainty is how they prosper).

    However, your timeframe is 12 months and to time a market is difficult so stocks may be too risky.

    If I were to select one bond for that period for ~5% then I think IPF would be the one. 6% plus coupon, just above par (so as long as there is no "Back Swan" it shouldn't lose any significant value) and recent good analyst reports and ratings on the company.

    FYI I am currently getting ~7% on a combination of P2P (Zopa, Ratesetter, Assetz and Wellesly), bonds (including IPF), historic fixed cash ISA and fixed cash bonds (most about to end!!), bank accounts (TSB, Santander) and stock market funds (high yielders).

    I intend to increase my P2P exposure (probably Assetz and Wellesley) to try and maintain 6% plus.

    Good luck.
  • should read (wrt TSB) "2 each and 2 joint"
  • Thanks Henders, IPF worth a look into. No wife (excessive annual management charges ;-)) so on cash have set up a merry go round of the best high street accounts such as TSB & Sant123 feeding off each other. Just shy of 3% all told, not too bad for a few 10’s of k with instant access given current rates.

    P2P is on my radar, on the shelf for the time being as expect it will require a more active /time-consuming monitoring. What sort of % mix of total portfolio would you recommend a fairly passive investor to dedicate to P2P’s? I was earmarking only 5% with say half of it on lower returns (eg Ratesetter/Zopa) that get loaned out in small chunks I don’t have to worry about & the other half on higher (6-10%) loans with Assetz (that would need to keep an eye on) & all hopefully averaging out at about 5% returns. Sounds like you’re able to draw better returns than that & happier with making P2P a weightier part of your mix. To a beginner though how would you rate it on the returns/risks/stress scale? I've hard there are some professional lenders out there now on the sites & if you're not clued up the returns can be meagre, money can end up lying around not getting loaned out etc.

    You may well be right on equities, my concerns stem in great part from my time-frame. Could be tempted into punting a small amount into an equities fund of some sort just so I don’t feel I’m missing out completely on the party if anyone has any tips.
  • Hi JackC,

    Ratesetter, ZOPA and Wellesley are ideal for passive investors. Put your money in and get on with your life. All 3 have provision funds so you can be fairly sure that, as long as the company keeps trading, you should be OK. No significant delays (none at all on Wellesley) on lending out (ZOPA the worst but not really that much of a problem). The challenge for you though is your timeframe. ZOPA and RS offer 3 and 5 year loans. You can get your money out sooner but will take a hit on rate (RS the toughest in this respect). With Wellesley you can do a 12 or 18 month loan (4.75% and 5.65%); this is backed by security (property and a provision fund). I am fairly relaxed with all my investments in these three (with a tendency to put more in Wellesley as they get more of a track record).

    AC is, for me, slightly higher maintenance. I am getting around 10% at the moment. I focus on short term (6 - 12 month) bridging loans backed by property security and buy on the aftermarket (i.e after the loan has drawn down so no dead money) mostly from underwriters offloading. AC's other loans (property development and small business) tend to be for longer periods (3-5 years) but you could buy and then sell (in 12 months) for little (or no) hit on the aftermarket. There is no provision fund but so far AC boast no defaults and the loans are backed by property security (mostly). AC are introducing a lot of automation to free up the amount of time you need to spend manually.

    My current exposure to P2P is about 10% of my total (50% in equities (mostly funds and ISA'd), 40% in "safe" cash (banks, NS&I). I am probably going to increase my stake in P2P to 20% over the next 12 months (some from equities but most from my "safe" cash as bonds mature).

    I do wish my exposure to equities was less (the ups and downs can be worrysome) but over the years my returns have been more than acceptable (I would guestimate average 8% per annum - maybe more).

    Wouldn't presume to tip anything but current thinking seems to suggest an ETF (vanguard or blackstone consensus) as a low fee, low maintenenace way of keeping in step with the market.

    BTW I am a complete amateur so please take any of my opinions with that in mind.

    Cheers and good luck.
  • Henders69 makes a good point about p2p aftermarkets as a home for some (of what sounds like a large potential portfolio).

    I would still counsel caution though on equities. The Dow hit an all time high yesterday. The FTSE100 is close to it. According to Picarda in the Investment Chronicle, the NAV to price ratio of Investment trusts is one of the best lead indicators and it is suggesting a fall in the Allshare over the next year ...and that is your time frame. The greatest danger to your capital is buying high and being forced to sell low. If there is any correction, a year may not allow prices to recover.

    As the FTSE100 has now broken 6800 and there are several warning signs of a fall, I will shortly be placing a short on the FTSE100 as I thnk the time has come for a correction.

    For a years investment be very cautious
  • I would consider PIBS. Leeds,Skipton, N'Wide are all solid and in the present enviroment even they can't go wrong- can they??? Pay about 7%
  • Thanks very much folk, sorry for delay after the long weekend.

    I’d given PIBS a look Enpassant, nice yields but dismissed them as difficult to exit & trade if recall correctly. I’m looking to exit in 12 months so PIBS may not be suitable? If you’ve any tips as to how to get round these potential problems most welcome to hear them. Btw had also heard about risks of reset & early calls, kinda frightened me off.

    Thanks Henders, useful info there most appreciated. Your comments are in line with the research I’d done, am still intending to go lighter into P2P than yourself, at least until I’m comfortable once I’ve seen how it works. Good luck with things, if you could be interested in shifting some of your equity exposure into renewables let me know, reasonable returns with (should be) less of a bumpy ride.

    Cheers EJohn, sage advice, if I take a wee equities punt it will most likely be very modest with an ETF tracker, my time frame not good for more than that as you say.
  • I use ETFS a lot - mainly the ISF.L one that covers the FTSE 100. Pays dividend and very low dealing costs as no stamp duty and very tight spread. Great liquidity too. You need to get your timing right and market in my view is going to take a dip later this month so if you get into the FTSE at sub 6500 that may be a good position to take for a few months
  • edited May 2014
    I agree DavRos. The Money flow index for the ISF ETF showed overbought on Thursday, so now is not the time to go into it. There is a 'short' ETF ticker XUKS (moves exactly opposite to ISF, but does not pay a dividend) that I have now bought as I suspect the market is in for a correction very soon.
  • My view on stock market timing is " i haven't got a blinking clue (not one iota) on whether the stock market will be 8,000 or 4,000 in 12 months".

    To quote from a few luminaries:

    "There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know".
    — William Bernstein, 2001

    "Market timing is a wicked idea. Don't try it — ever."
    — Charles Ellis, Winning the Loser's Game, 2002

    "If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what`s going to happen to the stock market."
    — Benjamin Graham, Interview with Hartman L. Butler, "An Hour with Mr. Graham", March 1976

    "Statistical research has shown that, to a close approximation, stock prices seem to follow a random walk with no discernible predictable patterns that investors can exploit. Such findings are now taken to be evidence of market efficiency... Only new information will move stock prices..."
    — Zvi Bodie, Investments, 2004

    I particularly like the final sentence of Bodie. Everything that is currently known is factored into the market; Ukraine, Europe, House prices rises, Market Technicals; what is not known is e.g. another 911, a resolution of the Ukraine situation etc.

    With that in mind I would counsel caution on any short term action wrt stock markets whether it be buy the market or sell it. Twelve months is way to short, I believe. When you consider that we are 14 years on from the FTSE all time high it becomes very sobering.

    Another way to look at it is to think every trade you make (buy or sell) is with another entity. It's worth considering before you trade 1) Who is on the other side of my trade? 2) Do I think I know more than they do? In my opinion, your answers are as follows: 1) You don't know; 2) It's highly unlikely.

    Finally, if you genuinely do believe you have a knowledge edge over others then I would point you to two recent books that are worthy of a read; "The Buy Side" by Turney Duff and "Flash Boys" by Michael Lewis.

    Anyway, my thoughts for what they are worth!!

    Good luck!!

  • That ETF mentioned above may not have a stamp duty part on purchase, but I'm sure it's wrapped up in the ETF price/charges.
  • I am not sure that is the case - for example, i can buy £100k of that ETF for say £10 dealing charge and sell it straight away for another £10, and lose few tens of pound for the (small) spread - i certainly don't lose 0.5% on the transaction. I think the ETF provider is domiciled in Ireland for this one and so have a way around it but don't know how they do this
  • You are correct. In the Autumn Statement(2013), George Osborne abolished stamp duty on shares purchased by fund managers for UK domiciled ETFs – in an attempt “to encourage those funds to locate in the UK", rather than in lower tax jurisdictions in Europe. http://www.ft.com/cms/s/0/29dd6110-5da9-11e3-95bd-00144feabdc0.html#axzz31miyacWg
  • Henders, just to say I sent you a private message on here earlier today. A wee cashback opportunity for you if you're interested. Just a way of saying thanks :-) JC
  • Thank you JackC; I have responded.
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