Last week, the UK’s second-largest investment platform, Interactive Investor, released an interesting article that looked at how those on its platform with assets of £1m or more within a Self-Invested Personal Pension (SIPP) invest their money. You can find a full breakdown of the top funds, stocks, investment trusts, and exchange-traded funds (ETFs) they own here. In this article, I’ll look at five things we can learn from these pension millionaires.
The most interesting takeaway from the SIPP millionaires, in my view, is that they favour actively-managed funds and investment trusts. According to Interactive Investor, the typical seven-figure SIPP portfolio has:
35% invested in active-managed funds
29% invested in investment trusts
15% in stocks
13% in cash
8% in ETFs
The reason I find this interesting is actively-managed investments have received a lot of criticism in recent years, particularly in the wake of the Neil Woodford scandal. Critics argue that ‘tracker’ funds (ETFs) are a better idea as they’re cheaper and it’s hard for fund managers to consistently outperform the market.
However, as I explained here recently, I believe actively-managed funds and investment trusts are still one of the best ways to create wealth, despite their slightly higher fees. It seems those with large pension pots tend to agree with me.
Interestingly, millionaires favour ‘star’ managers too. The most popular funds among those with a million in their SIPP? None other than Fundsmith and Lindsell Train Global Equity, which are managed by Terry Smith and Nick Train, respectively. Clearly, pension millionaires have not been put off by Neil Woodford’s downfall.
Tracker funds & gold
Tracker funds do appear in SIPP millionaire portfolios, making up 8% of assets. However, you may be surprised at how they’re used. According to Interactive Investor’s analysis, the top five ETFs held by pension millionaires are:
ishares Core FTSE 100 UCITS
WisdomTree Physical Gold
ishares Physical Gold ETC
Vanguard FTSE 100 UCITS ETF
Vanguard FTSE 250 UCITS ETF
Looking at this list of ETFs, two out of five are focused entirely on gold. This suggests many millionaires use tracker funds to hedge their overall portfolio risk through gold.
High-yielding dividend stocks are also popular among pension millionaires. Here are the top five stocks owned:
Royal Dutch Shell
Lloyds Banking Group
This indicates pension millionaires like their dividends and tend to invest in large, blue-chip FTSE 100 stocks as opposed to speculating on high-risk penny stocks.
Another key observation is that cash levels among millionaires are low, at just 13%. This suggests millionaires understand the importance of investing their money in growth assets, as opposed to just saving it.
Finally, it’s worth noting that pension millionaires tend to have well-diversified portfolios. For example, through funds, trusts, and trackers they have exposure to many different stocks. They also have plenty of exposure to international stocks through funds such as Fundsmith and investment trusts such as Scottish Mortgage. In addition, they’ve split their assets over many different types of investments.
“What unites them is diversification, spreading their investments across different assets, markets and sectors to ensure that all their eggs are not in one basket,” said Interactive Investor’s Head of Personal Finance Moira O’Neill.
This point shouldn’t be underestimated. If your goal is to build up significant wealth, risk management is crucial.
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Edward Sheldon owns shares in Royal Dutch Shell, GlaxoSmithKline, Scottish Mortgage Investment Trust , and Lloyds Banking Group and has positions in Fundsmith Equity and Lindsell Train Global Equity.The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.