New to investing: Andrew is a web developer looking to invest in green technologies
In our series Money Pit Stop, we ask an investing expert to give one of our readers a free portfolio makeover.
Andrew, 45, is a web developer living in Kent who has no investments outside of an endowment mortgage at present. He wants to start putting aside £5,000 a year out of his income into an ethical fund portfolio.
Andrew is particularly interested in investing in green technologies. He would use an Isa wrapper for his investments.
His original investing goal was to create a buffer in case of a shortfall in his endowment mortgage, which has 10 years left to run.
However, it is currently forecast to mature with £17,000 in excess of the target value, so he is now less worried about that and simply wants to improve his future financial outlook.
His time horizon is at least 10 years, probably longer.
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ANDREW’S SAVINGS AND INVESTMENTS
Shares, funds, trusts and ETFs: None
Property and mortgages: One house with two mortgages. 1) Endowment mortgage, £106,000, 10 years left. 2) Repayment, £50,000, 23 years left.
Mark Stone is a chartered financial planner. He is also the financial planning director at Bristol-based Whitechurch Financial Consultants. Mark says:
Andrew is in a good financial situation with a comfortable excess of income over expenditure.
He owns his own home albeit with two mortgages outstanding; his main mortgage is on an interest only basis and has only 10 years left to run.
It would appear his concerns are over the interest only portion of his mortgage in case his endowment does not cover the outstanding balance, although it is on track on the moment.
Mark Stone: ‘In the past the choice of ethical funds was limited but the market has grown and matured rapidly’
His financial position is as follows:
Objective: Mortgage repayment/investment funding
Cashflow now: £5,000 out of income to be put aside for investment
Mortgage endowment (forecast maturity value £17,000 over target)
Interest only mortgage £106,000 10-year term left
Repayment mortgage £52,000 23-year term left
Risk appetite: Medium
Ethical investment requirements: Interested in investing in green technologies
What to consider at the outset
The starting point for any investment solution is to ensure that there is a sufficient emergency fund in an easily realisable bank account.
Andrew currently has £15,000 in a cash account. We would normally suggest that six months’ expenditure is held as an emergency fund and therefore without knowing his outgoings this would give him the equivalent of £2,500 per month.
With the spare income that Andrew is looking to invest, I would agree that the use of an Isa would provide him with a tax efficient investment in terms of income tax, and eventually when a lump sum is required there will be no capital gains tax levied on any gain made by the investment.
As Andrew is interested in ethical investing he will need to research which online Isa platform offers the most comprehensive list of ethical funds which match his criteria of investing in green technologies.
He may well be best suited using such a platform as this could offer a way of ensuring that he can access the type of fund he requires.
A word of caution over platforms, is that there is an additional cost for the platform itself.
However, with most platforms there is no cost for switching between funds, so he could continue to make changes to the portfolio to ensure it continues to match his ethical criteria.
The advantage of the Isa portfolio is that it can be used as a dual pot. It is a means, if necessary, to repay any shortfall in his mortgage.
If this is not required then he has a tax efficient pot for other uses, such as additional retirement income.
How to set up an ethical investment portfolio
As Andrew has confirmed that his interest is in investing in green technology, the portfolio will need to have an ethical slant.
There is increasing interest in this area with substantial and growing media coverage of such issues which both reflect and stimulate public interest.
In the past the choice of funds was limited, but the market has grown and matured rapidly recently. However, careful analysis is n
eeded to ensure that any funds under consideration meet all of Andrew’s ethical requirements.
For example, some ethical funds will invest in fossil fuel companies if they meet certain standards on green or social policies, but not every investor will be comfortable with that.
Without knowing Andrew’s stance on such issues, we feel the following investment portfolio could match his requirements.
The portfolio has also been constructed to ensure that there is diversification across the main asset classes, to ensure it reflects Andrew’s medium risk appetite.
We have included a property fund for this reason.
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We also suggest holding a small amount of cash which is not invested, as a buffer in case of losses or in order to top up investments if you wish.
The funds used to build the portfolio have an ethical overlay and in some instances focus purely on green technologies or renewable energy. The UK equity funds and bond funds have been used to create a balanced portfolio with a medium level of risk.
Impax Environmental Markets in particular focusses on green technologies investing in companies which provide, utilise, implement or advise upon technology based systems particularly in the areas of alternative energies and energy efficiency, water treatment and pollution control.
John Laing Environmental Assets and The Renewables Infrastructure Group both focus on renewable energy. The F&C UK Property fund has an ESG overlay and considers energy efficiency and energy performance standards as part of its process.
The information provided by our expert is for the purposes of this article and is not personal advice.
If you are at all unsure of the suitability of an investment for your circumstances please seek advice.
Nothing in this response constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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