This is a follow up posting to my 'Investment Trusts (The Magazine)' - number 2735 dated: 18/11/01 and the subsequent request from one 'mushypea' to "shed some light for us about how you managed your portfolio over the years?" Before I begin to 'shed some light' I would like to state for the record that my next birthday will be my 57th and for those astrological Fools amongst you I am a Sagittarian. I have long been happily divorced and debt free, both conditions I am determined shall continue. I am also determined that no third party will intentionally benefit from any of my financial endeavours – now or in the future. If any of these statements had not been the case I very much doubt I would have taken on the risks, and reaped the rewards, I did. So, settle down now, you are in for a long lengthy read, you are about to be told the investment trust life story of 'forrado'. What success I have managed to achieve during a thirteen years involvement in the world of investment trusts can be traced back to the 'launch-pad' years of 1991 and 1992. And the effect that three memorable events had on one particular trust that allowed an initial out-lay of £5,000 to rocket up to £144,000 some seven years later.Once upon a time when the 80's became the 90's the split-level movement was establishing itself as a thriving sub sector within the investment trust universe. Being that one of my strong suites is a fascination with numbers and the uses they can be put to, I was naturally drawn towards a closer inspection of this 'breed' that appeared to be so different from others I had previously encountered. I found myself becoming more and more interested in the 'mechanics of the beast'; with one trust in particular I found especially challenging.The Scottish National Trust, under the stewardship of Gartmore fund managers, I discovered was converted along split-level lines back in 1987 and given an eleven year life before being eventually 'rolled-over' in 1998 into the now 2nd Scottish National. The name also lives on in the form of Gartmore's SNT. All in all, there were five different classes of securities that made up its complex jigsaw share structure, each one with differing share totals in circulation. At the top of the pecking order stood the zeros, next in line came a stepped preference – a type of share long since gone out of fashion and in effect a dividend-paying zero. In third place, a traditional income share and at the end of the queue rested the capital share with a warrant tacked on to keep it company.Bear in mind that this was pre-internet days and, outside of the Annual Report & Accounts and the fund manager's marketing department, very little relevant information was available to the private investor concerning this type of trust. So, equipped with my trusty Texas Instrument, a sharp pencil, a pad of fast dwindling A4s and a stack of well-thumbed Report & Accounts, I toiled away many an evening moving numbers around in an effort to make sense of it all. What eventually dawned on me was the realisation of what 'gearing' is, its strengths and weaknesses and what the capital share does with this rocket fuel. It was as if somewhere a light had been switched on and the numbers began to shine just a little bit brighter.All classes of share that have a fixed repayment to redemption schedule are in fact lending their initial monetary value to the capital share in return for this fixed repayment to redemption schedule and in some cases, the right to all or part of the dividend income. Just in the same way a person would borrow money from a lender and repay the combined principal and interest in regular monthly instalments. Immediately I could see both edges of a gearing's double-edged sword. Everything's OK while piling up enough money to meet the required payment schedule with enough left over to hang onto. But if everything's not OK and there's no money coming in, reserves quickly become depleted till the cupboard is finally bare. The life of a capital share is generally either feast or famine.From here, it was only a 'hop, step and a jump' for me to calculate what ratio a capital share's gearing would be on any given day. And because the Scottish National's capital share was 'borrowing money' from three classes of share above it, the effect this had on the gearing potential was dramatic. Lending itself to some roller-coaster share price rides over a volatile life span.For those amongst you who are not interested in the rather technical arithmetical workings of gearing ratios, to many people they can be something of a mystery; I do not want to bore you here. Therefore, I have created an extra posting 'IT Gearing Ratios' that analysis's their mechanics in greater detail for those Fools who want to or have tackled the subject before.Along with a fondness for arithmetic and calculator key bashing I have always paid close attention to events that have had an influence on World, and principally British economics. The years of 1991 and 1992 witnessed a great deal of activity, on this front, that impacted directly on the UK.First up, and at the very start of 1991 [19th January], was the Gulf War. Oil prices went sky-high while global stock markets travelled in the opposite direction. My armchair reading of the situation was that once Uncle Sam had decided to evict Sadham from Kuwait the inevitable military conflict would turn out to be a rather one-sided affair. World markets could then breathe a collective sigh of relief and carry on with business as usual. So, at the end of November  before the shooting match started, I gathered together £5,000 phoned my broker and bought 14,000 Scottish National Capital Shares @ 35p each. Come the first week of March  I sold them @ 55p and cleared a £2,600 profit. An ideal example of, as the old stock market saying goes, 'buying on the sound of gunfire, selling on the sound of trumpets'.Next up came the General Election in April 1992. The opposition Labour Party were double-digit points ahead of the incumbent Conservative Government in the vast majority of opinion polls. This led to the UK market taking a very pessimistic view towards stocks that could be influenced by a change in the political landscape. The [then] newly privatised electricity and water utilities came under strong selling pressure. The banking sector was also depressed; mainly due to interest rate and inflation worries, there was also talk of a Labour windfall tax on the banks. The portfolio of Scottish National was heavily biased towards these high yielding equities, which led to the capital shares becoming likewise depressed. No matter how hard I tried, and I did try, I just could not visualise Neil and Glenys Kinnock standing arm in arm on the steps of Number 10, the day after Election Day on April 9th, giving a victory speech for the benefit of the attending news media. So, it was back on the phone to my broker this time with £8,000 and, a look at my contract note of the time tells me, I bought 43,500 Scottish National Capital Shares @ 18p each. And so it came to pass, Neil Kinnock got the smile wiped off his face when a surprised John Major squeezed in with a 22-seat majority. The London market was caught wrong-footed and a stampede started back into the utilities and banking sectors. It took several weeks before the euphoria subsided and it began to sink in that whatever political party had the power, it was going to have to deal with the looming European Exchange Rate Mechanism [ERM] problem. By which time I had a problem of my own, I was showing a profit of near £7,000 and on the CGT borderline, so I made my exit for the second time @ 34.5p.Then, for all you Fools with long memories, along came the ERM crisis coming to a head on the 16th September 1992. I had made up my mind when Britain had entered this attempt at European monetary control that the £ had been fixed at too high an exchange rate of 2.95 DM to the £ against the dominant German mark. UK interest rates were far too steep for our economy at the time and ultimately the £ would have to be 'realigned' (another name for devaluation) within the ERM to allow rates to fall. Little did I realise what would come to pass when, with the help of George Soros, the freshly elected Conservative Government gave this European currency exercise up 'as a bad job' and the £ and interest rates were allowed to find their own market levels.One of the better ideas dreamed up during the Thatcher era, as it turned out, was the Personal Equity Plan [PEP]. Though, it was not until the scope was widened to include collective funds that the PEP began to be taken up by the private investing public in any great number. From my own perspective, I found the high charging fee structure imposed by the fund management outfits that operated these plans a hurdle I was not willing to jump over. Then during early 1990, I read via the pages of the FT about the concept of the self-select PEP. A few stockbrokers' names were mentioned in connection with this type of venture and following a request for literature and a little more research on the subject. I opened an account with one Killik & Co. [www.killik.co.uk] whom twelve years later I am still doing business with.It was my designated broker at the time at Killik & Co. (since moved on) who steered me towards my first ever investment trust purchase. The self-managed Whitbread Trust (of brewery fame) was loaded with alcoholic related assets and more than 50% owned by Whitbread family interests. The nature of the holdings gave the trust a defensive profile and the market sentiment was guessing that at some later date the majority shareholder would table buyout proposals and take the trust private – which it did around November 1993. The proceeds from this buyout were shortly after invested (at issue) in Mercury's mega float of its European Privatisation Investment Trust [MEPIT]. Again, my Killik & Co. broker put me right when I favoured taking shares in the similar competing Kleinwort Benson Trust [KEPIT]. Mercury's MEPIT now rebranded as Merrill Lynch's European Investment Trust is still with us – Kleinwort Benson's KEPIT disappeared long go, along with Kleinwort Benson.The following years saw holdings established in both the giant Foreign & Colonial and Alliance Trusts. These three named trusts are still providing the geographic diversification and spread to my equity holdings as I write. Though, over the coming years as I hopefully grow disgracefully older, I will be looking to gradually liquidate all my investment trust holdings as I slowly switch from equities into cash. These three low yielding securities will be, I suspect, the first in line for pruning. I plan to eventually arrive at a point, assuming I live longer than my allotted biblical time span of three score years and ten, when I will have little or no exposure to the vagaries of the stock market. The proceeds from this ongoing liquidation will provide the jam on the bread and butter of my state and personal pension annuities.But back in 1992 my thoughts were not running that far ahead. I had funds available to me of £16,000, along with a couple of hundred pounds in accumulated Whitbread Trust PEP dividends, and I was able to use £6,000 of this to cover my 1992/93 PEP allowance. The [then] Chancellor Norman Lamont having doubled the threshold from £3K to £6K from the start of that fiscal year. At the start of a new tax-year the following April  a further £6,000 to cover my 1993/94 PEP allowance was used up and I had £4,000 remaining plus a touch of interest from a depleted Building Society deposit account. In total, from Britain's departure from the ERM [16th September] and the end of April I bought on behalf of my PEP 60,000 Scottish National Capital Shares and a further 20,000 held in my stockbroker's nominee account. The average cost of these purchases being just fractionally short of 20p per share.After eighteen quarters of yo-yoing up and down but basically going nowhere they suddenly went into 'orbit' – I had hit the jackpot as the quarterly capital share price listings indicate.1992: 1st Oct. = 20p 1993: 1st Jan. = 21p…1st Apr. = 21p…1st Jul. = 25p…1st Oct. = 32p1994: 1st Jan. = 43p…1st Apr. = 43p…1st Jul. = 35p…1st Oct. = 34p1995: 1st Jan. = 30p…1st Apr. = 19p…1st Jul. = 18p…1st Oct. = 20p1996: 1st Jan. = 21p…1st Apr. = 21p…1st Jul. = 24p…1st Oct. = 28p1997: 1st Jan. = 25p…1st Apr. = 44p…1st Jul. = 57p…1st Oct. = 112p1998: 1st Jan. = 118p..1st Apr. = 212p..1st Jul. = 192p 30th September 1998…Wind-up [Data Source: Investment Trusts Magazine issues 25 to 48]I had nearly 'jumped ship' a couple of times before lift-off but I always believed that the share price would finally come good. Though, to be honest, my best guesstimate was round the 100p mark. My 'bottle' finally went @ 180p [March 1998] and still the share price kept rising, reaching a height of 235p at one point, but no way could I have stood the vertigo.Much to the taxman's annoyance he was unable to touch the PEP ring fenced £108K but he did spoil the party somewhat when he took his slice of CGT out of the £36K he could get his hands on.Around this time not everything I touched turned to gold. I got sucked into believing the hype that was being peddled concerning the new emerging 'Tiger' economies and the growth attractions of putting funds to work out in the Far East. An investment in EFM's Dragon Trust proved to be an expensive mistake and I finally cut my losses after more than two years of decline, exiting with little more than half of what I started with. The pain was eased; by of all people the taxman, when I sat down with a representative of the Inland Revenue to discuss how much of my non-PEP Scottish National profits I should part with. I was able to offset the Far East loss against part of my north of the border profit.Here, I would like to enter a couple of sentences of self-critisium about some of my investment judgements. In as much as I consider I have the ability to recognise good value opportunities when I see it. I do not always know, till it is too late, when to get out – it is my Achilles' heel.The losses incurred in the Far East did teach me one lesson – investing in expectations (for that is what growth is) is like believing in religion, it takes a leap of faith. Deep down I discovered I am a value investor at heart. It was these instincts that stopped me from getting caught up in the 'new' economy dot.mania feeding frenzy that seemed to be seducing nearly everybody, at one time or another, not so long ago. I forced myself to stand on the sidelines and be a bemused spectator. When the 'TMT' party was at its height I began to heavily buy three trusts [opening quarter of 2000] I had previously researched (one each from M&G, F&C and Martin Currie) that were stuffed with 'old' economy offerings that had been left out of the festivities. At this stage in my investment cycle my future requirements were about to become slanted towards providing an income stream, growth had to take second place. Dividends had become something of a dirty word but to me they were 'manna from heaven'.I was interested to read, during the course of crosschecking my archive records against my memory for accuracy and correct chronological order of events, my stated investment objectives as entered on the obligatory client / stockbroker agreement form I filled out for Killik & Co. back in 1990. “Currently 100% growth but by the end of this century income is expected to be the priority.” The resulting combined dividend income from these three neglected trusts filled the bill nicely and was further enhanced by the [then] deep discounts they were trading at. I had satisfied myself that with the minimum requirements they could sustain dividend increases in the line with the Bank of England's annual inflation target. A close inspection of their Annual Report & Accounts showed up nothing that I would consider out of the ordinary. Although, I was influenced by two date factors. In favour of the M&G trust was an ultra long life span terminating in 2017. The opposite being the case for the F&C trust in 2003. Having an orthodox investment trust structure with no debt on the balance sheet, this F&C vehicle has an out of date redundant mandate. Come the wind-up vote I am betting the fund manager will put forward proposals to merge or reorganize the trust in some, yet to be determined, way that will involve other UK focused funds, of either plc or unit trust status, within the F&C stable. Reading between the lines of the last Chairman's Annual Report & Accounts statement this could well be a possibility. For a long time after I bailed out of the Scottish National Capital Shares I kept a large slice of the sale proceeds in liquid form. The flexibility afforded by a self –select PEP allowed me the luxury of doing so. From outside cash and income resources I continued to make maximum annual contributions into what had been reborn as an Individual Savings Account [ISA]. With the lifting of PEP & ISA geographical restrictions I increased my holdings in both Foreign & Colonial and Alliance Trusts and added to my existing Merrill Lynch European Trust in an effort to create more spread and international diversification.Two weeks following the events of September 11th I dipped my toe back into the investment trust water with relatively small ISA purchase of some income shares.The Yeoman Trust had been badly mauled during declines amongst members of the 'magic circle' split level fraternity. Yeoman [www.yeomanit.co.uk] can trace its heritage back to the decade following the end of the Second World War. It is the biggest client and shareholder of BC Asset Management, a small collection of non-London based ex-Abbey Life fund managers, headed by the experienced David Bruce who has been involved with the running of Yeoman since 1993. Put simply, if the trust sinks then David Bruce and his team drown with it – they have got a lot to lose.A closer look at the assets showed [then] a 40% exposure to other splits and collective funds, 40% exposure to high yielding direct equities and 20% cash. A gradual movement out of other splits and into defensive property related funds coupled with a high degree of liquidity had been a feature of late. Their level of bank borrowings did and does cause me some concern but this is currently counter balanced by cash holdings.Yeoman is dated until the last day of the year 2008 and has three classes of share – zero, income and capital. In my opinion, the capital shares for the remaining life of the trust are a 'lost cause', though there is always the chance I could be proved wrong. The income shares have a fixed redemption value of 55p but the market thinks at the moment it is touch and go if this can be achieved and have priced the share to reflect their concerns. I am a little more optimistic, in that there is a fair amount of time left on the clock to repair the cover. A monthly dividend totalling 11.4p for the year is a heavy burden for the portfolio to carry but the fund managers are well versed when it comes to operating at this type of yield consideration.My view of BC Asset Management's future approach to the stewardship of the assets is a continuing bias towards generating high income – for that is their forte. They will be loath to admit defeat and slash the dividend but a reduction is a possibility if the going gets any tougher. Just how deep the cut will be, if and when it comes, (I am betting) will still leave a healthy annual payment to be collected. I look upon my holdings in these income shares as a semi-annuity type investment. In as much as I am putting at risk a small percentage of my investment trust portfolio in return for the uplift in forthcoming dividend income. Should the income share fail to achieve its redemption value is an event I have already taken in account. It is those dividends I am after and boosted by the ISA 10% tax credit, it is a risk I have calculated I can take.But nevertheless, because if its higher risk rating in relation to my other more middle-of-the-road funds, I will be monitoring very closely any developments that could effect my expectations concerning this trust. To date 77% of my non-pensionable assets are wrapped up in the seven investment trusts referred to in my Motley Fool Profile Interview. All are now sheltered within either a PEP or ISA wrapper. 23% of the remaining assets are held on deposit, of which half resides in an Abbey National tax-free sterling account in Gibraltar. This I make available for access when I am in Spain.The total running net yield on current value of assets employed is 4.8% per annum and I will be looking to 'top slice' some capital gain from my lesser yielding trusts when market condition allow.Add to this a further £138K (at last valuation) that is presently collecting interest and bonuses inside a Prudential Personal Pension 'With Profits' fund. Having taken sixteen years to get to this level, I intend to let it roll along there until the end of this decade. By which time I am hoping the present law concerning compulsory purchased life annuities will have been either abolished or amended.Many thanks 'mushypea' and all Foolish investment trust devotees (and anybody else for that matter) who have stayed with me and got to the end of my story. Trawling back through old archive records and contract notes, in an effort to make sure my numbers and dates were correct, has been something of a pleasurable stroll down memory lane for me. Although, I am back in the UK again (though not for long) the bulk of this essay was assembled from memory, over several sessions, while seated on the balcony of an apartment overlooking the Mediterranean in Fuengirola on the Costa del Sol. I could have done without the constant hammering and banging given out by a crew of Spanish builders who were gutting another apartment within my earshot. But whom I am I to complain, (nearly) everyone has to make a living (-: and writing all this down on paper saved me a good few pesetas by the forfeiture of any likelihood I would have been otherwise engaged propping up a bar in one Fuengirola's many drinking establishments.When, upon my temporary return to these cold and damp December shores and I got round to a second reading of my notes and began knocking them in to some kind of readable order. I could not help but think, if I had a crystal ball, would I have been as fortunate during this opening decade of the 21st Century because for me, the 90s was the right financial place to be at the right time. Indeed, in the language of Spain, if a person were said to have been (and I put this politely) 'the fortunate one' he would be called 'el forrado'. Hope you all have a Merry Christmas. Here is wishing for positive stock market returns for everyone by this time next year.All the best forradoAnybody out there thinking of holidaying on the Costa del Sol this coming summer - take my advice and steer well clear of Fuengirola – the place resembles a building site.
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