I've been a lurker on this board for several months, during which I've been thinking hard about a portfolio for our retirement income. Having been an Investment Trust anorak for the last 16 years, these are the investments I've been studying most. In doing so, I've come across some IT lists that I've found useful. In the hope that these lists may help others, I'm posting them here ... at the same time exposing my retirement-income strategy to review by the assembled company. I'd welcome your comments.A retirement-income portfolio is much the same as any other income-and-growth portfolio, except that the biggest risk is not market risk or inflation risk, but the risk of living too long. If my wife follows the current rule of thumb whereby on average a daughter lives to be 6 years older than her mother, then our portfolio has to continue providing an increasing income for the next 47 years! This means that I am looking for a long-term-buy-and-forget (LTBF) portfolio that will last longer than I do.FOREIGN & COLONIAL AND FRIENDShttp://www.fundworksinvestments.com/Fundnets_uploadfiles//uk_re_it_annualreport_fc_fcit.pdfForeign & Colonial is the oldest IT and one of the largest. It is suitable for a LTBF portfolio, needing no maintenance and yielding a modest but steadily increasing income. On page 20 of the new annual report, the board says that it monitors the manager's performance in part by comparing the NAV returns with the five closest peers within the global-growth investment-trust sector:Alliance TrustBankers' Investment TrustScottish Investment TrustScottish Mortgage Investment TrustWitan Investment TrustThe net yields on these trusts range from 1.8% to 2.5%. We have owned Alliance and Witan in the past, and still own Bankers and Scottish Mortgage.PERSONAL ASSETS AND FRIENDShttp://www.theaic.co.uk/find_compare/trustprofile/conventional/trust.asp?id=PNLIf the ITs on the first list attempt to provide, in a single share, a balanced worldwide share portfolio for a UK-based investor, then Personal Assets goes one step further. It doesn't restrict itself to shares, but provides a balanced cash-and-share portfolio, going liquid when the managers are bearish ... exactly what one wants in an LTBF portfolio.One of the directors, Robin Angus, writes a quarterly report for shareholders - an entertaining mix of common sense, marketplace analysis, and high eccentricity. In Quarterly No. 27, he said that "even the private investor with many millions to invest is in my view best served by a portfolio of half a dozen good general investment trusts." The following quarterly had to be devoted to the flood of shareholder questions and comments, and in Quarterly No. 29 - amid quotations from Shakespeare, Lewis Carroll, Chou En-lai, and the Gospel of Luke - he gave, not advice, but the names of some trusts in which his wife and he owned shares:Alliance TrustBritish Assets TrustForeign & Colonial Investment TrustIndependent Investment TrustLaw Debenture CorporationScottish Investment TrustScottish Mortgage Investment TrustThese quarterly reports are not available online, but shareholders (and, I presume, potential shareholders) can obtain them by telephoning the trust at the number given in the link above. We own shares in Personal Assets and shall continue to do so.ALLIANCE AND FRIENDShttp://www.alliancetrust.co.uk/press_releases/isa_top20.pdfFor the last 7 years, Alliance Trust Savings has published a list of the ITs, apart from Alliance itself, most frequently chosen by ISA customers. The top three, which have held those positions for some time, all have enthusiastic investors on this board:RIT Capital PartnersBritish Empire Securities & General TrustCaledonia InvestmentsThe problem with these trusts from my point of view is that - although they have served their investors well in terms of total return (dividends plus capital growth) - their net yields are low, ranging from 0.3% to 1.4%. And we need a net cash yield of about 3% from our portfolio. Many people would say that is not a problem: just sell a few shares when you need cash. For example, Robin Angus, in Quarterly No. 34, argues "that it would be logical for most investors seeking a high cash yield to achieve it by realising regularly a small percentage of their investment in high quality shares, rather than investing only for yield."I'm not completely convinced. For a start, as far as I know, Personal Assets is the only IT which will provide the automatic sales that an LTBF portfolio would require. Moreover, periodic sales to provide a cash income are economical only if one has a rather large portfolio. If one has investments totalling £1,000,000, then a monthly income at a rate of 3% a year involves selling £2500 of shares a month; a £12.50 dealing charge works out at a bearable 0.5%. If one has investments totalling £100,000, however, then £12.50 is an expensive 5% of one's £250 monthly income; so monthly income is not economically possible.BILL MOTT AND FRIENDShttp://www.asset.tv/online/?un=pseudo_PSigma&i=1664&tr=230107PSigmaA difficulty with superstar fund managers is that, by the time they have established clearly that they are skilful rather than lucky, they are close to retirement. Dr Mott has a spectacular track record and has been tempted out of early retirement to start Psigma Asset Management Limited and the Psigma Income Fund. On hearing about this, I proved that an investment-trust anorak can occasionally be broad-minded enough to consider a unit trust, and sent for a brochure. This describes the fund as being an "impressive alternative to the 'Big Four' income fund managers":Adrian Frost, of ArtemisGeorge Luckraft, of FramlingtonTony Nutt, of JupiterNeil Woodford, of Invesco PerpetualThe Psigma brochure also says that the fund suitable only for medium or long term investment, which it describes as being 3 to 5 years. I part company completely at this point: 5 years is not even remotely long term. I reckon the gilts market has it about right: a gilt with up to 5 years remaining is a "short", and a "long-dated" gilt is one with at least 15 years remaining. By this purist reckoning, Messrs Luckraft and Nutt do not yet have long-term track records.YIELD OVER 3%, EXPENSES UNDER 1%http://www.aicstats.co.uk/conventional/index.aspThis last list is my own. Although I am tempted by Robin Angus's contention that one should focus on total return and ignore yield; and tempted by the idea of having someone of the calibre of Bill Mott managing the early years of the portfolio; I still think that the most economical LTBF way of achieving a monthly income at the rate of 3% net a year is to have a portfolio of half-a-dozen or so general ITs. So I went through the statistics of the Association of Investment Companies looking for ITs with a net yield over 3% and a total expense ratio (management and administration charges, but not dealing costs) under 1%:British Assets, yield 4.0%, TER 0.62%, gearing 125%, quarterly income (1,4,7,10)City of London, yield 3.5%, TER 0.44%, gearing 107%, quarterly income (2,5,8,11)Dunedin Income Growth, yield 3.6%, TER 0.66%, gearing 111%Edinburgh, yield 3.8%, TER 0.41%, gearing 117%, quarterly income (2,5,7,11)Merchants, yield 4.1%, TER 0.67%, gearing 120%, quarterly income (2,5,8,11)Murray Income, yield 3.3%, TER 0.83%, gearing 105%, quarterly income (1,4,7,10)Securities Trust of Scotland, yield 3.7%, TER 0.79%, gearing 109%, quarterly income (3,6,9,12)Temple Bar, yield 3.6%, TER 0.58%, gearing 112%Some high-income trusts, and all Split income shares, put capital growth of any sort at risk; I want dividend growth over a very long time so I have left them off the list. The 3 highest yielding ITs on the list achieve their yields in part by the use of moderate gearing; am I right in thinking that this will increase their risk over the very long term?The portfolio that jumps out at me from this list is combination of City of London (which we already own), Murray Income, and Securities Trust of Scotland. This would have an average net yield of 3.5%, gearing below 110%, and would even provide an income payment every month.To this I would add some global ITs with a more modest yield. We can afford to allow the initial portfolio yield to drop to 3%, and my experience has been that lower yield ITs provide greater growth in both capital and dividends.Later,John
© Copyright 1998-2013, The Motley Fool Limited. All rights reserved. This material is for personal use only.The Motley Fool, Fool, and the "Fool" logo are registered trademarks of The Motley Fool, Inc.Place of Reg: England & Wales. Company Reg No: 3736872. VAT Reg No: 945 6990 68. Registered Office: 5th Floor, 60 Charlotte Street London W1T 2NU.
Page load time and server: