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Investment trusts for deaccumulating income investors

The Greybeard is exploring post-retirement money in modern Britain.

I have mentioned before that I’m starting to re-position my SIPP towards income generation rather than capital growth.

At the age of 60 – and expecting only a very gradual transition into full retirement – it’s a plan that makes sense.

When retirement finally arrives, I’ll have a pretty good idea of the income that I can expect, because it will be the income that I’m already receiving.

I have also mentioned that my income generation route of choice is a carefully-chosen basket of investment trusts.

Why investment trusts?

Three main reasons.

First, they’re collective investments, offering diversified exposure to different geographies and markets, and different types of businesses – such as Asia, UK smaller companies, North America, and FTSE 100 stalwarts.

I could buy these shares directly, to be sure. But it seems smarter to leave it to experts who can do it at a lower average cost.

Second, the ongoing charges for investment trusts are generally a lot lower than with open-ended investment funds (“OEICs”).

As regular Monevator readers know all too well, high charges eat into not only capital growth but also income. So if I want diversified exposure and active management, investment trusts are the way to go.

And third, the closed-end nature of investment trusts means that they can (and do) throw up opportunities where the share price can be at a discount to the underlying stocks that the trust holds – or the Net Asset Value as it’s termed.

Sometimes, those discounts can be tasty, rather than a handful of percentage points. Bide your time, and maybe there will be a chance to buy a pound’s worth of income-generating assets for 80p.

To be sure, I have other reasons for preferring investment trusts – investment trusts’ income reserving regimes help them to smooth income payouts, for example – but those three are the main appeal for me.

Which investment trusts?

Choosing which trusts to go for is, alas, a much tougher call.

Long in the shadow of their open-ended brethren – thanks to such funds’ juicy pre-RDR commission payments and hefty advertising budgets – investment trusts have typically received far less media attention, with few outlets providing regular coverage.

Data coverage has been fairly patchy, too.

Post-RDR, for instance, fund supermarket Hargreaves Lansdown has bolstered the coverage that it provides in respect of investment trusts. But before that retail investors had to chiefly rely on sources such as FE Trustnet, Morningstar and industry organisation the Association of Investment Companies (AIC) – and especially its aicstats website – for decent data. All are unfamiliar venues for the typical retail investor.

Moreover – and this is a purely personal perspective – the data that these various outlets have provided hasn’t been to everyone’s taste.

Or, more precisely perhaps, my taste.

Citywire, for instance, often bangs on about those discounts and premiums to Net Asset Value. Yes, discounts and premiums are worth bearing in mind. But for me, it’s investment trusts’ charges that are more important, particularly in a trust that is to be held for the long term.

So, as I’ve said before, I set out to build my own set of comparative data, capturing the facts and figures on which I wanted to focus, and recording them on a spreadsheet.

The team at Monevator (who are more technically minded than I am) urged me to do this using an online spreadsheet, which (apparently) will help us to keep it up-to-date.

They’ve even set up a dedicated page on Monevator for my investment trust table. You can follow that link to see it, or click on the image below.

Click to see the full investment trusts for retirees table

Click to see the full investment trusts for retirees table

So what does my table tell us?

Various things, I think.

Creating it has certainly been a most instructive (if long-winded) exercise.

First, the prospective yield on offer varies widely, even ignoring battered resource-centric trusts such as BlackRock Commodities Income (which I hold), and BlackRock World Mining. These offer high yields of 6.7% and 6.5% respectively at the present time – but the latter isn’t (strictly speaking) an income trust at all.

Proper income stalwarts, such as the venerable City of London (which I hold) and Murray Income offer something much closer to the Footsie’s average yield – respectively 3.7% and 4.1%.

Second – and even among traditional income stalwarts – there’s a surprising breadth of charges. I don’t mind paying something in the range of 0.40-0.50%, but much above 0.55% starts to look a little steep for a fund with a ‘long term buy and hold’ ethos.

In particular, Baillie Gifford’s 0.9% for Scottish American seems a little steep, as does Diverse Income Trust’s 1.33% and Perpetual Income and Growth’s 0.93%. (Disclosure: I hold Scottish American, but outside my SIPP.)

Third, some of the trusts are really a play on dividend growth, rather than income. When looking at a trust offering a yield of 2.3% (Bankers) or 2.9% (Perpetual Income and Growth), you must remember that you get around a third more income from a Footsie tracker, and at a lower cost. The managers must deliver superior income growth in order to justify their share prices.

Four, most of these income-centric trusts offer quarterly dividends. It doesn’t make any difference to the absolute level of income paid, but a smoother cash flow always strikes me as a better cash flow. So venerable trusts such as Law Debenture look to be hold-outs by sticking to a policy of twice-yearly payouts.

And finally, five, some trusts do seem to trade at fairly hefty average premiums. If these trusts take your fancy for other reasons, then it could well be worth keeping an eye on the actual day-to-day premiums, looking for windows of opportunity. Law Debenture is again an interesting example.

What next?

As I’ve said, I found the exercise instructive, and the job isn’t done yet. So the next time you see this table, it will hopefully look a little different.

Income reserves, for instance, might make a useful additional column, and I’ll look to add that.

Moreover, when you take a look at trust’s individual major holdings, it’s clear that there are some significant differences of managerial opinion, with trusts with purportedly very similar income generation remits holding very different baskets of shares. This is more difficult to encapsulate in a brief comment or statistic, but potentially very useful.

And useful though the Morningstar ratings are, they’re not necessarily giving the same weight to income dependency as I would. Going forward, I hope to add something there.

Finally, I’m open to suggestions about other trusts I might add to this table.

I’ve found the whole exercise very useful, and have two new ‘buys’ firmly earmarked. (Law Debenture and Dunedin Income Growth, since you ask.)

See all The Greybeard’s previous articles.

{ 60 comments… add one }
  • 1 David Hollinshead May 18, 2015, 11:50 am

    Thanks for an(other) excellent resource.

    Please could the columns be sortable?

    Regards David

  • 2 ermine May 18, 2015, 11:55 am

    Thank you for pulling this data together – I am looking and ITs for similar reasons to you and the summary helps clarify things a bit!

  • 3 dearieme May 18, 2015, 12:19 pm

    When I first bought ITs in the 80s their discounts were bigger and their reported costs smaller. Moreover UTs were absurdly costly, and either ETFs didn’t exist or I’d never heard of them. So ITs were overwhelmingly attractive. Less so today, I think. Cheap trackers offer stern competition.

    I would like to know how the tax system for ITs operates: may I suggest that as a topic for a future post? Anyway, thank you for this one.

  • 4 Moongrazer May 18, 2015, 1:28 pm

    For the unenlightened… what would be the advantage of an IT over a high yield/dividend OEIC like, say, Vanguard’s FTSE UK Equity Income Index that charges only 0.22%? I get that an OEIC can never trade at a discount, but nor does it trade at a premium – yet it offers a considerably lower OCF, so one would think it might be a reasonable alternative income fund?

  • 5 Mathmo May 18, 2015, 1:31 pm

    Thanks Greybeard — I always feel under-informed about ITs and this is a great overview. Without wishing to be rude, I do wonder if it’s a slightly generational thing (I know my father, for example, is a big fan), whereas younger investors have been more exposed to the marketing efforts of funds, and the next one will be mostly exposed to ETFs?

    Is the premium/discount a result of the closed-endedness — ie the lack of the authorised participant layer for creations who would otherwise arbitrage away this difference?

    It seems the TERs are 50bp at best, and mostly hovering around 75bp. Trading spreads seem to be about 40bp. (I just tested biggest MYI – 41, FCI – 47, cheapest CTY – 12, TMPL – 33). You’d need to factor that spread into the discount to NAV to see whether you were really getting a good deal!

    This is active management but not particularly egregious active management but still about 4 times the cost of passive ETFs (I reckon a passive portfolio comes in at about 15bp with a spread of about 10bp).

    I remain suspicious of any opaqueness in the asset management business and these guys do seem pretty open about holdings and fees, I’d always be scared that a discount meant the market knew more than I did about some UXO in the portfolio or leverage.

    I do see the appeal of the fact they run smooth dividend policies as large companies do — but ultimately it’s the earnings that matter (a rapidly increasing dividend payout is a sign of management running out of time to fix things), and increasingly the difference between capital growth and dividend is a matter of taxation and basic personal treasury work.

  • 6 Thruxie May 18, 2015, 1:42 pm

    I hold VMID FTSE 250 tracker TER cost 0.1% and it seems to include most of the IT’s listed above!

  • 7 The Investor May 18, 2015, 2:02 pm

    @Moongrazer — Pros and cons. See: http://monevator.com/death-infirmity-investing/

  • 8 weenie May 18, 2015, 2:31 pm

    Thanks for pulling this list together. I’ve recently started investing in investment trusts and you’ve highlighted a couple which I hadn’t considered previously.

  • 9 Robert May 18, 2015, 2:54 pm

    A great article, and very useful as I am starting to look into ITs – although a lot further away from retirement, I am using these into my ISA to help get regular income for the years when I know I wont be able to contribute as much as I would like to!
    It would be interesting to know how much the ITs have “in reserve” for years when dividends get cancelled, so how sustainable it actually is.

    Btw – great site and I’ve now become an addicted follower!

  • 10 Mike May 18, 2015, 3:45 pm

    The investment trusts seem a bit confusing for an investment novice like myself – equity income and growth funds seem a simpler option for my retirement ISA portfolio and seem to offer the same returns ish

  • 11 dlp6666 May 18, 2015, 3:52 pm

    Another useful column in the table, perhaps, could be annualised % growth in dividend income (over, say, 7 years).

    So we could then judge whether lower yielding ITs today might one day outpace the higher-yielding ones (which might have frozen their payouts for years).

  • 12 magneto May 18, 2015, 4:02 pm

    Started out originally investing with individual stocks. Favoured the valuation tools used by John Neff and Peter Lynch. However one day the penny dropped that most stocks fell and rose in valuations at the same time. Was it really worth sll the efffort. The research and constant monitoring of a large portfolio of stocks became an excessive work-load. Something had to change.
    Became drawn to ITs because of their transparency, and the long term focus as the managers did not have to worry about liquidity (unlike open ended funds) to meet withdrawals as investors rushed to the exit at moments of panic.
    Then came ETF trackers; offering even simpler investing. So today hold a mix of ETFs and ITs, watching how they peform alonside each other.
    ITs are favoured for yield (where ETFs seem to use unduly naive methods), and for reaching the less efficient markets.
    Will be watching with interest how The Greybeard sorts out his geographical and sector allocations.
    One sector not really listed is infrastructure. We selected HICL/3IN as quasi IL Gilts, and list them in desperation as bonds in our overall allocation, as gilts were offering such pathetic low yields!
    For those who ITs are a new area, recommend John Baron’s book ‘Investment Trusts’ (unlocking the city’s best kept secret).

  • 13 Topman May 18, 2015, 4:07 pm

    Bear in mind that the “Yield %” shown on the s/s (NB the “Scroll” function there is inoperative), is a moving feast, it being the most “recent” dividend divided by the current price “Buy” price, and it can be quite variable over time.

  • 14 Topman May 18, 2015, 4:11 pm

    @Topman

    Correction: “….. by the current “Buy” price …..”

  • 15 Topman May 18, 2015, 4:16 pm

    @ Robert

    Download the relevant R & A and check the Balance Sheet.

  • 16 PC May 18, 2015, 5:34 pm

    Fascinating – I need to know more about ITs. Thanks for the article.

    I’m puzzled about the reason for the switch to income over growth – in a SIPP the tax treatment is the same sin’t it? Isn’t the total amount of money the only thing that’s important or am I missing something?

    I can see that you might want to reduce volatility in retirement but that’s a different question.

  • 17 Topman May 18, 2015, 5:42 pm

    @PC

    It’s income as opposed to drawdown, and income with a good degree of predictability and consistency.

  • 18 diy investor (uk) May 18, 2015, 6:20 pm

    I must admit to being a big fan of the investment trust income route – they have served me faithfully for many years and they make up a large proportion of my SIPP. I am pleased to see the comparison offered as a valuable resource for others to consider.

    However, increasingly I am attracted to the lower costs of the passive index investing and in particular the simplicity of the Vanguard LifeStrategy funds which I added to my portfolio today(LS60).

    The ITs are certainly attractive for providing a steady and rising dividend income but surely the passive index funds provide a better total return, if only due to their lower costs – maybe 0.5% less on average.

    I will be experimenting with taking ‘income’ from selling down some of the units from my LS fund at the end of each year. Should be interesting.

  • 19 Dividend Drive May 18, 2015, 7:07 pm

    Nice post. I have been watching ITs for some time and find them very appealing indeed.

    Currently I am focusing on individual companies as I am only in my mid-20s and I think that strategy will pay off over the long term. However, I have written before on how–once I start to approach retirement–I plan to shift to a more collective investment strategy in which ITs will form a core. Obviously their lower volatility and often more consistent dividend profile stand out in my reasoning much like with you.

    Very interesting, thanks for putting it together for us.

  • 20 Neverland May 19, 2015, 9:28 am

    I just don’t see why you would do this when cheap etf trackers are available

    Charges on the best of these ~0.5% per annum

    Charges on a lazy man’s Vanguard all-world etf 0.25% per annum

    Dividend payments on the best of these = quarterly

    Dividend payment on a lazy man’s Vanguard all-world etf = quarterly

    Saving using a tracker vs the optimum IT portfolio ~0.25%*£500,000 (say) = £1,250 per annum = £24 per week

  • 21 The Investor May 19, 2015, 10:12 am

    @Neverland — Your points are well made, but hopefully we won’t get sectarian debates brewing here.

    One explanation is in Greybeard’s article on mental infirmity:

    http://monevator.com/death-infirmity-investing/

    Some do feel happier with active management. Each to their own. 🙂 Personally I think if you want to go down that route than ITs are often the best way forward. (I invariably hold a few myself).

    Another reason is trackers don’t smooth dividend payments — they will rise and fall with the market. That’s certainly not a fatal flaw for a retirement income investor provided you’re prepared to smooth the cashflow yourself. See one I wrote earlier:

    http://monevator.com/how-to-live-off-investment-income/

    That’s very much a belt and braces approach and some think needlessly complicated. I don’t, and I think those who do are probably either still fairly young or pretty wealthy (across all assets/pensions!) or both.

    Once you stop earning and saving, predictable income is an important point for nearly everyone, and I suspect underestimated by those of us still in the accumulation phase. 🙂

  • 22 Mathmo May 19, 2015, 10:58 am

    My solution for dividend smoothing for a portfolio that I look after was to set up a Santander123 account for the cash holding and to absorb investment returns (both dividends and the occasional annual rebalance into cash). I setup regular monthly standing orders from that to the current account for spending.

    Popping the pension income and household bills into the Santander123 account keeps it eligible for interest and ensures that the current account money is almost entirely discretionary expenditure. Effectively you are doing the same as the IT by holding a reserve, but you get to keep it as a rainy-day fund and earn 3% on the balance.

    Very simple for the operator. Living costs are taken care of, check balance to see how much I have left for lollies this month.

  • 23 dearieme May 19, 2015, 11:03 am

    Well said, TI: any contribution to this debate that helps me make up my mind on which mode to use for equity investing is welcome. Here’s a post making a similar point at TMF.
    http://boards.fool.co.uk/the-op-stipulated-the-yield-range-sought-no-more-13213940.aspx

  • 24 Neverland May 19, 2015, 12:40 pm

    @Investor

    Personally I wouldn’t give up 5-10% of my dividend income for the illusion of a smooth return from equities when there is no such thing

  • 25 The Investor May 19, 2015, 12:53 pm

    @Neverland — Fair enough. However I don’t agree with your statement, in as much as I don’t think we’re talking about a smooth return from equities, we’re talking about a smooth *income* return from equities.

    Plenty (possibly the great majority, I haven’t checked) of the sort of UK equity income trusts we’re talking about here have increased their dividends for multiple decades.

    Nothing is free, and the price you pay is (a) the fees and (b) at least the potential for lower capital/total returns, due both to the managers’ favouring income at the (potential) expense of total returns, and also the selling of capital if required to top-up those dividend payments.

  • 26 The Greybeard May 19, 2015, 1:39 pm

    Hello Neverland.

    I assume you’re talking about VEVE, the UK £ version of VDEV? It launched in August 2014, I think, so it’s hardly got a dividend-paying performance stretching back decades!

    More to the point, I’d be interested in seeing a yield — perhaps you can quote one, as you’re getting the dividends? I’m paying higher charges, yes, but I’m getting a higher yield, and from markets and companies I choose to invest in.

    Two-thirds of VDEV/ VEVE is the United States and the Eurozone, meaning that two-thirds of your income is subject to currency fluctuations, and also comes from countries with arguably less of a dividend-paying culture than the UK or Asia. The UK makes up only 8%, and that is of course the whole market, not a higher-yielding subset of it. I don’t know about you, but given that my bills have to be paid in UK £, I want a larger proportion of my income than 8% to be in UK £.

    For other readers, by the way, VEVE can be found here: http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P00014D7S

    Anyway, thank you for suggesting a good topic for my next article!

  • 27 Mathmo May 19, 2015, 5:53 pm

    I assumed Neverland was referring to VWRL — the all encompassing ETF, rather than just Developed world. The past year has 1.8% yield with another 17% growth. Probably a bit “growthy” for an income investor.

    VHYL yielded 3% with growth of 10%, but strong overseas exposure.

    Vanguard don’t have a good “all UK” product (VUKE + VMID?) but iShares offers IUKD — high yielding UK shares form the 350 (inc ITs). Yields 3% but with 40bp costs.

    How do you know if they will yield this next year? You don’t.

  • 28 Tim G May 19, 2015, 9:10 pm

    Thanks for this post – it’s got me thinking (a little prematurely in my case!) about the deaccumulation phase of investing.

    Is your allocation to ITs just coming from your equity allocation, or is it part of a more radical repositioning of your porfolio, involving a shift away from gilts/bonds/cash or whatever else you hold as well?

  • 29 Topman May 19, 2015, 9:35 pm

    @neverland – “Personally I wouldn’t give up 5-10% of my dividend income for the illusion of a smooth return from equities when there is no such thing.”

    Unlike OEICs for example, investment trusts can take to revenue reserve up to 15% of dividends and income received from their holdings in any one year, enabling them to supplement future dividend payments by drawing from this reserve when economic times are tough.

  • 30 Vanguardfan May 19, 2015, 11:00 pm

    @mathmo- vanguard do a couple of UK funds – an all-share tracker and a UK income tracker.

  • 31 Mathmo May 20, 2015, 1:37 am

    @vgf as funds, but I understand just the two ETFs – VUKE & VMID

  • 32 Cerridwen May 20, 2015, 6:42 am

    Many thanks for this wealth of information. I’m fast approaching deaccumulation myself and will probably adopt an IT based strategy so this is all very useful indeed (thanks also for the link last weekend :-))

  • 33 Neverland May 20, 2015, 10:55 am

    @Mathmo, Topman, Greybeard

    Yes the dividend from a worldwide etf tracker will vary and the yield will be lower than most of the investment trusts here, but you just sell some shares for a tenner’s cost a couple of times a year don’t you

    I actually view international diversification positively myself

    I’m afraid I don’t know the ins and outs of VWRL as I don’t use that etf myself (its too expensive in annual charges for me when half of it is an S&P 500 tracker which can be replicated elsewhere at about 40% of its 0.25% annual cost), my comment was to express what a lazy person could do with etfs with little/no effort

    For anyone who is interested here is the link to that etfs distribution history (it distributes in US$ unsurprisingly):

    https://www.vanguard.co.uk/uk/portal/detail/etf/overview?portId=9505&assetCode=EQUITY##pricesanddistributions

  • 34 Topman May 20, 2015, 11:34 am

    @TI – “Once you stop earning and saving, predictable income is an important point for nearly everyone, and I suspect underestimated by those of us still in the accumulation phase.”

    “If youth only knew, if age only could.” Henri Estienne (1470 – 1520) “Si jeunesse savait, si vieillesse pouvait.”

  • 35 PC May 20, 2015, 1:08 pm

    Maybe because my income has always been unpredictable, I’m self employed now, I’m used to keeping a buffer to cover fixed costs for a fair time ..

    If anything in retirement, having more money behind me will mean I worry about it a bit less.

    That doesn’t mean I wouldn’t consider ITs or even an annuity to cover basic costs.

  • 36 Naeclue May 20, 2015, 2:30 pm

    I am inclined to agree with Neverland. The dividend smoothing/revenue reserve features of some Investment Trusts are aiming to solve a problem I just don’t have – living off variable income. The trick here is called “Budgeting”. A skill once acquired that is never forgotten.

    I mainly hold cheap cap-weighted ETFs and gilts in my SIPP. My biggest holding is the low yielding Vanguard total US market tracker VTI, with a TER of just 0.05%. I withdraw all the income and once per year rebalance, withdrawing some capital at the time to make up the difference between the natural yield and my desired annual income from the SIPP.

    Under capped drawdown it was a bit of a chore to manage the cash, ensuring that there was always sufficient cash available to pay out regularly, but the new pension changes have made it far simpler. I just take out whatever cash is available each month or so, less a small float to cover the charges. Hargreaves Lansdown has swept away all of the drawdown charges which makes this very convenient and cost effective.

  • 37 magneto May 20, 2015, 3:48 pm

    @the total returners

    “Yes the dividend from a worldwide etf tracker will vary and the yield will be lower than most of the investment trusts here, but you just sell some shares for a tenner’s cost a couple of times a year don’t you”

    Fine when markets are steadily rising and stocks fully priced, then the total return concept rules supreme. No doubt about that.

    The difficulty arises when stocks are trading well below their fair price, maybe for some years and the investor is forced to sell off stocks at distressed prices merely to generate income. Then a little bit of tilt to yield prevents any need to sell stocks, and in fact a soundly constructed portfolio might be able to use surplus capital to pick up bargain stocks at those distressed prices, to add further to income (natural yield) generation.

    So yes in the long run total return is the best course for accumulators, but for retirees who do not have the long run; the picture is more subtle; when jam today is preferable to jam (or maybe no jam) tomorrow?

  • 38 Naeclue May 20, 2015, 5:13 pm

    “Fine when markets are steadily rising and stocks fully priced, then the total return concept rules supreme. No doubt about that.

    The difficulty arises when stocks are trading well below their fair price, maybe for some years and the investor is forced to sell off stocks at distressed prices merely to generate income.”

    Apart from cash/short term bonds, markets are rarely steadily rising. They leap all over the place from year to year. Provided your investments are properly diversified across cash, bond and global equity markets, this does not matter as you end up taking capital from the “Up” markets each year on rebalancing. If you overexpose on one market or market segment, such as UK high yield equities, then you are more likely to encounter the problem you describe.

    Monevator posted a link to a Vanguard Tactical Allocation paper recently. I cannot find the link now, but it showed that every year over the last 15 years there was at least one market that showed strong growth (mostly double digit growth).

  • 39 SemiPassive May 20, 2015, 9:03 pm

    Vanguard’s UK equity income fund is an OEIC fund rather than an ETF.
    As such it gets hammered by H-L’s near 0.5% holding charge, if you’re with them.
    There is an SPDR UK Dividend Aristocrats ETF which seems better constructed than the iShares IUKD ETF, will probably move a portion into Dividend Aristocrats when I reach the decumulation stage.
    But will also continue to hold VUKE, VMID and some income oriented ITs such as CTY and MYI, so keeping a foot in both camps.

    Will probably bin anything that yields much under 3%. E.g. move VWRL – the lowest yielding ETF I hold – into VHYL.

    Sorry for all the nerdy tickers!

  • 40 Neverland May 21, 2015, 8:43 am

    @magneto

    “The difficulty arises when stocks are trading well below their fair price, maybe for some years and the investor is forced to sell off stocks at distressed prices merely to generate income.”

    Since you’d be rebalancing your portfolio once or twice a year you would be a net buyer of stocks from selling bonds in such circumstances

    Overall your portfolio would be going down in these years though …. mostly not because you were selling one or two per cent of your capital to fund your living costs

    Thats just the reality of trying to live off investments….accumulation of further capital is pretty unlikely in real terms unless you have massive investments relative to your income needs

  • 41 The Investor May 21, 2015, 9:23 am

    @All — I’m not sure how I feel about this particular comment thread turning into a debate about trusts versus passive funds. It feels respectful and informative, which is great, but I’d rather it was ideally about the merits of particular income trusts for those who want to pursue the strategy.

    I don’t think passive investors would like it if every article about passive investing turned into an existential discussion about whether it’s right or wrong. There’s obviously a place for such debates, but it’ll get tedious if it happens every time we discuss ITs for those who want to use them here on the site.

    On the other hand it doesn’t feel like there’s much chat about IT specifics being drowned out here, so perhaps that’s wishful thinking.

    Anyway, just a heads-up. You’re obviously free to post what you like, but as long-term readers know I can and will edit/delete as I see fit. Nothing has been lopped off this thread, but if we see it every month when Greybeard posts I might get twitchy. 🙂

  • 42 PC May 21, 2015, 10:35 am

    @The Investor The article does start with “why investment trusts?” , inviting discussion .. although I share your wish for the discussion to focus on ITs themselves.

  • 43 The Investor May 21, 2015, 10:48 am

    @PC — Perhaps, though I think that’s more rhetorical, and his previous article was more for the philosophical debate. (I do understand why people are discussing this and it’s a good discussion; I am just wary of every article turning into one of those PlayStation versus Xbox type discussions every month. 🙂 )

  • 44 Naeclue May 21, 2015, 11:01 am

    @The Investor, understood, I will not comment on active/passive aspects again. Perhaps you may permit me to make a few comments on pursuing a high yield strategy though that some investors might want to consider?

    The first comment I would make is irrespective of whether a high yield strategy is pursued through actively managed ITs or UTs/OEICs, there are tricks that can be adopted to artificially boost income at the expense of capital. An example would be timing the buying and selling of shares so that shares are bought just before ex-dividend date and sold just after, or by holding high coupon bonds or other securities which will suffer a capital loss if held to maturity. Some of these things are easy to spot as the fund may have declared that they do this, e.g. taking charges from capital or boosting income by selling call options, so well worth reading the small print and commentary in past annual accounts before investing so you know where the “income” is coming from and are happy about that. ITs are actually allowed to pay income from capital, but I think this is a fairly new development and I don’t think many do this at present. As far as I know UTs/OEICs are not allowed to do this directly. Anyway, look inside the tin before buying it.

    The main way of boosting income is to favour higher yielding equities/bonds over lower yielding ones. This means that a portfolio will be less diversified than one spread across high and low yielding shares/bonds. That may mean higher volatility, so investors need to be prepared for that.

    Equity Income is a very popular investment strategy and it is possible that the prices of higher yielding shares have been bid up as a consequence. Monevator has linked to a few articles that have mentioned this. That may mean new investors are at present paying a premium to buy higher yielding shares. Again that may not matter as the premium (if it exists) could be a long lasting feature of the market and could go even higher.

    There are particular issues with ITs that investors should be aware of. For example, in a big market fall, the discounts on ITs may widen and so make the drop in capital value appear larger than the market as a whole. Great if you want to buy and nothing wrong with widening discounts if you don’t have to sell, but worth keeping in mind and being prepared to accept. ITs can use gearing which can also exacerbate falls when the markets suffer large drops. There are articles on Monevator and other sites which go into the details of ITs – the benefits of ITs v. UTs are not clear cut.

  • 45 Tim G May 21, 2015, 11:01 am

    What are the reasons for the differences between ITs in terms of underlying value and yield rates? And how would these influence choices? Apart from considerations of diversity and charges, do you just look for the biggest discount/highest yield?

  • 46 The Investor May 21, 2015, 11:57 am

    @Naeclue — Good comments, which I agree with apart from your last sentence (I prefer ITs for reasons of transparency and their overall structure).

    Gearing is well worth remembering — Merchant’s Trust, for example, tends to juice up its payout with gearing, if I recall correctly.

    And there are even more esoteric ways of generating income than even those you mention. 🙂 For instance, Blackrock World Mining increases its income via option writing. Very different from just collecting dividends (higher risk for the reward, though management might disagree).

    I’d say none of these things are bad per se, nor good — it’s more a matter of understanding what you’re investing in and why.

  • 47 magneto May 21, 2015, 12:29 pm

    Talking about specific ITs, or other funds for that matter, has anyone cracked how to get income from Japanese shares, or is that a nonsense with Nikkei yielding currently only 1.47%?
    Highest yielding specific Japan IT I can find is SJG @ 1.12% yield, but that comes with a hefty 1% ongoing charge.
    For Asia/Pacific we use AAIF/HFEL/SOI but in that group AAIF alone has Japan exposure, but then at a measly 3.2% of assets..
    Ideas anyone?

  • 48 Naeclue May 21, 2015, 12:36 pm

    @Investor, actually I did mention call options! Another is stock lending. As you say none of these things are necessarily a bad thing, although I struggle to see how churning the portfolio selling ex-div, buying cum-div is likely to benefit investors in the long term.

    Some of these devices are also ways that the fund managers can use to generate extra income for themselves that do not show up in the TERs. For example, how much commission from the writing of call options, foreign exchange, stock lending or even just buying and selling investments is creamed off by fund managers? A lot of the scams have been cracked down on, but the financial services industry is ingenious in dreaming up ways it can secretly take money out of investors pockets.

  • 49 The Investor May 21, 2015, 1:08 pm

    @Naeclue — Ah, so you did. Sorry I missed it, comments coming in on 4-5 articles on the site at the moment, and I’m meant to be doing ‘real’ work anyway. 😉

  • 50 vanguardfan May 21, 2015, 1:23 pm

    @investor and all – I for one am very much appreciating the broader discussion about decumulating strategies, so I hope it won’t get too censored/inhibited. I’m speaking as someone without a whole lot of investing experience, but who could be on the brink of (early) retirement and so I’m keen to hear from those who have made the transition. I imagine there must be a lot of people out there trying to make sense of the new drawdown freedoms, trying to work out how to create a predictable income stream that they will not outlive (yes I’m aware of the irony of describing an annuity!). I’m particularly interested in the psychology of it all and hoping that we might have more discussion (articles and comments) about transitioning to living off investments.
    To me, the strongest argument for a ‘take the income’ strategy (be it active or passive) is the limit it places on drawdown – I think it helps with the psychology of managing volatility. The strongest argument against are the implications of investing only in higher yield assets and the additional risk that may bring. I think its really important to allow the discussion to consider these aspects and not just specifics about ITs.

  • 51 PC May 21, 2015, 1:47 pm

    There are some other good threads on here on de-accumulation (?) eg http://monevator.com/death-infirmity-investing/

  • 52 The Investor May 21, 2015, 2:20 pm

    @vanguardfan — I hear you. 🙂 It’s a tricky balancing act. Allow everything, and comments degenerate into what you see on mainstream media sites where a collection of established blowhards repeatedly restate their entrenched positions. Obviously we’re not seeing that here — we’re seeing a great discussion – but as I said really this discussion isn’t ideal for a post about specific investment trusts. On the other hand, nobody is really debating the individual merits currently, anyway, so probably no harm done. I’m just an idealist! 🙂

  • 53 david m July 2, 2015, 9:41 pm

    I don’t think there are any significant omissions from the original list, although Schroder Oriental Income (SOI) would be another Asia Pacific option, whilst London & St Lawrence (LSLI) and F&C Managed Portfolio Income (FMPI) are fund-of-fund options.

    I think the list of 25 is overlong and I would reduce it to 12. I would leave out the property and commodity trusts and what I consider to be the poorer performers.

    I would keep MRCH, CTY, EDIN, MYI and AAIF as a higher yielding (4.2% average) selection covering UK, international, and Asia Pacific.

    I would keep PLI, TMPL, LWI, FGT, DIVI, MRC and LWDB as a lower yielding (2.7% average) selection with more UK exposure to small, mid cap, quality and recovery companies that should provide more growth.

    The 12 give an average yield of 3.3%. One could select from both selections to suit the income yield one requires.

  • 54 The Greybeard July 2, 2015, 11:02 pm

    @David M

    It’s not a portfolio, it’s an information resource. Thanks for the suggestion of SOI, though.

  • 55 eagleuk August 31, 2015, 8:41 am

    Hi
    MYIB is available at @10% discount in comparison to MYI which is also on 1 % discount.For long term which is one better to hold for diversification as MYIB has gone down by 48% in last 1 year.

    regards

  • 56 The Investor August 31, 2015, 10:34 am

    @eagleuk — I’m not very familiar with Murray International’s B shares, so had a quick look. It seems (as is obvious at face value! 🙂 ) that it’s a capital return structure to avoid income tax liability. I think the days are numbered for these. E.g. see this article: https://www.youinvest.co.uk/articles/investmentarticles/35990/new-tax-rules-could-strike-death-knell-b-share-schemes

    Also, in terms of the price decline, it’s a Bank Holiday Monday as you know so no firm quotes, but are you sure that 48% fall is based on firm pricing? I wonder if the bid/offer spreads in the database provider you’re using has blown out, or if the B shares are very illiquid?

    In terms of the topic of this post of income in retirement, MYIB would not be 100% ideal as it doesn’t provide income but rather more shares that you’d have to sell (so some costs etc), even assuming B shares persist if those tax changes above go through.

    Just some stuff to think about. You could be right in general that MYI is interesting to look at here, I hadn’t noticed it had fallen so far. May have to do some research myself. 🙂

  • 57 Chris Murphy August 15, 2019, 2:43 pm

    Second, the ongoing charges for investment trusts are generally a lot lower than with open-ended investment funds (“OEICs”).

    I really don’t think so, some ITs have higher costs in my view added to by hidden costs.

  • 58 The Investor August 15, 2019, 3:19 pm

    @Chris — The difference isn’t dramatic, but I’ve seen research several times suggesting that trusts are cheaper than their specific equivalents (although not cheaper than most passives of course). This is touted (with leverage) as the reason why they tend to outperform their OEIC counterparts over the long-term.

    For example:

    Research from investment platform AJ Bell has found investment trusts outperformed open-ended funds run by the same manager over a ten-year period three quarters of the time, with the majority also costing the investor less in management fees. AJ Bell found the trusts run by the same manager were cheaper than the open-ended funds in 60% of cases, with the average funds it looked at costing 0.97% versus a 0.91% fee on trusts.

    https://www.investmentweek.co.uk/news/3078921/aj-bell-trusts-outperform-equivalent-fund-75

  • 59 Brian May 6, 2021, 10:50 am

    Have just been studying spreadsheet above and something struck me, Scottish American “ticker” is listed as “Scam”, I’m more familiar nowadays with it as “Sain” usually spoken as “Saints” so it seems to have gone from villain to hero?
    🙂
    Useful spreadsheet btw, am still working through it, but am researching for drawdown income al la “2 pot” approach, but am definitely not a fan of annuities for a minimum income floor as per one of “the Accumulator” articles I have been reading, and am feeling that this could make an (admittedly slightly riskier) alternative that could be more productive?
    Brian

  • 60 The Greybeard May 6, 2021, 12:24 pm

    The FT still list it as SCAM, so that’s good enough for me!

    Greybeard

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