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Can ETFs deliver a dependable income for deaccumulating investors? (Part One)

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

Here at Monevator, a frequent request is for a post on exploiting the low costs and diversification of ETFs to generate an income in retirement.

And being the resident Monevator writer on all things retirement, the request has naturally landed in my inbox.

That said, it arrived with a faint air of apology. Our proprietor, The Investor, knows all too well that I have nailed my flag to investment trusts as a vehicle for retirement income.

Curate’s egg

I do hold ETFs in both of my SIPPs. I’m fully open to their merits in the wealth accumulation phase of the retirement investing journey.

But for the decaccumulation1 phase of the journey, I reckon that they have their drawbacks compared to active options.

Are those drawbacks of a terminal, show-stopping nature? For some investors, probably not.

Are the drawbacks permanent, and unlikely to ever change? Once again, perhaps not.

From a standing start, ETFs have grown into a $3 trillion phenomenon in a remarkably short time. Tomorrow’s ETFs might assuage my concerns in a way that today’s fail to.

So as a thought exercise, let’s explore how a portfolio of income-yielding ETFs might work, and see how those drawbacks manifest themselves.

Low-cost passive investing

The obvious attraction of an ETF portfolio is that many ETFs are attractively low-cost in terms of the fees that charge.

Moreover, in a financial world where many charges are rising, the largest ETF providers are cutting fees.

But that cheapness comes at a price: passivity. Basically, computer algorithms do the buying and selling, slavishly adhering to an index that the ETF in question tracks.

This is great for investors gunning for capital growth, as we at Monevator have long argued.

Statistically-speaking, passive investing beats active investing over the long term – and ETFs are generally the cheapest form of accessing those passive investments.

Capital growth, yes. Income, no.

But do passive investments suit an investor gunning for income, not capital growth?

Here I think the arguments are less clear.

I personally know of no studies claiming that passive investments do outperform active investments on the income front – an omission that is naturally of extreme interest to someone contemplating a retirement that might be funded by them.

So ETFs are great if you have investments large enough so as to be able to live off the natural yield that (say) a FTSE All-Share or FTSE 250 index tracker throws off.

Or, for that matter, a passive mix of corporate bonds and gilts; passively-focused ETFs can hold baskets of these fixed-income investments, too.

But for everyone else looking to be generate a passive income in retirement, you’ll probably be wanting the ETF to do something a little racier on the income front.

Smart filtering

So what might that raciness encompass? Inevitably, it comes down to ETFs characterised not so much by ‘passive’ versus ‘active’, but as ‘dumb’ versus ‘smart’.

In other words, the computer algorithm will be buying and selling stocks with a view to making selective pre-programmed judgements on characteristics such as yield, P/E, market capitalisation, and even dividend record.

Now we’re talking!

However that smartness comes at a cost – literally. For while passive ETFs are cheap, smart ETFs are rather more expensive.

In some cases, expensive enough to be within hailing distance of a straightforward actively-managed investment trust or low-cost fund.

Train wreck

Quite apart from cost, there’s another dimension to consider. Suppose the computer gets it wrong?

It can happen. Take the hapless investors who piled into one of the very earliest ‘smart’ income-focused ETFs, iShares’ FTSE UK Dividend Plus (IUKD), extolling its smart stock-picking, low charges, and general all-round wonderfulness.

Launched in 2005, IUKD flourished for 18 months, delivering a FTSE-beating share price and a growing income. And then came the credit crunch and ensuing recession.

Suddenly, IUKD’s ‘smart’ algorithm and stock-picking process looked monumentally dumb. Piling into higher-yielding shares had caused it to overload with just those shares that were about to crash –and in some cases, burn.

Eleven years after its launch, IUKD is still underwater:

Chart showing IUKD (blue) share price versus the FTSE 100 (red) from 2005-2017

IUKD’s share price (blue) versus the FTSE 100 (red) from 2005-2017

What about the all-important income? Here again, it’s not a pretty picture. The income plunged, too:

Chart showing IUKD's annual dividend distributions since 2006

IUKD’s annual dividend distributions since 2006

As you can see, in only one year since the credit crunch – 2015 – has IUKD’s income beaten its first year’s dividend distribution.

Dashed expectations

Investors hoping for a steadily-rising income stream, of the sort that many investment trusts deliver year on year – with a good number of investment trusts boasting a rising dividend for several decades – will have been bitterly disappointed.

Not only has their capital been seriously eroded, but their income is down both in absolute terms and in relative terms – that is, relative to what they might have expected from either a purely passive ETF, or an actively managed investment trust or fund.

The good news? Thanks to the low cost of an ETF, investors in IUKD will have paid a TER/OCF ongoing expense ratio of just 0.40%.

This, of course, is significantly cheaper than the 0.42% TER/OCF ongoing expense ratio charged by (say) the City of London Investment Trust, which has raised its dividend every year for 51 years.

And, which since the end of 2006, has delivered capital growth of 28%, versus the FTSE 100’s more modest 14%.

Sarcastic? Moi?

Striving for the dream

So is the dream of income-investing through ETFs dead?

Well, IUKD is a sample size of one. Other ETF managers have presumably learned from the experience, as will have iShares. The past is no guide to the future and all that.

So next time, in my next post, I’ll sketch out two different ETF portfolios, each intended to exploit ETFs’ virtues in a slightly different way.

One will go for the very biggest ETF providers, and the very lowest charges, and aim to deliver a globally-diversified purely passive income – from equities and fixed income investments – of the sort that you’d expect from a global investment trust or fund.

And being invested in ETFs, you’d expect to achieve that with lower fees.

The second will shop for ‘smart’ income-seeking ETFs, again with a global dimension. I will deliberately aim for a diversified spread of ETFs and ETF providers – following the logic that the algorithms will (hopefully) be sufficiently different so as to minimise the possibility of them all blowing up at the same time, à la IUKD.

Will either of them be attractive enough so as to force me to change my mind, Maynard Keynes-style?

You’ll have to wait and see.

Note: You can read all Greybeard’s previous posts about deaccumulation and retirement.

  1. That is, the spending bit! []
{ 77 comments… add one }
  • 1 John B February 16, 2017, 9:23 am

    1) I’ve never understood why deaccumulators want income over capital gains. Surely its just the total rate of return that matters, and you sell to top-up dividends.

    2) When you get to the investment trusts, can you say why you view them differently to active/passive funds, especially in their market beating qualities. I understand that their costs lie between active and passive, but that is presumably historical, as they have the same staff and trading costs, and you might spot one with a high book value. But what skill are you paying for that isn’t the same as market lagging active funds.

  • 2 john February 16, 2017, 9:37 am

    Interesting. IUKD also turn over 90% a year and the transaction costs associated with this are specifically excluded from the (already high) expense ratio.

    On a different note, one of the weekend reading articles showed, high dividend yield does not give much value bias these days.

    Going after income is tempting because it removes the need to sell units, but I will attempt to resist that temptation.

  • 3 John B February 16, 2017, 9:57 am

    You might to keep away from the passive/active debate by focussing on the different properties of fund/ETF/IT classes, all investing in the same market segment. So that’s instant/daily valuations, withholding tax, domicle, reporting, etc. One thing I don’t understand is how they report their fees, are they equally transparent as to how trading/admin costs are deducted, and what on earth is equalisation.

  • 4 Malcolm Beaton February 16, 2017, 10:23 am

    Hi All
    Ancient(71) retiree in Drawdown
    Learn a long time ago that the argument re Income and Capital Growth was a chimera
    Do Accumulation and let the Pot grow
    Anyone that promises Income sacrifices Growth and vice -versa
    On Retirement sell chunks of Equities/Bonds as required to top up your Instant Access Fund for daily spending
    £10-20000 lots at a time-shouldn’t cost you more than £10 on a low cost platform
    Selling guided by your Asset Allocation -if Bonds are over set limits sell Bonds-same for Equities-sometimes a bit of both-cost £20!
    Keep one or two years cash in Instant Access Account to feed your current Banh Account and that’s it
    Drawback-a bit more labour intensive

  • 5 L February 16, 2017, 10:24 am

    I agree with John B – I have never understood the appeal of income vs. capital appreciation for older investors. Is it perhaps an age thing (decreased appetite for perceived risk as you approach retirement)?

    I’d like to see some better arguments for the approach than ‘that’s what I feel like’/gentle self-deprecation.

  • 6 L February 16, 2017, 10:27 am

    On that note, I’d like to see TI actually talk about his investing approach a bit more instead of self-flagellating while telling us that we should all be investing passively.

    He drops in occasional nuggets such as the other day where he mentioned having index beating returns, but details are a bit sparse.

    It might be fun to have your beliefs/approach challenged/validated, no? 🙂

  • 7 The Investor February 16, 2017, 10:50 am

    Hi, we’ve discussed income versus capital appreciation in retirement several times, although admittedly more in comments from memory than in posts. Though here’s one on the subject:


    It is ultimately a matter of choice. I am of the opinion that investment strategies honed for wealth accumulation while you are earning over an average-to-long lifetime aren’t necessarily optimal for spending down money while earning nothing as you approach death (/the end of compounding!) This is partly for emotional and psychological reasons and partly for practical reasons, but also for mathematical/logical reasons to do with, for instance, sequence of returns risk.

    Strategies that deliver more growth/wealth in seven out of ten scenarios over a 20 year horizon, say, are not preferable to me to one that might do a less spectacular job 17 or 18 out of 20 times. You’re only retired once.

    But thoughtful people can disagree. My co-blogger @TA intends to sustain himself by selling off his capital, for example.

    It might be fun to have your beliefs/approach challenged/validated, no?

    Perhaps you’ve never run a blog that’s open to Internet comments? 🙂

    Fun? It’s not exactly like a cozy campsite chat with friends and family.

  • 8 The Investor February 16, 2017, 10:51 am

    p.s. We did debate my active investing a few years ago:


  • 9 The Investor February 16, 2017, 11:01 am

    p.p.s. Sorry, another ps! To my way of thinking, the best justification for a selling-capital approach is you haven’t got enough to live off a natural yield, even if tilted towards income. I wouldn’t argue with that. Also if you’ve no dependents and no wish to feel a warm glow thinking about your legacy, at some point you’re going to be best off spending. For me that would (hopefully!) come later though.

  • 10 Martyn February 16, 2017, 11:22 am

    I’ve boiled my investing down to two methods

    1) HYP shares includig preferences, accept limited to no growth but a constant income. Growth achieved prinicpally from re-investing dividends
    2) Passive ETF’s hopefully reasonable growth, but poor income generation

    When it comes to living off the proceeds strategy 1 involves no sales, strategy 2 involves sales of units. Both should bolstered with about 1 years running expenses as a cash buffer

    I see either as viable, with a expectation that strategy 2 is the best one, but a key component is an individuals temperment, I don’t like selling very much, hence have targeted strategy 1, only laterally beginning to build holdings in ETF’s. I fully concede this may have hindered my investment returns.

    In my use case I will pursue a mixed approach. The income components will ideally all be Strategy 1 this is the one I live off, investing surplus income into strategy 2 in the good times. In the bad supplement strategy 1 by selling unit’s.

    In practice I will maintain the cash buffer, only selling ETF units if the dividend stream is unable to maintain the headline total. This will be addressed flexibly to avoid being a forced seller in a down market.

    The nuts and bolts, my HYP has many holdings many advocate a much smaller number.

    VWRL is strategy 2, there is also little VUKE, but that me being lazy it’s so I can track the FTSE at a glance. This part is work in progress, I will grow signifcantly going forward.

    Strategy 1 currently (and it probably is now complete) consists of 68 indivual shares targeted for dividend over a number of years from FTS350, predominently FTSE100) which should offer a resilient a somewhat world diverse income stream denonimated largely in the currency I spend.

    As long as the income generated exceeds the income consumed from the day I start drawing (I’m seeing 10% as the minimum ammount), I think it works (actually I’m betting it does…). There you have it my game plan.

    The biggest problem I see is gagadom, but I’m training up my sons so they can manage it if I become incapable.

  • 11 dave February 16, 2017, 12:15 pm

    How about vanguard global high yield dividend etf and vanguard uk income.

    Seems to have performed reasonably well?

  • 12 magneto February 16, 2017, 12:59 pm

    First of all a big thank-you to ‘The Greybeard’.
    His experience of ETFs biased to yield versus Investment Trusts aligns very much with my own. Broad market (unselective) ETFs are fantastic instruments, but any variation from that simple concept seems to lead to problems.

    Re the ever ongoing debate about seeking yield in retirement, it is all about Sequence of Returns Risk and as we have discussed before :-

    The ideal goal in retirement is to live within the ‘natural yield’ of the Investment Portfolio.
    For others where this is not the case, and capital has to be drawn-down in retirement, one of the better plans is outlined in Frank Armstrong’s book ‘The Informed Investor’, chapter 18. (second hand copies quite cheap and a useful read for any investor).

    The simple two bucket approach :-
    Bucket 1 : 5 years (better 7 years) of income needs in cash and/or short term bonds.
    Bucket 2 : Global Stocks
    Designed to prevent selling stocks at distressed prices (£ cost ravaging) while maximising reasonable exposure to the long term outperformance of stocks.
    When stocks are hitting a rough patch the retiree draws from Bucket 1.
    When stocks are surging (e.g. hitting all-time highs as at present) the retiree draws income from stocks (Bucket 2) and replenishes Bucket 1.
    Very few other retirement plans seem to offer as satisfactory a solution to side-step the Sequence of Returns Risk problem.

    Frank has a (new?) on-line book ‘Investment Strategies for the 21st Century’ at ‘Investorsolutions.com’, from which below is an extract :-

    “I assumed that the investor would re-balance the portfolio so that in good years he would replenish his hoard of short-term bonds, and in bad years he would draw it down. This idea isn’t entirely new. A similar technique was used by Pharaoh about 3,000 years ago with some notable success.”

  • 13 Neverland February 16, 2017, 2:33 pm

    My question would be whether a “dependable” income is worth as much as is charged for it

    Alliance Trust or F&C IT TER (as an example): 0.8% (2015)

    Vanguard All World ETF TER (as an example): 0.25% (current)

    Yield on FTSE All World (2016): 2.5%

    You seem to be paying an awfully big part of your “natural” yield over for the illusion of “dependable” income

    In reality much of that dependable higher income growth will be paid for out of foregone capital growth or hidden higher risk in the underlying portfolio

  • 14 Mark February 16, 2017, 3:13 pm

    @JohnB (and others), I think the rationale for favouring natural yield over selling down in retirement is that someone who relies of the sale of shares or units to fund their retirement sells proportionately more when capital values are down and fewer when they’re up, which is counterintuitive and destroys value.

    In theory, a really good ‘smart beta’ EFT could generate an income that competes with an investment trust’s, at a lower cost. However, the problem is that they are so far not that smart. In particular, reliance on historical dividends and weighting by factors such as yield or longevity of dividend growth are imperfect compared with a really good active manager’s ability to anticipate future performance. Also, those mechanical factors can lead to overtrading, the costs of which are not captured in the annual management charge but rather hidden in the TER (which can be very volatile).

  • 15 The Rhino February 16, 2017, 3:21 pm

    @Magneto/TI – wondering whether the bucket approach already has an article, or if not whether it deserves one (maybe its coming next from GB). I’ve seen it mentioned a few times over the years and its always seemed like a really solid strategy.

    One other thing on the pro side for selling off capital is the tax treatment is less harsh, i.e. capital gains tax vs income tax

  • 16 The Investor February 16, 2017, 4:15 pm

    @Neverland — You can put “dependable” in quotes if you like, but you might put anything in quotes in investing. Nothing is certain, not even the “expected” “total return” from an “index” tracking fund. (See how it’s done?)

    There are numerous income investment trusts that have increased (or at worst not cut) their dividends for decades, including through the financial crisis. Given that test, I think it’s reasonable to assume that anything that forces them to cut their dividends will likely hit other investment strategies, too. (One exception — some sort of systemic failure. But I don’t see the mechanism for that).

    That’s not to say you won’t pay a price. While equity income investment trusts have actually beaten UK trackers over long periods, I would readily accept that might be an artifact of the past turbulent 20 years. Investment theory says it shouldn’t happen, and indeed the income should come at the expense of capital growth.

    I’m arguing that’s a fine trade-off. Not for “everyone”, as you might say. 🙂

    @TheRhino — See this article:


  • 17 The Greybeard February 16, 2017, 5:17 pm

    @John B et al: These arguments have been rehearsed here many times. Each of us must make our own decisions, coloured by our own views and experiences. When markets are down, I don’t want to be forced to sell capital at rock-bottom prices to get income. Nor might I necessarily always be in a mental state to make the best (or any) decision as to what to sell, as I get older. And after I am gone, my belief is that my wife (who doesn’t really “get” investing) would be even more at sea. So a flow of income has obvious appeal.

    This article wasn’t intended to review the “sell capital” versus “get income” debate, as its introduction and premise made clear. So to that extent these comments are at best irrelevant.

    What it *was* intended to do is debate the virtues of ETFs as a means of gaining that income, especially when compared to low-cost investment trusts with good track records. CTY (City of London investment trust) yields 3.9%, has an OCF of 0.42%, and has raised its dividend for 50 years.

    To me that seems an attractive proposition, at least for a significant part of my retirement income, especially in later years.

  • 18 The Rhino February 16, 2017, 5:51 pm

    @GB – apologies if this is a silly question, but what does ‘raise its dividend’ actually mean, and is it that useful a metric?

    Very simplistically, if CTY has been raising its dividend for 50 years yet yields 3.9% should we be particularly excited about it?

  • 19 Neverland February 16, 2017, 5:51 pm


    “CTY (City of London investment trust) yields 3.9%, has an OCF of 0.42%, and has raised its dividend for 50 years. To me that seems an attractive proposition, at least for a significant part of my retirement income, especially in later years.”

    Did you never read that bit at the bottom of the prospectus which says “Past performance is no guide to the future”?

    It seems to me quite ostrich like

    I used to invest quite heavily in investment trusts 20 years ago and most of the trusts I held shares in have now either been taken over or changed their strategies

  • 20 The Investor February 16, 2017, 6:01 pm

    @Neverland — We all understand the point. Enough, thanks.

    @everyone else — That may seem disproportionate, but understand (a) Neverland has been finding something negative to say about the majority of posts on this blog for 5-10 years, often minutes after posting and (b) I am really getting fed up with off-topic comments at the moment on this blog.

    Sometimes we will post something you don’t agree with. If the disagreement is on-topic (i.e. somebody here could have made, as one did, a suggestion of a better/different proxy than IUKD) that’s fine. If the disagreement is *about* the same topic as the article (e.g. If the article was: “Should you live off an income or sell your capital in retirement?”) no argument either.

    But if it’s just endless repetition of your personal viewpoint, about something that is subjective, that has already been said by five other people on this post and 50 times before on previous ones, it just gums up the conversation and makes it less likely that those who DO want to talk about the topic of the day will get involved.

  • 21 The Greybeard February 16, 2017, 6:10 pm

    @TheRhino: it’s not a silly question, but one that gets right to the heart of what a yield calculation is. Simply put, there’s nothing to stop a company raising its dividend for 50 years AND the yield remaining at 3.9% for 50 years (or alternatively, going down).

    Consider a 3.9% yield thus: dividend, 39p, price 1000p. Now raise both the dividend AND the price by (say) 15%. The dividend becomes 44.85p; the share price 1150p — and the yield stays at 3.9%.

  • 22 The Rhino February 16, 2017, 6:22 pm

    So potentially, to the retiree living of his wares, the critical metric (when one is looking to live of income alone and not top-slice capital) is neither the no. of consecutive dividend raises or the dividend yield but whether the rate of change of the dividend matches (or ideally exceeds) ones personal rate of inflation?

  • 23 kean February 16, 2017, 6:33 pm

    Thank you Greybeard – certainly food for thought!
    Kind of baffled though & this is why ……….
    1) Underlying assumption appears to be that stock pickers – whether ITs or any other form of actively managed collectives – suddenly can deliver sustained & growing income while at least preserving capital when in retirement or de-accumulating phase. Ahh, so this is when miracle happens! Bearing in mind that now retirement can mean catering for yourself for up to 20-30yrs. Tall order me thinks!

    This in contrast to many prominent people in the industry now saying actively managing investments to deliver sustained & growing income while at least preserving capital on a longer term horizon is a fallacy.

    2) I remember a couple of decades ago experts suggesting that an investor only needs a share portfolio of 25 – 30 steady and reliable dividend payers to secure comfortable retirement . Likes of Unilever, BP, TSB, Barclays, Rolls, etc., nearly always cited as good examples. And look what happened! In today’s global environment looking even more than a year ahead appears to be a huge gamble from this perspective.

    My own strategy is anchored on the following …..
    • only an accountant should ever worry about whether in retirement drawdown comes from income or capital column. I am not an accountant. I only have one pot & am focused on trying to increase net value of my single pot whether labelled retirement pot or not.
    • would dearly love to leave a fab legacy behind especially for my one actual dependent. However, for both our sakes, I am not playing Russian Roulette with my one & only pot.
    • when I get to de-accumulation – don’t think I ever will have a clear demarcation line – I intend to just minimise risk as much as poss.

    Look forward to Part 2 – scope looks interesting!

  • 24 The Rhino February 16, 2017, 6:46 pm

    Maybe this article is part of a sliding spectrum with one end being the low cost ETFs where you happily consider capital and income as equivalent and your brain is still firing on all cylinders – basket of ITs producing a ‘semi’ reliable income sitting in the middle when your brain is on its descent glide path and then at the other end an index linked annuity for when your a veg-box? sound like a reasonable summary?

  • 25 optimistic February 16, 2017, 7:17 pm

    Interesting article, the first few years of my deaccumulation were IT’s, but from 2009 onwards I moved to a more globally diverse and decreased the emphasis on IT’s to the point where I am mainly in ETF’s, mostly a Global Portfolio with overweighting UK, Small and underweight Japan. I now pay no attention to the yield but where in 2007 I depended on a 4% natural yield I now happily live off dividends and part of the capital gains from the taxable portion of my portfolio and continue to move taxable assets to ISA’s.

    Interestingly the natural yield has fallen significantly in % terms but remains fairly steady in £ generated. Given the overall return of the portfolio has exceeded spending by a generous multiple each year since 2008 and the lower natural yield would still sustain normal spending easily , you can have the best of both worlds…..

    Like Magneto a sizeable cash/bonds pot would allow one to avoid sales in a market downturn. ETF’s are low cost and efficient passive investing tools and have worked well but in fairness the previous Investment Trust approach could have worked well too but I would have reduced exposure to the usual income trusts and taken advantage of discounts on some trusts which provide opportunity to profit.

  • 26 The Investor February 16, 2017, 7:31 pm

    @Kean — I think you are misunderstanding the argument of passive versus active. Active managers do generally grow their funds, just not as much as passive products, after costs.

    And active managers can certainly tilt their portfolio to emphasize income (or lower volatility, or higher volatility, or anything else). The debate, which is really off-topic to this post, is whether that’s at the expense of something else. (In most cases income would be at the expense of capital growth. i.e. total return).

    This in contrast to many prominent people in the industry now saying actively managing investments to deliver sustained & growing income while at least preserving capital on a longer term horizon is a fallacy.

    Even a simple FTSE 100 index tracking fund has achieved this many times over, across the past three decades. The issue — and fallacy — would be to say it could do so without *volatility*. i.e. Sometimes it will crash and you’ll have to wait around five years for it to recover. Not so easy if you’re 80, say. (Income trusts could see their share price crash as well, clearly. The case for them is that the good ones have seen their *income* hold steady or grow).

    Most of the problems of old age investing and miscommunication, IMHO, are caused by people who don’t know anything about and have never been interested in investing suddenly rocking up to retirement and demanding the unlikely or impossible. “I want a growing income and no risk”. Well no, that does not exist. It also betrays a cluelessness that some will prey on.

    But as I say this is all off-topic. I just wanted to clear up the misconception. This is the trouble with off-topic posting! 🙁

  • 27 The Investor February 16, 2017, 7:38 pm

    Hmm, to correct myself, you can get a growing income and *almost* no risk with an inflation-linked annuity. The trouble is there that the starting yield (i.e. income) is likely to be very low.

    As a rule I think everything has some risk though. (E.g. In the case of an inflation-linked annuity you might risk not having enough money to live on when you’ve bought it, you risk regret when your friends who stayed in equities see their retirement pots double, or perhaps the measure of inflation your bond tracks is out of kilter with your own. Or maybe your government goes Mad Max and you should have stayed in gold! 😉 )


  • 28 Jed February 16, 2017, 8:34 pm

    @greybeards. City of London yield 3.9% OCF 0.42 yes you could do a lot worse than choose this fund. It states in the annual report that the trust is “predominantly invested in the FTSE 100”. Why not just buy a FTSE 100 tracker such as (etf) ISF yield 3.7% OCF 0.7% (that’s one sixths of Citys OCF). Ignoring past performance both funds will give you FTSE 100 exposure but ISF will give it to you cheaper and you wont ever have a worry about some manager blow up in the future.

  • 29 The Investor February 16, 2017, 8:43 pm

    @jed — FTSE 100 trackers do not deliver a consistent/growing income.

  • 30 Tony February 16, 2017, 8:49 pm

    If you’re looking for a value tilt, what do people think about Vanguard’s VVAL etf? With a miserly 0.22% TER, it looks promising to me.

  • 31 The Greybeard February 16, 2017, 8:52 pm

    @Jed: Because the FTSE’s dividend payout hasn’t increased every year since the index was created in 1984 or 1985 (I forget which). Yet CTY’s dividend has increased for 50 years. Don’t confused yield with dividends, or ignore dividend growth. On a quick look, I can’t see the iShares ETF dividend growth since inception, and so can’t compare it to CTY’s. But that is what you would have to do to make a full and proper comparison.

  • 32 John B February 16, 2017, 9:14 pm

    Equity prices are volatile, so the prices of products based on them, whether ETFs or ITs, must be equally volatile, unless they internally protect with bond/cash buffers.

    Equity dividends are less volatile, but you are fully exposed to them through an ETF. I guess IT’s provide consistent dividends by doing stuff behind the scenes, either using bond/cash buffers or selling off assets. So surely ITs are ravaged like ETFs.

    I don’t see what the secret dividend sauce is that ITs provide that you couldn’t get from a similar equity/bond/cash portfolio, at lower cost.

    I’m not keen on the hindsight approach of quoting a IT that has done well and an ETF that has failed, it feels like you are cherry-picking the winner/looer to make a point.

  • 33 The Rhino February 16, 2017, 9:26 pm

    @JB maybe the point is that you don’t have to do the work, the IT does it for you. In other words the secret sauce is they do the portfolio management bit for you.

    That may seem pointless now but well worth the extra basis points when you are dribbling into your cornflakes in a care home?

    I think that was one of the points GB was trying to get across

  • 34 Jed February 16, 2017, 9:37 pm

    @greybeards @investor, Yes agreed the dividends would be lumpy. Point taken your goal being smooth upward dividend flow, to get that from a FTSE 100 etf would require you to do some work yourself (smoothing).

  • 35 Jed February 16, 2017, 9:43 pm

    @Rhino That made me laugh the thought of someone dribbling into their cornflakes in a care home with calculator in hand “now how much dividends to retain to smooth out next years dividends”

  • 36 xj650t February 16, 2017, 9:52 pm

    @Greybeard great post thanks, I’ve spent all afternoon hunting ITs, just to have a look. Another 13 years accumulation to do but looking for ideas now for when it’s time to drawdown. I’d like to live of the dividends and not have to sell units, or certainly not too many, time to get Excel out to do some modelling.
    Have also had a look at a couple of Funds with a high yield, Artemis High Income and Schroder High Income, yields around 5% and 0.60% and 0.705% OCF, a touch expensive, HL pricing.

  • 37 SemiPassive February 17, 2017, 1:01 am

    I look forward to Part 2. Have built up a significant holding in a few different SPDR Dividend Aristocrat ETFs, and iShares Emerging Market and APAC Dividend ETFs.
    But also hold old school ITs such as City Of London, Murray International and recently added Merchants Trust yielding a whopping 5%.
    The appeal is living off an average natural yield of about 4%, and never having to sell in a bear market and face those sequence of returns problems. I see it like an automatic Safe Withdrawal Rate, as you will never run out of money.
    And unlike bonds there should be some capital gains across the portfolio to help counter inflation.

  • 38 Peter February 17, 2017, 5:46 am

    > stick-picking

    assumed typo

  • 39 The Investor February 17, 2017, 9:53 am

    @Peter — Cheers. That one lasted for quite a while without being spotted!

  • 40 ermine February 17, 2017, 10:58 am

    IMO there’s too much rationalist materialism on this thread 😉 Let us also remember this is the journey of a human life. As someone who has recently crossed the event horizon of accumulation to decumulation, it is also an emotional journey. Unless you are a very early retiree, once you are in decumulation you are also a little bit more aware that your time on earth is limited, although statistically I may be slightly longer in retirement than I was in work.

    In accumulation I spent a lot of time obsessing about minutiae, though I did come to the conclusion that less is more in investing. It was fascinating and I spent a lot of time with it.

    In decumulation I want to do other things, I don’t need to sweat every last penny. I can see the attraction of GB’s IT solutions, and indeed I have followed a little bit of this path myself. I hope I never get to the stage of drooling in my cornflakes, may I go before it gets to that, but generally I want things more on autopilot. I’ve found the natural yield varies much less than the market value of a diversified stock portfolio, but perhaps still a little too much for comfort if it were my entire source of income. The two buckets solution sounds good and I broadly use that in my SIPP that I am burning up over a short period before other income kicks in, but in my ISA that is topping up my pension I will probably shift more in the direction of ITs. I fully accept that I am giving up some total return for that. I am not a university endowment fund, where maximising TR is the be all of the project. Sometimes I am prepared to pay for comfort, and more as I get older. In accumulation, maximising your total return is what it’s all about, because you have no access to the capital for decades in many cases, so why the hell not maximise TR to the best of your ability, anything else is illogical. But in decumulation it is a mix between total return and the comfort of the ride regarding volatility. It’s hard to make drawdown decisions in the face of market volatility, which is why taking the natural yield is attractive – you don’t have to make decisions. Sadly the natural yield of a lot of indices seems to be below the 4-5% safe withdrawal rate otherwise you could stay in the index funds in decumulation without making judgement calls every year.

    I think both sides of this argument are right – the total return maximisers are spot on, but perhaps the aim is to save a little bit more than you need so you can exchange some of that capital for less volatility of income. The extreme case of that is buying an annuity.

    So what I am saying is perhaps your TR maximiser may come to value different things in their portfolios as they get older. Greybeard is highlighting one of the strategies you could use to simplify things. He probably will exchange some TR for that, and that’s okay, as long as you know that. By definition your investment horizon is shorter in decumulation than it was in accumulation, so the cumulative hit will be lower.

  • 41 magneto February 17, 2017, 12:46 pm

    @ John B
    “I don’t see what the secret dividend sauce is that ITs provide that you couldn’t get from a similar equity/bond/cash portfolio, at lower cost.” John B

    Hopefully back on topic?

    There is no secret sauce to ITs, but differences abound.
    In no particular order :-
    + Trading at premiums or discounts (opportunities)
    + Gearing (sometimes varying opportunely with market outlook)
    + Board of Directors duty bound to address investors’ interests
    + Closed End Structure (no need to sell assets at distressed prices should investors be fleeing en masse for the exit in a major downturn).
    + Previous point vital in illiquid assets as we saw recently with several open end property funds being ‘gated’. And the almost open end structure of ETFs relying on authorised participants has maybe yet to be fully tested.
    + Being able to retain dividends in reserve
    + Able to distribute capital gains as dividends (relatively new)
    + Someone at the tiller overseeing stocks progress and changing stock selection criteria as and when necessary to ensure IT goal being met (e.g. Dividend Growth), rather than perhaps naive unresponsive criteria..
    + No stock lending?

    TI will undoubtedly have covered these points on ITs somewhere in the vast library of articles, so please excuse the repetition.

    Whether these are sufficient reason to favour one over the other is for individual investors to decide.
    But no-one is saying that ITs will always outperform ETFs (are they?).

    Much of the discussion has focused on UK examples, but perhaps when examining options a greater focus could be on International; the larger allocation for most investors?

  • 42 helfordpirate February 17, 2017, 3:05 pm

    I feel there is a lot of hindsight bias here!

    A comprehensive (though probably self-serving analysis by the AIC) here http://view.ceros.com/citywire/issue-29-may-2016/p/34 basically shows that for some periods of time for some sectors some ITs “outperform” the market. Is that news?

    Digging deeper the suggestion is that in rising markets ITs can do better on a share price basis as the discount narrows (people get excited about ITs again!) and the gearing gives them some extra zip – the opposite happens in falling markets and they tend to underperform.

    The better performers choose to deliver their over-performance through the strangely much-revered “continually rising dividend”. Do ETF provide this rising dividend income – no, they cant withold 15% of their income, use leverage and go-off piste when they feel like it.

    To me this all sounds like, “sometimes an active fund beats passive investing and in this case provides the return as rising dividends”. Of course, but it does not help me to pick which fund in which sector is going to do this for next 25 years.

    Passive funds and a 2 year cash buffer for me…..

  • 43 The Investor February 17, 2017, 4:15 pm

    @HelfordPirate — Firstly, we are talking about a specific subset of ITs, mainly UK equity income trusts. Secondly the argument is not that they beat the market, that is a strawman you guys have brought to the table. The discussion is about their income, and the degree to which is is more dependable than passive income. Thirdly I said all this earlier as have others and the author, yet you’ve still chimbed in. Fourthly, it’s off topic, as I also pleaded above. Fifthly, your individual comment itself is pleasant and innocuous enough. But writ large it’s why I am seriously thinking again about turning off all comments, except perhaps for certain pages like the broker table. 🙁

  • 44 The Investor February 17, 2017, 4:18 pm

    Oh, and sixthly, pretty sure you’ve said all this at least once before on an investment trust for income post, and we would have replied similarly. (Unfortunately I’m on my mobile and can’t check the 20,000 odd comments but a strong hunch.)

    Essentially, politely asking people to remain on topic rather than wave their passive fundamentalism hasn’t worked. Again.

  • 45 D February 17, 2017, 5:13 pm

    I had SEDY for a few years. The ETF consists of large, dividend-bias companies in emerging markets. It averaged around 4.6% over 5 years for a 0.65% fee p.a. Capital growth ha been muted until recently. Hence, I sold for a breather. I would recommend it for income.

  • 46 helfordpirate February 17, 2017, 5:40 pm

    @TI Sorry to upset you! But…

    Firstly, the article doesn’t say it is about “UK Equity Income”. It was taking about “income investing” and I took CTY and IUKD as just examples. If you took “Global Equity Income” as an asset class you would get different results as the AIC link I referenced in my apparently off-topic post shows,

    Secondly, if “beating the market” is off-topic why does the article contains a graph of IUKD against FTSE and a throwaway comment about CTY beating the market since 2006?

    Thirdly, I obviously failed to make my point properly. As I was trying to say that it’s part of the structural nature of an IT that it can smooth out income, can use leverage in good times and I think even some flexibility in distributing capital as income (?maybe wrong on that one).

    I’d like to counter all your six cardinal points but can’t..!

    It’s great that you engage in the comments in your blog – but I am struggling to see how I can have caused offence.

  • 47 Scott February 17, 2017, 6:09 pm

    I imagine most readers really don’t mind when comments stray slightly off-topic, and more often than not enjoy the nuggets that can be unearthed that way. I think it would be a real shame if you turned off comments to prevent this happening. I appreciate it’s your blog, but you provide it for others to read and contribute to, so I’d like to politely suggest that you relax a little re the comments (and I appreciate you’ve explained in the past why you sometimes object to the off-topic stuff, and your reasons are sound, but maybe you should just learn to accept it, rather than fight it 🙂 )

  • 48 The Investor February 17, 2017, 6:37 pm

    @HelfordPirate — Sorry if I wasn’t clear, but as said your comment itself certainly isn’t offensive. It’s perfectly fine as is. It’s more coming on a thread where multiple times I’ve tried to steer people into addressing the topic or, frankly, say nothing.

    To my mind useful comments on this article would concern particular income ETFs, particular ITs, etc.

    I think I’ll write about this tomorrow rather than comment more here.

    Like I say, no offence caused, this is straw and camels back type stuff.

  • 49 The Investor February 17, 2017, 6:45 pm

    @Scott — Cheers for thoughts. The issue is broadly that we write articles we hope are informative, and then potentially people are misled or distracted by comments below, which we can’t control.

    This thread is less dangerous in that people aren’t saying anything wrong. They have just crowded out what might have been a fruitful discussion about income ITs, ETFs, etc. I for one wouldn’t bother commenting here just to get shouted at and told I was being irrational etc. It’s annoying enough for the author.

    You’re probably right it that I should accept people can’t be asked to stay on topic, but that’s what leads me to consider just turning comments off.

    Anyway point noted, and will be better discussed on tomorrow’s post I think, where I’ll try and explain in more detail. 🙂

  • 50 Passive Investor February 17, 2017, 7:51 pm

    @ grey beard. I like to read your thought about investment trusts so thanks for an interesting and informative post. I can see the advantages of the practical (and even more importantly) psychological simplicity of an IT portfolio. But the one thing that keeps me on the ETF side of the debate at them moment (though I may change as I get into drawdown – not quite there yet) is concern about costs. A very broad market ETF portfolio could easily have a total cost of investment of 0.2% while an investment trust portfolio would probably have a TER /OCF of nearer 0.75%. Even taken on those figures and thinking of a 2.5% withdrawal rate that is a fifth of annual income going to the manager. My real concern is that the TER / OCF may underestimate the cost of the IT considerably – turnover costs, custody charges etc. My question is are there any good data on the total cost of investing in ITs. I have gone as far as looking at annual reports but I can’t really work out to my own satisfaction what the correct figure may be (ie how much OCF / TER underestimates the costs of investing). Do you have any data or can you give any pointers as to how to get the data?

  • 51 Naeclue February 17, 2017, 8:26 pm

    @Greybeard said “The good news? Thanks to the low cost of an ETF, investors in IUKD will have paid a TER/OCF ongoing expense ratio of just 0.40%.

    This, of course, is significantly cheaper than the 0.42% TER/OCF ongoing expense ratio charged by (say) the City of London Investment Trust, which has raised its dividend every year for 51 years.”

    Did you really mean to say that? I would not call 2bps “Significantly” cheaper. Apart from that, has it ever occurred to you that you may have been falling into the trap of survivourship bias?

    I would also add that “raised its dividend every year for 51 years”, would not necessarily have meant a lot during the high inflation period of the seventies. What happened to the inflation adjusted income for say the first 10-11 years and for that matter, what went wrong 52 years ago? Over the last 30 or so years, due to the very favourable sequence of returns, someone could have taken an inflation adjusted 4% every year from a FTSE Allshare tracker and still have more inflation adjusted capital than they started with, so it should have been relatively easy for a UK equity income IT to do something similar (before charges and taxes). Even if dividend income had been unfavourable at times, there are some simple techniques that fund managers can use to convert capital to income.

    Problems with the equity income IT approach would show up when sequence of returns are unfavourable, as they would have been from the mid 60s to mid 70s. How did equity income ITs as a group get on then? I appreciate you may not know the answer, I certainly don’t.

    IUKD, smart-beta/factor ETFs, etc. are really just active strategies that have been computerised. I don’t see the justification for buying those either. At least, not at a TER of 0.4% when you can get an allshare tracker for 0.07% or lower. Fund managers will create products they think they can sell. That does not make them sensible investments.

  • 52 The Investor February 17, 2017, 8:29 pm

    @naeclue — He was being ironic.

    @HelfordPirate et al — You see? It’s just relentless.

  • 53 Stefan February 17, 2017, 8:40 pm

    @magneto Great comment! IUKD and City of London IT operate in totally different ways. The risk of dividend fluctuation is much higher with IUKD because it doesn’t hold reserves to raise dividends even in hard times.

    This is a fundamental difference between the two securities and investors need to decide if it matters (and how much they are willing to pay for lower risk). I hope future posts include this information because it’s a good way of explaining ITs vs ETFs.

  • 54 Naeclue February 17, 2017, 9:33 pm

    Sorry, irony lost on me. Possibly an early sign of senility, time to buy some ITs?

    I do agree with the main thrust of the article. If someone

    1) Was wedded to the idea of matching the income produced from investments to their spending;
    2) Wanted more than the natural yield of the market;
    3) Did not want to take an income by selling/rebalancing across assets;

    then semi-passive high yield ETFs (and similar OEICs) would lead to an income stream that would likely be too volatile. At present only ITs have the flexibility to hold an income reserve and use it to smooth out distributions.

    My concern and clearly that of others is that the higher costs, risk of poor performance and the risk that the income may not keep up with inflation may outweigh the ITs income-smoothing benefit.

  • 55 Jed February 17, 2017, 10:11 pm

    @naeclue I know what happened to Investment Trusts during the 70s. Up untill the 1980s Inv trusts were not allowed to advertise unlike unit trusts. They were a backwater because very few people knew they existed and discounts of 50% were not uncommon. UK focused Inv trusts generally tracked the market however over a ten year period virtually none beat the FTSE All Share. Yields on the income focused trusts were around 14%. However another factor depressing the demand for share holdings and Investment Trusts was punitive Capital Gains Tax and tax on dividends.

  • 56 The Investor February 18, 2017, 2:09 am

    @Naeclue — Your concerns and points are fair enough. You have aired them before on articles about ITs for income. My grievance is I specifically asked people to desist from making the point repeatedly on a post about something else. And my contention is that we effectively will never get a conversation going for those that *do* want to use ITs for income, because every time we post on it, we get this kind of response. As said earlier up the thread, it’s off-topic IMHO for this article.

    I appreciate it’s to some extent a limitation of the blog format / calendar / etc. (And also my rather capacious memory, combined with OCD tendencies.) It’s hard to “move on” and consumption of the content isn’t linear. But it’s frustrating. Hence I am going to have to do something Draconian I think, at least as an experiment. (Probably a zero tolerance policy on off-topic comments, which will I will delete regardless of standalone merit, rather than suspending comments to begin with. Maybe that will work.)

  • 57 dearieme February 18, 2017, 2:49 am

    I wonder whether there could be a natural distinction according to where you hold your assets. For example, I can imagine ITs and REITs being suitable in an ISA, throwing off dividends to be paid out monthly or quarterly. Meantime one might have ETFs (and even ETCs?) in a pension where you anyway may expect to sell some each time you make a drawdown decision. And if selling looks unattractive you instead draw cash from your high-interest current accounts, regular savers, Premium Bonds, and whatever other devices you’re using t0 try to avoid near-zero interest payments.

  • 58 Jed February 18, 2017, 11:01 am

    @greybeards, in your next post you are going to sketch out two etf portfolios for income,as a suggestion why not also include a portfolio of Investment Trusts. Then going forward we can see how each performs on the income front etc.

  • 59 Mr optimistic February 18, 2017, 12:33 pm

    I prefer Investment Trusts to ETFs and this article has made me wonder why. First off there are some proven trusts which have real people standing behind their performance. Bankers IT has charges comparable to an ETF and is a solid payer. Once you are down to 20 basis points charge difference or so I am happy enough to pay the difference.

    In terms of income versus selling units, well there is the emotional bias accrued of having invested for years with a view to accumulation, and the age old view of avoiding ‘digging into capital’. There is also the issue of choosing what to sell. There is plenty of discussion here about buying decisions, selling must just be as difficult.

    I am now in just the position this blog was aimed at, so thanks and I look forward to the next article. Personally I am looking at HSBCs global strategy portfolios as perhaps a middle way.

  • 60 PC February 18, 2017, 1:00 pm

    Thanks for another thought provoking article. On balance I’m suspicious of investment trusts or anything else that promises smoothing because I suspect it comes at a cost, to me.

    Please don’t turn off the comments – this is one of the rare places on the internet where the comments are well worth reading, even if they do stray off topic sometimes. It really puts me off when the comments are turned off, although I appreciate I don’t have to moderate them.

  • 61 Naeclue February 18, 2017, 1:37 pm

    @Mr Optimistic, I aim to just sell and/or buy once per year when I reballance. It is not onerous.

    On the specifics of the article, IUKD does look incredibly risky. If someone wanted to increase the income yield of their portfolio something like the Vanguard UK Equity Income fund looks better as it appears to track the allshare much more closely and is much more diversified. The Vanguard All-World High Dividend Yield ETF also seems to be better constructed, with very wide diversification across 1,196 stocks. The Vanguard funds are cheaper than IUKD as well and due to the way they are constructed should result in lower portfolio turnover. I still think they would be higher risk (and cost more) than market trackers, but not quite as much as IUKD.

    Going for Vanguard would still not solve the income volatility problem though. Someone would need to handle this themselves, which starts to complicate matters. How much income reserve should be kept and where should it be invested, etc. I cannot really see this being a great alternative to someone who just wants an easy time. In which case ITs are really the only way to go other than paying a broker to manage your portfolio (God forbid). At least with ITs, if the income does not grow as expected, the pain should be spread over a few years, giving time to adjust spending downwards, instead of coming as a large shock.

    If I were to go down the IT route, I would spread across a large number of them as the differences in performance is wide. According to the AIC web site, the UK equity income funds with 10 year histories have TRs between 14.3% and 168.7%. City has been one of the better ones at 104.6%, but with my luck I would not be at all surprised if it ended up towards the bottom in 10 years time if I bought it now.

  • 62 The Investor February 18, 2017, 1:40 pm

    @PC — There will in theory be a cost, in terms of a lower total return. But see this article:


    Re: Comments, I’ve just posted my thoughts in an epic waffle this morning. 🙂 I am going to try harder moderation first.

    It’s going to be tricky, though. Your comment — and this one I’ve just written — would probably qualify for deletion under my new thinking.

    Why? Because this whole thread has become another discussion about the merits of income in retirement and of income trusts, crowding out the 10-15 on-topic comments about the mechanics of choosing between ITs for income or ETFs. That latter discussion has not bloomed.

    This has happened 3-4 times in a row with posts on this topic. It’s frustrating and sub-optimal.

  • 63 The Investor February 18, 2017, 1:42 pm

    p.s. Any further comments on — um — comments should please be posted on today’s article about them:


  • 64 Mr optimistic February 18, 2017, 2:06 pm

    @Naeclue. Better stay on topic here…..Point I was trying to make re selling is that I will have maybe two SIPPs when I have sorted it out, plus three ISA’s. Each holds a range of investments. There isn’t a lot of science behind them in terms of managing the whole lot as a portfolio. However if I want to raise 10k which investment do I sell? Should I try and keep the balance the same and if I do that it multiplies up the trades and cost.

    It don’t want to spend my retirement as an ersatz wealth manager particularly and it’s hard enough managing the asset allocation side of things without also fretting about which things to sell periodically.

    There are certainly plenty of IT’s and, from my research, I have been surprised at how many ETFs are not available in distributing form.

    One last thing, I reckon keeping 5 years worth of cash is too much in many cases. Say 5 years of top up income, to add to other pensions, is 8k. pa that’s 40k which now isn’t contributing and is at the mercy of inflation, and at say 2% yield is reducing your income in all years by £800 or 10% of what you need based on these numbers. Nice if you can afford it

  • 65 Grumpy Old Paul February 18, 2017, 2:47 pm

    I strongly agree with your comments. In 2010, @TheInvestor posted http://monevator.com/investment-income-trust/ . Rest assured, the following is in no way an attack or criticism. The performance of the investment trusts in capital terms (Share Price) over 10 years is interesting:

    Temple Bar Investment Trust PLC 45.10%
    The City of London Investment Trust Ord 31.20%
    Murray Income Trust PLC Ord 25p 2.20%
    Merchants Trust PLC – 12.10%
    Edinburgh Investment Tst plc 45.60%

    Figures from Trustnet/Google. For comparison.
    HSBC FTSE 100 Index C Inc 14.70%

    I quote these examples solely to reinforce the point @Naeclue makes in his final paragraph about the differences in performance between trusts.

    I have to declare an interest: in the near future I’m going to have to sort out an income stream for someone close to me using a share of the proceeds from a house sale and the individual concerned is neither well-organised not financially savvy. I’m minded to use an IT portfolio since it seems to be the best option for a ‘fire and forget’ portfolio to generate a relatively high starting income with the probability/possibility of increasing with inflation. However, I’m also inclined to wait until the next crash and thereby benefit from both a high initial percentage dividend yield and high discounts.

    Having said all that, I have a number of concerns regarding much of the discussion of investment trusts over the years. There has been a tendency to treat ITs as a ‘magic path’ to riches appreciated only by the initiated.

    Firstly, I would certainly concede that until relatively recently (pre-RDR and earlier), most investment trusts were much cheaper than broadly equivalent unit trusts; I’m old enough to remember 5% front-loaded charges and 1.5% annual charges being typical for ITs. But this is is no longer true although some platforms offer better deals for ITs.

    Having conceded that, the criticisms are as follows:

    a) Too little emphasis on diversification

    Even if you’re creating an IT portfolio mainly for dividend income, surely you still need to diversify by asset class and geography .

    b) Too little mention of manager risk

    Just as with unit trusts, you can’t assume that a manager with a cracking performance record will continue to do well, especially if she has an investment style which falls ‘out of favour’. Investment trust managers are human: they fall ill (physically and mentally), age and die like the rest of us. Note that Jo of Curtis, of City and London,
    has been in post for over 25 years – reassuring but he won’t go on for ever.

    Therefore, when choosing an IT for a particular asset class/geography, surely one should diverse across of a number of trusts within that sector to minimise manager risk.

    c) Over-exposure to individual shares

    Given that the FTSE 100 is heavily concentrated in the top 10 shares by market capitalisation, and that most UK-based IT investors will presumably want a heavy home bias for an income portfolio to avoid currency risk, there is a an obvious risk of over-exposure to a handful of shares and and a couple of sectors

    d) Little or no discussion of rebalancing an investment trust portfolio.

    I hope the above comments are not deemed ‘off-topic’ and look forward to responses.

  • 66 Mr optimistic February 18, 2017, 2:58 pm

    Not certain I understand some of this.
    A) yes but there are plenty of ITs
    B) too little mention? That’s what the active V passive thing is all about isn’t it?
    C) yep, especially if you chase ‘UK’ equity income so need to diversify as per a)
    D) rebalancing is rebalancing isn’t it, what’s to discuss with respect to ITs ?

  • 67 david m February 18, 2017, 10:51 pm

    My view is that investment trusts are preferable to ETF’s, especially where the objective is income and income growth.

    A key point is the demonstrable track records of capital and income growth. The annual accounts of the individual trusts give a ten year track record. The AIC has on it’s website performance for the past twenty years and dividend records back to the 1970’s. You can go further back by referring to Companies House filings. By contrast ETF’s and income focussed ETF’s have little history.

    I think Greybeard could usefully compare the investment trusts he has previously listed against the ETF approaches he is now preparing.

  • 68 dearieme February 19, 2017, 3:46 pm

    @Mr optimistic: OK, say your retirement income is indeed DB pension, State Pension, and £8k p.a. from a DC pension. If you don’t think it would be wise to hold £40k cash, by what other means would you protect yourself from share market volatility?

    Remember that the way you recommend has to be practical for people who are getting less sharp intellectually, less patient, less energetic, and less up-to-date technologically with each year that passes.

  • 69 magneto February 21, 2017, 12:25 pm

    Trustnet had an interesting angle on this issue :-


    The following quote is food for thought when comparing ITs with higher yield ETFs.

    “By paying part of your dividend out of capital, managers of trusts can avoid being forced to hold onto high yield stocks that might cut their dividends in the future to maintain their own pay-outs

  • 70 Anon February 23, 2017, 10:54 pm

    Very interesting topic this. A while ago I helped out a relative invest a six-figure lump sum for income and did find myself bemoaning the lack of a one-stop-shop from Vanguard. Yes I know in theory absolute return is the only thing that matters and gains are as good as divis/interest (tax treatments aside), but in practice this needed to be truly “fire and forget” and hands-off. In the end, a requirement for monthly income rather constrained the choices (for the curious, funds ended up in PKMONR, K1DVCM, FICNRM, LGMMII, MFAABA, K1AAAD, FCPT… the latter – F&C’s commercial property trust – is the only trust there). We’ll let it run for a few years before reviewing. To me (a VLS fan), it’s horribly active and the fees eat what could have been some more income… but the alternative was for them to hand it all over to a wealth manager who’d have taken most of yet another percent to probably invest it in things charging much the same.

    I do wonder what the ideal low-cost passive vehicle for “deaccumulating” income seekers would look like. Before the VLS funds came along, no doubt the passive fans would have said “well you can just rebalance yourself”, and yet the VLS funds clearly appeal to a huge customer base. More recently Vanguard have added the interesting Target Retirement Date funds… what is less clear to me is what you’re supposed to do with them after that retirement date… buy an annuity? Live off the (meagre) bond income? Reinvest in equity income? It’d be interesting to see what Vanguard came up with as a passive offering in this space; I think their current equity income / high-yield funds are more value than income plays, and they’d really need to up the divi payment frequency (and smooth it) to at least quarterly and ideally monthly to be useful to people like my relative.

    I do find income trusts like City and Merchants interesting. But mainly see them as something to pick up cheap when they go on a big discount when the markets hit a jittery patch; that makes it hard to plan to use them though.

  • 71 The Greybeard February 23, 2017, 11:19 pm

    @Grumpy Old Paul and @ Anon: Thank you for your interesting, informative, and on-topic posts. I am sure that serious and engaged readers of these posts will find them useful, and if they spark further debate, so much the better.

    @Mr Optimistic: Care to post a link to those HSBC’s global strategy portfolios? I’m sure people would find them interesting.

  • 72 Mr optimistic February 28, 2017, 9:52 pm


    A bit discouraged after phoning HSBC and hauling through 7 numbers as advised by them to try and find out the duration of the bond fund.

    Aviva have recently launched a range of aims funds too. Looks like the industry is waking up to the wave of decumulation clients coming their way.

  • 73 arty March 23, 2017, 11:51 am

    I hope the brouhaha over the comments didn’t put you off putting up part 2 – looking forward to it.

  • 74 The Greybeard March 23, 2017, 12:01 pm

    Don’t worry — part 2 is in progress.

  • 75 Nigel Root April 22, 2017, 11:28 am

    Thank you for the article. I would like to raise a question please. If investments give us growth and income, after tax, isn’t the investor in a similar position with either growth or income – he/she is better off – and can spend the gain? Surely the only difference is that it feels wrong to sell some shares/units to realise the capital gain, whereas it feels OK to spend the income? This then leaves us with two real differences, that some collective investments (unit trusts/mutual funds/ETFs) are more diversified than others, and some charge more fees than others so we should concentrate on these.

  • 76 andrew ranshaw March 27, 2018, 3:12 pm

    I always believed that when a dividend paying share went ex divi the share price fell to reflect the value of the dividend ‘egg’ which was about to pop out. So there is no way to take dividend income without depleting capital because the market depletes the capital on investors behalf by decreasing the value of the shares held whenever a dividend is paid out.
    As far as equities are concerned the difference between investing for income and growth is mostly psychological, the greater concern should be that a focus on investing for income will produce a more concentrated and less diversified portfolio than a total market approach.
    Comparing the return of managed funds to broad indexes, whether the funds are Investment Trusts or open ended funds is meaningless unless one includes the dismal performance of all the funds which were closed because no one would buy them due to poor performance. Fund managers do not retain embarrassing funds and their records in public view so no realistic comparison between broad indexes and managed funds can be made because the history of managed funds is full of holes.

  • 77 The Rhino November 18, 2019, 4:13 pm

    On the subject of ETFs for decumulation, I wonder if anyone knows of a tool similar to the AIC Income Builder (https://www.theaic.co.uk/income-finder/income-builder) for ETFs? Obviously, that one is for ITs only.

    I know the perceived wisdom is that dividend dates shouldn’t be important as you should smooth over with a pot of cash, but it is still a handy tool nonetheless? Would be nice to have a similar visualisation for ETF income.

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