I have mentioned before that I’m starting to re-position my SIPP [1] 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 [2] 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 [3].
Why investment trusts [4]?
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 [5] eat into not only capital growth but also income [6]. 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 [7] 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 [8] 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 [9] that it provides in respect of investment trusts. But before that retail investors had to chiefly rely on sources such as FE Trustnet [10], Morningstar [11] and industry organisation the Association of Investment Companies (AIC) – and especially its aicstats [12] 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 [13], 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 [14]. You can follow that link to see it, or click on the image below.
[14]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 [15] 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 [6], 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 [16] 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 [17]. 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 [18].