Long time readers may remember that as I’ve written on Monevator many times, a few years ago I began repositioning my main SIPP towards income-centric investment trusts.

Mostly, this meant selling various passives and some funds, and replacing them with investment trusts.

This isn’t the place to reprise the merits or otherwise of that strategy.

Previous articles by me have:

• Argued the case for investment trusts as one solution for retirement income.

• Made the case for active management in deaccumulation.

• Explained the traits I look for in such trusts.

For me it boils down to a combination of in-built diversification, (mostly) reasonable charges, and a proven investment model that in many cases goes back over a hundred years.

To which I might add that in some cases, investment trusts also offer access to asset classes that would otherwise be problematic for ordinary investors.

These days, for instance, my own portfolio features large-scale industrial and warehouse properties in the form of Tritax Big Box, and solar and wind farms in the form of Bluefield Solar Income and Greencoat UK Wind.

Terra incognita

Whatever their merits, investment trusts have historically faced an uphill struggle for mindshare among investors.

The financial press, for instance, has traditionally fêted open-ended funds, for reasons not unconnected to the amount of advertising that such funds undertake.

When soliciting interviews with active managers, the same logic applies.

Investment advisors, too, were slow to tout the attractions of investment trusts. The arrival of RDR back in 2014 and the demise of a number of cosy commission-based arrangements has changed that a little, but more needs to be done.

And – it has to be said – the venerable nature of a number of investment trusts hasn’t helped to bring about a nomenclature that appears investor-friendly to modern eyes.

The Scottish Mortgage investment trust, for instance, is nothing to do with mortgages, and the last time I looked it had no investments in Scotland. To be blunt, the name does little to hint at index-beating major investments in Facebook, Google-owner Alphabet, Tesla, Amazon, Alibaba, Tencent, and other digital illuminati.

Put another way, investment trusts can be something of an unknown for many ordinary investors, with relatively few sources of worthwhile information.

New, better, bigger

Hence, back in 2015, I created a Monevator-published table of income-centric investments trusts, which became something of a popular resource.

Further updated in 2016, it was actually in the process of receiving a 2017 refresh when, as they say, real life got in the way.1

And somehow, here we are in 2019.

The 2019 table, updated at long last, contains a small number of improvements. Three, to be precise.

• It includes many more investment trusts – roughly twice as many.

• I’ve included a number of ‘specialist’ trusts, as well as property-centric trusts, not least because these asset classes now figure fairly prominently in my own investments.

• Following reader suggestions, trusts are categorised and grouped together: UK-centric, global and international, specialist trusts, and property-centric trusts.

Click through to view the cloud-hosted investment trust table in a new window.

The small print

There are four observations to make on the 2019 bunch of trusts.

The first is that among those trusts that featured in the 2016 list, costs are down: 18 trusts had a lower reported ongoing charge; four were the same; and two appeared to have slightly increased it.

Second, of the trusts listed, 24 feature among my own investments, with two more earmarked for purchase soon.

Third, to be included in the table trusts had to be a member of trade body the Association of Investment Companies, which means that a number of REITS that would otherwise make this list have been excluded. Among my own investments, for instance, are Primary Health Properties, Empiric Student Property, and Tritax Eurobox. These do not feature in the table.

Fourthly and finally, the SIPP in question which holds these trusts is now significantly larger, after two other pension investments have been rolled-up into it in order to cut costs and improve performance.

There’s still a fairly hefty five-figure sum in funds, but for me at least, the strategy of moving into income-centric investment trusts is delivering the goods.

Naturally this information is only provided as a starting point for Monevator readers doing their own research: If you invest in any of them, on your head be it!

Of course I hope it’s useful, and look forward to any comments. It’d be especially interesting to see an outline of the portfolio of any readers using investment trusts in retirement, if you’d care to share?

See all The Greybeard’s previous articles.

1. My friend is now fully recovered from his heart attack and subsequent coronary bypass, and now regularly trounces me at our weekly exercise class. [↩]

The standard story is that when equities collapse we should be saved by our bonds. Like a financial Clark Kent, this hitherto unassuming asset class takes off its glasses, reveals its cape, and soars above the chaos, lancing losses with laser beam glances.

The so-called flight to quality – when capital deserts risky equities to take refuge in high-grade government bonds – worked during the meteor strikes of 2008-09 and 2000-02.

But – oh big surgery-enhanced buts – it doesn’t always work.

UK equity and gilt returns since 1899 reveal that bonds are not always enough. Our portfolio defences need to be multi-layered like a castle, with walls, moat, archers on the ramparts, and pots of boiling oil ready to meet the potential threats.

How often do bonds rise to the occasion?

UK equities have ended the calendar year with a loss 43 times between 1899 and 2018 according to the Barclays Equity Gilt study, the go-to source for UK returns data.

That’s a timely reminder that you can expect to see an annual loss on your allocation to UK shares around one year out of every three.

So how often have UK government bonds (or gilts) proved an effective remedy for that portfolio pain?

For each year that ended with a loss for UK equities, gilts:

• Rose 28% of the time.
• Fell by less than equities 37% of the time.
• Lost more than equities 35% of the time.

Two-thirds of the time you’d have been better off holding some gilts versus 100% equities during a down year – but even our safe haven bonds would have made things worse a third of the time.

Not ideal.

Do gilts save their best for darker days?

When equities lost 10% or more in a single year,1 gilts:

• Rose 25% of the time.
• Fell by less than equities 65% of the time.
• Lost more than equities 10% of the time.

This is more like it! Gilts made a bad situation worse in only 10% of major market corrections. Nine times out of ten owning gilts cushioned the blow.

When equities lost 20% or more in a single year, gilts:

• Rose 40% of the time.
• Fell by less than equities 60% of the time.
• Gilts have never underperformed equities in this scenario.

UK equities have lost more than 20% in a year on five occasions. Gilts didn’t do worse in these years but the airbag left you in a body cast three times. Double-digit inflation was running amok in each case – 1920, 1973, and 1974. Gilts got trampled like a traffic cop trying to halt King Kong.

To put some gory numbers on the UK’s biggest horror show:

• UK equities lost -71% between 1973 and 1974.
• UK gilts fell by 50% between 1972 and 1974.

You’d struggle to live on those crumbs of comfort.

As mentioned, gilts did register gains during the Dotcom Bust (2000 – 2002) and the Global Financial Crisis (2008 – 2009). Not by enough to fully cancel your losses if you held a 50:50 equity/bond portfolio, but enough to help you pay the bills and buy equities during the fire sale.

Just add cash

The problem is our memories are short and the textbook performance of quality government bonds during the last two meltdowns can easily blind us to the fact that gilts haven’t worked one third of the time.

Can we solve the problem if we diversify into other defensive assets as well as gilts?

Cash has lost value in real terms every single year since 2008. That dismal record might easily stop us digging deeper to learn that cash scored better annual returns than UK equities and gilts in 27 of the 43 drawdowns – or 63% of the time.

Note: The Barclays Equity Gilt study uses UK Treasury bills2 as a proxy for cash.

Cash looks worth holding because:

• Gilts and equities were both down 72% of the time in a losing year. But adding cash meant that you’d have at least one asset in positive territory 51% of the time.

• Cash outperformed bonds 65% of the time when equities lost more than 10% over the year.

• Cash outperformed bonds 80% of the time when equities lost more than 20% over the year.

• Cash beat bonds during all three of the supply shock years – 1920, 1973, and 1974. Cash was still down in real terms, but by much less than equities or gilts.

Index-linked gilts for anti-inflation

Might we improve our portfolio’s resilience with index-linked gilts?

These inflation-resistant government bonds (called ‘linkers’ by their fans) have only been around since 1983, which is a pity because they would have been more popular than flares in the 1970s.

• UK equities have had ten down years since ’83.

• Linkers only outperformed conventional gilts twice. And linkers were still in the red both years, just marginally less so than gilts.

• Linkers ended down when equities lost over 10% in 1990, 2001, 2008, and 2018.

Index-linked gilts did register a small gain in 2002, when equities lost 24.5%. But all told they’re no replacement for conventional gilts as a safe haven.

With all that said, linkers are the only asset class regularly cited as offering useful protection against high and unexpected inflation.

Don’t expect equities, property, or most commodities to help when inflation is off-the-hook. Gold might assist, but not reliably so.

Talking of gold…

Gold for chaos insurance

Gold is famously uncorrelated with equities or bonds. It sometimes works when nothing else does.

We can take a look at whether gold improved a portfolio’s return during every UK equity market drawdown since 1970, thanks to the amazing Portfolio Charts.

There were 15 down years between then and now. Gold, equities, gilts, and cash all sunk together only twice – just 13% of the time.

Gold improved the portfolio return two-thirds of the time.

It did a spectacular job in the stagflationary 1970s. But it’s impossible to know how connected that performance was to the ending of US political controls on the yellow metal in 1971.

Gold also put in a good shift at the height of the Global Financial Crisis. It returned 90% between November 2007 and February 2009.

What’s less well remembered is that gold fell 30% in October 2008, swirling in the same toilet bowl as everything else. Year-end returns can only tell us so much about what it’s like to be a forced seller in the midst of a crisis.

There are many reasons to be wary of gold. It’s not a good inflation hedge for small investors and it has a long-term track record of low returns and high volatility – the opposite of what we want in an asset class.

But gold’s reputation as a safe haven holds up, on balance. Passive investing champion Larry Swedroe sums up the evidence:

As for gold serving as a safe haven, meaning that it is stable during bear markets in stocks, Erb and Harvey found gold wasn’t quite the excellent hedge some might think. It turns out 17% of monthly stock returns fall into the category where gold is dropping at the same time stocks post negative returns.

If gold acts as a true safe haven, then we would expect very few, if any, such observations.

Still, 83% of the time on the right side isn’t a bad record.

An asset that counterbalances falling equities 83% of the time is pretty remarkable in my view.

Gold may help you avoid being a forced seller of shares

Cash and gold do not feature in my personal accumulation portfolio because the evidence shows they’re a long-term drag on returns.

Instead, I’ve backed myself to ride out any crisis and to not panic sell if my portfolio heads south for a few years.

Living off your portfolio in retirement is a different ballgame, however.

A deaccumulator must sell to live.3 If a bear market lasts several years then ideally I’d have at least one asset class in my portfolio that’s above water when I need money. At worst, I’d want an asset that I can sell for a marginal loss.

The nightmare is selling equities at a loss over a protracted period and torpedoing the long term sustainability of your portfolio.

Retirement researchers have found that the dreaded sequence of returns risk hurts us most during the period that starts five years before you start living off your investments until about 10 to 15 years into your retirement.4

That period is the red zone for any retiree. Avoiding too much damage to your portfolio during that time is mission critical.

Which leads me to think that cash and gold should join my deaccumulation portfolio alongside conventional gilts and linkers to provide defence in depth when I’m most vulnerable.

Since 1970 there have only been two out of 15 total losing years for equities where all these asset classes ended the year down together.

I doubt I’ll hold more than 6% of my asset allocation in gold. In the deaccumulation red zone I could probably squeeze two years of living expenses out of that. The ever-excellent Early Retirement Now has also mentioned a couple of times that small allocations to gold (5-10%) can mitigate sequence of return risk.

Gold would be a one-shot weapon for me – fired off to protect my other assets from a worse loss. I’d be unlikely to replace it once used because I’ve only got to make it through that first decade or so. I remain firm in my belief that gold is an expensive insurance policy over the long term.

I feel similarly about cash. Again, I can see myself holding a couple of years supply to get through the height of sequence of returns risk.

One of the odd advantages of being a small investor is that I can probably do better than the Treasury bills rate by keeping cash squirrelled in the UK’s best buy bank accounts – refusing to let it rot when bonus interest rates evaporate. I’ve certainly done alright with cash in the last decade using that strategy.

The critical takeaway is that we need to diversify our defences so that the high watermark of a crisis does not flood our equity growth engines. History tells us not to rely purely on equities and conventional bonds to protect our portfolios.

Take it steady,

The Accumulator

1. There are 20 instances between 1899 and 2018. Okay, okay, I admit I rounded a -9.6% and a -9.8% to -10%. [↩]
2. Short-term government debt with maturity dates of 12-months or less. [↩]
3. Editor’s note: Ahem. Presuming they’re not following a ‘living off the income’ strategy, which requires a larger starting pot of capital. [↩]
4. Peak vulnerability to sequence of returns risk can even last up to 20 years in the deaccumulation stage if you’re a precocious FIRE type looking forward to 60 years in retirement. [↩]

One of my occasional forays into the cruel and unusual punishment of Brexit. Not your cup of tea? Feel free to skip to the money links below.

Will August 2019 be remembered as the moment the Brexit brown stuff hit the fan? It’s a brave call – what with the three-year pantomime already resembling a bust-up between a mountainous Marmite stockpile and the London Array.

But so far it’s been mostly political, with one unprecedented crisis after another Parliamentary omnishambles.

Now it’s the economy, stupid.

Or, as the Brexiteers call it, the stupid economy.

We voted to be poorer

Even I wouldn’t imagine the UK’s just-revealed lurch into ‘negative growth’ last quarter was entirely due to our decision to shoot our own foot off.

The 0.2% GDP contraction between April and June – the first such shrinkage since 2012 – may in part be an unwinding of a previous growth boost the UK ‘enjoyed’ from companies frantically stockpiling before the last Brexit cliffhanger.

Also, Brexit’s fellow traveler over in the White House deserves some of the credit for the way in which he’s advancing America’s not unreasonable case against China. The resultant trade war is hitting German manufacturers as surely as Texan farmers and Chinese chip makers.

But I think we can mostly blame Brexit.

The UK economy applied the brakes with the 2016 Referendum result. Not entirely – we escaped a recession – but we’ve been losing momentum ever since. That lost growth had cost us £66bn by April, according to the ratings agency S&P. There’s been no positive news since then, and I wouldn’t be surprised if the figure is now significantly greater.

Given our depreciated currency, whatever the exact number is you wouldn’t want to see it in US dollars.

And remember – as we Remoaners are wont to remind-ya – Brexit hasn’t even happened yet! Nevertheless Brexit uncertainty intrudes into the reports of many of the UK companies I read, aside from the multinational behemoths.

UK retail, for example, is on its knees. If you’re confident of a post-Brexit bounce back (and you’re not too worried about Amazon) you can already buy listed commercial property REITs at a 40% or greater discount to the underlying assets.

As for British manufacturers, they seem to have made little from the weaker pound they’ve always wanted. (Big surprise, you can’t devalue your way into becoming Germany).

Not that manufacturers are of key importance to our service-orientated economy, unless you’re a blurry-eyed Leaver nostalgic.

And even if you are, don’t you dare bring fisheries into it. The entire UK fishing industry is about the size of High Street bike shop Halfords.

Down but not out

One episode of shrinkage doesn’t equal a recession, as an erectile dysfunction expert might say. We’ll need two quarters of negative growth for that.

Will we get it? Who knows but the omens aren’t good.

The likes of Chancellor Sajid Javid are always pointing to the resilience of the UK economy as a reason to be confident about Brexit. It’s true that unemployment in particular is very low.

But remember we were busy bouncing back from the deepest downturn for global economic growth since World War 2 when we voted for Brexit. Where would we be now if the recovery had continued unimpeded by the referendum-winning Gang Show?

Anyway, bragging about how great the existing trading framework is working even as you’re seeking to undermine it as a Brexiteer makes no more sense than Woody the Woodpecker hammering away at the branch beneath his feet.

The boys are back in town

Active investing in the face of this Technicolour episode of the Twilight Zone is a maddening enterprise and I envy all you sensible passive investors serenely sailing through it with globally diversified index funds.

I made an especially duff call a few months ago. I believed Parliament looked like it would prevent the Brexiteers from doing their absolute worst. The pound was rallying but it still looked potentially undervalued so I pivoted a decent chunk of my global funds back to Blighty and sterling.

Oops! As things turned out, the ultra-Brexiteers repeatedly voted against Brexit for their own Byzantine reasons, and the rest is history, Boris Johnson, and the pound back down at a two-year low.

Chastened by that experience, I have to consider that the worst case scenario could really come to pass on October 31st.

Boris Johnson is many things – most of them better expressed in Olde English slang about merkins and fopdoodles – but he’s not stupid. It’s hard to believe he really wants to preside over a no-deal Brexit and the likely consequences.

On the other hand we can see Team Leave are at work again now they’ve got the band back together, with Downing Street preparing to blame everyone else for the mess of their own making, from the EU to British MPs, cynics and pessimists like me, and no doubt poor Larry the Cat.

The latest wheeze from the Defenders of Democracy is to consider holding a General Election over the October 31st deadline so we crash out while there are no grown-up MPs at home to stop it happening. I saw a Tory MP interviewed by the BBC conceding the enemies of Brexit may try to thwart such actions “in the courts”, as if the law was something only a dirty foreigner would stoop to.

Let’s remember the courts have already upheld previous skullduggery by Remainers, such as that MPs should get a vote before triggering Article 50, precisely because it was, you know, the law.

I don’t see how MPs insisting the law should be followed are Enemies of the People – and I don’t want to live in a world where the courts aren’t there to protect the hard won rights of us little people against our rulers – but then I’m not a 55-year old Leave voter who talks as though I lived through the Blitz.

Brexit: Imagine a bureaucrat stamping your papers forever

Let’s be realistic: We can’t rely on Sinn Féin to save us from a no-deal Brexit and the disintegration of the Union.

Yes, Brexit has brought us to a place where that sentence was not ironic.

So perhaps Johnson will go through with it, and this isn’t all an admittedly more plausible bluff.

He seems to me entirely the kind of must-win schemer who would turn over the Monopoly board as a kid, so anything is possible.

Maybe he’ll salvage his conscience by turning us into Singapore by the North Sea as the best way to benefit from the rotten hand of cards he’ll have dealt us.

It’s all very difficult, and I will certainly make more mistakes on the way to navigating Brexit from an investing perspective. It’s hard to win when you’re tossing a loaded coin.

One mistake I won’t make again though is to think the pound looks cheap while Brexit is still in play. That’s to fall into the same trap as the Brexiteers who point to the fact that our economy is doing well while we’re freely trading with our biggest trading partner as a reason to confidently derail the relationship.

The pound looks cheap against the world as we knew it. But we don’t know what’s to come.

We won’t truly know for years, most likely. If you’re a Leave fan who somehow read this far, please understand that one thing.

The day after we make our glorious break with the EU in a no-deal scenario, we go back to the EU and begin negotiations about trade. There is no escaping it.

Even assuming the EU partly saves us from ourselves (for its own reasons) by, say,  extending current arrangements in some kind of emergency status for an indefinite period of time, we’ll still be negotiating from an ever-weakening position.

The talks will go on for years. I’d bet you £10 that progress will be being referenced somewhere in the pages of the Sunday newspapers (or their digital equivalents) a decade from now.

It will never end. And something that five years ago most of us were totally relaxed about and basically ignored because it just worked will be an annoying buzzing in our lives indefinitely.

Meanwhile three years worth of Leave voters have passed away, leaving the EU has been revealed as like having your cake and eating it only in the same way as Henry 1st ate his surfeit of eels before keeling over, and we have a prime minister plotting to achieve Brexit by doing it while nobody is running the country.

Draw your horns in. Avoid hero bets. Stay diversified.

And put a raincoat on.

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