I am slowly positioning my largest (but by no means only) SIPP towards investment trusts.

Why? You can read the full reasoning in my previous articles that:

• Put forward 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.

Basically 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.

That said, investment trusts differ widely in their suitability for income-focused retirees.

Fitness for purpose

Take, for instance, Scottish Mortgage. While I’m a huge admirer of Scottish Mortgage (and a holder, in another portfolio), its miserly yield is of little use once an investor moves from a strategy of accumulation to one of deaccumulation.

Likewise, as with index trackers and investment funds in general, costs are everything. Why pay virtually double, for a more or less identical performance? For the unwary, it’s easily possible.

Which is why, this time last year, I published a table of retiree-focused data on a selection of investment trusts.

And now, I’ve updated it.

Yearly review

One year on, not much has happened – which is exactly as it should be in the (mostly) slow and steady world of investment trusts.

There are however some points worth making about a few of these trusts. (In the discussion that follows I’ve marked with an asterisk those I personally hold).

• Yields are up, right across the board. No surprise there, what with the FTSE 100 down some 800 points since May 2015, having hit an all-time high of 7104 on April 27th, just days before. Generalist trust Murray Income* now offers a yield of 4.78%, for instance, while Asian specialist Aberdeen Asian Income* yields 5.07%.

• Some trusts that I judge of interest to income-seeking retirees have reduced their charges – most notably the two Invesco trusts managed by Mark Barnett, after Neil Woodford decamped to run his own outfit.

• Two contrarian trusts led by well-established, highly-regarded managers (Temple Bar* and Murray International*) are now characterised by a discount, not a premium. Temple Bar, for instance, has a 12-month average discount of 5.07%.

• Costs remain a differentiator. Schroder Income Growth has this year increased its ongoing charge from 0.94% to 1.00%. But six of its top ten holdings are the same as the lowest-charging investment trust in the selection – the much-admired Job Curtis managed City of London* – where charges have been reduced from 0.44% to 0.42%.

Personal account

Finally, how has my own SIPP performed over the period?

The capital is down in line with the market, as you would expect. But income has risen by an appreciable amount, and has been reinvested in further purchases of investment trust shares.

Gradually, the proportion represented by trackers, ETFs, and direct shareholdings is reducing, and the proportion represented by income-centric investment trusts is increasing.

On retirement – still slated for nine years away, when I’m 70 – I shall simply switch the income from reinvestment to funding the cost of living.

Note: As mentioned, while not in any sense a recommendation, Greybeard’s own holdings among the investment trusts are indicated by an asterisk. You might want to read the rest of his posts about deaccumulation and retirement.

Good reads from around the Web.

One thing led to another this week, and so Weekend Reading had a rare hiatus from its usual Saturday slot.

(But let’s face it – even the most curmudgeonly of us were surely enjoying the fact they weren’t being snowed on in London, in Spring, as happened very briefly to me last week).

Here’s a Sunday heatwave edition of our weekend links.

[continue reading…]

I have explained in the past that while everyone can expect to do well from investing in a broad basket of shares over time, seeking to try to do better than the market – active investing, in other words – is a zero sum game.

In that long post I wrote:

…‘Alpha’ cannot be magicked out of thin air.

The only place an active manager can go to get more or fewer shares than are held by the market is by dealing with other active investors in that market.

(Because the passive investors by definition hold the market).

And then you have to subtract those higher costs.

Those higher costs mean that in aggregate, investors in active funds see lower returns than passive investors.

Now, this doesn’t mean any individual active investor – or active fund – can’t do better than the market.

Some can beat the market, and some very few do.

What it means is that overall, as a group, they must do worse than the equivalent passive index funds.

It means ignoring marketing rubbish like “active funds come into their own and trash trackers when the market goes down because they’re able to take action to sell the expensive shares” or similar nonsense.

As a group, this is impossible. They can only buy and sell shares to other active investors. Hence one active fund can only win at another active fund’s expense. In the meantime, investors in both the winning and losing active fund are paying higher cost than index fund investors, so in sum they are losing out.

(All that said, some active funds do better than index funds in bear markets – but this is typically because they hold a slug of cash to meet client redemptions, and this cash doesn’t fall when the market does. In contrast index funds are always very near fully invested).

Warren Buffett explains the truth about active investing

I’m still pretty happy with my explanation of why active investing is a zero sum game – and it has a cool graph courtesy of Vanguard – but I will happily defer to Warren Buffett on almost anything, including this.

Because Buffett just gave a simpler and clearer explanation to some 40,000 people at the Berkshire Hathaway annual shareholder meeting.

You can watch his explanation in the video below.

Unfortunately Yahoo Finance doesn’t allow me to start the video at the specific spot, so you’ll need to manually fast-forward to the 2h 42m and 20 second mark:

After explaining how he is wildly wining his bet that a low-cost S&P index fund would beat a handpicked collection of hedge funds, Buffett quipped:

“Now that may sound like a terrible result for hedge funds, but it’s not a terrible result for the hedge fund managers. […]

There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities.”

Keep watching past the recap of his anti-hedge fund bet to the section where Buffett divides the stadium audience in half, and explains how the passive 50% must do better than the active 50%.

I literally couldn’t do better myself. (I tried!)

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