The primary investment interest for retirees is to have a portfolio that offers a stable income and some growth but won’t be subject to nerve-wracking volatility. However, with cash yielding a very low real rate of interest, despite low inflation, and other assets paying out less than they once did, this is no simple feat.
FE Trustnet has been paying close attention to this theme in recent weeks in a series of articles looking at different ideas around the subject of retirement income. So far, we have taken a look at multi-asset income portfolios that offer a monthly dividend and UK equity income funds that also pay monthly as well as hearing from Bestinvest’s Jason Hollands on which equity fund he tips for retirees.
Investment trusts have several differences to open-ended funds with one of the key advantages being the potential for managers to ‘smooth’ dividends by holding back some cash in good uses and paying it out in leaner ones.
Here Charles Cade, head of investment company research at Numis Securities, tips five investment trusts that he thinks can work together in an income portfolio specifically for retirement, with an emphasis on trusts with “attractive yields, low fees and strong management”.
Law Debenture
First up is this £631m trust managed by FE Alpha Manager James Henderson, who Cade notes has a good track record and yield – currently 3.9 per cent, although it is paid out on twice a year.
“Half of the yield comes from the trustee business, with the remainder from a global equity portfolio,” Cade said.
Manufacturing and aerospace is a dominant theme with the trust’s two largest holdings – Senior and GKN. The rest of the top 10 is mainly blue chip names such BAE, Royal Dutch Shell and BP.
Henderson has run the trust since 2003, over which time he has returned 311.58 per cent compared to an IT Global sector average of 231.35 per cent and beaten its FTSE All Share benchmark index by more than 130 percentage points.
Performance of trust since 2003
Source: FE Analytics
It is currently on a relatively high premium of 8.9 per cent and has an ongoing charges figure (OCF) of 0.47 per cent. It is 5 per cent geared.
Murray International
Next up is another trust with a global mandate but this one sits in the IT Global Equity Income sector.
Its manager Bruce Stout has been running the trust since 2004, a period over which Cade says he has demonstrated his skill.
“Stout has an excellent record of delivering growth and income from a global equity portfolio with little attention to market indices,” he said.
Performance of trust over manager tenure
Source: FE Analytics
Returns have also been strong with the trust up 324.29 per cent since Stout took over, although it suffered in June 2013 during the ‘taper tantrum’. The fund is down more than 9 per cent since this date, although it has been back to making money over the past year.
It has a current yield of 4.3 per cent and it pays out quarterly. It is also on a premium of 4.9 per cent and has an OCF of 0.67 per cent. This is subject to a performance fee, which most recently pushed charges up to 1.08 per cent.
Edinburgh IT
FE Alpha Manager Mark Barnett took over this trust from fellow FE Alpha Manager Neil Woodford just over a year ago with the relatively short period emphasising Barnett’s reputation as stock picker in blue chip names.
The trust has returned 18.68 per cent over the past year, giving it the best total return in its sector where the average trust made just 5.61 per cent. The FTSE All Share Index gained 7.1 per cent over this time.
Performance of trust, sector and index since 28 January 2014
Source: FE Analytics
However, in part this is due to the narrowing of its discount which is currently at 3.2 per cent having been around 6 per cent when Barnett took over.
It has a current yield of 3.6 per cent which is paid quarterly. Its OCF is 0.68 per cent and the trust is 13 per cent geared.
British Assets
This £408m trust is on a discount of 6.8 per cent, which has been steadily widening for five years from a slight premium.
It has underperformed both its sector and index since current manager Phil Doel took over in September 2011 with returns of 27.13 per cent. However, British Assets is on a high yield of 4.9 per cent, paid quarterly.
“It has a poor historic record, but the fund is shortly to move to BlackRock and adopt a multi-asset income mandate, subject to shareholder approval at a vote on 26 Feb,” Cade said.
He says it will seek to achieve absolute returns with low volatility, targeting a total portfolio return of the CPI inflation plus 4 per cent gross over the medium term of about five to seven years.
TwentyFour Select Monthly Income
Last up is the only bond trust Cade tips although it is somewhat an alternative type of bond portfolio, as it invests across a diverse range of fixed income.
TwentyFour Select Monthly Income has the highest yield of the five trusts at 6.2 per cent and, as the name suggests, it pays out monthly.
“It pays a monthly yield from a diversified portfolio of debt investments, with interest rate duration actively managed, currently 2.3 years,” Cade said.
TwentyFour has become popular quickly as a boutique alternative to the larger bond houses.
Managed by Gary Kirk, Eoin Walsh, Felipe Villarroel and Pierre Beniguel, the trust is relatively new, with a track record of less than a year and is currently down 3.47 per cent.
Performance of fund since launch
Source: FE Analytics
It is on a premium of 2 per cent, has an OCF of 0.75 per cent and has no gearing.
