The Lemon Fool

This is the third annual review of my real life Investment Trust Income portfolio, as of 31 July 2021. The objective at the outset was to provide income which helps to support our retirement which can keep pace with inflation, and to preserve the capital value in real terms in the long term.

My wife and I retired in May 2018. We'd been building this portfolio in our SIPPs with Hargreaves Lansdown for some years, and it was completed in July 2018 upon the transfers-in from DC funds from our final employers. For reporting purposes I use close of business 31/07/2018 as the cut off point.
This income supplements income from guaranteed sources, i.e. legacy DB pensions and the State Pension and it is about 45% of our total income.

The portfolio consists of 20 income focused ITs, diversified across markets and themes, consisting of:

4 UK equity trusts; Dunedin Income Growth, Merchants, Shires Income, Henderson High Income
5 International equity trusts: Murray International, Europeans Assets, Blackrock North American, Middlefield Canadian, Henderson Far East
2 Private Equity Trusts; Apax Global Alpha; Princess Private Equity
2 Bond/Debt trusts: Twentyfour Income, CQS New City High Yield
3 Property trusts: Standard Life Property, Real Estate Credit Investment; Regional Reit
4 Infrastructure based Trusts: Renewables Infrastructure, John Laing Environmental Assets, GCP Infrastructure, Sequioa Infrastructure.

I've rebased the portfolio's starting value to £100,000 for these reports, so all the figures below are pro rata to that amount. This is a buy and hold portfolio and there has been no trades since its inception. All income is removed.

Income Performance



This portfolio is unashamedly an income play so I'm quietly pleased that the income has held up despite the economic and social turmoil we've experienced. This year, dividend cuts from the Property trusts have been offset by the restoration of dividends from last year's cutters - Princess Private Equity and European Assets. All other ITs maintained (just about) or modestly increased their dividends. Inflation over the three years is around 5% so income growth is about three points short of that, but, all in all, I'm content with the performance. Things could have been much worse. 5.8% yield from the initial investment is on the high side, and perhaps comes with some downside on capital growth.

I'm confident that Investment Trusts are a better bet for a smooth income flow than OEICs. One other advantage is that Hargreaves Lansdown's fees are capped at £200 for ITs and this helps to manage the costs of running the portfolio.

Capital Performance



The capital value has recovered from last year's set back, and is now three points ahead of its start, although still a couple of points behind inflation. There are some sizeable swings of course, The three property ITs are 13.4% below their starting value, and the two Bonds/Debt trusts 9.7% down. The equity based trusts are 9.1% up, driven by stellar performance from the two private equity trusts. Apax is up 53% and Princess is up 20%, Of the others, it is interesting that despite fishing in the same pond, Dunedin Income Growth is up 23.5% overall while Henderson High income is 5% down. On the Infrastructure side, good performance from Renewables (+23%) has more that offset a 13% loss from GCP.

Altogether, what started as a 60/40 Equity/Other split is now 64/36.

I hope this is some interest to board members. Questions / comments are encouraged.

Thanks for reading

MP

mickeypops wrote:This is the third annual review of my real life Investment Trust Income portfolio, as of 31 July 2021. The objective at the outset was to provide income which helps to support our retirement which can keep pace with inflation, and to preserve the capital value in real terms in the long term.

Mickeypops, thank you for sharing.
Did you consider devoting a small % of the capital to growth ITs as an insurance for the capital value (that could then be reassigned to income later is appropriate)?
tuk020

I make that an annualised return of around +6.7% to date. Hopefully the dividends and value will increase with time. So, a better return than an annuity.

Were the initial percentages of each holding the same?

TUK020 wrote:

mickeypops wrote:This is the third annual review of my real life Investment Trust Income portfolio, as of 31 July 2021. The objective at the outset was to provide income which helps to support our retirement which can keep pace with inflation, and to preserve the capital value in real terms in the long term.

Mickeypops, thank you for sharing.
Did you consider devoting a small % of the capital to growth ITs as an insurance for the capital value (that could then be reassigned to income later is appropriate)?
tuk020

Not at the moment. In real life, not all of the income is spent and the remainder is invested in Vanguard index products for the future benefit of our young grandchildren. We intend - after many years hopefully - that our daughter will inherit this portfolio intact and put it to good use..

monabri wrote:I make that an annualised return of around +6.7% to date. Hopefully the dividends and value will increase with time. So, a better return than an annuity.

Were the initial percentages of each holding the same?

Interesting observation Monabri. The strategy has many HYP-ish qualities - long term hold, diversification, minimal or no trading - except it uses ITs rather than individual shares. And of course one of the original HYP strategy objectives was as an alternative to an annuity.

The trusts weren't quite equally weighted at the start. The equity ones were slightly heavier weighted so as to get a 60/40 split. They were all in the range of £4,500 to £5,500 approximately.

mickeypops wrote:
The strategy has many HYP-ish qualities - long term hold, diversification, minimal or no trading - except it uses ITs rather than individual shares. And of course one of the original HYP strategy objectives was as an alternative to an annuity.

Great review MP, and good to see such a simple, no-fuss income-strategy delivering on it's requirements, and especially during the recent 'eventful periods'...

It'll be very interesting to see how things go for you from here, given what markets have had to cope with in recent years...

Cheers,

Itsallaguess

Itsallaguess wrote:

mickeypops wrote:
The strategy has many HYP-ish qualities - long term hold, diversification, minimal or no trading - except it uses ITs rather than individual shares. And of course one of the original HYP strategy objectives was as an alternative to an annuity.

Great review MP, and good to see such a simple, no-fuss income-strategy delivering on it's requirements, and especially during the recent 'eventful periods'...

It'll be very interesting to see how things go for you from here, given what markets have had to cope with in recent years...

Cheers,

Itsallaguess

Thanks, Itsallaguess. I'm definitely more suited for income investing as opposed to a total return strategy. Of my 20 ITs, all but two (the private equity pair) pay dividends quarterly and so our SIPPs have 78 payments credited annually. Even in the pits of the market collapse last year, the dividends kept flowing and I remained very sanguine about the plummeting capital value. Had I been relying on selling off a portion of the capital each month or quarter, I don't think I would have been so calm. This approach works for me, so far.

Thanks Mickeypops.

I'm following a similar strategy with my retirment portfolio. My original inspiration was Luiversal's baskets of IT. It is very much income focused, and I found it very useful to be able to compare my income and capital growth results with your own. I seem to be lagging behind you in income growth, but ahead interms of capital growth.

I also found that dividends held up better than I expected in the pandemic. I will try to put together a similar review to your own and publish it here. I'll rebase mine to £100,000 so that the absolute numbers can be compared.

As someone who is moving away from an HYP held as shares and into ITs, this is a very useful thing for me to see.
Thank you.

tacpot12 wrote:I also found that dividends held up better than I expected in the pandemic.

Unlike OEICs and ETFs, managers of ITs are able to maintain dividends by asset sales or borrowing. That's not a free lunch as such activity will be reflected in the NAV and may adversely affect the share price. It does mean for a private investor looking to retain an income level there's less to do than maintaining an individual portfolio trying to do the same.

Alaric wrote:

tacpot12 wrote:I also found that dividends held up better than I expected in the pandemic.

Unlike OEICs and ETFs, managers of ITs are able to maintain dividends by asset sales or borrowing. That's not a free lunch as such activity will be reflected in the NAV and may adversely affect the share price. It does mean for a private investor looking to retain an income level there's less to do than maintaining an individual portfolio trying to do the same.

Normally IT managers do not distribute all the income. They have to distribute at least 85%. So they build up a buffer to enable them to maintain dividends during a temporary fall in company distributions. So yes it isn't a free lunch but it is a lot more reassuring for investors to leave this to the managers and to have a steadier income as a result. It is one reason why, if I were to seek a retirement income from investments as an alternative to an annuity, I would much prefer to invest in investment trusts rather than individual equities or funds.

tacpot12 wrote:Thanks Mickeypops.

I'm following a similar strategy with my retirment portfolio. My original inspiration was Luiversal's baskets of IT. It is very much income focused, and I found it very useful to be able to compare my income and capital growth results with your own. I seem to be lagging behind you in income growth, but ahead interms of capital growth.

I also found that dividends held up better than I expected in the pandemic. I will try to put together a similar review to your own and publish it here. I'll rebase mine to £100,000 so that the absolute numbers can be compared.

Hi tacpot. I’ve seen your review, thanks. It’s interesting to compare a similar timescale using a similar reporting structure. Your capital held up terrifically well in year two didn’t it? Mine was going through the floor and I stopped looking! I was reassured though that the dividends kept flowing in nicely and our income was uninterrupted. I agree that ITs are well suited to this type of income requirement in retirement. I’m looking forward to next years review.

absolutezero wrote:As someone who is moving away from an HYP held as shares and into ITs, this is a very useful thing for me to see.
Thank you.

Two useful reference sources for ITs are the AIC website, and the John Baron site (this is behind a paywall but you can get a week’s free trial I think.)

mickeypops wrote:

absolutezero wrote:As someone who is moving away from an HYP held as shares and into ITs, this is a very useful thing for me to see.
Thank you.

Two useful reference sources for ITs are the AIC website, and the John Baron site (this is behind a paywall but you can get a week’s free trial I think.)

JB Portfolios

"The 13 closed website pages which are normally available only to paid members (nine portfolio pages, Dealing history, Commentary, Trust of the moment and Your views) are also available to visitors who sign up for a 20 day trial membership by creating an account via the 'Sign up' section below.

The £36 (inc VAT) cost is deductible from the £204 membership fee whenever the latter is paid. If the outstanding annual fee is paid within the trial period, the year’s membership will start in its entirety once the 20 day trial has expired. This ensures a free trial period for new members."

monabri wrote:

mickeypops wrote:

absolutezero wrote:As someone who is moving away from an HYP held as shares and into ITs, this is a very useful thing for me to see.
Thank you.

Two useful reference sources for ITs are the AIC website, and the John Baron site (this is behind a paywall but you can get a week’s free trial I think.)

JB Portfolios

"The 13 closed website pages which are normally available only to paid members (nine portfolio pages, Dealing history, Commentary, Trust of the moment and Your views) are also available to visitors who sign up for a 20 day trial membership by creating an account via the 'Sign up' section below.

The £36 (inc VAT) cost is deductible from the £204 membership fee whenever the latter is paid. If the outstanding annual fee is paid within the trial period, the year’s membership will start in its entirety once the 20 day trial has expired. This ensures a free trial period for new members."

Thanks Moabris. JB must have changed his approach in the last few years.

It may be worth adding that the FTSE100 index at the start date of my IT portfolio was riding high at over 7700. At the review point last weekend it was 9.5% down. It’s by no means a perfect benchmark for the portfolio, but my 3% growth looks decent as a comparison.

mickeypops wrote:Things could have been much worse. 5.8% yield from the initial investment is on the high side, and perhaps comes with some downside on capital growth.

I don't have end of July figures, but for end of June years, S&P500, FT100, FT250 equal weighted and rebalanced each year versus yours (total returns) ...


Compares relatively closely to your portfolio, putting aside a 1 month time shift difference. Given that you're more 60/40 then pretty good outcome/reward, however the volatility seems to have been higher than 'all-stock' ?? (18 stdev in yearly total returns for yours versus 15).

Of course with total return of S&P500, FT100, FT250 you might apply a 4% SWR, so lower income, but less risk/variability i.e. you start with 4% of the start date portfolio value and uplift that amount by inflation as the amount drawn at the start of subsequent years, which comparatively would have left more for growth.

Purely just observational, not trying to say anything, just had the figures to hand so posted them here.

For calendar years CSP1/ISF/VMID ... viewtopic.php?f=56&p=436076#p436076

Thanks 1nvest, that’s very interesting.

MP

I think the three way S&P500/FT100/FT250 is a good choice of benchmark in general for comparing against 'stock' portfolios. For fair comparisons you have to resort to total returns.

For a HYP benchmark the FT250 alone fits well IMO. More inclined towards being equal weight. For instance compares broadly relatively closely in historic total returns to Terry's TJH HYP. Winners are top sliced i.e. eject out and into the FT100, feeds in/out of both the top and bottom and is less inclined to see 10% in a single stock.

When total returns are the same (accumulation), its then just a question of how and how much income is drawn. Two portfolios with the same total return no matter how that was provided support the same amount of ££ income/withdrawals, however that income might be drawn. The likes of Trinity study provides a guide as to how much of total return might have been drawn/spent historically - based on a regular inflation adjusted income uplift (consistent/reliable income), i.e. 4% of start date portfolio value increased by inflation was historically successful in nearly all cases, and being based on the worst historic outcome the prospects on average are for (much) better rewards/results.

MRC investment trust is another example, somewhat a FT250 holding, but with gearing of 90% (10% cash) to 120% (1.2x leveraged). Using Robert Lichello's AIM (mechanical overbalancing method) restricted to the same range a similar 0.5% reward was evident since 1986. MRC however levies a near 0.5% fee so in effect works for itself, whilst a DIY alternative would see the investor keeping that reward/surplus. I use VMID and 2MCL for that, so if for instance 110% indicated by AIM then 95% VMID, 5% 2MCL (a 2x FT250) does the job. If 90% then 90% VMID, 10% IGLS. Lichello's AIM works such that it would have had you at 90% in the late 1990's, 120% at the 2003 and 2009 lows, which can reasonably enhance rewards similar to this

Many dislike 2x leveraged funds, but half in 2x, half in bonds, rebalanced yearly ... works just as well as 100% 1x So if you're ever short on cash you can always borrow from yourself at whatever the bonds yield across that time.

mickeypops wrote:I'm confident that Investment Trusts are a better bet for a smooth income flow than OEICs.

Bingo. And to that I would add most HYP portfolios. I have seen the light.

mickeypops wrote:
The portfolio consists of 20 income focused ITs, diversified across markets and themes, consisting of:

4 UK equity trusts; Dunedin Income Growth, Merchants, Shires Income, Henderson High Income
5 International equity trusts: Murray International, Europeans Assets, Blackrock North American, Middlefield Canadian, Henderson Far East
2 Private Equity Trusts; Apax Global Alpha; Princess Private Equity
2 Bond/Debt trusts: Twentyfour Income, CQS New City High Yield
3 Property trusts: Standard Life Property, Real Estate Credit Investment; Regional Reit
4 Infrastructure based Trusts: Renewables Infrastructure, John Laing Environmental Assets, GCP Infrastructure, Sequioa Infrastructure.

Most of these are on my target list also. Plus a couple of REITs and Infrastructure you don't mention, with steady and high yield dividend histories:


THRL
CSH
FSFL
JLEN