Income and growth options: 2011-23

[Luniversal]

Following the twelfth annual review of my FTSE100 High Yield Portfolio (1), here is an exact comparison with ten other ways to secure a growing, inflation-proof income and/or capital preservation.

The choice lies among the 'boring', venerable and large trusts of 2011: those most apt to be picked by the inexpert, cautious private investor. Four portfolios, two of blue-chip equities and two of investment trusts, and seven single-IT alternatives are measured from the birth of 'LuniHYP100', Jul. 18, 2011. They are illustrated by the amount invested in it: c. £18,000, give or take a few quid for different dealing costs and the impossibility of buying fractions of shares.

The 'Sturdy HYP' is a reconstructed assemblage of the Big Board stocks which in 2010 I had judged most orthodox for HYP purposes (2). It was as close as I could get to a HYP benchmark. Both HYPs started with 15 shares in discrete sectors.

The Basket of Eight (3) went for an above-average yield comparable with a HYP, 4.4% to the LuniHYP's 4.5%; whereas the Basket of Seven (B7) (4) kicked off at 3.3%, near the 3.1% market average yield, but has grown its stream roughly twice as fast as the B8 did. 'Juicy' hare or 'growthy' tortoise; instant regard or deferred gratification? It depends on one's needs and life expectancy.

The common objective would have been to preserve income purchasing power indefinitely... insofar as it was compatible with low volatility of capital values (no thrills and spills) and with simple operation (as few decisions as possible). The investment would be made at one blow and not trimmed and titivated subsequently. No more funds were to be contributed or deducted, although miscellaneous receipts such as takeover proceeds or sales of rights could be ploughed back into new constituents of the share portfolios.

Since 2011 LuniHYP100 has required a few actions. One B8 member needed replacing. Otherwise you could have sat back watching dividends roll in and quoted prices fluctuate.

Capital growth is incidental, but the three ITs which emphasise that goal are followed as a contrast. Less so than formerly: the 'global growth' sector has swung towards 'income and growth' since the Global Financial Crisis, shelling out more revenue more often.

CAGR is the compound annual growth rate, a nominal figure. Inflation (RPI) in 12 years to Jul. 2023 was 4% pa. Subtracting it reveals real progress or regression.


GROSS INCOME
Latest/change from 2021-22... Total to date/CAGR

LuniHYP100: 899/+2.4%... 13,584/1.0%
Sturdy HYP: 1,013/+10.7%... 11,632/3.5%

City of London: 1,214/+1,4%... 12,307/3.6%
Edinburgh: 1,046/-10.8%... 12,306/1.7%
Merchants: 1,252/+1.5%... 13,388/4.4%
Murray Intnl: 1,055/+3.8%... 10,922/3.8%

Basket of 7: 1,063/+4.0%... 10,679/4.5%
Basket of 8: 1,159/+3.4%... 11,846/4.6%
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Alliance: 1,152/+13.2%... 8,059/9.2%
F&C: 714/+5.5%... 6,591/6.0%
Scottish American: 1,064/+8.0%... 10,368/3.5%
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All ITs average: 1,071/+2.9%... 10,563/4.6%


Scottish American and Murray International are overseas specialist trusts with more regard for generous and rising payouts (particularly Murray) than Alliance and F&C. Both the former two have netted more than £10,000 of income, though neither equalled the weakest basket member, Edinburgh.

LuniHYP100 was the back marker in Year 12, but the winner overall, harvesting almost £14,000. Erratic income production calls for 'derisking', a procedure for smoothing spendable receipts. It replicates an index-linked flow with support from an income reserve.


SPENDABLE INCOME
Latest/12-year average safety margin... CAGR

LuniHYP100: 12,129/11%... 4.8%
Sturdy HYP: 11,197/4%... 4.5%

City of London: 11,067/10%... 4.3%
Edinburgh: 11,333/8%... 4.4%
Merchants: 11,962/11%... 4.7%
Murray Intnl: 9,855/10%... 3.9%

Basket of 7: 9,946/7%... 3.9%
Basket of 8: 10,864/8%... 4.2%
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Alliance: 6,524/19%... 11.4%
F&C: 5,827/12%... 7.3%
Scottish American: 9,512/8%... 4.1%
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All ITs average: 9,440/11%... 3.7%


The safety margin is the average percentage of receipts withheld for the income reserve. It varies quite widely, from 4% in the Sturdy HYP to an anomalous 19% at Alliance Trust.

Hitting upon a prudent initial withdrawal rate is no exact science. One must guess trends in underlying income and the cost of living. In practice, a rate in line with the prevailing market yield, but index-linked, has allowed income ITs to hold their own over all test periods (from 2000, 2006 and 2015 as well as 2011). That does not always permit rises above inflation every half-decade or so as originally hoped. For instance, the B8 has stuck on 4.6%+RPI for eight years. And in current conditions rises are off the agenda all round.

The main aim was never to cut a derisked rate, yet two reductions were found necessary in each of the equity portfolios. First, the 2020 health scare brought dividend cuts or passes on a scale unseen since the 1930s. Next came 2022's surge of inflation to pre-1980s levels, which gnawed into the purchasing power of fitfully restored payouts.

With hindsight, I was too eager to bump up withdrawal rates in the 2010s: by 30% in 2016 for both baskets, by 25% a year earlier for the LuniHYP. We can now see that companies were overdistributing then. It would have been safer to lift withdrawal rates circumspectly in 5% or 10% increments at intervals of 2-3 years, or allow a gap of at least six years between larger hikes.

However, up to date all the income-focused options kept spendable income above or close to inflation. ITs availed of their revenue reserves to maintain payments, though seldom in real terms. The global-growth ITs raised income far faster, if from a much lower base. Until recently they had no aspirations to be Dividend Heroes. Now they are selling themselves more like one-stop shops, though the big guns of the sector return little more than half the All-Share Index's yield. Alliance and F&C have accumulated very strong internal revenue reserves for what they do dispense:


PERFORMANCE AND RESERVES
No of years increased (of 11)... Latest/12-year average months in reserve

LuniHYP100: 7... 13/16
Sturdy HYP: 6... 5/6

City of London: 11.. 12/11.
Edinburgh: 9... 8/12
Merchants: 11... 11/16
Murray Intnl: 11... 11/11

Basket of 7: 10... 7/7
Basket of 8: 7... 9/10
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Alliance: 9... 17/19
F&C: 11... 13/11
Scottish American: 11... 10/7
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All ITs average: 10... 12/12


Each option nominally increased income in siz or more of the 11 years measured; usually in real money too.

The Sturdy HYP operated on a rather thin average six months' worth of current income and the B7 and Scottish American on seven; whereas most juicier trusts and LuniHYP hold around a year in reserve and Alliance and F&C a lot more. Only Edinburgh has showed a marked deterioration lately. The dividend was 'rebased' by its new managers-- but only by one-sixth, maybe not enough.

Trusts retain the option of distributing realised capital profits, considerable in these ancient companies, to supplement uncovered revenue intakes. It was encouraging that such a desperate remedy was avoided even in the hurly-burly of 2020-22. Now it appears that between the abatement of inflation and continued pickup in nominal dividend declarations across the board, a corner has been turned-- black swans permitting-- for equity income.
===================================================

CAPITAL
Market value after 12 years/change in latest year... change since launch/CAGR/FE Risk Score

LuniHYP100: 25,124/+3.4%... +40.9%/2.9%
Sturdy HYP: 31,838/+4.1%... +78.4%/4.9%

City of London : 25,362/+5.5%... +41.5%/2.9%/98
Edinburgh: 25,574/+7.5%... +42.7%/3.0%/111
Merchants: 24,182/-1.7%... +35.0%/2.5%/127
Murray Intnl: 22,873/-1.4%... +27.9%/2.1%/111

Basket of 8: 24.376/+7.9%... +36.0%/2.6%/111
Basket of 7: 26,383/-0.2%... +47.2%/3.3%/118
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Alliance: 48,296/+9.0%... +169.5%/8.6%/107
F&C: 45,931/+4.8%... +156.7%/8.2%/108
Scottish American: 39,282/+9.9%... +118.2%/6.8%/115
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All ITs average: 33,071/+4.8%... +84.5%/4.9%/111


The difference between income and growth emphases is stark. The former group turned £18,000 into £25,000, give or take, in 12 years. Only the Sturdy HYP increased its real worth. Murray International austerely shunned Wall St, went nap on the Pacific Rim and lagged the others.

On the other hand, trusts majoring on America, FAANGs, etc have shone despite not going the whole hog like Scottish Mortgage. F&C topped £45,000 and Alliance-- shedding its financial services offshoots to adopt a 'ringmaster' fund-of-funds approach-- belied its dull reputation by almost hitting £50,000. These two grew value twice as fast as inflation. Scottish American was less ebullient if juicier, nudging £40,000.

FE Trustnet Risk Scores indicate that no IT-based option was unduly volatile. Scores measure price movement over three years, weighted towards the present, where cash is 0 and the FTSE100 average swing 100. City of London emerges as a bit more placid than the Footsie, another reason to view it as the bellwether of balanced, steady-as-she-goes income and growth. No other trust is seriously gyratory except Merchants. Stressing a high starting yield over either income or capital cultivation, it is more prone to selloffs when rival asset classes promise richer income, as now.


RELATIVE PERFORMANCE
No of rises (of 12 years), latest year end real value (launch=100)... price performance v. FTSE100/FTAS

LuniHYP100: 6,88... 105/101
Sturdy HYP: 10,111... 133/127

City of London: 5,88.. 113/107
Edinburgh: 6.89... 113/108
Merchants: 7,84... 113/108
Murray Intnl: 7,80... 99/94

Basket of 7: 6,92... 115/111
Basket of 8: 5,85... 107/102
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Alliance: 8,169... 210/201
F&C: 9,160... 200/192
Scottish American: 9,137... 167/160
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All ITs average: 7,115... 145/139


Generally growth trusts' monetary value rose year by year in 2011-23. Income trusts managed this only about half the time, the B7 more often than the B8. The baskets failed to match the cost of living: the B7 ended at 92% of its launch purchasing power, the B8 at 85%. The two old global growthers each doubled in real terms.

All options except Murray International outran the FTSE 100 and All-Share indexes. That is of small interest to me, except that it implies the inherent advantages of the IT structure. Adroit use of such features as gearing (in a time of cheap money) and discount control do more for results than stock selection.
===================================================


COMBINED RETURNS
Capital gain+income since launch/percentage contributed by income.. . CAGR

LuniHYP100: 20,818/65%... 6.6%
Sturdy HYP: 25,580/46%... 7.7%

City of London: 18,434/67%.. 6.1%
Edinburgh: 19,962/62%... 6.4%
Merchants: 19,652/68%... 6.4%
Murray Intnl: 15,877/69%... 5.4%

Basket of 7: 19,144/56%... 6.2%
Basket of 8: 18,304/65%... 6.0%
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Alliance: 38,437/21%... 10.0%
F&C: 34,604/19%... 9.4%
Scottish American: 31,732/33%... 8.9%
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All ITs average: 25,528/48%... 7.5%


Disentangling the hard cash of dividends from the evaporable profit of a rising share price gauges relative contributions to outcome. The Sturdy HYP has done better overall than LuniHYP100; yet it only approximated the average of the seven trusts, and with a mite more faff. The LuniHYP beat the baskets and individual income ITs. However, with combined returns 50-100% bigger, the old growthers left any income runner for dead.

Academic research postulates that income and growth supply total return about fifty-fifty over time. This was so for my choices: receipts accounted for 48% of trust returns, though it would be more had they been reinvested.

Another popular rule of thumb is that over the last few decades nominal total returns from equities were around 7-8% pa: a reasonable target for a risk-averse investor, translating in Britain to a real return of 4-5%. The ultra-orthodox Sturdy HYP got 7.7% and the seven handpicked trusts 7.5%.
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CONCLUSION

The past twelve years have been fairly traumatic, but these options fulfilled their intentions, except that capital was eroded somewhat among the income specialists. Their receipts stood up to inflation and divi-slashing; the HYPs, where cuts became advisable latterly, still pay little less than at the outset and retain inflation protection. Only recently have bonds and cash deposits become competitive for running return, and that is on a short-term view.

Growth trusts whose focus is on foreign holdings easily outran the cost of living and furnished far from negligible revenue along the way. They are a low-risk way of building capital for redeployment into income on retiral.

Peering into the medium horizon, the consensus is that Britain and British-based (though mainly foreign-earning) companies will struggle against slower economic expansion, especially in the UK, and dearer money. That does not bode well for dividends. It may be harder than before 2020 to obtain more than flat purchasing power from income baskets or a 'classic' HYP. Equity portfolios also face a narrowing choice of large-cap stocks, particularly those with unimpaired histories, unless one lets them off pyad's desired 'five years of rising dividends'.

Nevertheless, the B8 now yields c. 5% historic, as does City of London. The B7 yields 4.2%. These are higher than in most of the time since Jul. 2011, offering some solace for reduced odds that income will advance spiritedly.
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NOTES
(1) viewtopic.php?f=15&t=39979&p=603773#p603773
(2) viewtopic.php?f=31&t=33422&p=482501#p482501
(3) viewtopic.php?f=31&t=36064&p=532298#p532298
(4) viewtopic.php?f=54&t=38886&p=584677#p584677

[NotSure]

Gosh! Thanks. Best post ever?

I'm just bumping really so I can easily find later to reread properly.

[BullDog]

The evidence mounts that a portfolio of investment trusts just gets on with it and delivers what it says on the tin?

[monabri]

"Growth trusts whose focus is on foreign holdings easily outran the cost of living and furnished far from negligible revenue along the way. They are a low-risk way of building capital for redeployment into income on retiral."

I'd disagree with that! Terminology such as " low risk".... with equities?

[Dod101]

I hold Alliance and have done for many years and am pleased to see that it comes out of Luni's comments quite well. I think it under its new guise is misunderstood or overlooked.

Dod

[1nvest]

The evidence mounts that a portfolio of investment trusts just gets on with it and delivers what it says on the tin?

7.5% average versus around +1% more from 50/50 BRK/Gold (no yield portfolio) or TJH HYP accumulation, and indicative to me that the delivery by IT's comes with a delivery cost. But all within a similar average outcome ball-park and where 'average' is usually good-enough. Accordingly whichever is the more cost/tax efficient and least inclined to induce capitulation through regret during down-turns is as good a choice as any.

[tjh290633]

I hold Alliance and have done for many years and am pleased to see that it comes out of Luni's comments quite well. I think it under its new guise is misunderstood or overlooked.

Dod

I have used Witan, FCIT and Alliance for my grandchildren's bare trusts. They have had different periods, so the IRRs are not comparable.

Witan - 8.78% over 22 years to date, excluding dividends, IRR on SP - 5.16%
FCIT - 13.52% over 20 years to date, excluding dividends, IRR on SP - 8.41%
ATST - 9.22% over 19 years to date, excluding dividends, IRR on SP - 7.21%
FCIT - 9.32% over 9 years to date, excluding dividends, IRR on SP - 8.33%

I think that FCIT has proved to be the better option.

TJH

[Dod101]

I hold Alliance and have done for many years and am pleased to see that it comes out of Luni's comments quite well. I think it under its new guise is misunderstood or overlooked.

Dod

I have used Witan, FCIT and Alliance for my grandchildren's bare trusts. They have had different periods, so the IRRs are not comparable.

Witan - 8.78% over 22 years to date, excluding dividends, IRR on SP - 5.16%
FCIT - 13.52% over 20 years to date, excluding dividends, IRR on SP - 8.41%
ATST - 9.22% over 19 years to date, excluding dividends, IRR on SP - 7.21%
FCIT - 9.32% over 9 years to date, excluding dividends, IRR on SP - 8.33%

I think that FCIT has proved to be the better option.

TJH

As always it depends over what period we are looking. Your 19 years for Alliance includes a lot of its years in the wilderness. As I said, 'under its new guise', that is since it was shaken out of its lethargy and WTW were appointed as multi managers of their 'best ideas'.

Dod

[richfool]

There is a discussion, which I have just resurrected, which may be of interest involving IT's in the Global Growth sector, here:.

viewtopic.php?p=607579#p607579

As Dod says, Alliance has performed much better over recent years, since the shake out; and ironically, FCIT has gone off the boil this year.