Smoother dividends, the ability to gear and higher incomes are just some of the reasons investors should consider turning to investment trusts to get the most out of their pension pots, according to AllianzGI’s Simon Gergel. 
The manager, who has run the £661.4m The Merchants Trust for nine years, believes that it is fundamental for today’s working generation to start adding to their pensions as early as possible to ensure their retirement is as comfortable as possible.
However, he expresses concern that many of those who are some way off their retirement have yet to start thinking seriously about it.
Added to this is the fact that people are living longer – the average life expectancy for men and women in the UK is 81 and this could edge close to 100 for children born in the next generation, according to data from the Office for National Statistics – and their pension pots have to last for many years more than they do now.
“I suspect the general level of understanding in terms of how much money you’re going to need in retirement is not that high and people are generally living longer. The provision of pension schemes and the generation who have benefitted from defined benefit pension schemes has largely drawn to a close,” Gergel said.
“Those people that are working today and certainly most of the younger workers don’t have defined benefit pension schemes so they have to take more responsibility for their own pensions and start thinking about how much money they’re going to need.”
“I suspect the understanding of that is not as good as it needs to be because you need a lot of money to provide a decent income in retirement.”
The manager argues that investment trusts can help with the situation because they are able to generate increasing streams of income while also growing capital over time.
He says this can provide an income stream for retirees that keeps pace with inflation if the trust is well-managed and can last as long as the investor’s retirement if they don’t need to draw down the capital.
“I’m not saying it’s impossible for open-ended funds to do that, but trusts have other advantages too,” he explained.
“A major benefit that trusts have is the ability to gear [or borrow money], which can enhance the income. I think for investors, investment trusts generally have lower fees than open-ended funds and you’ve got an independent board looking out for the interests of the shareholder.”
Gergel says the biggest advantage a trust can offer those who are putting money towards their pension is that the manager is able to put money away into reserves during good times to smooth their dividends in more difficult periods.
This is exactly what the manager has done with The Merchants Trust, which has managed to pay increasingly higher dividends to its shareholders year-on-year for the last 33 years.
Its 10-year net dividend record shows that, since 2006, the trust has boosted its dividend from 18.9 to 23.8 pence per share at a median increase of 0.6p per annum.
10yr net dividend record in pence
Source: The Merchants Trust
“When dividends were cut in the market we were able to keep growing our dividend by drawing on reserves. Now the income is balanced again, the dividends are covered again,” he explained.
“It’s easier to maintain and grow a sustainable dividend in an investment trust because of these reserves and because of the ability to tuck money away. I think with open-ended funds it’s quite hard to have an increasing dividend every year because of the volatility of individual company dividends.”
“If you want a steady income, it’s probably easier to manage that in an investment trust.”
Out of 509 trusts in the Association of Investment Companies universe, Gergel’s Merchants Trust is well within the top quintile for its yield of 5.6 per cent.
The manager says that not only is the yield high, investors can have peace of mind knowing that it is entirely invested in the UK market, which means currency risks are minimised, they are protected by the UK legal system and businesses are covered by the Takeover Code, which aims to maximise fairness to UK shareholders.
“I think the UK is a very good place to invest. The UK in a broader sense has been very outward-looking as a country for an awfully long time – it is a built-up trader with links around the world,” he explained.
“The Merchants Trust has an active stock-picking approach. We are quite different in our portfolio structure to many trusts as we move around the positioning of the portfolio to take advantage of where we see opportunities in the market.”
An important trait that those investing for retirement should look for is the strength and the reliability of the investment management company that supports the trust itself, according to Gergel.
He says that working for a large firm like Allianz Global Investors means that he has bountiful resources to tap into as a trust manager.
“We’ve got a huge team of research analysts based around the world so we’ve got good information sources in terms of what’s going on and a large team of analysts to analyse companies,” he said.
“We’ve got great access to the businesses we invest in. Being a big investor, we get to meet the chief executives of the companies we invest in, which is important because we want to understand how they allocate our clients’ capital. It’s a strong board and a strong fund management company.”
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Past performance is not a reliable indicator of future returns. You should not make any assumptions on the future on the basis of performance information. The views and opinions expressed herein, which are
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The Merchants Trust PLC is incorporated in England and Wales. (Company registration no. 28276). Registered Office: 199 Bishopsgate, London, EC2M 3TY. The Company is a member of the Association of Investment Companies - Category: UK Equity Income.