I’ve been in two minds as to whether or not I should start my pension over the last year or so. On the one hand, I prefer the flexibility of an ISA, but there’s no denying the merits of long-term investing for retirement.
After a great deal of deliberation, I’ve decided to start investing in my pension; albeit, very steadily. I plan on increasing my contributions, but for now I’m more comfortable keeping the bulk of my investments in an ISA.
So now it comes to fund selection. While this is often overlooked by investors who often select the default option, I wasn’t particularly impressed by the offer put in front of me; particularly when I can get something better for less. I don’t want to dilute the performance of the manager, so I’m just going for one portfolio.
Luckily, my pension provider gives me a great deal of flexibility when it comes to picking my investments, which is particularly relevant to me given my preference for investment trusts over open-ended funds.
First and foremost, the cheapness of trusts is a big draw for me. I’m 24 years old, so it will be at least 40 years until I’m able to touch my pension. I always find it amazing just how corroding costs can be on returns.
Research from Vanguard shows that over 20 years, a total expense ratio (TER) of around 0.7 per cent will retain more than 80 per cent of total returns, while a charge of 2 per cent will only retain around 65 per cent. I want an actively managed portfolio, but one that can maximise my returns as well as add value to the benchmark.
Then there’s the potential for upside through gearing. I don’t want anything too heavily leveraged, but if the manager has a particularly high-conviction view of where the market is going, I want to benefit from that.
I also like the fact that investment trust managers tend to be more long-term and have a lower turnover than their open-ended rivals.
Admittedly, one potential drawback with trusts is discount volatility. While this can often work in favour of the investor, it’s a risk that is essentially out of the hands of the manager, and this is something I’m not very comfortable with. For this reason, I want a trust with a discount control mechanism (DCM) and one that has a sizeable track record in keeping to it.
From an asset-allocation point of view, I think flexibility is the key. No, I don’t want to be invested in bonds and cash for the next four decades, but if the manager believes there are storm clouds or clear skies on the horizon, I want them to have the flexibility to move in and out of asset classes.
So I’m looking for a cheap, flexible investment trust that can gear, preferably has a DCM and, of course, is headed up by a highly rated manager with a strong track record.
It’s for this reason I’ve gone for Sebastian Lyon’s Personal Assets Trust.
With an ongoing charges figure of 0.89 per cent and no performance fee, it certainly ticks the first box. Troy Asset Management is a big proponent of keeping costs low, so I am confident that as the trust’s assets grow, if anything this figure will come down.
Crucially, it’s cheaper than the top-rated, and soft-closed, Trojan fund, which sits in the open-ended universe.
The £550m trust, which has five FE Crowns to its name, has a very simple objective: to protect and increase the value of its shareholders’ funds over the long-term and to achieve as high a total return as possible, while avoiding any level of risk significantly greater than that of its FTSE All Share benchmark. It has no constraints and can invest across a huge number of different asset classes.
At present Lyon (pictured) is relatively cautious and so equity exposure is currently at 50 per cent and the trust isn’t geared; however, he hasn’t ruled out holding 100 per cent in risk assets, and will gear when he thinks the time is right.
Personal Assets sits in the IT Global Growth sector, and so it can invest in international companies, in both developed and emerging markets. North America currently has a 24 per cent weighting, the UK has 18.5 per cent, Europe has 3.5 per cent and Asia Pacific has 1.8 per cent. Perhaps many investors with an equally long investment horizon would want more exposure to emerging markets, but as I explain in more detail later, I’m cautious by nature. Being invested in equities is more than enough risk for me.
The trust is very much a multi-asset portfolio. I like the fact the manager invests in alternatives such as gold and currencies, rather than just sticking to equities and bonds like many of the “multi” asset managers out there.
Unlike some investors, I have no problem with Lyon’s use of cash, which currently stands at 13 per cent. I’d much rather the manager put that money to good use when he sees genuine opportunities, rather than investing it for the sake of it.
Personal Assets also ticks the DCM box; the trust aims to keep its share price as close to net asset value (NAV) as possible, by issuing and buying new stock where appropriate.
The premium currently stands at 1.57 per cent.
Last and by no means least is strong past performance, which Lyon has in abundance. The trust has actually underperformed since he took over in March 2009. However, it has done with significantly less volatility; according to FE data, it has an annualised score of 6.56 per cent over three years, compared to 11.56 per cent from the average Global Growth trust, and 13.75 per cent from the All Share.
Performance of trust, sector and benchmark since March 2009
Source: FE Analytics
As a result, the trust’s Sharpe ratio, which measures risk-adjusted performance, is significantly higher than both the sector and index.
Personal Assets also has a decent yield [1.59 per cent]. I’m not investing for income, but its compounding effect in the long-term is certainly a welcomed bonus.
Some investors may think it strange to talk about strong performance when a trust has actually returned less than its benchmark, but I think you need to look beyond the figures.
Lyon took over at the bottom of the market following the financial crash, when the equity markets were at historic lows. Given Lyon’s attitude towards volatility and other measures of risk, it’s hardly surprising that he’s underperformed. When the markets are going up, I have no problem with a manager lagging the market a bit, as long as they protect me from massive market corrections, which has a far greater impact on long-term performance.
In 2008, Lyon’s Trojan fund managed a return of 1.1 per cent, when the All Share crashed by just under 30 per cent. Given the huge overlap between Trojan and Personal Assets, I think its safe to say that the trust would have fared rather well compared to its benchmark and peer group.
Performance of fund versus index and sector over 10yrs
Source: FE Analytics
Trojan is up 158.84 per cent over 10 years, compared to 117.22 per cent from the FTSE All Share. If the next 10 years are anything like the last, and given the various macro headwinds that is certainly a possibility, a portfolio like Trojan or Personal Assets is exactly where I want to be.
As far as I’m concerned, I’m in a win-win situation: if the market rallies for the foreseeable future, and Lyon remains cautious, I will have still made a healthy return, even though I would have been better off investing in a tracker. If, however, this isn’t the case, and we see a sustained period of market volatility, then I’m invested in a manager who has proven experience in protecting capital effectively, but who also gives investors exposure to upward movements in the markets.
What do you think of Joshua's choice? Your feedback below is always much appreciated.