For most, the endgame of investing is to have built a large enough retirement pot. But once there, it’s not all just spending the money that has been built over time but generating a stable dividend pay-out as income.
Below, several financial advisers highlight the investment trusts they believe those starting the final stage of their investment journey could benefit from.
Temple Bar
The first is the £587.2m Temple Bar trust, which was picked by Paul Chilver, associate & financial planning manager at Birkett Long. It has grown its dividend in each of the past 36 years.
“Retirees are more likely to require an income from an investment,” Chilver said. “And with that in mind a suggestion would be Temple Bar, managed by Investec’s Alastair Mundy – who is known for his contrarian investment approach which has been out of favour in recent years.”
As Chilver said Mundy’s value style has been out of vogue recently, but this can be a benefit for portfolios by providing diversification from their other holdings.
Aiming to outperform the FTSE All Share benchmark, Mundy’s trust currently has a 7.8 per cent dividend yield, generated by his process of investing low and taking advantage of investors overreactions to negative news which creates mispricing opportunities.
The trust’s value style has been especially out of favour during the ongoing coronavirus crisis and it is down 53.61 per cent over 2020 so far. This means that over five years, it is down 32.27 per cent – more than the IT UK Equity Income sector (down 15.71 per cent) and the FTSE All Share (down 9.18 per cent).
The trust is currently trading at a 4.9 per cent discount with 23 per cent gearing. It has ongoing charges of 0.49 per cent.
Finsbury Growth & Income
Alongside Mundy’s trust, Chilver recommends the £1.5bn Finsbury Growth & Income trust as “another good option for a retiree [as] its investment approach would blend nicely with Temple Bar”.
Run by FE fundinfo Alpha Manager Nick Train, Finsbury Growth & Income’s quality-growth approach means that it has shielded investors better than the average UK equity income trust and the FTSE All Share over 2020, with a loss of 20.78 per cent. This means it has made a positive return of 26.22 per cent over the past five years.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The trust is currently on a 1.6 per cent discount with a 2.4 per cent dividend yield and 1 per cent gearing. It has ongoing charges of 0.66 per cent.
Merchants
The next two trusts come from Jim Harrison, director at Master Adviser, and his recommendations have around 200 years’ combined investment history.
The first is Simon Gergel’s £467.7m Merchants trust, which launched in 1889 and is the oldest of Harrison’s picks.
“There will be various requirements for a retirement investor, but a main one is likely to be the need for an immediate income as a salary replacement. A key component of this should be Simon Gergel’s Merchants,” Harrison said.
With retiree investors looking for higher than average yield with long-term capital growth, Harrison said Gergel’s trust fits the bill with its 8.2 per cent yield making it a “steal” for a large-cap, blue-chip portfolio.
It has made a loss of 11.05 per cent over the past five years, which again is down to the current bear market that has been caused by the coronavirus pandemic.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Merchants is trading on a 7.9 per cent discount. It has 31 per cent gearing and ongoing charges of 0.59 per cent.
Lowland
Finding a portfolio to run alongside Merchants to give “investors the best of both worlds”, Harrison pairs it up with the £300.5m Lowland trust. The two might work well together because Lowland starts with a lower yield and aims to grow it.
Managed by Janus Henderson’s James Henderson and Laura Foll, the trust invests predominantly in the UK although it can have some exposure internationally. They have a preference for quality companies that occupy a unique position in their industry and command pricing power as a result.
It has made a loss of 26.35 per cent over the past five years, caused by a 44 per cent fall as stock markets have sold off in 2020.
It has a 7.3 per cent dividend yield and is currently trading at a 9.6 per cent discount, with 24 per cent gearing. It has ongoing charges of 0.63 per cent.
Henderson International Income
The final trust combination is from Philippa Maffioli, senior adviser at Blyth-Richmond Investment Managers.
“Henderson International Income is vital within a retiree’s portfolio due to its attractive dividend yield of around 4.0 per cent,” Maffioli said.
“Ben Lofthouse is a well regarded fund manager, whose aim is to provide diversification for investors who already have plenty of UK equity income exposure and therefore require international income exposure.”
The trust’s largest exposure is to the US with a28 per cent of the portfolio invested there, followed by Switzerland at 11.9 per cent and then France at 11.7 per cent.
Over the past five years it has remained in the black with returns of 3.98 per cent, but has underperformed both the IT Global Equity Income sector (up 13.31 per cent) and MSCI World ex UK index (up 33.55 per cent).
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Lofthouse’s trust is currently trading at a 7.9 per cent discount and is 10 per cent geared. It has a dividend yield of 5.2 per cent and ongoing charges of 0.84 per cent.
Dunedin Income Growth
The final trust recommendation is Dunedin Income Growth, which Maffioli said “is essential for an income-hungry retiree”.
“It contains a selection of high-quality UK and overseas companies, delivering a resilient quarterly income,” she added. “Dividends are paid in February, May, August and November, which is good for providing smooth dividend flows within a portfolio.”
Mainly investing in financials, healthcare and consumer products, its top 10 is littered with big FTSE 100 names: Glaxosmithkline, British American Tobacco and Diageo to name a few.
Over the past five years it has made a loss of 5.69 per cent – which is a better result than the average IT UK Equity Income trust and the FTSE All Share over the same period.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Managed by Louise Kernohan and Ben Ritchie, the trust has a dividend yield of 6.3 per cent an ongoing charges of 0.63 per cent. It has an 11.2 per cent discount and is 14 per cent geared.