10 investment trusts for pre- and post-retirement portfolios

We analyse the power of 10 trusts over a decade of savings and a decade of drawdown to show how they have quadrupled investors' cash.

Investing during the dotcom crash? Drawing an income during the financial crisis? These were pretty hair-raising times for investors, but those who invested regularly in investment trusts in the decade leading up to the financial crisis, then withdrew the natural income in the 10 years since then have virtually quadrupled their money.

They have turned a total investment of £100,000, saved diligently into a range of 10 investment trusts at a rate of £1,000 per trust per year, into almost £390,000, including an income stream of almost £80,000.

These compelling statistics, compiled by the Association of Investment Companies (AIC) for Trust, form a crucial part of this feature, which shows that the same investment trusts can serve investors well in both the investment and the drawdown stages of their retirement planning.

‘Pensions freedoms have blown away the line in the sand between the accumulation and decumulation phases of pension planning,’ says Haig Bathgate, head of portfolio management at Seven Investment Management (7IM).

‘With two-thirds of us now apparently opting for drawdown, investments need to work harder and for longer. Those out-and-out growth funds can be held for considerably longer than they used to and lower-risk options can stay in the bottom drawer for longer too.’

A top 10 table showing how dividend yields have shifted on 10 selected trusts


Double win

Funds that combine growth with a decent level of income offer a double win for investors in both accumulation (the saving stage) and decumulation (drawing an income).

Ben Yearsley, a director of Shore Financial Planning, a Plymouth-based adviser, says: ‘In the accumulation period you roll the income up and in the decumulation period you take it. While there used to be a huge emphasis on de-risking investments leading up and into retirement, investors can now glide smoothly from building retirement wealth to drawing on it with little or no changes to their portfolio, provided they choose their investments wisely.’

One of the biggest mistakes investors make, he says, is underestimating the level of risk they need to take to keep their pot growing sufficiently to keep pace with inflation and fund what is likely to be a lengthy retirement.

‘Quite simply, they don’t take enough risk on the way up and are too soon to de-risk on the way down,’ he says. ‘While you probably shouldn’t be in a frontier market fund in drawdown, you should predominantly be in equities with an emphasis on investing for growth in capital as well as decent – and ideally rising – dividends.

‘Even if the yield as a percentage stays constant, if the capital doubles over 10 years then your income doubles too – that’s the real attraction in continuing to grow your asset base after retirement.’

Unique features

Investment trusts have unique features that make them particularly well suited to investors saving for retirement and then drawing an income from the same investments.

Gearing – borrowing money to make additional investments – is arguably the biggest benefit of the closed-ended investment trust structure for those in the accumulation phase. Although gearing can make investment trusts more volatile in the short term, the ability to deploy gearing is a competitive advantage that has enabled them to generally beat the returns from open-ended funds over the long term.

The permanent capital structure is another big benefit for those saving for retirement, because it affords managers the freedom to focus on growth rather than managing inflows and outflows.

For income-seekers investment trusts have another significant advantage: they are able to retain up to 15 per cent of their income each year to keep paying and growing their dividends even in volatile markets.

This allows managers to commit to a progressive dividend policy and some trusts have notched up 50 or more consecutive years of dividend growth.

The ability to generate a rising level of income is clearly desirable for investors in drawdown; they are able to take the natural yield without inflation eroding their spending power. It also helps to supercharge investments in the accumulation phase.

‘Compounding – the so called eighth wonder of the world – works best if you reinvest your dividends, rather than drawing them – so avoid the temptation to do this too soon,’ says Bathgate.

Power of 10

To demonstrate the power of investment trusts in both the saving and drawdown phases of retirement planning, we looked at how an investor might have fared over the past 20 years – 10 spent accumulating assets and another decade spent taking the income from them.

This period takes in some pretty nasty falls in the market. The first 10-year period, from 1998 to 2008, encompasses the 2000- 2003 bear market that was sparked with the bursting of the dotcom bubble. The second 10-year period, from 2008 to 2018, includes the financial crisis.

We selected 10 trusts from a variety of sectors with a starting yield of 3 per cent or more on 1 August 2008 – the point at which our hypothetical investor retires. Among them are four UK equity income trusts, two global equity income trusts and one Asia Pacific income trust, as well as a dividend-paying UK smaller companies trust, global growth trust and property trust. All 10 trusts also had to have decent yields in the accumulation phase from 1 August 1998.

In the 10 years from 1998, £1,000 is allocated to each on an annual basis with the dividend income being reinvested. At the end of that period, a total investment of £100,000 has grown to £160,098.

This capital is left invested, but in the subsequent 10 years the natural income from each trust is withdrawn. Over the decade, the investor receives £78,806 in income and still has a capital sum of £310,152, nearly double the amount invested 10 years earlier.

‘Trying to time the market is a fool’s errand, and what these figures brilliantly illustrate is that the best course of action is to maintain your investment discipline and stick to your strategy, no matter how painful it might feel at times,’ says Yearsley.

Below, we take a closer look at our 10 examples of trusts that could see an investor through both the accumulation and the decumulation phases of their retirement planning.

Note: The capital values quoted in the profiles account for income reinvested during the accumulation stage and then with income stripped out in the decumulation phase.

Please click here to enlarge tables

A pair of tables showing the accumulation and decumulation phases for 10 investment trusts


Aberforth Smaller Companies (ASL)

Aberforth Smaller Companies has turned a £10,000 investment into £42,298 while generating an income of £6,773. Its current dividend yield of 2.3 per cent is supported by three years of dividend cover.

Bathgate at 7IM has held the trust in client portfolios for the past 20 years. It is by far the largest UK smaller companies investment trust, but trades on one of the widest discounts at more than 10 per cent.

‘It’s difficult to find investment trusts on double-digit discounts 10 years into a bull market, and income investors have the added benefit here of getting more shares working for them to produce capital and income,’ says Bathgate.

The six investment managers focus on a ‘value’ style of investment, which has meant the fund hasn’t been exposed to some of the high-profile growth stocks that have driven performance in recent years. This has dented its track record over the medium term, but James Carthew, research director at investment trust research company QuotedData, rates it a ‘good option’ if UK interest rates rise and investors’ focus switches from growth to value.

Bankers (BNKR)

Bankers investment trust has produced capital of £33,283 and income of £5,252 from an initial investment of £10,000.

It sits in the global sector and aims to produce capital growth in excess of the FTSE World index, as well as annual dividend growth that is greater than inflation. Having grown its dividend for 51 successive years, it is among the top four trusts on the AIC’s list of ‘dividend heroes’ and has been a Money Observer Rated Fund since 2013.

It yields less than the average global equity income trust of 3.5 per cent, but more than the 1.9 per cent average in its own sector. Over the past decade, the shares have yielded a very respectable range of 2.1 per cent today to 3.1 per cent in 2009.

The trust’s manager Alex Crooke, who is also co-head of equities for EMEA and Asia Pacific at Janus Henderson Investors, believes that focusing on real income growth is ‘vital to weathering different market conditions’.

‘In the accumulation stage of savings, the dividends can be reinvested and in drawdown an attractive income can be harvested to supplement living costs,’ he says.

City of London (CTY)

This UK equity income trust, a Money Observer Rated Fund since 2015, has turned £10,000 into £21,497 over 20 years, while producing an income of £7,317 over the past decade. The trust yields 4.1 per cent at present and pays a quarterly dividend.

Topping the dividend heroes list with 52 consecutive years’ dividend growth, the trust has dipped into its revenue reserves to increase its dividend in seven out of the 27 years since Job Curtis became its manager in 1991.

Shareholders received a dividend of 17.7p per share for the year to 30 June 2018, up from 16.7p the previous year. That left 5.3 per cent of earnings retained in the trust’s revenue reserve, which amounts to 85 per cent of the cost of the annual dividend.

Curtis, who is head of value and income at Janus Henderson Investors, manages the trust conservatively, focusing on high-yielding, cash-generative businesses that can consistently grow their profits and dividends.

It is one of the largest UK equity income trusts with one of the lowest ongoing charge ratios of 0.42 per cent.

Page 2: more diversified trusts

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