For many investors who have saved long and hard over the years to build up their retirement nest egg, whether within Isas or Sipps or outside, there is often a natural reluctance to start dipping regularly into capital to supplement a retirement income. Switching to income-producing investment trusts in this situation appears to be a safer option. It means you can convert your returns into income and leave your capital untouched.
Each year for the past five years, we have put together a portfolio of income-producing trusts designed to provide a £10,000 income. We have always stressed that there is no guarantee that the portfolio will meet its objectives but so far it has always delivered over £10,000 income each year. Its capital value has been somewhat more volatile, rising in two years, and falling in two. This year so far the direction has been positive.
There are many reasons why regular savings are a good idea – not least the fact that they enable investors who don’t have spare capital to build up a lump sum. A savings plan also provides a good discipline. Aside from those considerations, regular purchase of investment trust shares has real investment benefits.
The ability of investment funds and trusts to provide investors with a regular and growing income is often underrated. Many investors still regard them as a way of accumulating capital, rather than as a means by which they can use capital to supplement their income. Yet for many of the 2019 Money Observer Rated Funds, income generation is one of the primary objectives; and historically they have proved they can deliver.
Most people who want to generate income from their capital, particularly in retirement, like to know they can rely on that income. Many shy away from the stockmarket for this reason. However, that is because they tend to focus on share price volatility rather than looking at the much steadier trajectory of share dividends. One of the best ways to tap into a steady ow of share dividends is through investment trusts.
When you buy an investment trust, your main hope is that its share price will be higher by the time you want to sell. Whether this happens and by how much will largely depend on the skills of the investment manager in growing the portfolio, and the direction of the stock market or other asset classes in which it invests.
Inflation, standing at 2.5 per cent for March, may be on the wane after peaking in November at 3.1 per cent – but it has not gone away, and it is potentially very damaging for investors. It will gradually erode the value of your capital and income, so anyone investing for the long term who needs a regular income really needs to look for investments with the potential to maintain the value of their capital and preferably grow their income payments as well. This is where some of the Money Observer Rated Funds can help.
Our investment trust portfolio has notched a second year of healthy capital gains and a third year of growing income.
As growth strategies start to flag, value- and contrarian-oriented trusts may be coming back into fashion.
Portfolio manager Roddy Kohn discusses its three-year performance and reflects whether, in hindsight, he would have managed it differently.