Purposeful Portfolios: Regular Income - up 9% since inception

Although several holdings are down since the last report, Holly Black finds our manager is happy with the 9 per cent gain since inception.

Our regular income portfolio of investment trusts has posted total returns of 9 per cent since inception last April, despite a ‘hairy start to the year’ which has seen nine holdings in negative territory since our last update. James Brumwell, who is managing the portfolio, has been tinkering to take advantage of capital gains allowances before the end of the tax year.

A common tactic used by professional investors is to ‘bed and breakfast’ investments. This refers to the sale of a particular holding that is then bought back almost immediately; it can work well for investments which have performed strongly. This strategy means it’s possible to crystallise gains without paying tax on them.

Bed and breakfasting

For example, if you had an investment which grew 10 per cent from £10,000 to £11,000 in a year, you would have made a £1,000 gain, which is well within your annual capital gains allowance of £11,700. But if you held that investment for 10 years and it grew by 10 per cent each year, you would have seen your £10,000 grow to £27,070. While that’s a fantastic gain of £17,070, if you sold that holding in one trade you would have to pay CGT on the £5,370 over your annual allowance.

Bed and breakfasting allows you to sidestep this by crystallising smaller gains each year. A 30-day rule makes it slightly trickier, as investors adopting this strategy have to wait for a month before they can repurchase their investments. This introduces an element of risk, of course, because a lot can happen in the market in 30 days.

Brumwell has ‘bed and breakfasted’ 400 shares in Scottish Mortgage investment trust, buying back 380 after a 30-day wait. This decision was also partly driven by the sale of HICL Infrastructure in January, which had been mooted at our last update. The infrastructure fund had had a ‘soggy patch’ and disappointed – it has been sold at a loss of £789.25 and Brumwell says he ‘probably should have done it six months sooner’.

To even out this loss, he took profits from two of the top performers – Standard Life Equity Income, which has produced a stonking total return of 21.2 per cent since inception, and Scottish Mortgage, which is up 19.9 per cent. These trades crystallised total gains of £799.66 to leave us slightly in the black. While half of this money was pumped straight back into Scottish Mortgage, Brumwell has also taken the opportunity to add to his holdings in Finsbury Growth & Income and RIT Capital.

Replacing HICL is the Twentyfour Income Fund, a trust which invests in a mixture of preference shares and corporate bonds as well as ‘some more opaque instruments which we have to trust, from the strong, long-term track record, that the manager understands’. The fund brings a chunky 6 per cent yield to the portfolio, and has already produced a total return of 3.8 per cent since it was introduced in January.

There is a monthly income version of the trust, but Brumwell didn’t choose it because it hasn’t ever increased its dividend. That’s an important characteristic when picking investments for a regular income – funds which increase their payout help you generate an income that rises in line with inflation. City of London is a great example of this. The so-called dividend hero has increased its payout for an incredible 52 years in a row. Some nine of our holdings have hiked their dividend since the portfolio was launched.

Consider dividends too

Brumwell says: ‘This shows why you don’t want to tinker with your portfolio too much – rising dividends can offset a capital loss in the short term. You need to consider dividends when you’re bed-and-breakfasting investments too, as you don’t want to do that at the expense of missing a payout.’

Some of the strongest holdings in the portfolio have been our preference shares, which continue to produce a healthy yield. General Accident yields 5.8 per cent and has also produced a capital gain of 2.6 per cent since the portfolio was launched.

Over the next few months, Brumwell will be keeping a close eye on Murray International, which ‘may be next in the firing line’. The trust, he says, is prone to bouts of poor performance and has struggled to rally enough to make up for those in recent years. It is one of three holdings in the fund whose share price has fallen since inception, and is the weakest performer in terms of total return, up just 1.2 per cent.

At the other end of the spectrum, Foreign & Colonial Commercial Property has rallied after a lacklustre start and is benefiting from improving sentiment towards the sector.

A year since launch, Brumwell is pleased with how the portfolio is shaping up – the yield has increased to 4.5 per cent and, while he will be watching interest rates closely, they have not yet derailed things by rising sooner than expected. He says: ‘If you had spoken to me a couple of months ago, you would have found me scratching my head and wondering which changes to make. Interest rates may force us to readjust later in the year but, for now, I’m very pleased with the income we’re achieving.’

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