The Lemon Fool

Hello, I have been asked by a family member for advice about investing £200,000. They have no current particular purpose for the investment or the income. I have been investing in a share based HYP for several years and a HYP is what I will recommend they buy. I don't believe a share based HYP is right for them, so I am interested in constructing a HYP using Investment Trusts only. However, I know very little about which ITs to invest in.

My objectives is to generate a higher yield than the FTSE 100 is currently achieving, which I believe is close to 4%, and to continue to beat the this for the next forty years without tampering. I'm not trying to smash the FTSE yield; just beating it is sufficient, so I hope this de-risks my objective to some extent. I have no preferences for the types of IT to invest in, except they should be available to a UK-based investor buying on the London exchange. I do want to diversify the portfolio, so as not to be dependent on just a couple of holdings; I don't have any view on how many holdings are needed to provide the required diversity.

I really will be interested to read your IT recommendations and allocations.

Thank you, ZipserSir

I've done something similar for my Dad, except yield has not been a primary consideration so I may be wasting my time posting, but FWIW here's what I've bought:

City of London Investment Trust, Blue chip shares
Finsbury Growth & Income Trust , Concentrated portfolio of blue chips
Diverse Income Trust, Smallcap with a bias toward income
Standard L. Smaller Co's Trust, Smallcap UK
European Asset Trust, European small / mid cap with high yield paid partially from capital
Fundsmith Emerging Equities I.T., Focus on consumer goods in developing world, but not the normal brics
Henderson International Income, Global blue chips not UK

Sorry about the formatting

I have the FTSE100 yielding under 4 currently, still a good enough number for a marker. I hold two UK large cap ITs The City of London CYT yield 3.94% and Murray Income Trust MUT on 4.12% - yield details from https://www.trustnet.com/investment-tru ... ection=Asc
They fish in the same pool and share fair few holdings, many FTSE, blue chip, high yielders familiar to HYPers. I started buying in 2013 and added for a couple of years, CTY has seen price appreciation most years whereas MUT struggled at some points, both have steadily increased dividends. There are other investment trusts in this sector favoured by Luniversal on HYP for his baskets.
http://boards.fool.co.uk/basket-of-eigh ... e#13435673

ZipserSir wrote:My objectives is to generate a higher yield than the FTSE 100 is currently achieving...

Ok.

...and to continue to beat the this for the next forty years without tampering.

Why?

If you buy an IT or a portfolio of ITs with a higher yield than the FTSE 100 is currently achieving, and then it increases (capital wise) at a rate notably more than the FTSE does, and so your yield drops below the FTSE, will you consider that a failure?

I would like to make a few comments about this. Over a 40 year timespan it could be a mistake to overemphasise high yield at the expense of capital gain. The overall return is what matters. So an IT with a record of excellent capital gains might well beat one with a high yield but low capital gain. That is why I would suggest that Scottish Mortgage Trust is a strong contender for your portfolio.
My second point is that it would, in my opinion, be an error to set up the portfolio and then just leave it untouched for 40 years. It would need a regular review - perhaps once a year or possibly every 2 or 3 years. That is because the investment world does not remain static. At the moment some countries have great long term promise eg China and India. But this may not remain so forever. Themes like healthcare and tech are rightly popular now may be superseded by other things. Also some ITs may fall into a lengthy period of underperformance and will need replacing.
Regards
ermintrade

ZipserSir, what you're looking for seems to be a pretty close match to the two baskets L'uni put together on TMF some time ago. One had a higher yield and less capital growth focus than the other, and hence different risk profiles, but in principle both were looking to be diversified, smoothed, income generators, and pretty much LTBH portfolios. When TLF was born from the ashes of TMF L'Uni decided to take a back seat I think, and we've never had an update from him on any changes he would suggest to the portfolios to reflect current conditions.

I wonder if any of the more informed/opinionated posters may wish to reflect on the two portfolios, provide a commentary on how they've performed since L'Uni's last review, and suggest any modifications to them.

Or perhaps L'uni can be coaxed out of retirement to do this?

Thank you for the feedback BrummieDave, ermintrade, mc2fool, kempiejohn, and doug2500. Really do appreciate your investment suggestions, which I will take away and look at more closely - including Luni's baskets, which sadly have not been replaced here since leaving the old place.

mc2fool asked why it should be an objective to continue to beat the ftse100 for the next forty years without tampering and whether, if I bought an IT or a portfolio of ITs with a higher yield than the FTSE 100 is currently achieving, and then it increases (capital wise) at a rate notably more than the FTSE does, and so the yield drops below the FTSE, would I consider it a failure?

In my clumsy way what I was asking for was proposals for an above average yielding IT investment that would not for any obvious reason now stop from achieving the overall objective any time soon.

ermintrade picked up on the no-tampering clause: if it were my investment I would definitely be reviewing it, but this one is for Doris, who won't review it. The points about China and India are spot on, which is why the principled way each IT is managed is probably more important than the constituents of the investment now, and why diversity across more than one fund is so important.

What I want to do is to set-up a long term and leave investment that has a reasonable chance of paying out an above average return for as long as possible.

Hope this clears up any misunderstanding.

ZipserSir wrote:In my clumsy way what I was asking for was proposals for an above average yielding IT investment that would not for any obvious reason now stop from achieving the overall objective any time soon.

Yes, I understood that, but it's just repeating your objective, not explaining it. (IIUC) You said your objective is pick ITs with a higher yield than the FTSE 100 now that will (hopefully) continue to have a higher yield than the FTSE for the (very) long term.

Why? Why do you care about their yield relative to the FTSE in the future? There are multiple ways that objective can be met, most of them not good! (And, BTW, I suspect you are conflating "objective" with "method", the end with the means).

E.g. if I were to point you at an investment that yielded, say, 6% (which beats the FTSE), has done so for many years and looks likely to continue to do so pretty much forever, would you be happy? It meets your stated objective. What if I were then to tell you that the capital value has remained static for a long time and looks likely to continue to do so forever?

What I want to do is to set-up a long term and leave investment that has a reasonable chance of paying out an above average return for as long as possible.

Ah! Now that looks like an objective! But why do you think that an (un-tampered) investment that has and continues to have a higher yield than the FTSE is a means to achieving that?

Are you conflating "yield" with "returns"?

mcfool2, you are a smart person! I think you understand what I am trying to achieve.

And yes, I am conflating two ideas - yield and return.

If you were to show me a way that achieved my goal without reference to FTSE or yield then yes, I would be very interested (though possibly I should not have posted that as a question here?)

I've been impressed by the performance of HYP, and therefore have belief in the approach, and I also believe it should be possible to emulate by means of ITs.

Your recommendations had better be good after that!

ermintrade wrote:I would like to make a few comments about this. Over a 40 year timespan it could be a mistake to overemphasise high yield at the expense of capital gain. The overall return is what matters. So an IT with a record of excellent capital gains might well beat one with a high yield but low capital gain. That is why I would suggest that Scottish Mortgage Trust is a strong contender for your portfolio.
My second point is that it would, in my opinion, be an error to set up the portfolio and then just leave it untouched for 40 years. It would need a regular review - perhaps once a year or possibly every 2 or 3 years. That is because the investment world does not remain static. At the moment some countries have great long term promise eg China and India. But this may not remain so forever. Themes like healthcare and tech are rightly popular now may be superseded by other things. Also some ITs may fall into a lengthy period of underperformance and will need replacing.
Regards
ermintrade

I think this is spot on ermintrade.

I would disregard yield.

We have always, for decades, had a good slice of our equities investments in ITs, not a jot of regret so far.

FWIW, here is a selection of some we hold in various portfolios which we hope to hold for a couple of decades looking forward, after that we will be pushing up daisies in all probability. In any case 40 years is asking a bit too much in investing terms since the future might be so different from the present.

CTY, LWI, MYI, EAT, HFEL, WTAN, RCP, IPU, SMT, FCS, FGT, TGIT. To this I would add just one ETF, EQQQ(to cover the NASDAQ). This lot, in TR terms, should leave the FTSE well behind over a couple of decades imho. So far not the slightest hassle with that lot.

If no further hassle is required, I would reinvest the divis in a world tracker, or FUNDSMITH(on a platform without ad valorem charges for just holding funds), for a few years. Or slowly rotate the divi re investment among the selection.

Ozyu

Sorry about just mentioning the IT codes, easily looked up anyway, but we are catching a plane later today, so not much time and Mrs Oz is getting impatient with me.

ZipserSir wrote:Hello, I have been asked by a family member for advice about investing £200,000.

If you are going to pursue the general advice to try to minimise taxes, the first question is whether any of this loot is already in tax shelters. And can any that's not in tax shelters be put there over the next few years?

The dividend allowance sinks to £2000 p.a. starting next tax year.

If you want a minimum-intervention portfolio wouldn't passive investment be attractive, rather than ITs?

Thanks Kantwebefriends, helpful observations

"the first question is whether any of this loot is already in tax shelters" - nope, and due to family member's circumstances it can't be.

"If you want a minimum-intervention portfolio wouldn't passive investment be attractive, rather than ITs?" - what do you mean by a passive investment?

ZipserSir wrote:"If you want a minimum-intervention portfolio wouldn't passive investment be attractive, rather than ITs?" - what do you mean by a passive investment?

A cluster of low-charge passive ETFs for example - see recent Monevator article
http://monevator.com/income-portfolios-passive-etfs-retirement/

BrummieDave wrote:ZipserSir, what you're looking for seems to be a pretty close match to the two baskets L'uni put together on TMF some time ago. One had a higher yield and less capital growth focus than the other, and hence different risk profiles, but in principle both were looking to be diversified, smoothed, income generators, and pretty much LTBH portfolios. When TLF was born from the ashes of TMF L'Uni decided to take a back seat I think, and we've never had an update from him on any changes he would suggest to the portfolios to reflect current conditions.

I wonder if any of the more informed/opinionated posters may wish to reflect on the two portfolios, provide a commentary on how they've performed since L'Uni's last review, and suggest any modifications to them.

Or perhaps L'uni can be coaxed out of retirement to do this?

It is also worth noting that he said himself towards the end of TMF that if he were to create a new basket to do what he wanted it would have a few different income IT choices in it, but for historical reasons around data tracking performance his basket choices became frozen in time so that he could check whether the approach was successful or not.

DrBunsenHoneydew wrote:

ZipserSir wrote:"If you want a minimum-intervention portfolio wouldn't passive investment be attractive, rather than ITs?" - what do you mean by a passive investment?

A cluster of low-charge passive ETFs for example - see recent Monevator article
http://monevator.com/income-portfolios-passive-etfs-retirement/

This article and the one that goes before it hardly seem a ringing endorsement for passive investments; investment trusts still look more compelling.

Hi All,

First time poster here but have been enjoying looking at this forum for a while

I won't post on the merits of the investing technique of buy and hold forever or funds vs IT vs ETF etc. I'm a fairly young investor (well 39!)
For what it's worth I've been buying a pot of IT's mainly focused on Income and a maybe a bit more growth for the SIPP
Here is my own collection, Perhaps influenced by John Baron's IT monthly article in the IT and also my subscription
to the Money Observer Magazine. Would be interested in anyones thoughts. I've been building it for 5 or so years now and it's producing a
nice growing income

ISA Holdings

Blackrock Commodities Income - BRCI
Finsbury Income and Growth - FGT
Henderson Far East Income - HFEL
Invesco Perpetual Enhanced Income - IPE
Merchants Trust - MRCH
Murray International - MYI
CQS New City High Yield - NCYF
Perpetual Income and Growth Trust - PLI
Smaller Companies Dividend Trust - SDV
Schroder Real Estate Investment Trust - SREI

SIPP Holdings

Aberdeen Asian Income - AAIF
Caledonia Investment Trust - CLDN
European Assets Trust - EAT
HICL Infrastructure Trust - HICL
Henderson Smaller Companies - HSL
JP Morgan Mid Cap Trust - JMF
Murray Income Trust - MUT
Standard Life Equity Income - SLET
Standard Life Investment Property Trust - SLI
Scottish Mortgage - SMT
Temple Bar - TMPL

Good IT's I would say Noiseboy. One of the factors that would determine whether you should aim for income or growth orientated IT's at your age is what you do with the dividends. I assume that you reinvest, but then what are the costs of doing this either on your platform(s) or with direct IT holdings?

In terms of others with an income theme but also good growth potential, you may want to have a look at Acorn (AIF) which as the name suggests concentrates on smaller companies (so it always has a lot of growth potential) but also has an interesting chunk allocated to fixed income. It took a bit of a knock a few years ago with the untimely death of John McClure at a far too young age, but is back on track now (but still trades at around a 10% discount to NAV). With your time frame you should do well with more growth company funds.

TR European Growth (TRG) is a European smaller companies growth fund that has done very well but is still trading at a 11-12% discount and will do will in any long-term portfolio I think.

Brunner (BUT) is also one to look at as it is about to pay off some very expensive debt that has held it back and under Lucy MacDonald is now starting to move away from being a UK only income fund (which is sensible). The 12% discount makes it a good potential for both growth and income in my view.

I don't believe a share based HYP is right for them

Why not? Did I miss something? Are they ineligible for ISAs?

1stnform wrote:I don't believe a share based HYP is right for them

Why not? Did I miss something? Are they ineligible for ISAs?

Moderator Message:
Please try to use the "Quote" option when quoting from another post. You can do this by clicking on the " symbol above each post, and then it will give the OP's name. I have looked and failed to find where you quote came from.

TJH

@TJH - It's in the third sentence of the first post in this thread.

ZipserSir wrote:Hello, I have been asked by a family member for advice about investing £200,000. They have no current particular purpose for the investment or the income. I have been investing in a share based HYP for several years and a HYP is what I will recommend they buy.

Thank you, ZipserSir

I hold the following and with the exception of Dunedin, they have all done well for income and capital. Dunedin are changing their strategy to cut out the dogs to improve the total return. I have held Dunedin and Murray International since the early 1990's and Temple Bar since 2002. Temple Bar have increased the dividend yearly at least since I first invested and for a long time before that, Murray International never reduced the dividend but did have a couple of flat years, about 1993/4 I think without looking at my records.

City of London Inv Trust
Dunedin Income Growth Inv Trust
Merchants Trust
Murray Income Trust
Murray International Trust
Perpetual Income & Growth Inv Trust
Temple Bar Inv Trust

Last year I bought a few Blackrock Throgmorton Trust to have more exposure to UK smaller companies. The yield is only 1.6% but up 13% on capital.


HTH

john