IT's for Income - how many

[GrandOiseau]

Back story:

I started a share HYP as a long term plan for secondary (beyond a couple of company pensions) and a UT ISA investment and a few more standard savings investments.

Then the missus had some money to invest over and above as it were and on TMF I was inspired by the B7/B8 idea and started small scale splitting 5 ways on BNKR, BCI, CTY, MUT and SCF. Anyhow things got busy over the last 3/4 years, meanwhile we've both been accumulating further investment capital. And now seems the perfect time to buy more - given it's for the long term / income driven.

But having done a bit of reading on here and elsewhere to catch up I am considering what to do.

The 5 above are largely focused on income growth and aside from Bankers predominantly investing in UK equities. Correct me if I'm wrong, it's a whiles since I researched them. But reading on here some posts folk are suggesting what's the point of having a basket of UK based IT''s as they'll all largely be investing in the same equities. Thoughts?

Additionally the suggestion that a basket of IT's should be more about high income bond ITs, international income, asset backed, real estate, etc. Offering diversification. Again, thoughts would be appreciated?

Also, share HYP's - are their still believers?

[77ss]

....
The 5 above are largely focused on income growth and aside from Bankers predominantly investing in UK equities. Correct me if I'm wrong, it's a whiles since I researched them. But reading on here some posts folk are suggesting what's the point of having a basket of UK based IT''s as they'll all largely be investing in the same equities. Thoughts?

Additionally the suggestion that a basket of IT's should be more about high income bond ITs, international income, asset backed, real estate, etc. Offering diversification. Again, thoughts would be appreciated?......

I think that ITs offer a good way of diversifying into non-UK shares. A number of years ago I started moving away from HYP - largely into ITs.

My current collection is about 35% of my holdings and, overall, about 80% in non-UK stocks. This was quite deliberate and I have no regrets at all.

I can't offer an opinion on your second question as my focus is not on high income (although some of my ITs would qualify).

[OllyDrod]

Back story:

I started a share HYP as a long term plan for secondary (beyond a couple of company pensions) and a UT ISA investment and a few more standard savings investments.

Then the missus had some money to invest over and above as it were and on TMF I was inspired by the B7/B8 idea and started small scale splitting 5 ways on BNKR, BCI, CTY, MUT and SCF. Anyhow things got busy over the last 3/4 years, meanwhile we've both been accumulating further investment capital. And now seems the perfect time to buy more - given it's for the long term / income driven.

But having done a bit of reading on here and elsewhere to catch up I am considering what to do.

The 5 above are largely focused on income growth and aside from Bankers predominantly investing in UK equities. Correct me if I'm wrong, it's a whiles since I researched them. But reading on here some posts folk are suggesting what's the point of having a basket of UK based IT''s as they'll all largely be investing in the same equities. Thoughts?

Additionally the suggestion that a basket of IT's should be more about high income bond ITs, international income, asset backed, real estate, etc. Offering diversification. Again, thoughts would be appreciated?

Also, share HYP's - are their still believers?

It’s true that many UK Income ITs will have overlapping holdings and I have some sympathy with the argument that there’s little point in having multiple UK Income ITs in the same portfolio. Why not just have one IT (if you want an active fund manager) or just a FTSE tracker fund (if you’re happy with passive)? However…

- Dig beneath the Top 10 holdings. Lots of UK Income ITs will hold the likes of Shell, Unilever, Diageo, BP, etc, but the rest of the portfolio can vary dramatically. Eg: LWDB and its wholly-owned professional services firm, IPS which represents ~15% NAV.

- It’s generally not a good idea to put all your eggs in one basket. Having multiple ITs (even if they have similar holdings) reduces your exposure to a fund-specific risk event which could negatively impact the share price. Eg: the resignation of a successful manager or an accounting scandal/issue.

- Even if the holdings appear similar, there are other characteristics that may distinguish one IT from another. Eg: the manager’s approach, the track record, the level of gearing, the dividend policy, revenue reserves and dividend cover, etc. (the latter particularly salient at the moment!)

- There’s definitely a place for tracker funds, but at the moment (with so many beaten-up shares out there) I’d rather have an active manager sifting through the wreckage for bargains on my behalf, rather than putting X% of my cash into a fund which doesn’t discriminate between the good, the bad and the ugly. (This obviously depends on the skills of the active manager, etc.)

For my part, I don’t see anything wrong with holding a basket of UK ITs – as long as together they’re worth more than the sum of their parts.


Re: alternative assets, ITs are the ideal structure for holding some of these – particularly niche or illiquid assets – and many alternative ITs pay out decent dividends. Things to check:

- How is the dividend funded? Some alternative ITs have great secure cash flow. Others have next to none and fund the dividend to a greater or lesser extent from the capital reserve (‘enhanced’ dividends). Nothing wrong with this in principle, but you’ll want to know that it’s sustainable in the event of a downturn (like now…)

- Watch that premium. Lots of income-focused alternative ITs (particularly the infrastructure funds) have been trading on whacking great premiums over the last few years and many have already gone back to premium following the crash earlier this year.

- Watch that discount. There area lots of apparently ‘cheap’ ITs out there at the moment. Some will (many have) bounced back, but others are cheap for a reason (eg: dividend suspension!)

- Same with any investment, but make sure you understand what it is the fund is investing in. There’s some weird and wonderful alternative ITs (songs, forestry, aircraft leasing, etc) but many of them don’t have a particularly long track record and are yet to be tested in a downturn.

- Check how well they've held up over the most recent downturn... there's little point in investing in ITs for diversification if everything still moves the same direction at the same time as your equity holdings.


Re: HYP shares, possibly, but certainly not me. I’m a terrible stock-picker. Much happier with a diversified portfolio of ITs.

Hope that helps – good luck!
- OllyDrod

[GrandOiseau]

OllyDrod,

Thanks for your input/counter.

I am thinking that having 3/4 UK Income IT's will be no bad nothing for the reasons you mention. Perhaps having 7/8 is where it gets a little unnecessary?

Thanks for the thoughts on the alternatives. Not thinking anything too exotic at the minute for sure.

Out of interest vaguely what asset categories are you IT's split over?

GrandOiseau

[OllyDrod]

I’d be loathe to put a specific number on it – really comes down to what you’re comfortable with. I'd say better to have 7/8 UK Income ITs that each offered something different than 3/4 that were basically the same.

In terms of my holdings, I’m approximately split:
- 25% UK Equities
- 20% Debt – Loans and Bonds (Mixture of UK, US and Euro)
- 20% Global Equities
- 10% Asia Pacific
- 7% Property
- 5% Emerging markets
- 5% Infrastructure
- 5% Biotechnology
- 3% Private Equity

Not for one moment suggesting that this is in any way optimal, but I’m relatively happy with the weightings. May look to increase Global and Bond exposure relative to UK Equities over the longer term, but not planning any drastic rebalancing...
- OllyDrod

[GrahamPlatt]

If you aren’t already aware of it, can I devise looking at www.theaic.co.uk
A very useful resource.

[GrandOiseau]

If you aren’t already aware of it, can I devise looking at http://www.theaic.co.uk
A very useful resource.

I wasn't and yes it looks very useful. Many thanks.

[fca2019]

I'm one who thinks there's no point having more than one uk income IT.

The winners in the coronavirus crash have been big tech and healthcare.

So to me makes sense to have at least one investment in each. For example Smithson is heavy in healthcare which has meant its outperformed.

[OllyDrod]

I'm one who thinks there's no point having more than one uk income IT.

The winners in the coronavirus crash have been big tech and healthcare.

So to me makes sense to have at least one investment in each. For example Smithson is heavy in healthcare which has meant its outperformed.

I don't think it's an either/or - plenty of room for some thematic trusts in a diversified portfolio alongside more traditional equity-based holdings. And remember, that which has performed best in the crisis may not perform best in the recovery. UK shares are looking cheap and there's definitely value to be had from UK Income ITs at the moment.
- OllyDrod

[Lootman]

I'm one who thinks there's no point having more than one uk income IT.

I agree. Given that a huge proportion of total dividend income derives from a very small number of UK shares, it seems screamingly obvious to me that all the UK income ITs are fishing in the same shallow pond.

Sure their allocations may vary, and the gearing, and therefore the returns. But it is a faux diversification if you are merely permutating the same usual suspect names. Far better, in my view, if you want to diversify your income is to look at either foreign income shares or else other asset classes. As an example US shares so far have announced far lower levels of dividend cuts than UK shares. The fact that US shares have much lower payout ratios means that perhaps this is not surprising.

I own Finsbury Growth and Income IT and no others. Go with best of breed.

[Arborbridge]

I'm one who thinks there's no point having more than one uk income IT.

The winners in the coronavirus crash have been big tech and healthcare.

So to me makes sense to have at least one investment in each. For example Smithson is heavy in healthcare which has meant its outperformed.

You seem to be undermining your own argument there. Say, five years ago you chose one IT - because as you allege there's no point in having more - and that IT didn't have a high percentage in big tech and healthcare (quite possible, because "big tech" tends to be low yield) - then along comes coronavirus which has now made you see it would have been a good idea all along to have so "big tech and healthcare". DOH, Oh dear.

I'd also say to those who think one IT will do because they are all fishing in the same pond: how come they have such different performances and often in different epochs?

Back one trust at your peril, unless you have an excellent crystal ball.

Arb.

[Arborbridge]

I'm one who thinks there's no point having more than one uk income IT.

I agree. Given that a huge proportion of total dividend income derives from a very small number of UK shares, it seems screamingly obvious to me that all the UK income ITs are fishing in the same shallow pond.

Sure their allocations may vary, and the gearing, and therefore the returns. But it is a faux diversification if you are merely permutating the same usual suspect names. Far better, in my view, if you want to diversify your income is to look at either foreign income shares or else other asset classes. As an example US shares so far have announced far lower levels of dividend cuts than UK shares. The fact that US shares have much lower payout ratios means that perhaps this is not surprising.

I own Finsbury Growth and Income IT and no others. Go with best of breed.

FGT I agree is a very good total return trust, but it is hardly providing any income - in fact some might say it is hardly an income trust at all, providing as it does only around 2% at the moment. One would have to have a big pension pot to live on this one - and although it is undoubtedly a great investment, will it always be so? It is a high risk IT having a concentrates portfolio and depends on the contiuing ability of its current manager.
BTW, I have a substantial holding it FGT, but it is hardly pulling its weight as an income provider, although it looks pretty for my XIRR.

Arb.

[OllyDrod]

it is a faux diversification if you are merely permutating the same usual suspect names.

I quite agree. As I said - one reason for holding for holding multiple UK Income ITs (or multiple ITs of any sector for that matter) is because you feel that each is genuinely adding something different to your portfolio.

Far better, in my view, if you want to diversify your income is to look at either foreign income shares or else other asset classes. As an example US shares so far have announced far lower levels of dividend cuts than UK shares. The fact that US shares have much lower payout ratios means that perhaps this is not surprising.

Again - agreed. I don't think anyone suggested one should own multiple UK Income ITs at the expense of everything else. Going global for income introduces some currency risk, but improves the diversification of a portfolio. That said, global equities are more closely correlated than one might initially think. IMHO, if you genuinely want diversification, you need to look beyond equities altogether.

I own Finsbury Growth and Income IT and no others. Go with best of breed.

And good luck to you. But if Nick Train gets hit by a bus tomorrow*, you're going to take more of a hit than you would have done if you'd held Finsbury AND something else...
- OllyDrod

*(And the headlines write themselves: Finsbury goes off the rails as Train hit by bus)

[GrandOiseau]

I'm one who thinks there's no point having more than one uk income IT.

The winners in the coronavirus crash have been big tech and healthcare.

So to me makes sense to have at least one investment in each. For example Smithson is heavy in healthcare which has meant its outperformed.

You seem to be undermining your own argument there. Say, five years ago you chose one IT - because as you allege there's no point in having more - and that IT didn't have a high percentage in big tech and healthcare (quite possible, because "big tech" tends to be low yield) - then along comes coronavirus which has now made you see it would have been a good idea all along to have so "big tech and healthcare". DOH, Oh dear.

I'd also say to those who think one IT will do because they are all fishing in the same pond: how come they have such different performances and often in different epochs?

Back one trust at your peril, unless you have an excellent crystal ball.

Arb.

I think he was saying you should only have one UK Equities IT but have a portfolio of IT's covering different geographies, sectors and assets. Which seems to tie in with a lot of what others are saying.

As you it is possible to for UK Equity IT's to have significantly different portfolio's, on the other hand people are suggesting that has become increasingly difficult.

Leaves with a minor dilemma. Which one or maybe two of the four current four UK Equity Income IT's do I pick as my horse?

Subsidiary Q: Do I sell the others for neatness/clarity/admin purposes.

I also now need to research other IT's that will bring diversification.

[GrandOiseau]

I own Finsbury Growth and Income IT and no others. Go with best of breed.

Appreciate your post and input but just on this - what makes Finsbury Growth and Income IT best of breed. As someone else mentioned current yield seems very modest.

[Arborbridge]

I own Finsbury Growth and Income IT and no others. Go with best of breed.

Appreciate your post and input but just on this - what makes Finsbury Growth and Income IT best of breed. As someone else mentioned current yield seems very modest.

It has a very good record for TR. It's a "conviction" portfolio of companies which the manager believes will perform well through thick and thin with several household names which one cannot imagine going bust in a hurry - so far he has been correct. He is a very picky manager and a bit like Warren Buffett will only buy when he's absolutely sure and will not "diworsify" - buy stocks just to add to the number of holdings. This results in relatively few holdings which rarely get sold, and so far he has got everything right. Unless brands and big cash generating companies with healthy balance sheets go out of fashion, or he changes his picky approach, he will carry on succeeding.

If I were "pot building" I would rely heavily on this IT, but in my current circumstances (retired, 74 years old) I need to lean more on income producers.

Arb.

[Dod101]

Referring to FGT in an income IT thread is more or less OT, but bear in mind that Nick Train is 60 and he can I am sure well afford to retire . He will not be there for ever so enjoy the TR whilst he is there, but not for the income!

Dod

[richfool]

My UK holdings include FGT and MUT, (plus Mercantile in the mid cap space, and SLS and IPU in the smaller coys space), even though my objectives are more income focussed.

Last year I took profits from FGT and redeployed them into higher yielding IT's. Then in the falls in March this year I topped FGT back up again for the quality and growth prospects. I have done similarly with a number of IT's, including SOI (Schroder Oriental Income trust), taking profits when the yield had fallen and redeploying them into higher yielding trusts. Then topping back up later, if and when prices fall.

I usually hold more than one trust per sector.