The Lemon Fool

I don't often post but have been waiting for the New Year to lay out some plans I've been developing and to seek any views or feedback.

Later in January I will receive an inheritance of almost £200,000 and, as a pensioner with a company pension covering my everyday needs have decided to buy a small collection of ITs to preserve the capital and possibly grow it modestly, whilst delivering a rising income. Based on reading the board and other research I plan to balance global exposure with UK and a little bit of sizzle from other emerging type markets.

To that objective my plans are to buy three UK and four global ITs:

17% City of London - UK stalwart equity income IT
17% Murray Income - bit of an overlap with CTY but trading at a discount
17% Lowland - smaller cap focus compared to CTY and MUT

17% Murray International - general global exposure with a little far east included
17% Securities Trust of Scotland - a more blue chip global bias compared to MYI
8% Henderson Far East - specific exposure to far east
7% Aberdeen Latin American Income - the sizzle alongside HFEL

Not sure if the equal split between UK and global is the right way to do this, or if more global would be better, and if I'm choosing the right ITs. Hence posting this for anyone to comment.

Bobwood wrote: have decided to buy a small collection of ITs to preserve the capital and possibly grow it modestly, whilst delivering a rising income.

Depends on your thoughts on the time period. Over a long-enough period of time, you stand a good chance of preserving or growing your capital but over one or two years (or more) the risk of losing a significant amount of capital must be considered.

--kiloran

Personally I would prefer Edinburgh IT to Murray Income. I hold both but I think Edinburgh is the more consistent performer.

Dod

Bobwood wrote:17% Lowland - smaller cap focus compared to CTY and MUT

It certainly was (and probably still is) more mid / smaller cap than CTY and MUT but that is just dependent on what the managers feel is appropriate at any given time. I think in one of their recent updates they said they were going a bit back to larger cap now. If you want mid / smaller cap in particular I think you need to have that in the remit of the IT. I hold VMID (FTSE 250 tracker), and BRSC (Blackrock Smaller Companies) for this purpose.

From Lowland web site...

"The Company’s policy is to invest in a broad spread of predominantly UK companies of differing sizes with normally not more than half by value coming from the largest 100 UK companies and the balance from small and medium sized companies."

So I guess small and medium sized is in the remit. But up to 50% large cap is feasible when they so desire.

The mix looks a little light on US exposure if you are trying for global representation.

Terry.

Wizard wrote:The mix looks a little light on US exposure if you are trying for global representation.

Yes, and that's a serious mission unless it is intentional, perhaps because the investor has other US investments.

That said I don't know of an investment trust that has a focus on US dividend payers. There is a Blackrock North American Income fund, which I didn't like the look of because it appeared to be boosting income via the use of selling options. There is also a rather anonymous sounding self-managed IT called North American Income IT which I don't know anything about.

Personally I would use an ETF for this area, specifically the SPDR US dividend aristocrats ETF (USDV), which has a focus more on dividend safety and growth over a high running yield, and has a long track record in it US-listed form.

I might also look for something with a focus on continental Europe and also global smaller companies, although I think that yields are low at the moment due to the significant capital gains we have seen.

Lootman wrote:That said I don't know of an investment trust that has a focus on US dividend payers. There is a Blackrock North American Income fund, which I didn't like the look of because it appeared to be boosting income via the use of selling options. There is also a rather anonymous sounding self-managed IT called North American Income IT which I don't know anything about.

NAIT? Originally Edinburgh US Tracker (S&P 500 tracker) until a change of mandate to the recently fashionable income trend.

http://www.northamericanincome.co.uk/it ... canincome/

Lootman wrote:Personally I would use an ETF for this area, specifically the SPDR US dividend aristocrats ETF (USDV), which has a focus more on dividend safety and growth over a high running yield, and has a long track record in it US-listed form.

Might this be a problem now, with the forthcoming MiFID II regs?

XFool wrote:

Lootman wrote:Personally I would use an ETF for this area, specifically the SPDR US dividend aristocrats ETF (USDV), which has a focus more on dividend safety and growth over a high running yield, and has a long track record in it US-listed form.

Might this be a problem now, with the forthcoming MiFID II regs?

A problem if you want the US-listed one, ticker SDY.

But not for the UK-listed one, ticker USDV.

I would just like to second Kiloran's warning that over a short time scale ( a few years) a loss of capital on equities is a real possibility - particularly since there are warnings from respected players that a market correction seems likely. So a cautious investor may think about slowly dribbling the investments in over a longish period, while holding the balance in interest bearing cash (e.g. National Savings 2.2% 3 year Bond). This approach should also be advantageous in a fluctuating market which is basically going sideways - due to pound cost averaging.
A cautious investor may also be concerned with the discounts on ITs which are at a historical low. A sudden market correction could result in a double whammy - NAV reduction, and discount widening. So I also support FredBloggs who suggests that you consider OEICs. There is a large selection which allow you to pinpoint specific market areas, and there is no discount problem. Low cost ETFs are also worth looking at - Lootman has suggested a USA ETF, and certainly, if you are considering the USA market, an ETF makes a lot of sense, since it is usually agreed that a US index fund is rarely bettered by a US stock picking fund. I have also found that an Emerging Market ETF (e.g. EMIM) also seems to be at least as good as some Emerging Market ITs or OEICs.
Currently I hold a mix - OEICs, ETFs and ITs (and cash).

Many thanks for all the responses, all of which have added to my thoughts.

I agree with those who comment about the relative lack of US exposure, but I have struggled to find the level of yield I'm looking for from anything heavily focused on the US. Lootman suggests an ETF (USDV) but this yields less than 2% which is below my target. Also note that Securities Trust of Scotland has 42% in the USA. Perhaps i should reduce the UK exposure a little, and add some North American Income Trust (NAIT) currently yielding 2.7%.

Food for thought.

I have just added to my portfolio with MCT, Middlefield Canadian Income, more Canadian than US but has a yield of 5.1%. Like you I found no suitable US fund.

Raptor.

Like Raptor, I too use MCT as a good way of getting exposure to Canada and the USA. Just be aware it is unhedged for the purposes of currency.

Here's one from Left field that I am starting to dip my toe into (albeit not an IT)

Aberdeen Global Indian Bond Fund. Monthly income derived predominantly from Indian Government Bonds, again with the currency risk. (or opportunity depending on your point of view)

Buying it for the uber long term ie multi decade

Have you looked at buying US shares directly?

OP requires long term capital growth with some running yield but advises that he is sufficiently provided for on current pension provisions. Before diving into specific investment options, what is his thinking regarding what may be major issues and considerations:

1. Brexit and a possible Corbyn government - do you want to be in or out of sterling, UK?
2. Inheritance - is this an opportunity to plan for succession? Should funds be retained in your estate or distributed? Perhaps they can be structured for succession now but leaving OP to manage from the investment point of view.

Part of the first question is Corbyn's admiration for Venezuela and the consequences of their policies on the bolivar. GBP is a relatively small currency now and will have few defenders against a serious undermining of its value. For me, the possible attractions of undervalued UK investments need to be cautioned with some concern at the sterling outlook in the medium term. Where are Fools on this?

Raptor and Flyer, MCT looks interesting in its own right and as part of the general wish to diversify globally, but I don't think it ticks the 'getting exposure to the US' box. I might add it in though, at a 5% level.

An no Flyer, buying US stocks directly wouldn't interest me.

To answer Peter's questions, whilst noting he also requests views from others, the possibility of a Corbyn government and/or Brexit going wrong both, I assume you think both point towards a weakening UK economy and reduction in the value of the pound. As noted by several people, most UK equity income ITs hold the majority of their allocation in large cap stocks which as we are often told, generate much of their income and profits overseas. So although the domestic market may falter and the pound lose value, the impact on my proposed UK ITs may not be all bad. That's not to say I would welcome either of the two situations you mention.

Inheritance isn't something I particularly plan for, not yet at least. I take the view that it's my money and the priority should be making it provide for me and my wishes. I do have grown up kids and both have their own ISA based funds.

Interested in others' views as you also request.

Bobwood wrote:I agree with those who comment about the relative lack of US exposure, but I have struggled to find the level of yield I'm looking for from anything heavily focused on the US. Lootman suggests an ETF (USDV) but this yields less than 2% which is below my target. Also note that Securities Trust of Scotland has 42% in the USA. Perhaps i should reduce the UK exposure a little, and add some North American Income Trust (NAIT) currently yielding 2.7%.

If you're looking for UK levels of dividend yields in the US then you may be disappointed. You will find yourself sectorally challenged as the high yields are only in a few industries e.g. telephones, utilities and some energy and drug names.

The US has more of a culture of capital growth and returning money to shareholders via buybacks. If you add buybacks to dividends you get a payout number much closer to UK levels. Also, payout ratios are more conservative in the US and not as stressed as the UK.

US investors who crave yield often use other types of instruments to achieve that. Examples are REITs, preference shares, royalty trusts and master limited partnerships. Not all of those are suitable for a taxable UK investor.

I have taken a look at MCT in view of comments above and thought I would buy some. My share platform Barclays Smart Investor will not allow a purchase. Same story with Vietnam Opportunity Fund (VOF) when I tried to buy them. I know that is a bit off topic but very irritating.

I also had a look and it looks fine on Halifax, MCT that is.

I didn't look for VOF.

As your pension income covers your needs, why reach for yield? A core set of cap weighted tracker funds covering the world market can be put together for an OCF of about 0.1% and would yield about 2% if you stuck to world cap weightings. Then add specialist ITs/UTs to provide the "spice" you are after.

everhopeful wrote:I have taken a look at MCT in view of comments above and thought I would buy some. My share platform Barclays Smart Investor will not allow a purchase. Same story with Vietnam Opportunity Fund (VOF) when I tried to buy them. I know that is a bit off topic but very irritating.

Maybe not so smart then. HL is my platform of choice and where my MCT resides.

Raptor.