Retirement IT Income Portfolio - half year report

[mickeypops]

Background

Six months ago I posted details of my and Mrs MP's SIPPs which contain a portfolio of income producing Investment trusts here:

viewtopic.php?f=8&t=13160

The portfolio is a John Baron-esque collection of 20 diversified trusts covering UK and International/Private Equities, Fixed Interest, Property and Alternatives/Infrastructure. The original post attracted considerable interest and many comments, which was very pleasing: a lot of the discussion centred around the viability of the high forecast yield of the PF (5.69%) and also whether this "natural yield" approach is lesser that a Total Return approach.

The SIPPs are with Hargreaves Lansdown. We benefit from the £200 pa fee limit and this keeps our platform costs under 0.1% of the total. The two SIPPs are managed and reported as a single consolidated PF. For ease of reporting I have pro rata'd all the figures to represent a starting value of £100,000. There has been no trades in the period.

Income

!8 of the trusts pay dividends quarterly, and two twice yearly. Therefore 38 payment events were expected, and 38 were duly received. HL are very efficient: the vast majority of these payments dropped into our SIPP accounts on the nominated payment date.

The forecast yield for a full year was £5,676. For the half year then(without bothering to look into finals v. interims etc.) I was expecting £2,838. This was very accurate: the sum received in the half year was £2,844.

Going forward, European Assets has announced a dividend cut for 2019 of 23% to reflect its shrunken NAV (see below), reducing the total income for the PF by just over 1%. Hopefully this will be made up elsewhere, but no major problem.

Capital

I have a HYP-ish philosophy to this portfolio. Accordingly, the capital value is of lesser importance to me than an income stream which at least matches inflation over the years. Nevertheless, it would be pleasing to see it grow over the years.

The last six months have been particularly torrid of course, with all sorts of geo-political and economic problems. At the end of July, the start period for this PF for reporting purposes, the FTSE100 was riding high at 7748. At the end of January it sat 10% down at 6969. Hi ho!

The diversified nature of the PF has helped minimise the capital loss though: The portfolio is down 3.42% over the period; 7 of the 20 are actually in profit and a further 2 are under 1% down. here are some comparisons:



Individual Trust Performance



The dog of the PF is European Assets, whose European small/mid cap sector has taken a particular hammering. This trust targets a 6% yield partially funded out of capital. As mentioned above, there is to be a 23% cut for 2019, which is probably sensible.

Also noteworthy is the lack of a diversification benefit from the pure fixed income trusts, Twentyfour Income and CQS New City High Yield, down 7% and 9% respectively. High yield bonds have not performed well over the half year, although the projected income has been duly received and there's no reports of upcoming cuts.

Blackrock American and Murray International equity funds have done very well considering, and the UK equity funds (Dunedin Income Growth, Shires, Henderson High, Merchants, have all done a little better that the FTSE100.

Infrastructure funds have helped the PF hold up.

I'll be back at the end of July with a full year report, in the meantime thanks for your interest.

MP

[BrummieDave]

Thank you MP, always interesting to see how someone else is going about things with a similar approach and presumably similar objective to oneself.

I hold a 20 IT portfolio to complement a DB pension which contains several of the same ITs as yours, notably Murray International (my joint largest holding along with Securities Trust of Scotland at around 14% each), Middlefield (at 6% of the portfolio), Henderson Far East Income (at 7%), Henderson High Income (at 3%), Standard Life Property (at 2%), John Laing Environmental (at 1%), Regional (at 3%), and European Assets (at 1%).

These relatively small amounts (the ones less than 5% each) are primarily part of the 10% of the overall portfolio that I have in non-equity based ITs (Inf and Property), the core of the portfolio being Luni's B7a ITs. The exception is European Assets where thankfully I went in small to see how it fared (badly!).

My real dog however is Acorn Income Fund (AIF) which I chose for smaller cap diversity away from the core holdings, which comprises 3% of the portfolio, and which is down 25% in capital terms since I bought it in January 2018. If anyone out there has opinions on this, either as a worthy top up given its fall, or otherwise, please share.

Good to see the approach, which as I say bears similarities to mine, has worked well for you Mickey, well done.

[mickeypops]

Thanks for your comment BrummieDave. We share the same objective, I.e. to supplement DB income in retirement. We are fortunate enough to have guaranteed income sources to pay the bills and keep the wolf outside the door, so the income from this PF provides the jam to our bread and butter!

It’s very early days for this portfolio, although I have been building it up since 2015, originally from cashing in a HYP as I found myself psychologically unsuited to the peaks and troughs of individual shares. Since then we’ve been adding our monthly savings into the trusts plus the tax credits, and reinvesting the income. Finally, in June/ July we transferred in our DC funds from our last employers upon retiring.

So far so good, but of course 6 months is far too short a period to draw conclusions from. I’m heartened though with this initial relative performance, and the performance of the John Baron dividend focussed portfolios over the years, to which this PF has many similarities.

MP

[OhNoNotimAgain]

The last six months have been particularly torrid of course, with all sorts of geo-political and economic problems. At the end of July, the start period for this PF for reporting purposes, the FTSE100 was riding high at 7748. At the end of January it sat 10% down at 6969. Hi ho!


MP

You should focus on Total Return indices, not the capital only ones. They are just noise. The signal is the income.

[BrummieDave]

It's interesting how few private investors realise that some indices are total return such as the DAX and which aren't, such as the FTSE 100.

[mickeypops]

The last six months have been particularly torrid of course, with all sorts of geo-political and economic problems. At the end of July, the start period for this PF for reporting purposes, the FTSE100 was riding high at 7748. At the end of January it sat 10% down at 6969. Hi ho!


MP

You should focus on Total Return indices, not the capital only ones. They are just noise. The signal is the income.

Except that I’m comparing the capital value of the IT shares in my portfolio, which doesn't include the income.

[TheSlowHare]

Hi mickeypops

Thank you for posting this update, as well as your earlier postings on your IT portfolio which I’ve really enjoyed.

I have a question: how did you make the change from saving/investing for ‘growth’ to ‘income-based’?

All being well, have 4 years to make 55 and possibility of accessing my SIPP. A few years ago, pulled together various DC pots and amalgamated together with HL. All investments are in ITs and largely reflective of John Baron’s’ Summer’ portfolio (or ‘Growth’ in the I.C.); current thinking is, in time, to have a ‘Winter’ or ‘Dividend’ portfolio and live off natural yield. (Have no DB pension.)

Do you have any help/comments on timing i.e. move to more suitable, dividend-paying ITs gradually over next 4 years (e.g. JB’s Autumn portfolio) or, instead, perhaps, at age 54, change IT constituents to an income-based natural yield portfolio and annual dividends over 54 – 55 would accumulate (i.e. not re-invested) and then offer first year’s SIPP pension drawdown (55 – 56) and so on on a rolling 1-year lagging basis.

Thanks, and look forward to further updates.

TSH

[mickeypops]

Hi SlowHare, thanks for your interest and your kind words.

I think all of the methods you suggest would be OK. What I did was as follows. I cashed in a HYP collection of shares in early 2015, and selected ten income focussed IT, all of which are still part of my final 20, and invested equally in each. Over the next few years I was adding money into my and Mrs MP’s SIPPs every month, and along with the tax credits and any dividends received, I topped up the lowest value IT amongst the ten.

A couple of months before retiring I stopped reinvesting the divs to build up a cash position in the SIPPs. At this point, I had earmarked the further ten trusts I intended to purchase once we received the transfer of our employers DC funds after we retired. When the funds were received, I made the purchases.

So in effect I was building up the income portfolio about four years out from retiring. Buying ITs involves a bid/offer spread and, usually, stamp duty, so I didn’t want to incur the trading costs of building up positions in growth focussed trusts, only to have to sell and then purchase the income funds later on.

There are many roads to Rome and I wouldn’t dream of offering advice, but I hope this explanation of my process will at least provide some food for thought.

Thanks again

MP

[TheSlowHare]

MP
thank you for your reply - all food for thought.

[TheSlowHare]

Hi MP
Will you be doing another review at the start of February?

I still refer to your IT portfolio as I ponder my own gradual re-alignment to something similar (spread across SIPP and ISA to produce a natural yield approach to drawdown). The more I ponder, the more I keep coming back to it!

In particular, would you be able to provide any commentary on selections such as Real Estate Credit Investment, and the two private equity holdings (Princess, and Apax)?

Finally, if you were re-investing funds for a transfer now, would the premia currently seen on your infrastructure investments put you off at all?

Okay, that's probably enough questions.

Thanks a lot for any feedback

[Gilgongo]

Thanks for posting this update.

It reminds me ask a possibly rather naive question which I hope isn't too off-topic: do you include the effects of fees/OCFs for the portfolio in the performance calculations?

So if, for example, a holding has gone up by 5% but its fees for holding it are 0.5%, does that mean you're up by 4.5%? I see that Apax Global Alpha is 0.54%, for example.

G

PS: HL says that Regional REIT Ltd's average annual charge is 3.12%

[PinkDalek]

Thanks for posting this update. ...

If of interest, there was a later update over at Portfolio Management & Review:

Investment Trust Income Portfolio - Year 1 Review (31 July 2019)
viewtopic.php?f=56&t=18816&p=240865#p240865

[BrummieDave]

PS: HL says that Regional REIT Ltd's average annual charge is 3.12%

REITs are ITs in name only, being very different beasts than equity ITs for example.

Whereas an OCF for an equity IT could be around 0.8% perhaps, a figure paid to employ some well spoken people to sit in an office and decide what shares to buy and sell, in contrast to run a company that owns, develops and manages a portfolio of properties costs a lot more. Have a read what's included in the management fees for a REIT and you'll see what I mean. The costs are relevant of course, but certainly can't be directly compared to OCFs for equity ITs.

[Gilgongo]

The costs are relevant of course, but certainly can't be directly compared to OCFs for equity ITs.

OK, but my overall question was how are costs treated in evaluating the performance of a portfolio like this (which includes both REITS and equity ITs?). Are the percentage performance figures excluding the effects of charges or accounting for them?

[BrummieDave]

The costs are relevant of course, but certainly can't be directly compared to OCFs for equity ITs.

OK, but my overall question was how are costs treated in evaluating the performance of a portfolio like this (which includes both REITS and equity ITs?). Are the percentage performance figures excluding the effects of charges or accounting for them?

No, historical performance figures are net of fees.

You may wish to take costs into account when designing a portfolio of course, but any data associated with how an investment has performed will be net of fees.

[Gilgongo]

any data associated with how an investment has performed will be net of fees.

OK, thanks for explaining.

[mickeypops]

Hi MP
Will you be doing another review at the start of February?

I still refer to your IT portfolio as I ponder my own gradual re-alignment to something similar (spread across SIPP and ISA to produce a natural yield approach to drawdown). The more I ponder, the more I keep coming back to it!

In particular, would you be able to provide any commentary on selections such as Real Estate Credit Investment, and the two private equity holdings (Princess, and Apax)?

Finally, if you were re-investing funds for a transfer now, would the premia currently seen on your infrastructure investments put you off at all?

Okay, that's probably enough questions.

Thanks a lot for any feedback

Hi, apologies for missing these questions - I wasn't expecting this old thread to reappear. As mentioned a couple of posts above, there was a full year report posted at the end of July 2019.

I was away on holiday at the end of January this year and so didn't capture the info required for a six-monthly update. At the moment though (23 Feb) the portfolio value is up 4.2% since my year end (July 2019) and 7.2% since the PF's commencement (July 2018.) The income has continued to be delivered, with a yield in excess of 5.5% of the original purchase price. There have been no real surprises. The PF remains unchanged with no sales or purchases.

You mention three trusts in particular. The two private equity trusts (Princess, Apax) are among the top gainers in terms of capital value, up 13.3% and 37.4% respectively. Real Estate credit investments is up just 2% since the start, but it's reliably yielding just over 7%

With regards to premia, I can't say if I would have been put off. I would have made a purchase decision based upon their current income potential and the future income prospects.

Thanks for your interest.

MP

[mickeypops]

The costs are relevant of course, but certainly can't be directly compared to OCFs for equity ITs.

OK, but my overall question was how are costs treated in evaluating the performance of a portfolio like this (which includes both REITS and equity ITs?). Are the percentage performance figures excluding the effects of charges or accounting for them?

No, historical performance figures are net of fees.

You may wish to take costs into account when designing a portfolio of course, but any data associated with how an investment has performed will be net of fees.

Yes, this! I’m reporting on the “sell” price as reported by Hargreaves Lansdown, so the portfolio has accommodated the bid/offer slight loss upon purchasing. The fees are of course reflected in the NAV which in turn affects the share price I guess.