Edinburgh Investment Trust

Edinburgh IT, run by star manager Neil Woodford since September 2008, has issued its full year results for the year to 31st March 2013.(Link via Investegate)

The Company invests primarily in UK securities with the long term objective of achieving:

1. an increase of the NAV per share by more than the growth in the FTSE All-Share Index; and,

2. growth in dividends per share by more than the rate of UK inflation.

20% of the portfolio comprise overseas listed holdings including Swiss Pharma, Roche and US tobacco firms Reynolds and Altria.

Share price total return for the year was 20.1% compared to an increase in the FTSE All Share of 16.8%. It is proposed to increase the final dividend to 7.8p making a total of 22.8p for the year, an increase of 3.6% on the previous years payout of 22.0p.

The returns have been excellent over the past 3 years, however this has given rise to the payment of a hefty performance fee of £11.5m which has increased the overall charges this year to 1.6% TER (compared to 1.0% in 2012). In addition the servicing of loans and debentures accounted for a further £19.5m - an additional 1.7% of NAV. The good news on the gearing situation is that the £100m 11.5% debenture will mature next year and this should significantly reduce borrowing costs thereafter.

Woodford likes to invest in large, well-established businesses that generate plenty of cash and are committed to returning some of this to shareholders via decent dividends. All he aims to do is to capture the biggest share of this future dividend stream as he can for investors. At the current price of 587p the yield is 3.9%.

Neil Woodford

By sticking with income investing and not following the latest investment fad, Woodford has produced superior, consistent, long-term returns. Also, by focusing on quality, defensive businesses, he has avoided the high-risk end of the market where the biggest losers lurk. For example, he ditched financial shares long before the credit crunch of summer 2008 blew up our banks and led to huge, taxpayer-backed bailouts. In the past year he has avoided miners which has been a positive for the portfolio.

He prefers a fairly concentrated holding of around 40 shares and favours big pharma, accounting for 25% of his portfolio and tobacco 20%.

One of the bigger decisions this past year was to completely offload Vodafone - previously a top ten holding - noting the cash flow cover has fallen to uncomfortable levels.

Edinburgh is one of the corner stones of my income portfolio in both Sipp drawdown and ISA. Obviously I would have liked a little more uplift in the dividend but cannot complain about the overall returns and happy to continue holding.

Vanguard Income ETF

I’m always on the look-out for ways to diversify my portfolio. I also like to keep costs to a minimum.

I was therefore interested to see low-cost index tracker provider, Vanguard have recently launched 4 new exchange traded funds (ETFs) - here’s a link.

As an income investor, the main item of interest is the FTSE All World High Dividend Yield (VHYL). The index consists of over 1000 higher yielding large and mid-cap companies listed all around the world. The largest sector of 33% is USA followed by UK 13.2%, Australia 6.3%, Switzerland 5.7% - also France, Canada, Germany, Japan, China and Brazil.

The target yield is 4% and I assume the distribution will be twice yearly. The annual costs are very competitive at just 0.29% TER.

One advantage of holding this ETF within my Sippdeal ISA is the avoidance of the £50 per annum custody fee levied on Vanguard funds. Also, there is no 0.5% stamp duty to pay on purchase.

I think this could be worth adding to the portfolio. It would be interesting to see how a passive income index tracker compares with a managed global investment trust like Murray International.

Abbey Protection Special Dividend

Further to my write-up on ABB in March (here's a link), I was pleasantly surprised to see this mornings announcement.

Abbey have decided to return around £5m to shareholders by way of a 5p special dividend to be paid in June. This will make a total dividend of 9.9p for the year and yield of 8.6% at the current share price of 115p.

The company has no gearing and at the time of the final results, they had increased net cash by a further £3.3m compared to the previous year.

Ex dividend for the special is next Wednesday, 29th May.

Individual Shares Portfolio

Back in early January, I did a guest post for RIT “Investing for Income Using Shares”. Here’s a link to that article.

As with a recent article relating to my investment trusts, I think it could also be a useful exercise to monitor an income portfolio based on 18 individual shares from my portfolio. Again, I have taken prices from the start of 2013 and allocated a nominal £1,500 for each share.

Here’s the portfolio showing current valuations and including dividends accumulated since January.

(click to enlarge)

Some of the above have been the subject of an article in recent weeks - Reckitt, Aberdeen, Greggs, Dialight, BSkyB, Abbey Protection, DS Smith, Tesco and, most recently, Sainsbury. I will comment on others as results are announced later in the year.

Income has been almost exactly as expected - the total for the full year should be around £1,100. However, the overall  return, (including those dividends paid to date) of 8.4% is disappointing considering the FTSE 100 is up over 15% on a total return basis since the start of the year. Furthermore, the return on my investment trust portfolio is up around 16% which is prompting me to seriously question whether the more profitable route over the longer term would be to switch the proceeds of the shares entirely to investment trusts.

I have been running parallel income portfolios using shares and investment trusts for over three years and each year, the total returns from the investment trusts has been slightly ahead of the shares portfolio - maybe 2% or 3%. As we have seen with management charges, the effect of an extra 3% or 4% compounded over many years can make quite a difference to your final outcome.

I will run the twin track portfolio until the end of the year and see how things turn out - I think 4 years will be a sufficient length of time to reach a conclusion.

As ever, slow & steady steps…..

Compare Fund Platforms & Brokers

I thought I would take a brief look at ways to compare the costs of the increasingly complex ways of holding investments.

My personal preference has been to hold a mixture of investment trusts and shares for the equity portion of my portfolio. However, many investors choose the simplicity of funds (OEICs) including the increasingly popular low-cost tracker funds.

With the introduction of the Retail Distribution Review (RDR) at the start of this year, the industry is moving to a more transparent way of charging which should be beneficial to retail consumers. In the past couple of weeks, the Financial Conduct Authority (FCA) has announced that from April 2014 all fund supermarkets and platforms will be obliged to explicitly charge for what they do rather than take payment in the form of commission and back-handers from fund providers. Some platforms have already moved to this new system of charging but the rest will be allowed 2 years to make the full transition.


Traditionally, part of a funds charges has been paid by the fund provider to the platform, say 0.25% to 0.5%, out of the typical 1.5% TER. As this will no longer be permitted, it should mean the charges for funds will be lower and it will create more of a level playing field between investment trusts (which have never paid commission) and low cost trackers. Indeed, some funds have already started to offer a ‘clean’ class of fund with the lower TERs (or ongoing charges).

Investors holding a portfolio of funds should now therefore check with their provider to see whether a lower charging ’clean’ option is available and whether their provider will move them over to the new class automatically.


Comparison Sites

Monevator has recently created a comparison table covering most of the popular discount brokers and fund platforms. The table is mainly aimed at diy investors seeking a passive approach to running a portfolio using mainly index funds and ETFs.

Compare Fund Platforms is a spin-off from Candid Money run by Justin Modray. You select the funds you wish to compare or may be interested in purchasing, confirm a few assumptions on period of investment and rate of growth (include the option of also holding shares and/or investment trusts also) and instantly see which broker currently offers the lowest cost. The site covers 3,500 funds. Although most of the main brokers are now on board, the results will not include Hargreaves Lansdown as they refuse to send the required data.

DIY Investor (a subsidiary of AJ Bell/YouInvest) offers a handy comparison tool to assess charges for SIPP, ISA or Dealing Account all of which can be refined according to investment amount, intended number of years and percentage of funds/shares etc. Well worth inputting a few figures to see the differing results between all the main providers.

The International Investor tries to simplify the process by listing only the cheapest broker for each platform. Just be aware that not all funds are available on all platforms so if, for example, you only require Vanguard tracker funds, the first check will be to see whether they are available on any particular platform/broker.

Hopefully, by using one or more of these comparison sites, the average diy investor will be in a position to work out the most cost effective way to build and maintain their chosen investment portfolio.

Sainsbury

Following on from a record breaking Christmas trading and reflecting 32 quarters of increasing like-for-like growth, todays impressive full year results should come as no surprise.

Total sales increased by 4.3% (excl. fuel) and 1.8% on a like-for-like basis. Underlying profits were up 6.2% to £756m.


Justin King, Chief Executive said:

"Our focus on helping our customers Live Well For Less is delivering good growth in sales and profit.  Our key points of difference, such as the best quality own-brand, Nectar, Brand Match, coupon-at-till and industry leading service, are recognised by our customers.

We continue to invest in offering customers choices of how they shop with us, bringing our food, clothing and general merchandise to more customers.

Our decision to take full ownership of Sainsbury's Bank will add further momentum to our strategy of developing complementary channels for the benefit of both customers and shareholders.

Whilst we see no near term change in the current economic situation, we remain confident that by continuing to invest in our long-standing strategy and by understanding and helping our customers, we are well positioned for future growth."

In addition to the traditional supermarket, they have over 500 convenience stores which have seen a 17% growth and revenues of £1.5bn. In addition the online business has grown 20% and sales are approaching the £1bn mark.

The dividend has been lifted 3.7% to 16.7p (16.1p 2012) which gives a forward yield of 4.2% at the current share price of 393p. The dividend cover has increased from 1.75x to 1.83x - the aim is to bring cover up to 2x over the medium term.

The shares could have been purchased for around 325p earlier this year so that’s an impressive 21% increase in the past 4 months. Panmure Gordon recently reviewed the company shortly after its 4th quarter announcement and placed a target price of 540p on the shares.

Following in the footsteps of its rival Tesco which took full control from a joint venture with RBS in 2008, Sainsbury has confirmed it will acquire full ownership of its banking business from Lloyds Bank for an agreed sum of £248m plus a cash injection of a further £40m net.

Hopefully this will not be a distraction to the main goal of regaining the number 2 slot it lost to Asda ten years back which heralded the appointment of Justin King as CEO.

I'm happy with progress so far and look forward to picking up the final dividend in July.

SSE

SSE (formerly Scottish & Southern Energy) is one of the UKs 'big six' energy suppliers providing gas and/or electricity to around 10 million customers throughout the UK and Ireland.

It has been in my income portfolio for many years and has provided a steadily rising dividend which has kept pace with inflation.

I was a little concerned to read this article in the Telegraph which drew attention to some utility companies paying dividends out of borrowings. The managers of Miton UK Value Opportunities looked at these large utility companies and found that 5 out of the 6 had negative cash flows - regarding SSE :

"SSE, formerly known as Scottish & Southern Energy, will have a positive "headline" cash flow of 3.8pc this year, according to analysts' forecasts compiled by Bloomberg. However, it will pay a dividend yield of 5.38pc.
After all costs are taken into account, Ms Hamilton calculated that it would lose cash to the tune of 4.5pc. In other words, it will pay its dividends out of borrowings, rather than from cash generated by the business – as it has since 2008, the managers said".

This started alarm bells ringing and when I had a closer look at the latest accounts, it seems clear the borrowings have steadily risen in recent years and gearing is now over 200%.

The share price has seen a good run in recent months and is up around 10% since the start of 2013.

Given the concerns over gearing and the question mark on dividend sustainability, I decided to let this one go and sold today at 1555p.

Schroder Oriental Income (SOI)

This is one of my long-standing income trusts providing exposure to the Far East and Australian markets. It was established in July 2005 and has been managed by Matthew Dobbs who has been running Asia equity portfolios for Schroders since 1985.

Yesterday they issued a half year report (link via Investegate) for the period to 28th February 2013.

Net Assets increased 25% and the share price has risen 28% as the price to NAV premium has further widened. With the sp trading at this premium, the company has been able to issue a further 9.5m shares. They have also announced an intention to go ahead with a new equity issue of 'C' shares and will offer existing shareholders the opportunity to subscribe for 2 C shares at the price of 100p for every 5 existing shares they hold.

The interim dividend will be increased from 2.7p to 2.95p - an uplift of 9.2%. Furthermore, they have decided to move from half yearly to quarterly payments in line with most other investment trusts. I have pencilled in a full year figure of 7.4p which gives a forward yield of 3.6% based on the current share price of 206p.

The portfolio is spread far and wide - the main areas for investment are Australia 23.1%, Hong Kong 22.6%, Singapore 16.3%, Taiwan 11.9% and Thailand 9.2%.

One area to keep a close eye is management fees. The basic fee is 0.75% of net assets, however, in addition, they are entitled to 10% of the added value over 107% of net assets. As the trust has performed exceptionally strongly over the past 6 months, they have taken a chunky £3.7m performance fee equivalent to 1.0% of NAV (compared to just £0.84m in 2012) and this together with the half year management fees has already exceeded the total full year fees for the previous year.

I will need to have a little time to think about the rights issue - but on the face of it, assuming the new 'C' shares will be converted to ordinary shares at some point, it looks like I will have the option to pick them up at half price!