Tuesday 21 October 2014

Investment Trust Income Outstrips Inflation

As most readers of this blog will know, I am a big fan of investment trusts when it comes to providing a steadily rising and predictable income.

It was therefore no surprise to read today’s article on the AIC website which shows that income from the average trust in the UK equity income sector over the past 20 years has outstripped inflation by over 2% per year.

This may not sound like much however when looking at the start figures for both income as well as capital, the comparison is compelling.

The data starts with a lump sum of £100,000 in 1994 - this was shortly before I bought my very first investment in City of London Trust. In year 1, it provided an income of £3,265, a yield of 3.26%. 20 years later and the income has risen to £8,139. The annual income grew by an average of 5% every year compared to an average inflation rate over the 20 yr period of 2.9%.

In addition to the total income generated over the period of £113,664, the capital value of the lump sum has risen from £100,000 to £222,315. Therefore a total return of over £235K and compound annual growth (CAGR) of 6.23%.

I have just made a quick calculation of the projected returns from my inv. trust income portfolio. Taking the round figure of £34,000 from the most recent update in August, and projecting forward 20 years with the same CAGR, if I have done the maths correctly, the value of the portfolio in 2034 would be just over £113K.

I regard my basket of investment trusts as the equivalent of an index-linked pension annuity with the advantage that, in addition to the growing income stream, I retain control of my capital which will give many more options in the years to come.

As ever, patience is the key....


  1. The main core of my portfolio are Investment trusts. They gave me initial diversification and a jump in income. This has allowed me to look at value type shares, here and in the US.

    I would have more trust in holding a group of Investment Trusts than a pension.

    Great article by the way,



    1. Hello Louis,

      Good to hear from you and hope your investing is going well. Glad to hear you enjoyed the post.

      I know what you mean about pensions but you can, of course, build your own diy pension via a sipp and hold a basket of investment trusts. This is what I did when I moved my various pension pots to Sippdeal some years back and those same trusts are still held in my income drawdown sipp - only difference being that instead of reinvesting the income, I now withdraw it for living expenses.

  2. I also felt sometimes that there is waste of time by picking some good shares. Instead, just pick few IT like CTY, MRCH or EDIN in equal proportion and keep watching your share price grow and reinvest the dividends if any. Temple Bar is one of my favourite but there are many in UK Equity Income sector or UK Global Growth Sector. I don't know if anyone has done any research with ETF like Vanguard UK FTSE 100 Index Fund verses basket of good IT and who perform better in long term.

    1. Hi,

      Like you, I sometimes question holding my portfolio of shares when my ITs regularly provide the slightly better overall returns.

      As the ETFs have not been around for too long, any comparison with ITs would not be very meaningful. I purchased the Vanguard Global High Yield ETF last year partly to act as a benchmark for my IT basket so it will be interesting to see how it has performed at the end of this year.

  3. We bought ITs in the late 80s and 90s when the discounts were very appealing. I am considering returning, but the discounts appeal a good deal less. How much of your success can be attributed to the shrinking of discounts?

    1. I'm afraid I do not really pay a great deal of attention to discounts - obviously better to purchase at a discount rather than a premium but over the longer term these things will balance out. I imagine you will have received a reasonable return from your ITs purchased in the late 80s/90s but I would not think anything but a small fraction of the CAGR would be derived from the reduction in discount over such a lengthy period.