Tuesday 31 March 2015

Shares Portfolio Update - End Q1 2015

New Strategy

Last week I offered some thoughts on my income investment strategy and came to a decision that my individual shares portfolio was the weakest link in my income strategy. I decided therefore to reduce my reliance on this sector and I have started to ease down a little on my shares portfolio. As I get older I appear to be losing a little of my appetite for all the work involved, all the time and effort it takes to research shares and run the portfolio is just not worth it.

In the past month I have sold four shares from my portfolio - Imperial Tobacco, DS Smith, Hargreaves Lansdown, Sage Group and in the past week, Nichols which has seen a strong run to £11.90 (net proceeds £1,418) - all have seen strong share price gains since my last review. The proceeds of  £8,875 have been reinvested in Vanguard UK Income fund. This will now provide an additional benchmark against which to evaluate the rest of my equity income holdings.

As I said in my previous post, I do not intend to sell off the entire holding of shares - just start to remove some of the more volatile performers and try to improve my overall income by switching out of some of the lower yielding shares. The balance between shares and collectives will change from around 35:65 to maybe 20% shares and 80% mix of investment trusts/funds.

I last updated on my shares portfolio in November, since which time the FTSE 100 has broken through its previous all time high point, has then gone on to break through the 7,000 barrier earlier in the month, then just as rapidly dropped back down - fortunately, most of the shares in my portfolio have seen a corresponding rise in value over the past 3 months.

Since the start of 2015, high up the leader board are Tesco - up 29% which is a relief after the dramatic sell-off in the second half of 2014. Legal & General is up 15% and Glaxo up 14% but surprisingly, top of the pile is RB spin-off, Indivior which has risen 31% in just 3 months.

As ever, there are a couple that have not joined the party - Booker is down 10% over the 3 month period and Centrica is down around 7% after full year results and a 30% dividend cut.

At the close of business today, the FTSE 100 stood at 6,773 - a gain of 0.75% on the starting level of 6,723 end November 2014. Total return for the FTSE 350 year-to-date is 6.6%.

I am pleased to see that overall, the shares portfolio is quite a bit ahead over the past 4 months with a return of 9.3% including dividends of 1.2%. Lets hope this can continue for the rest of the year!


Dividends are the most important aspect for me and these continues to roll in very much as expected. It is well documented that, over the longer term, dividend growth and, where appropriate, the reinvesting of dividends will provide the lion’s share of overall returns from an equity portfolio.

Of the companies which have declared full year figures, Next have lifted their dividend by 16.3% and in addition will be paying a number of special dividends which is expected to lift the yield to over 5% for the year. Legal & General announced a 21% increase and easyJet a 35% uplift. These increases will go some way towards offsetting the 30% cut announced by Centrica earlier in the year and the shortfall in income from my two supermarket shares.

I am not however expecting double digit income growth seen last year. I have a figure of 8.0% pencilled in at this early stage.

Here’s the current portfolio:

(click to enlarge)

As ever, slow & steady steps…..

Monday 30 March 2015

Dunedin Income Trust - Final Results

I hold this trust in both my ISA and income drawdown portfolios

They have just issued results for the full year to 31st January 2015( link via Investegate).

The headline is that NAV per share on a total return basis has increased 11.1% - compared to its benchmark the FTSE all-share index which increased by 7.1% over the previous year. Underlying income per share was fairly flat at 11.9p.

The Board is recommending a final dividend of 3.525p, which will make for a total of 11.25p for the full year (2014 - 11.10p) - an increase of 1.3%. A little disappointing but still a little ahead of inflation. At the current share price of  264p, the trust yields a handy 4.25% but share price appreciation has been below par for the past couple of years. Over the past 12 months, in common with other investment trusts in this sector, the share price has lost its premium and currently trades at a 7% discount to net assets.

I am pleased to see dividend reserves have again increased to £22.6m (2014 £21.4m) and now represents 135% of dividends paid out over the past 12 months.

The manager appears to experience increasing difficulty finding opportunities to add value for shareholders. In his report the lead manager Jeremy Whitley said :

"Finding companies that have exposure to growth markets, that meet our quality criteria and which can be purchased at sensible valuations is increasingly a difficult exercise…

With the income account now relatively stable we are seeking to put more money to work into mid sized companies. These often offer lower starting yields and consequently higher valuations but much better dividend and capital growth prospects. This may mean restricting a little the pace of income generation for a period as we reduce higher yielding but lower growth investments but we believe that investors will be well rewarded over the longer term from this process".

Portfolio turnover is again modest at just 0.08% - but an increase from the previous year (these costs for the average fund are over 1%). Ongoing charges for the trust are 0.69% - average for the UK income sector.

As ever, please DYOR.

Saturday 28 March 2015

New Flexible Pensions

Just over a year ago, the Chancellor announced some far-reaching changes to pensions. The new rules  give us all far greater flexibility over what we can do with our pension pot. The changes are coming into force in just over a weeks time - 6 April 2015.

There will be many thousands of people approaching retirement and wondering what to do about their pension. The government have now got the Pensionwise site up and running and this will be the first point of reference for many. In addition to the info on their website, it will be possible to get telephone guidance via the Pensions Advisory Service or arrange an appointment with a pensions adviser at a local Citizens Advice office.

Under the old regime, most people would exchange their pension pot for an annuity. It was relatively simple, you give up your pot of accumulated pension for a guaranteed income for the rest of your life. The main decision would be whether to accept the offer from your existing pension provider - usually one of the large insurers - or whether to shop around for a better deal.

Basically, the new rules mean anyone aged 55 yrs and above with a personal or stakeholder pension as well as those with a SIPP will have much more flexibility on how they would like to take money from their pension. The first 25% of any sum withdrawn remains tax free (as before) - sums above this will be taxed at marginal rates, for most this will be 20% but for those who have a modest income, they may be able to withdraw sums up to their personal allowance of £10,800 tax free.

Those with larger pension pots need to be aware that all sums taken out above the tax-free 25% is regarded as taxable income for the tax year in which it is taken so will be added to other taxable income. Large withdrawals in any one tax year may therefore become liable to tax at the higher rate of 40%.

Whilst the new flexible access to pensions is generally thought to be positive, I suspect it may cause as many problems as it tries to solve and may be a big headache and possibly result in extra expense for the many thousands of pensioners wondering what to do.

Regular Income

Of course, most people who have spent years building up their pension, will wish to use the pot for its original purpose - to provide a steady regular income. Before the changes announced last year, most would purchase an annuity and be guaranteed an income for life. However, whilst this is still an option - particularly those in poor health for example - most will be looking at ways to take some form of drawdown income from their existing pension pot.

Having consolidating my hotchpot of various smaller pension pots into one SIPP some years back, it was not too difficult to move this into income drawdown in 2012 when the time had arrived for me to take a regular income from my pension. The individual shares in my portfolio were sold and reinvested in a few more income investment trusts - this reduced the volatility of the shares and also provided a more diversified portfolio.

The whole operation is now very low maintenance and I can leave well alone and harvest the income as it rolls in.


As with many aspects of investing, it will always pay to keep an eye on costs - I do not follow the non-diy sector but I am fairly sure some of the larger insurers - Prudential, Aviva etc. will now be offering more flexible ways for existing pension customers to access their pot, so it will be worthwhile to check out this option and be fully aware of what the costs would be.

For those who feel the fees and charges are too much and who wish to operate drawdown income at minimal cost on a diy basis, it may be worth exploring a transfer to a low cost SIPP provider. (I may cover this in another article at a later date). Many of these providers - AJ Bell, Hargreaves Lansdown, Best Invest, Charles Stanley Direct for example - will have sections of their website dedicated to explaining the changes.

Of course, there is always the option to take advice from a suitably qualified adviser. The costs of advice can be relatively expensive, especially for more modest pension pots - maybe around £1,000 to £2,000 would be a ballpark figure. This may be appropriate in some situations however, I am sure many more will be able to spend a little time on research and come up with a decent diy plan.

Run Out of Money

We are all living longer - so goes the mantra - but we don’t know how long we will live - some will live to 100, some will die in their 60s or 70s. The big danger for many people will be running down their pension pot too quickly, especially if they have been dipping into capital for unplanned expenditure.

It will therefore be important to have some sort of plan or strategy to take advantage of the new pension freedoms. The key question will be - what is the safe and sustainable rate of withdrawal? For many years various academic studies pointed to a rate of 4% but more recently other studies suggest a reduced figure may be required to take account of lower returns and longer life expectancy.

For me, the answer would have to be - withdraw the natural income generated within the investments, without touching the capital sum. This is what I do with my own drawdown SIPP. Of course, you would probably want to hold those investments which generated the higher returns - so equities would be in the mix as they provide higher returns than bonds or cash deposits (over the long term). In addition, equities will provide a rising dividend income which will rise each year and keep ahead of inflation.

Fixed interest securities, as the name suggests, will not do this (but they may give some modest capital appreciation). However some bonds and fixed interest securities such as corporate bonds and gilts are less volatile and will provide a ‘smoother’ ride.

What Level of Income to Expect

Depending on the asset allocation for income between equities and bonds, we might therefore settle on a figure of 3.5% for a sustainable rate of return. Lets see what sort of lump sum pension pot would be needed to provide what level of income.

Starting with a modest pension pot of £20,000 - this would generate an annual income of £700 or £58 per month.

£50,000 would generate £1,750 or £146 pm

£100,000 will generate £3,500 or £292 pm, and

£250,000 will generate £8,750 or £729 per month

I imagine some people will be surprised to see how much is needed to generate quite modest amounts.

I have come across individuals who are a bit dismissive or sniffy about the state pension however, its worth pointing out that the new flat rate pensions which come in next year will start at around £155 per week which is just over £8,000 per annum. Therefore an individual would need a £230,000 pension pot to generate the equivalent amount!

So, to coin a phrase from Retirement Investing Today, young people will need to save hard and invest wisely if they want to retire early on a decent income.

As ever, slow & steady steps…..

Finally, just a word of caution to all - there will be a multitude of scammers and criminal fraudsters out there preying on the vulnerable, naïve and trusting individual pensioners. They will use many clever ways to part people from their pension pots. The industry forecasts indicate there will inevitably be many, many people losing huge amounts of money so please make sure you and/or your relatives are not one of them.

Thursday 26 March 2015

Amec Foster - Final Results

Amec Foster Wheeler is a FTSE 250 company with a market cap. of around £3.8bn. It mainly operates in the energy services and engineering sector, with major operations centres based in the UK and Americas and offices and projects in around 40 countries worldwide. In the past year, AMEC completed the acquisition of Foster Wheeler in a share and cash deal to the value of US $3.3bn.

Its goal is to deliver profitable, safe and sustainable projects and services for their customers in the oil and gas, mining, clean energy, environment and infrastructure markets, including sectors that play a vital role in the global and national economies and in people’s everyday lives.

Customers, in both the private and public sector, are among the world’s biggest and best in their fields - BP, Shell, EDF, National Grid and U.S. Navy to name just a few.

They have today released results for the full year to 31st December 2014 (link via Investegate). At £3.99m, revenues were marginally ahead on the prior year. However, the dramatic fall in oil and commodity prices has had an impact on earnings and profits.

Adjusted profits are down 5% at £317m - earnings per share down 9% at 79.5p (2013  87.2p).

CEO Sam Brikho commented, "I am pleased to report that we have delivered 2014 results in line with expectations. Looking ahead, I believe our low-risk, multi-market model combined with the additional benefits from our integration and cost savings programmes, is a strong platform from which to create long-term value for shareholders."

Amec Foster have a progressive dividend policy and although profits and earnings have fallen this year, the management feel sufficiently confident to increase the full year dividend by 3.1% to 43.3p (2013  42p). The dividend is covered 1.8x by adjusted earnings.

At the time of posting, the share price is down around 3% at 940p giving a yield of 4.6%.

Saturday 21 March 2015

Individual Shares - Review & New Strategy

I have been investing in equities for many years using mainly a combination of individual shares and investment trusts. Historically, one of the main reasons for this twin approach was to try to minimise costs. Unit trusts were more popular with small investors in the 1980s and 90s but usually more expensive than investment trusts.

For the past 7 years or so, since retiring, the aim of my investments has been to generate income and I have naturally gravitated towards building a sustainable higher yielding portfolio. In early 2013, I did a couple of guest posts for RIT “Investing for Income… Using Shares” and “…Using Investment Trusts“.

Shortly after this, I started this blog and I thought it could also be a useful exercise to track my income portfolios and have therefore monitored the progress of an individual shares portfolio and a separate investment trust portfolio.


As some readers will know, one of the most difficult aspects for me personally, and maybe for other small investors, is the volatility of the price of individual shares. Much of the time I try to filter out these fluctuations but however much I do this, there’s no escape from the emotional rollercoaster of holding shares.

Of course, this is not so much of a problem when prices are generally rising, as they have been in recent months. The FTSE 100 broke through to its all time high of 7,020 last week.

When I was younger, working full time in my business and various other activities, my shares were probably much less of a focus. Now I am retired and writing my ebooks and blog, the investments are more upfront and dominant - perhaps more significantly, I depend on them for my income.

Another aspect of share price volatility is income yield. If the price goes up 30%, 40% or even 50% in a fairly short time frame, although I will get exactly the same dividend in my account, the yield will have dropped.

Take a couple of examples - I bought L&G around a year back for 205p and a yield of 4.5% - 9.3p per share. Today the sp is up to 295p - an increase of over 40%. After 12 months the dividend has been increased over 20% to 11.25p but the yield has fallen to 3.8%.

Likewise with easyJet, the share price has had a strong run over the past few months - up from around £12.50 to currently £18.50 in just 6 months - a rise of nearly 50%. Although the dividend was increased by 35% this year, the yield has fallen to less than 2.5%.

My instinct is in both cases to hold long term, but I am also aware not to become emotionally attached to any one individual holding - the dramatic rise in capital values offers opportunities to obtain a better income elsewhere.

Dividend Cuts

Share price volatility combined with a drop in income is a double whammy for this income investor who relies on investment income to pay the bills and put food on the table.

Over the past year, 3 of my holdings have announced the dreaded ‘C’ word. My two supermarket holdings Tesco and Sainsbury performed poorly in 2014. Tesco cut its interim dividend by 75% and later cancelled its full year dividend. Sainsbury announced that they would fix dividend cover at 2x earnings - forecast earnings for the coming year are 26p for this year and 22p for next year which implies a dividend of 13p and 11p compared to last years dividend of 17p.

More bad news on income recently when British Gas owner Centrica announced a 30% cut in dividend.

Although my shares portfolio is only around 40% of my equities holding - cuts to 3 of my shares out of 24 will have an impact on overall income for the next year or two which I will need to try and make up elsewhere.

A Quieter Life

By contrast, the volatility on my collective investment holdings is less of a rollercoaster and therefore, from an emotional aspect, I find them much easier to maintain some equilibrium. This is only to be expected given the number of holdings in each trust or fund.

In addition, whilst the income from my shares and trusts are very similar, the total return from my basket of investment trusts has outperformed my shares portfolio in each of the past 5 years. The percentages are fairly modest - last year for example the gap was only 0.2%, the previous year a little higher at 3.1%, 2012 was 2.5%.

These performance figures have been nagging away for the past year or so and have prompted me to seriously question whether the more profitable route over the longer term would be to switch the proceeds of the shares entirely to collectives.

As we have seen with management charges, the effect of an extra 2% or 3% compounded over several years can make quite a difference to your final outcome.

The total return on my equities portfolio for the past 5 yrs has been : 2010 10.4% (13.5%), 2011 1.1% (2.9%), 2012 11.5% (15.5%), 2013 13.9% (21.0%) and 2014 3.5% (1.8%)  [total returns for the Vanguard UK Equity Income fund shown in brackets/bold]. Combined 5 yr total for above returns are 40.4% (54.7%).

When I take a cold, hard look at the analysis and compare performance - firstly shares -v- investment trusts, and secondly my combined income equity -v- Vanguard fund, it is clear that something needs to change and hence a review of the past 5 years leads to the conclusion that a new approach is needed.

New Strategy

I have asked myself a couple of questions -

Does my shares portfolio give me an edge over the other possible strategy options, and

Is all the time and effort I put into researching and running such a portfolio worth it?

If I am honest, the answer to both has to be NO.

Having regard to all of the above, I think it is fairly clear that my individual shares have been the weakest link of my income strategy to-date. A 5 yr time frame comparing parallel portfolios is long enough to draw conclusions and I feel therefore the time has probably come to wind down the shares portfolio and redirect investment towards my investment trusts, ETFs and also to embrace the possibility of more low cost tracker funds such as my recent purchase of Vanguard UK Equity Income.

That’s not to say I will be selling all my shares - for the time being, I will maintain a slimmed down portfolio of what I regard as solid long term core holdings - the likes of Unilever, Next, Reckitt etc. I have however started to sell off some of my shares which have seen significant share price appreciation and which have as a result, become lower yielding holdings.

This process has started with portfolio sales of DS Smith @ 377p, Hargreaves Lansdowne @ 1175p and Sage Group @ 489p. The proceeds of these was £5,560 and from last month, Imperial Tobacco £1,897 have been reinvested into the Vanguard UK income fund.

I will update the individual shares portfolio in the next week or so.

As ever, slow & steady steps…..
Spring is here!

Thursday 19 March 2015

NEXT - Full Year Results

This FTSE 100 retailer was added to my ISA portfolio in October 2013 and so far it has been one of my more profitable acquisitions.

The retail chain was only launched in February 1982 and the first store opened with an exclusive coordinated collection of stylish clothes, shoes and accessories for women. Collections for men, children and the home quickly followed. NEXT clothes are styled by its in-house design team to offer great style, quality and value for money with a contemporary fashion edge.

Today NEXT trades from 540 stores in the UK and Eire and almost 200 stores in more than 35 countries overseas. The only significant new territory launched in the past year was China.  Sales started slowly but are now exceeding expectations and the Company say that China will shortly become a top ten trading territory.

Online shopping was introduced in 1999 and the entire book became available to shop from on the internet, page by page – another first in home shopping in the UK. NEXT Directory now also serves customers in around 60 countries outside the UK. They expect international online sales to grow by 25% in the year ahead, to around £205m.


They have today reported results for the full year to 31st January 2015. Sales for NEXT Directory increased by 12% and NEXT Retail by 5%.  Total Group sales rose 7% and reached £4 billion for the first time. After the upbeat trading statement in December, it is little surprise that the figures are at the top end of forecasts with pre-tax profits rising 12.5% to £782m (2014 £695m). 

As a result of share buy backs, earnings have risen 14.7% to 419.8p (2014 366p) per share supporting a full year dividend of 150p (2013 129p). Dividend cover is maintained at a healthy 2.8x earnings. The Company have also returned an additional 150p to shareholders by way of special dividends. This will be the 6th consecutive year that earnings and dividends have increased by more than 15% - quite an achievement and of course good news for income seekers.

The share price has advanced some 14% over the year and the board have decided continue to return excess cash to shareholders by way of special dividends - 50p was paid last month and a further 60p to come in May in addition to the 100p final dividend. 

Furthermore, they have reviewed their financial objectives and now include the value of returning cash to shareholders. The restated aim includes the objective as the delivery of long term, sustainable growth in Total Shareholder Returns (TSR). TSR is defined as growth in earnings per share added to the total dividend yield. TSR over the past year was 19.3%.

The outlook for the coming year is slightly less positive than the previous year with forecast profits of between £785m - £835m and TSR of between 6% - 12% . The management are masters at managing expectation!

There is little doubt the year to January 2015 was another good year for NEXT. However, the forecasts for the coming year seem to be a little lower than analysts were anticipating and in early trading the share price was down over 4% at £73.00.

This is a very well run organisation under the stewardship of CEO, Lord Wolfson. I am happy to continue holding.

Tuesday 17 March 2015

Investing Notes to my 21 Yr Old Self

It was not until I was in my mid to late 30s before I started to become interested in investing. My parent were savers rather than investors so stocks and shares were never the subject of conversation at home.

I suppose my initial interest would have been sparked by the receipt of shares from the demutualization of Abbey National BS in the late 1980s. A few years later in my early 40s I started saving in a low cost tracker PEP (the Tory version of ISAs) with Legal & General - half was allocated to FTSE All Share Index and half to Fixed Interest. In 1995, I purchased some shares in my first investment trust - City of London.

I have since become much more aware of the importance of keeping costs low and also of the effects of compounding over a longer period. Today, I am mainly focussed on investments to generate a predictable and rising income in retirement.

I thought it would be interesting to turn back the clock some 40 years and think about how I might approach things differently if I were starting out today. Here are some thoughts and investing notes to my younger self.

1. Select a Low Cost ISA Provider

The charges for most diy investments have become very competitive in recent years. As we shall see below, it should not be too difficult to put together a simple portfolio with combined charges well below 0.30%. These charges are only part of the process however as it is equally important to choose a low cost broker/platform to hold these investments.

ISA providers broadly fall into two groups – those that charge a percentage fee which are obviously good if you have smaller amounts - probably the norm for most investors in the early years - and those that charge a flat fee which is possibly the better choice for larger sums.

It is also worth considering dealing costs for the type of asset you want to hold in your account. Some providers make no charge for buying/selling funds. Others may charge for buying ETFs or investment trusts but then do not charge a platform fee.

A good strategy for the novice investor is to start with an ISA provider with a low percentage fee, ideally less than 0.3pc and also one that does not levy a charge for buying/selling holdings.

Fortunately, Monevator provides a neat comparison table which sets out the different charges for all the main DIY platforms/brokers so it would not be too difficult for my younger self to make a suitable choice.

The percentage fee candidates include Charles Stanley Direct or Cavendish Online (both 0.25pc) combined will no fee to purchase funds. If my 21 yo self decides to go down the ETF route then AJ Bell may be a good choice as there is no platform fee and their regular investment facility could be used to purchase @ £1.50 per deal. Their platform fee on tracker funds is only 0.20% but they charge a £4.95 dealing fee - this will obviously add to costs if money is fed into the account on a monthly basis.

When the portfolio has reached a reasonable size – say above £30,000 – it can be moved to a provider charging a flat fee or capped charges.

2. Select Diversified Low Cost Investments

With the prospect of investing for over 50+ years, the odds of selecting a managed fund or investment trust which could out-perform the market are extremely low - probably less than 100 to 1. Selecting that single manager from the multitude of funds right at the start would be nigh on impossible. I would therefore suggest a low cost tracker fund or ETF would be the best option.

There are many markets to track - the FTSE 100 or FTSE All Share are popular in the UK however the British market accounts for less than 10% of the global market - the largest market is USA with around 50%. One option however for investing in the UK market is Vanguards UK All Share fund with charges of just 0.08% - that works out at less than £1.00 p.a. for every £1,000 invested.

If my younger self wishes to avoid home bias, then it is easy to select one or more global trackers which will provide a diversified and broad-based approach. It is then just a question of selecting funds with the lowest charges.

One of the cheapest options is again Vanguard with their Developed World (Ex UK) Index Fund which charges 0.15%, or just £1.50 on a £1,000 fund. Another low cost option is L&G International Index fund with charges of just 0.13%. Low charges such as these would have been unthinkable just 10 or 20 years back.

Depending on platform charges of the broker, it may be preferable to go for exchange traded tracker funds. A couple of options are iShares Core World ETF (SWDA) with charges of 0.20% or Vanguard Developed World ETF which has charges of 0.18% - £18 per year on £10,000 holding.

Over the longer time span, equities are likely to provide the better returns so for those with an ability to ride the rollercoaster, I would advise accepting the higher volatility and invest 100% equities and avoid bonds - it may be worthwhile reviewing this aspect at some point down the line - maybe at age 50 yrs by which point my younger self may be thinking about retirement options!. For those who like the less volatile route, another option would be the Vanguard LifeStrategy funds with their mix of equities and bonds - possibly the VLS80 or VLS60.

Some people advocate a more measured approach with a mix of equities and bonds. This will reduce volatility but there is a price to pay - lower average returns. For example, investing £200 per month for 40 yrs in an equities tracker with average returns of 5% per year would produce a total of £263,101 (after allowing for annual fund charges of 0.5%). An allocation of 50% equities and 50% bonds will provide lower  returns than equities - on average perhaps 3.5%. The same sum invested in the mixed portfolio will produce a return of £183,897 - nearly £80,000 (30%) less than the equities only route (thanks to Candid Money Investment Calculators).

So, a couple of diversified low cost trackers will be the core of the portfolio but I would always advise a modest allocation to smaller companies over the longer periods - maybe 5% to 10% of the total allocation. A couple of options are F&C Global Smaller Companies Trust which has charges of 0.53% - alternatively, the Vanguard World Small Cap Fund with charges of 0.38%.

3. Maximise any Company Pension

For many years in the early days of my working life, my employer did not provide a company pension. It was not until I joined a corporate employer in my mid 30s that I started a pension - I therefore missed out on around 15 years right at the start which I could never hope to catch up.

The importance of early years saving was a point I emphasised in my book DIY Pensions using the example of Alex and Sue - here’s a summary in one of my early posts.

My advice to any young person would be to start saving for retirement sooner rather than later.

With the recent introduction of auto enrolment, all young people are now more likely to be part of a longer term savings scheme even if the amounts being invested are fairly modest in the early years.

Therefore the advice would be to join the company pension scheme - with many of the larger employers, there is usually a scheme with the offer of some sort of “matching”. Commonly, you put in 5% of your earnings, your company puts in 5% as its default rate - if you raise your amount to 6%, they might put in 6%.

In addition to the company scheme, I would also advise my 21 yr old self to open a low cost SIPP. If I move jobs, the value of any pension can then be transferred to my own private pension.

4. Start a Sipp

In addition to a S&S ISA, I would advise starting a self-invested personal pension at the earliest opportunity. Depending on circumstances, I would try to put at least an extra 10% of salary into my SIPP over and above what is paid into the company pension.

It doesn’t mean lots of complicated decisions - as with the ISA, keep it simple with a couple of low cost equity trackers and a smaller companies fund. The combination of tax credits and reinvesting of income via accumulation funds should provide a very handsome pot after say 30 years.

With the prospect of continual interference from successive governments combined with the raising of the state pension age, I would advise my younger self not to rely too much on there being any state pension before age 70, possibly 75 yrs - even then, I suspect it will hardly cover a basic existence.


So there we have it, to provide the best chance of a little more comfort in later years, my 21 yr old self needs to switch on to saving in the early years. Equities will provide better returns than cash savings or bonds but will be more volatile (not to be confused with risk which is basically not knowing what you are doing).

The important thing will be to ignore the factors over which we have no control and concentrate on the areas where we do have a choices - costs, diverse investments, persistence. Over the longer time span of 50+ years, a low cost, diversified equities tracker will provide a better return than 99% of managed funds.

They say you can lead a horse to water but you can’t make it drink - by the age of 21, my younger self thinks he probably knows everything that is worth knowing so whether he will take on board any of the above is quite another matter!

What advice would you give your younger self? Feel free to leave a comment.

Thursday 12 March 2015

Vanguard UK Equity Income Tracker - New Purchase

For some time now, I have held Vanguards All World High Yield income ETF in my ISA portfolio. The current yield is around 3.7% and I was pleasantly surprised at the end of last year when I compared its return against my basket of investment trusts.

Unfortunately there is no UK equivalent ETF, so I have been keeping tabs on their open-ended income fund which has been around for several years. I tend not to consider OEICs mainly for historical reasons and also because my broker charges me an extra 0.20% for holding them in my portfolio.

The Vanguard fund tracks the FTSE UK Equity Income Index, which I understand was specially commissioned by Vanguard from the FTSE index compilers.

The idea is simple - give investors access to a broad range of dividend-paying securities from across the FTSE 350, while reducing the risk of being overly invested in a small number of high-paying shares or particular industry sectors by limiting the percentage of the index invested in any one company or industry.

Index Construction

Here's a summary outlining how the FTSE UK Equity Income Index is constructed:

  • All stocks not forecast to pay dividends over the next 12 months are screened out.
  • All investment trusts and REITs are removed.
  • The remaining shares are ranked from highest to lowest by forecast annual dividend yield.
  • Stocks enter the index in order of their forecast annual dividend yield, until the total shares held in the index equals 50% of the float-adjusted market capitalisation of the available shares.
  • The number of shares in any one business is restricted to a maximum of 5% of the total value of the index.
  • The maximum amount invested in any industry sector is restricted to a maximum of 25% of the total value of the index.
  • The index is re-balanced twice-yearly. A stock remains in the index until its forecast annual dividend yield is no longer in the top 55% of qualifying shares; a stock that is not already in the index will qualify for inclusion if it falls within the top 45% of qualifying shares -- a 'buffer zone' that exists to minimise costs.

The Vanguard fund holds around 140 companies - the top ten holdings include all the usual suspects - Vodafone, Glaxo, Unilever, BATS etc. Other top 50 holdings include Next, L&G, Sage and BHP Billiton.

Ongoing charges are 0.22% and also a one-off initial stamp duty levy of 0.40%. In addition, my broker AJ Bell makes a charge of 0.20% for holding funds (no such charges for holding shares, investment trusts or ETFs). The total ongoing charges therefore are not excessive and certainly compare with say City of London IT - no broker charges but investment trust charges of 0.45%.

The current yield is around 4.0% based on projections from last years distribution. Dividends are paid out half yearly in June and December.

Of course, this is a departure for me. With my investment trusts which smooth out the dividend income by way of dividend reserves, I have a pretty good idea what income I can expect for the coming year. With funds, all the income has to be paid out so the distributions from one year to the next will be less predictable.

I will use the Vanguard UK income tracker as an additional benchmark against which to compare returns for my equity income portfolio - individual shares and investment trusts.

Tuesday 10 March 2015

Murray International IT - Final Results

The trust aims to provide both capital and income growth from a portfolio that is predominantly focussed on global equities; it’s particularly useful for those investors seeking a steady income.

I would say that until last year, manager, Bruce Stout had done an excellent job since taking over the reins for over a decade. The trust has become one of the most consistent global income trusts under his stewardship. Prior to 2013, it had outperformed its benchmark in each of the previous 11 consecutive years. According to figures from the Association of Investment Companies, £1,000 invested over the past 10 years would have produced a total return of £3,180. With one or two exceptions, the dividend has grown or been held in each of the past 40 years. Dividend growth over the past 5 years is 6.3% p.a.

Murray International (MYI) has today reported results for the full year to 31 December 2014 (link via Investegate).

For a second consecutive year, the trust has not managed to outperform its benchmark. The share price total return for the year was just 1.7% compared to 7.5% for the benchmark - comprising 40% of the FTSE World UK Index and 60% of the FTSE World ex-UK Index.

Some of the reasons for the underperformance are an underweight position in USA which returned 20% last year, a reduction in the premium to NAV, currency exchange headwinds and an increase in weighting to fixed income securities.

Whilst NAV per share has fallen over the past year, the management charges to Aberdeen have increased 6.2% to £7.2m (2013 £6.8m). Total charges represent 0.76% of net assets including transaction costs.

As ever, the analysis of the global economy provided by Bruce Stout is well worth the read.

Despite this years underperformance, Stout sees no reason to change his defensive approach "Certain maxims exist globally irrespective of country, creed or culture.  Oil and water don't mix; foundations built on sand don't last; pouring petrol on fire won't extinguish flames.  Applying such logical thought and common sense to the financial world, it would be reasonable to assume borrowing more money won't reduce debt.   Self-evident, perhaps, but seemingly beyond comprehension for central bank policymakers.  Complicit with relentlessly layering more debt on top of existing debt in a futile attempt to solve the chronic global debt crisis, their actions remain beyond contempt.  Unfortunately such practice continued to dominate recent global economic policy"… and…

"Alas debt dependency, built up over decades, has disfigured private and public sector balance sheets beyond any point of recognition.  Fearing widespread austerity and fragile democracy, policy makers pump even more credit into the financial arteries of an already desperately indebted system.  In the United States alone, the national debt is on pace to double during the eight years of the current administration.  In other words, from the most recent two-term presidency the US government will accumulate as much debt as it did under all the other presidents in US history.  For those advocates of easy money and blinkered short-termism, none of this matters.  Unfortunately in the real world it most certainly does.  Crippling debt-financing commitments condemn numerous global economies to a future of lower growth, persistent unemployment, lower wages, lower living standards and few opportunities".

He concluded: 

"Companies operating in such environments can expect intense competition, constant pressure on margins and capital constraints on innovation.  Cost control will reign supreme.  For those more fortunate to have global presence, the focus on higher growth, higher profitability markets become paramount.  To find these, companies must embrace regions with abundant savings, countries not constrained by irresponsible credit cultures and consumers benefitting from rising real incomes and increasing confidence.  

Whether in Asia, Africa or South America the challenge remains the same: identify solid growth businesses with strong balance sheets and proven management teams willing to return cash to shareholders, then invest for the long term.  Possessing exactly the type of flexible investment mandate to pursue such global opportunities, Murray International will continue to emphasise truly global diversification in pursuit of its capital and income objectives".


On the dividend front, they are proposing a final payment of 15.0p making a total for the full year of 45p - an increase of 4.65% on the previous year (43.0p). The revenue for the year however was only 40.8p (2013 43.8p) so the full year dividend has not been covered by income and the management have dipped into reserves to cover the increase in payout to the tune of £5.3m. Hopefully this is a one-off but something to monitor for next year's results.

Despite recent underperformance, MYI has been one of the cornerstones of my income portfolio for several years and I am happy to continue holding for the diversified income and I am hopeful it can manage to get back on track before too much longer.

Thursday 5 March 2015

Nichols - Final Results

Nichols operates in the soft drinks sector and has been trading for over 100 years. It is best known for the brand Vimto which is sold in 65 countries around the world.

Nichols  is listed on AIM and was added to my ISA portfolio in September 2013. Here’s a link to the previous post around the same time last year.

They have today issued  results for the full year to 31st December 2014 (link via Investegate). Sales increased 3.5% to £109.2m ( 2013 £105.5m), profits were up 14% as a result of improved margins. Earnings were strong with an uplift of 20% to 55p (2013 45.8p) and once again they were able to deliver a double digit increase in the full year dividend - up14.2% to 22.4p (last year 19.62p). Dividend cover has increased to 2.45x earnings.

The balance sheet appears strong and the company has a net cash position of £34.5m.

Around 80% of sales are generated in the UK and the remaining 20% from abroad. International sales increased by 4.3% to £24.1m driven by a strong performance in the Middle East. Vimto was first sold in Gulf countries such as Kuwait, Yemen, Bahrain, and the UAE. It was sold in Saudi Arabia as far back as 1928, and has been manufactured in Dammam, Saudi Arabia, since the 1970s.

The drink has become a tradition during Ramadan as Muslims enjoy the taste and energy boost after a day of fasting. Nearly half of Vimto’s annual sales occur during Ramadan, which runs from the end of June to the end of July.

Commenting John Nichols, Non-Executive Chairman, said:
"2014 was another strong year for Nichols as the Group once again outperformed the wider soft drinks market on its way to delivering double digit operating profit growth, pre-exceptional items. This strong outcome is again underpinned by the strength and heritage of our core Vimto brand both in the UK and internationally, as well as the diversity of our products and markets.

We remain focused on delivering our growth strategy both in the UK and internationally and we look forward to the year ahead with confidence."

NICL 3m price chart (click to enlarge)

These are very good results and have been well received by Mr. Market - at the time of posting the shares are up 2.5% at £11.05. I am very happy to continue holding. The share price has had a good run recently - up over 20% in 2015.

As ever please DYOR.

Wednesday 4 March 2015

Legal & General - Final Results

There will not be many people in the UK who have not heard of this large insurer. It has been around since 1836 started by six lawyers operating from temporary premises in Chancery Lane, London.

L&G is a large FTSE 100 company with a market cap of around £16bn employing over 8,000 people serving 10 million customers. It is responsible for investing over £500bn worldwide with operations in USA, France, The Netherlands, Egypt, India and the Gulf. However the UK still accounts for the majority of its business.

They are the UK’s leading provider of individual life insurance as well as a market leader in group protection, annuities and workplace pensions. L&G are a top 20 global asset manager and one of Europe’s largest institutional asset managers as well as being the UK’s largest investment manager for UK pension schemes.

The shares joined my portfolio for the first time shortly after last year’s results. Around this time we had the budget and the surprise announcement of changes to pensions which would impact LGENs annuity business. Furthermore, the Financial Conduct Authority announced they would be conducting an investigation into 30 million poorly managed pension and investment products sold between the 1970s and 2000 to see whether customers have been treated fairly. This subsequently turned out to be a red herring but for a short time the share price of all the large insurers were sent into a tailspin and I took advantage to pick up the shares for my ISA income portfolio.So far, they have performed very well and in addition to dividends, the share price has increased over 35% - definitely one of my better decisions of the past 12 months!

LGEN 1 yr price chart  (click to enlarge)

Legal & General has a diversified business model. In 2014, 31% of the firm’s operating profit came from UK insurance, 29% from retirement products, 23% from investment management, 13% from investing its own capital and 4% from the company’s American operations.


The Company has today announced its preliminary full year results for 2014 (link via Investegate). At the half way point last August, earning and profits were up 9% and the interim dividend was hiked by 21% to 2.9p. Todays results show earnings and profits up 10% and the full year dividend lifted 21% to 11.25p (2013 9.3p).

Nigel Wilson, Group Chief Executive, said:
"Our market leading growth businesses coupled with continuous cost reductions have given us scale and efficiency in our chosen markets. The five global macro trends driving our strategy - ageing populations, globalisation of asset markets, welfare reform, digital connectivity and bank retrenchment - create long term growth opportunities, which we position our businesses to capture. The rapid growth of LGIM's international business to over £100bn, the £5bn of investment in physical assets in the UK, and our entrance into the lifetime mortgage market are all examples of the successful execution of our strategy.

Over the last five years we have increased dividend per share from 3.84p to 11.25p - a nearly threefold increase. In 2014 we produced another year of double digit growth across our key financial metrics enabling us to reward shareholders with a 21% rise in the dividend." The dividend annualised growth rate (CAGR) is 24%.

LGEN have implemented a policy of reducing dividend cover to 1.5x earnings - this should be achieved over the coming year so I expect the current payout to be lifted in excess of 10% and have pencilled in a figure of 12.5p for 2015.

It appears the profits are slightly below analysts forecasts and the share price is down 3% at 268p at the time of posting. The shares are currently trading on a P/E of 16 and yield of 4.2%.

I am happy with my acquisition and will be holding for the foreseeable - possibly adding should the share price pull back significantly.

As always, please DYOR