Collectives Income Portfolio Review

I last updated on my investment trust income portfolio at the end of 2014. Since then there have been a few changes so it’s probably time for another update.

Just to recap, in June 2012, I moved my sipp into income drawdown as I felt I could generate a better income from investing over the long term than taking an annuity. Investment trusts now generate a large percentage of my drawdown income and also, combined with more recent index funds/ETFs, a larger percentage of the income in my stocks & shares ISA.

The main objective is to generate a natural income which will hopefully rise each year to keep pace with inflation - a sort of index-linked annuity substitute.

I will use the combined average of my 3 Vanguard index funds as a benchmark for the portfolio.

The Changes to the Portfolio

As mentioned in the previous report, the portfolio income of £1,222 from 2014 was used to make a new addition of Backrock Commodities Income trust - 1,355 shares @ 89p including dealing costs. Since purchase, the share price has retreated around 20% - so not the best timing but so far, the income is much as expected!

In March I replaced the Invesco Income trust with Vanguard’s Equity Income fund.

In May I replaced Schroder Oriental and Henderson Far East ITs with Vanguard’s Asia Pacific ETF. I also took the opportunity to sell half of my holdings in three investment trusts - Murray Income, Murray International and Temple Bar. The net proceeds (after sale costs) of £3,321 were reinvested in the VLS60 fund.

In June I decided to sell the Bankers trust which has had a really good run for the past few years as I wanted to move some of my equity gains into a little more diversified holdings - I therefore added the proceeds to the Vanguard LifeStrategy 60 fund.

Although this is demonstration income portfolio, it largely mirrors my own holdings. However, whilst I withdraw most of the income from my trusts and index funds for living expenses, with this demonstration portfolio I will reinvest the income at the end of each year either into an addition investment trust - as with BRCI  - or recycle the income generated into one of the existing holdings.

Performance

So, how have the various investments fared over the past few months - has the income risen - how do returns compare against my Vanguard trackers?

Most investment trusts have performed reasonably OK year-to-date, however the two Aberdeen stabled trusts - Murray Income and Murray International - have been disappointing. MYI has been one of the cornerstones of my income portfolio for several years but seems to have lost its way over the past 18m or so.

The manager, Bruce Stout has railed consistently against the state of financial markets which he believes have been distorted by 'money printing' of central banks. He has also been frustrated by the underperformance of Asia and emerging markets, where he has half of the fund invested in shares and bonds, compared to the strong performance of the US stock market, where he has just 15% allocated.

I sold down half of my holding in May so maybe now could well be good opportunity to add back to my holding - however, I would need to have faith that the manager could turn around the fortunes of the trust which I do not have at present. It is not difficult to understand why the demise of the fortunes of such investments as MYI, has been instrumental in my turning more towards index funds over the past year - they will always consistently perform in line with expectations and do exactly what it says on the tin - follow the index!

Although these two have not done so well, others such as City of London, Edinburgh, Finsbury and Aberforth have performed better and have more than compensated.

As I said earlier, my benchmark against which I will measure performance will be firstly the Vanguard All World High Income tracker. The performance of this global income ETF over the year-to-date has been fairly flat. The total return, including income is 0.1%.

My Vanguard UK Equity Income fund has provided a total return of 3.5% including the half-yearly distribution at end June.

Although only recently added to the portfolio, the year-to-date return for the VLS60 fund has been 3.0%. This now represents the largest single holding in my portfolio.

Therefore, taking an average of these three, the benchmark figure against which to assess the portfolio is 2.2%

Building on the positive returns of the past three years -

2012  +20.9%,

2013  +19.4% and

2014  +  5.0%

The value of the portfolio at the start of 2015 was £35,106 compared to the current value of £35,338 - a rise of £232. The collectives income portfolio has therefore provided a return of 0.66% over the past 7 months. With a couple of exceptions mentioned, I am reasonably happy with the portfolio performance for the year so far, particularly the predictability of income.

Income

As I absolutely depend on the income from my investments to pay the bills and put food on the table, the objective of the income portfolio is to produce a dependable and rising income. Capital appreciation is always welcome but will largely follow the ups and downs of the general stock market.

Last years dividends of £1,222 were (prematurely) reinvested in the addition of Blackrock Commodities trust. The continual reinvesting of dividends is a sure-fire way to turbo charge your investment returns over the longer term.

Income so far this year is £866 - an increase of £86 compared to the dividends paid at this point last year of £780 - a rise of 11%. The main objective of the portfolio of generating a rising income to keep pace with inflation has been more than achieved with inflation currently running at below 1.0%.

I have moved some of the portfolio into the accumulation version of Vanguard LS 60 fund so there will be no distribution of income. Instead, I will be working on a strategy to sell down some of the units and will expand on this in a separate post

At the start of the year, my target income for the year was £1,365. Whilst its always very difficult if not impossible to forecast capital returns, we are more than half way through the year and I remain fairly confident the income figure will be there or thereabouts by the end of December.

Here is the current portfolio

(click to enlarge)

I will update again at the end of the year.