Thursday, 2 June 2016

Compare Investment Trusts to My Index Funds - Past 5 Years

Looking back to early 2013 when I started this blog, it is clear there has been quite a significant change to my investing strategy. Back then I was focussed on a portfolio of individual higher yielding UK shares combined with a ‘basket’ of investment trusts to generate the natural income I required in retirement.

Today, the individual shares are much reduced, some of the investment trusts have been sold in both ISA and SIPP drawdown and have been replaced by Vanguard index funds and ETFs.

I realised at some point that I was limiting my investing options by restricting my chosen investments to those that provided an adequate natural yield - say 3% minimum. This had ruled out looking at the likes of Vanguard LifeStrategy funds with a natural yield of under 1.5% for example.

Individual shares have been interesting but they are volatile and I have not noticed any greater return to my portfolio for the additional risk and volatility so I will wind down the rest of my shares portfolio in the coming months and move the proceeds into collectives.

My managed investment trusts have provided mixed returns in recent years. Some have done very well - Nick Train’s Finsbury Income, smaller company specialist Aberforth, Edinburgh, City of London - others have struggled - Murray Income, Murray Intl. and Dunedin Income for example.

Of course it is impossible to know in advance which investments will do well - all I have to go on at the time of purchase is past performance which is not a very good indicator. Therefore I decided to spread the risk between several diverse trusts in the hope that the average returns combined would outperform the market.

I find investment trusts less volatile than individual shares however, they do use varying amounts of gearing and can trade at a premium or discount to their NAV so they are a little more complex. Against this is the advantage for the investor who requires income of their ability to pay a steadily rising income steam due to their being able to hold back excess income in reserves during good years.

I like the concept of withdrawing a rising natural income from my investments. However, the acid test for me will always be long term total return. It can be seductive to harvest a natural yield of 4% or 5% but if the share price is stagnant or falling away, I may as well hold the money in a no-risk cash account and deplete the capital for ‘income’ each year.

The fortune of the trusts are always dependent on the managers making consistently good calls - some appear to be reasonably competent and some a little more average.

Performance Compared

As I have held my investment trusts for at least 5 years, I thought it may be an opportune time to compare the returns against some of my index funds.

Here is my basket of 12 investment trusts showing returns over the past 5 yrs to end May 2016
(click to enlarge)
The 5 yr annualised average total returns for my 3 benchmark funds are

Vanguard UK Equity Income  6.64%

Vanguard All World High Yield ETF  3.65%

Vanguard LifeStrategy 60  7.51%

The average for the 3 is 5.93%

Admittedly 5 years is not such a long period to compare but I am pleased to see the basket of managed investment trusts are doing the business and have delivered almost 2% extra return each year compared to my Vanguard funds. Of course, had I chosen fewer trusts or different trusts, the outcome may have been very different.

For example, if I did not hold Edinburgh, Finsbury and Aberforth the return for the basket would drop to just 6.1% p.a. On the other hand, if the basket did not include Murray Income, Dunedin and Aberdeen Asia the returns would be 9.1% p.a. Maybe luck plays a big part in the investing process!

So far, the basket of investment trusts continue to add a little extra value to my portfolio returns. There is not really much maintenance once purchased - just wait for the quarterly dividends to roll in and read the annual final results. Also, with my broker AJ Bell Youinvest, there are no platform charges for holding my trusts which is an added bonus.

I am happy to continue with my combined managed and passive mix for the time being although I may lose one or two of my underperforming UK income trusts if there is little sign of improvement soon.

As ever, slow and steady step….


  1. Hi, I wonder if perhaps it might be more instructive to compare your IT's NAV growth to the funds. (Although of course that's misleading in a different way).

    The reason I say that is because I'd wonder if discounts narrowing provided some of the outperformance?

    Certainly that'd have been true from say 2009 to 2014. Might not be quite such a factor over past 5 years though...

    1. TI,

      Good point - if I find a little time I may have a look at the 5 yr NAV returns on Trustnet to see if there is much difference.

    2. Just plugged in the 5 yr NAV returns from Trustnet. With the exception of Aberforth, the returns are all higher than share price which suggests the sp discount has widened.

      The average total for the 12 ITs is 53.8% and corresponding annualised is 8.99% p.a.

      Hopefully prices and discounts will revert to longer term mean at some point which should be good news for holders.