City Merchants Trust - 2016 Results

The stock market essentially deals in two kinds of asset; shares and bonds. These investments have very different characteristics; shares make you a part-owner whilst bonds, being debt instruments, turn you into a lender.

As a shareholder you've got to be fairly optimistic about your company's prospects; expecting that its shares will produce a better return than its bonds. In contrast, bondholders can be pessimists; as long as the company or government generates enough money to pay the interest they'll still be paid even if the shareholders are having a hard time.

They say shares are for optimists, bonds are for pessimists. I am still fairly optimistic on equities which is why I continue to maintain a 60:40 balance but there’s no harm in hedging your bets and bumping up immediate income with fixed interest, higher yielding trusts.

Similar to my other holding in this sector, City Merchants investment objective is to seek to obtain both high income and capital growth from investment, predominantly in fixed-interest securities.

It is almost two years since I purchased this IT for my ISA as a replacement for a few sales from my shares portfolio.

The overall portfolio is fairly defensive with a significant proportion of higher quality companies which the management consider to be ‘default-remote’.

They have this week announced final results for the 12 months to 31st December 2016 (link via Investegate).

Net assets have steadily increased over the year and taking the full year dividend of 10p per share into account, the total return was 11.8% (2015  2.7%).

CMHY  3 Yr Performance
(click to enlarge)

Dividends

The dividend target for the trust is 10p per share paid quarterly. This amount was paid in 2014, 2015 and 2016 and remains the target for the coming 12 months. At the current price of  190p the shares offer a yield of 5.2% which is obviously attractive compared to the rates on offer from our banks and building societies. The average cash ISA rate is currently a miserly 0.8% according to latest figures from Moneyfacts. In 2007, the average rate was 5.0%.

Of course, the share price will move around as can be seen from the chart and this may provide opportunities for a better yield at certain points.

For me, the trust provides some diversity to equities and a steady and predictable quarterly income stream.

As they say, slow & steady steps….

AJ Bell Passive Funds Launch

I was pleased to receive an email from my ISA provider AJ Bell this week to flag up the launch of their new range of passive funds from April.

I guess as the rise of passive index funds goes from strength to strength, it makes a lot of sense for the platform to offer a ready-made option for their customers.


Five Options

AJ Bell are offering a range of 5 funds which are a mix of equities, corporate bonds, gilts, property and cash. Each fund will hold a blend of underlying funds/ETFs from the likes of Vanguard, Blackrock, iShares and State Street etc.

The offerings range from cautious to adventurous and the corresponding equity levels start at 20% then step up to 30% for the moderately cautious, 40% for the middle option, 50% for the next step through to 60% for the higher level - so not overly adventurous.

I think the weighting for UK equities is less than the Vanguard Lifestrategy funds however, I was a little confused to see they seem to use 2 options for the S&P 500 - iShares ETF and Source ETF.

The bonds comprise a mix of gilts, corporate bonds and high yield bonds. The total percentage of bonds is 60% for the cautious and falls to 20% for the adventurous.

The portfolios also includes a percentage of property and cash across all options which my Vanguard Lifestrategy range does not offer so this could be good for those investors who require a broader mix of assets.

Charges

I was a tad disappointed to see the relatively high figure of 0.50% for ongoing charges - certainly high compared to the Vanguard funds at 0.22%. To mitigate, there is no charge on purchase and until 2019, AJ Bell will not levy their usual 0.25% custody fee.

Would it not have been possible to consolidate the underlying charges of the funds/ETFs together with a small admin fee to make a total of, say 0.4% and waive the custody fee permanently? …just a thought but possibly not practical.

Conclusion

Apart from the higher charges, which will take away from returns over the longer periods - I welcome this offering from AJ Bell and will certainly bear them in mind when the time comes around reinvesting some of the cash from various sales in recent months as the markets have risen.

Index investing is becoming very popular but of course, whatever index you follow, they are not immune to the bear market so however tempting the offering I will leave my cash in cash for a while longer.

The funds should be available from 19th April.

I would be interested to hear what others think - leave a comment below....

National Debt and State Pensions - Start Saving

I am not an economist - far from it, but one thing that niggles away at the back of my mind is our ever increasing debt and how this may impact on society in the future. How can we afford state pensions and welfare provision when they seems to increasingly rely upon borrowing the money to fund them?

Our national debt is the total amount of money borrowed by our respective governments. It is mainly created by the issue of government loans called gilts which are purchased by the Bank of England, the private sector such as insurance company pension funds and also other governments from around the world seeking a safe home for their money.

The debt currently stands at £1.7 trillion and has been increasing year-on-year since 2001 when it stood at just £300bn. The amount we borrow each year peaked just after the financial crisis at £150bn in 2009/10 and has been steadily declining each year however we are still spending £50bn more than we receive.The deficit is predicted to fall to £20bn by 2020...that's £30bn more than was forecast in 2016 - the goalposts seem to keep moving. The politicians are quick to assure us that the deficit is falling but slow to point out that the total debt continues to rise.

Like all borrowers, our government has to pay interest on the debt it creates. In 2001 we were paying around £20bn per year in interest and we are now paying around £39bn which represents around 5% of total spending and more than we spend on the likes of social service or transport.

Since 2007, bond yields have been falling which means the interest on the debt has been lower than it would have been. 10 Yr gilt yields are currently around 2%. However, this could easily reverse which would result in higher debt repayment costs.

The Consequences for State Pensions

Having paid into the system for the past 45 yrs, I will finally become eligible for my state pension next year - whoo hoo!!

I am not overly concerned about the governments ability to continue with state pensions in the shorter term. However, unless there is some signs that UK plc will start to live within it’s means PDQ, I do wonder whether the universal state pension can be afforded in its present form for those starting out today.

Spending on pensions has doubled in the past 10 years to £157bn and this dramatic rise looks likely to continue. The combination of far more people living longer and the squeeze on welfare provision could create quite a toxic time bomb down the line.

When I was looking at research for my book ‘DIY Pensions’, I was a bit surprised to see that around half of all workers had made no private pension provisions and would be solely relying on the state pension. Of the remaining 50%, the average pension pot was only £35,000 which obviously will not provide much additional pension - £100 per week at best.

Start Saving

The government have been trying to cut back on public expenditure in recent years with their so-called austerity measures but they are having to increasingly implement spending priorities - NHS, Welfare etc. and the debt is still rising. With an ever increasing population, people living longer and all the uncertainties of leaving the EU, the pressures are building.

If this continues, which is clearly more likely than not for the foreseeable future, there will be a point where a future government will question whether it can continue with universal pensions for the relatively wealthy when more money is needed for social services and pensions for those who have no other provision - in other words, some form of means-tested cut off point.

I am not saying this will happen, merely that it must be a possibility.

It will therefore be incumbent for those younger people to prepare for such a possibility and take saving for their retirement much more seriously.

In a recent article on reasons to save, Morgan Housel writes:

“You don’t need a reason to save. Are you saving for a house? Or a vacation? Or a new car? No, I’m saving for a world where curveballs are the most common balls thrown. Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Savings is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.”

Yep, I will second that….

What do you think - leave a comment below and share your thoughts with others.

Vanguard UK Equity Income - Year 2 Update

It is now 2 years on since my initial purchase of this UK income index fund.

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

The concept is fairly simple - to 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-yielding shares or particular industry sectors by limiting the percentage of the index invested in any one company or industry.

I have tried holding a portfolio of higher-yielding shares in recent years but felt a little over-exposed to misfortune with my 20 portfolio holdings. If 2 or 3 hit the buffers, my income for the following year could fall by over 10%.

The Vanguard fund holds around 120 companies - the top ten holdings include all the usual suspects - Vodafone, Glaxo, BP, BATS, National Grid etc. The effects of the same 2 or 3 shares running into difficulties obviously has far less impact.

Ongoing charges are 0.22% and also a one-off dilution levy of 0.40% on purchase. In addition, my broker AJ Bell levy an annual platform charge of 0.25% of the total value of the fund.

The current yield is around 4.3% based on projections from last years distribution. Dividends are paid out half yearly in June and December.

Performance

My initial purchase price was £177.50 - by last March it had fallen back ~9%. However, it has bounced back over the past 12 months and is back to just above my entry price, currently £181 - a total return of ~17% over the past year (incl. income).

By way of comparison, the total returns for some of my UK income trusts over the past year -

City of London  20%, Edinburgh 11%, Finsbury Growth & Income  20% and Temple Bar  30%.

5 Yr Comparison -v- FTSE All Share Index

Income

The fund has so far provided me with income payments of 776.92p in 2015 and 775.65p in 2016 - which gives a current yield of 4.3%. The income distribution represents the combined dividends received from all holdings in the fund (less costs and fund charges) so, unlike investment trusts which hold reserves to smooth out the income payments, I do not know exactly what payment will be received in my ISA until it actually arrives. For example, the income distribution for 2014 was 708.8p and in 2013 699p.

It will be interesting to see how the managed income-focussed investment trusts compare to the Vanguard index fund over the coming year or two.

I now use the Vanguard fund as an additional benchmark against which to compare returns for my collectives income portfolio.

It’s early days - just two years since purchase but I am happy to continue with this income fund which seems to be doing the job required for my income portfolio.

This article is a record of my personal investment thoughts/decisions and is not a recommendation - as always, please DYOR.

Tritax Big Box REIT - Final Results

This property REIT was added to my income portfolio last October following a placing of shares at 132p.

Screwfix, Staffordshire

Tritax Big Box is the only Real Estate Investment Trust dedicated to investing in and funding the pre-let development of very large logistics facilities in the UK. The company believes these properties, known as Big Boxes, are one of the most exciting and highest-performing asset classes in the UK real estate market.

Big Boxes offer tenants economies of scale and cost savings not available from smaller, older buildings. They are also crucial to the efficient and effective operation of retailers, and in particular the fulfilment of e-commerce orders. Because the nature of what the companies use these buildings for is so fundamental to their very existence, Tritax is unlikely to suffer from unexpected vacancies.

Big Box have sought to distinguish themselves through the quality of location and modernity of their real estate assets let to high calibre tenants, which provide long term income and attractive prospects for growth.

The group hold a portfolio of distribution assets which are located close to motorways and are let to tenants including some of the leading supermarkets - Sainsbury, Tesco, Morrisons as well as M&S and Next. Some other tenants include:

Amazon - the world’s largest electronic and ecommerce retailer

Argos -  the UK’s leading multi-channel retailer, offering more than 33,000 products both on-line and in-store.

Brake Bros -  the number one food service distribution company in the UK

Ocado -  the world’s largest dedicated online grocery retailer.

Wolseley - the world’s number one distributor of heating and plumbing products

The UK has been one of the fastest global adopters of online retail and continues to exhibit significant growth in the sector, driving new demand for logistics real estate including Big Box assets. Successful large-scale retailers (online and conventional) and logistics providers are increasingly relying on the Big Box asset and demand is evident from companies up-scaling to such facilities.

Results

Tritax Big Box was first listed at the end of 2013 at an initial floatation price of 100p. During 2016 it raised £550m of equity through two substantially oversubscribed share issues.

They have today issued results for the full year to end December 2016 (link via Investegate). Total Shareholder return for the period was 15.1% which compares very favourably to the FTSE All-Share REIT Index return of -7.0%. The company target a total return (being the increase in EPRA NAV + dividends paid) of 9.0% per year - the figure for 2016 was 9.6%.

Income

Building on payouts for the previous two years of 4.15p in 2014 and 6.0p in 2015, the declared dividend for the full year 2016 is 6.20p rising to 6.40p in the coming year. At the current share price this provides a fwd yield of ~4.4%.

The company are now moving to quarterly dividend payments. The Group's dividends are fully covered by adjusted earnings of 6.51p, which are underpinned by strong rental stream and low cost base.

Commenting on the results, chairman Richard Jewson said:
"The outlook for the Group remains positive. We are in a strong financial position and see further opportunities to acquire high-quality standing assets and to forward fund pre-let developments.

We consider there to be limited potential for capital growth through further yield compression and whilst more challenging, we have maintained a 9% per annum total return target. Capital growth is therefore likely to come from steady state capitalisation rates being applied to growing income. We believe that income will remain the most important component of total return over the next 12 months. There are strong drivers to rental growth in the market, both due to the ongoing imbalance between occupational supply and demand and the increase in build costs in 2016, which we expect will feed through to rents. This rental growth will help to support the Group's progressive dividend policy. For 2017, we have increased our dividend target to 6.40 pence per share.

In uncertain times, investors are often drawn to companies that can deliver low-risk and growing income. Since our IPO, we have deliberately constructed a portfolio that offers secure income from high-quality tenants on long leases that generate an element of predictable growth through upward only-rent reviews.

In summary, our market is resilient and we expect 2017 to be another positive and stable year for the Group."

My grandchildren would prefer this big box!

Summary

I am pleased with this recent addition to my income portfolio. The share price has gained 13% compared to the offer price of 132p last October. In addition, I have received a dividend of 1.55p and the prospect of 6.4p for the coming year.

The way we shop has changed quite significantly over the past decade and internet sales are forecast to account for over 20% of total sales by 2020. To remain competitive in this environment, retailers need to have large, highly efficient distribution facilities that can fulfil orders quickly and accurately. This need is only becoming more acute as customers demand ever-shorter delivery times.

The demand for the BIG boxes offered by this REIT is likely to remain strong. I may well be looking for an opportunity to add to my initial purchase over the coming year.

This article is a record of my personal investment thoughts/decisions and is not a recommendation - as always, please DYOR.

Twitter Update

Just a very brief post to announce that, after 4 years, I have now got around to giving the site its own Twitter account :

diy investor (uk) @ diy_investor_uk

Therefore, in future, I will flag up all blog articles and related matters on this new feed.