Saturday, 17 June 2017

Compare My ITs to 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 focused 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. Now I hold an equal mix of trusts and Vanguard index funds.

When I compared the performance between the basket of trusts and my index funds last year over a 5 yr period, the trusts came out as clear winners. One year on and I will have a look at the same 5 yr comparison having regard to the portfolio changes I have made in the past year.

In the past 12 months I have disposed of Murray Income, Invesco Income, Aberdeen Asian Income, Murray International, Law Debenture and Dunedin Income.

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. I think also I was holding too many UK-focused income trusts.

My managed investment trusts have provided mixed returns in recent years. The ones which have delivered for me are Nick Train’s Finsbury Growth & Income, smaller company specialist Aberforth, Edinburgh & City of London and these have obviously been retained. I have added a few additional trusts to provide more diversity - HICL Infrastructure, TR Property and Capital Gearing and these have been included in the updated comparison.

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 necessarily a very good indicator. Over time, it becomes a little clearer which trusts are performing better than others.

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 dividend steam due to their being able to hold back excess income in reserves during good years.

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.

Here is my basket of 9 investment trusts showing returns over the past 5 yrs to mid June 2017.
Comparison 5 Yrs to June 2017
(click to enlarge)

I am pleased to see the basket of managed investment trusts are still doing the business and have delivered an additional 3.7% return compared to my Vanguard funds. The basket used for the comparison last year would provide a reduced average return of ~12.5%.

I think it is clear that some managed trusts can add value to a portfolio and it is therefore worth paying the extra charges but of course it is difficult to identify in advance which of the 400+ on offer will continue to outperform. Some of the trusts I selected when I started my investment trust income portfolio have fallen short of my low cost index funds - for example Aberdeen Asian Income, New City High Yield, Murray Income and Dunedin Income. Maybe luck plays a big part in the investing process!

Having replaced a few trusts in the past 12 months, I am happy to continue with my combined managed and passive 50:50 mix for the time being. The pendulum seems to be swinging towards low cost passives in the debate as to which is the better option for small investors but from my experience so far, it does not need to be one or the other but can be both.

Leave a comment below if you have any thoughts on active v passive.


  1. Ciao DIYUK,
    I am really impressed at the results that you are getting with the trusts... I added CTY recently and i am pretty happy with it right now, might look into other trusts too in the future, they are cost effective (compared to single stocks), although I am still a big fan of the cherry picking strategies.
    Ciao caio

    1. Good to hear from you Stal. I first purchased CTY in mid 1990s and it has proved to be very steady and reliable. I caught your recent portfolio update...looks like your investing is doing well and the cherry picking bearing fruit!

  2. Just a post to say i often read your blog and really appreciate analysis such as this. I hold VLS60 in my Sipp and a growing basket of trusts in an ISA, so it's great to hear your take on this combo! I find the many blogs which argue in favour of low cost passive to be very convincing, but can't get over the idea that there must be some value in active management too. The reason i like investment trusts is the fact that lots of them have been around so long (100 yrs+!) that they have a solid reputation to uphold. Plus they can be held to account by shareholders, unlike a fund.

    Anyway - thanks again for keeping up the good work on your blog.

    1. To be honest I am fairly new to the passive strategy - just 2 yrs since I picked up VLS60. I have held investment trusts however for over 20 yrs so I am far more au fait with them.

      The passives are not a replacement but more a change in emphasis...keep what works with the old but keep an open mind for new opportunities.

      Good to hear you appreciate the blog and thanks for sharing your thoughts on this.