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Investment trust portfolio with high growth expectations

Will our reader be able to double his investment trust-focused portfolio in 7 years? Our experts disagree on whether this is possible
August 8, 2014

Ron is 59 and has been investing for five years. He has a self-invested personal pension (Sipp) portfolio worth £182,000 and mainly invested in investment trusts, which he hopes to grow to £400,000 on retirement at age 66. The Sipp is in drawdown as he has taken the 25 per cent tax free lump sum from it.

Apart from his house worth £300,000, this portfolio is his only asset. However, he has just started a new job and is making annual contributions of 12 per cent of his £60,000 salary to the company pension.

Ron says: "I'm looking towards retirement but still have a young family (a daughter of 11 years) so I'm working at both ends of the age spectrum and trying to balance saving for retirement with family life."

Reader Portfolio
Ron 59
Description

Self-invested personal pension

Objectives

High growth

RON'S SELF-INVESTED PERSONAL PENSION PORTFOLIO

Name of holdingNumber of shares heldPriceValue £%
Aberdeen Asian Smaller Cos Invt Tst (AAS)581945p£5,4903

Baillie Gifford Japan Trust (BGFD)

2,502359.7p£8,9995
Biotech Growth Trust (BIOG)1,761473.06p£8,3305
BlackRock Frontiers Inv Trst (BRFI)3,886127p£4,9353
BlackRock Throgmorton Trust (THRG)2,400272.25p£6,5344
City Natural Resources High Yield Trust (CYN)2,237139p£3,1092
European Assets Trust (EAT)709930p£6,5934
Finsbury Growth & Income Trust (FGT)1,190498.25p£5,9293
Henderson Smaller Cos Inv Trst (HSL)1,223512.3p£6,2653
Herald Investment Trust (HRI)1,157638.2p£7,3834
International Biotechnology Trust (IBT)1,725286p£4,9333
iShares £ Corp Bond ex-Financials UCITS ETF (ISXF)93£114.21£10,6216
JPMorgan Mid Cap Inv Tst (JMF)1,267736p£9,3255
JPMorgan Smaller Companies Inv Tst (JMI)731745.61p£5,4503
Jupiter Euro Opportunities Trust (JEO)1,227428p£5,2513
Montanaro UK Smaller Cos Inv Tst (MTU)1,153454.75p£5,2383
New City High Yield Fund (NCYF)5,95064.31p£3,8262
Perpetual Income & Growth Inv Tst (PLI)1,211372.5p£4,5102
RCM Technology Trust (RTT)1,264505.5p£6,3893
Schroder Oriental Income Fund (SOI)2,766188.62p£5,2173
Schroder UK Mid Cap Fund (SCP)1,256449.9p£5,6503
Standard Life Investment Property Income Tst (SLI)6,04574.75p£4,5182
TR Property Investment Trust (TRY)1,924255.2p£4,9103
Utilico Emerging Markets (UEM)2,654187.05p£4,9643
BlackRock Smaller Companies Trust (BRSC)1,679787.39p£13,2207
Edinburgh Investment Trust (EDIN)3,109608.5p£18,91810
Scottish Mortgage Investment Trust (SMT)2,807211.05p£5,9243
TOTAL£182,431100

LAST THREE TRADES

BlackRock Smaller Companies Trust (buy), Edinburgh Investment Trust (buy), Scottish Mortgage Investment Trust (buy)

WATCHLIST

Edinburgh Investment Trust, Scottish Mortgage Investment Trust

 

Chris Dillow, the Investors Chronicle's economist says:

I’m afraid it looks as if you’ll fall well short of your aim of having £400,000 by the age of 66. Assuming a 5 per cent annual return - after inflation - this portfolio will only grow to around £260,000 in today’s money.

Of course, it’s perfectly possible that returns will exceed 5 per cent a year. But I reckon there’s a less than 10 per cent chance of good luck alone being enough to get you to £400,000.

This leaves you the unpleasant options of saving more and or working longer or trying to get a better paid job.

That said, things are far from disastrous. With average luck, this portfolio plus the state pension should give an annual income (in today’s money) of around £25,000. That’s even if annuity rates don’t rise, and it ignores your company pensions. As this would put you above the average wage, it hardly condemns you to the poorhouse - although I fear it might dash any hopes you had of helping your daughter through university.

What it does mean, though, is that you should keep an eye on your spending. Go through your monthly outgoings and see if you can’t trim some unnecessary expenses - for example by tweaking your phone or utility tariffs; I recently did a spring-clean of my (hardly lavish) outgoings and easily saved £50 per month. As the advert says, every little helps.

Failing all this, you might have to reduce your expectations.

I fear there’s a reason why you’ve gotten into this problem. You only started investing five years ago at the age of 54, which is relatively late in life. It is far easier to build a decent pension fund by starting early and using the power of compounding.

Of course, this advice is useless for you - what with time travel not having been invented - but I say it as a reminder to younger readers: the sooner you start saving, the better.

Despite all this, there’s much that you’ve done right. I like the structure of your portfolio. In having some exposure to property and corporate bonds, it’s pretty well diversified, subject to the need to be mostly in equities in order to generate high returns. And you’ve avoided the mistake of handing over a fortune to open-ended fund managers.

In fact, there’s another reason to praise your interest in investment trusts. It’s that their returns can be partly predictable and this means that, occasionally, you can buy £10 notes for £9.

This is because of the behaviour of their discounts to net asset value. There’s some evidence, from the US and UK that these discounts are sometimes driven by investors’ sentiment. When investors are bullish towards a particular asset class, they can drive up investment trust prices relative to their net asset value, causing discounts to narrow. But of course, when sentiment is high it is likely to fall, and vice versa. This means that trusts’ discounts can predict returns. A low discount points to poor returns, and a high discount to better returns.

I stress that what matters here is the discount relative to its own history; some funds systematically have lower discounts than others. So, keep a track of those discounts. If see you a fund’s discount widen, consider buying. And if it narrows, think about profit taking.

 

Colin Low, chartered financial planner and managing director of Kingsfleet Wealth says:

You have created a portfolio of Sipp investments that have performed extremely well. I calculate that this portfolio would have outperformed the FTSE All-Share Index by a significant margin over the last couple of years.

Your objectives are clear and precise and although your goals are challenging, they should be achievable if market conditions are favourable. Our calculations would indicate that with your current valuation being increased by the value of regular contributions there is a good possibility of being able to achieve your goal of a fund of £400,000 in approximately 7 years.

Our research estimates the fund to be currently valued in the region of £200,000. Adding to this fund at a rate of 12 per cent of your £60,000 salary (ie currently £7,200 a year), and assuming that the salary averages growth of 3 per cent a year, a compound net return of 7 per cent per year would deliver the £400,000 you are aiming for.

However, there are a few of words of caution in all these calculations: Firstly, inflation will erode the value of that sum, so in today’s terms you may require over £475,000 allowing for average Retail Prices Index inflation rates over the last few years.

Secondly, is your intention to convert the whole fund to an income at that stage by purchasing an annuity? While this would provide a high level of security in respect of the income, it may be that you choose to leave the funds invested using income drawdown. The more flexible rules available to pension investors that are now in place and which are due to be enhanced next April are likely to give you more alternatives to facilitate the additional income you require.

Thirdly, in the generally benign markets that we have experienced since 2009, 7 per cent seems like a very straightforward and achievable return, but this is where the dilemma arises. A term of 7 years certainly allows you to take a reasonable level of risk early on, but as you progress towards the target date, you may wish to think about the level of risk you are taking.

Our portfolio analysis has indicated that the current risk rating of this collection of holdings, as measured by volatility, is relatively high. I appreciate your preference for equities over cash and bonds, this will have served you well over the past couple of years, but a significant bear market would have an enormous impact on your plans. Your attitude to investment risk really needs some clarification in order to be more precise on how this issue can be addressed.

Unfortunately, there aren’t many easy solutions for this problem. Diversifying asset classes can be of help, but when bond yields are at such historically low levels and cash is providing a negative real return, they may also have the effect of creating a headwind to your portfolio returns.

Finally, the portfolio is predominantly weighted towards UK equities, which I would agree with, considering that you are a sterling investor. Further analysis of your underlying investments suggest a fair degree of ‘stock overlap’.

You have 11 funds that are primarily invested in the UK and this will lead to a duplication in the underlying equities held and this is clearly seen in the similarities between the Edinburgh Investment Trust (EDIN) and Perpetual Income and Growth Trust (PLI) which make up just under 13 per cent of your portfolio as a whole - both funds are run by the same manager, Mark Barnett. Other than this overlap issue, you have put together a really strong portfolio and all being well, you will make good progress towards your objectives.