Stewart Munro’s primary objective as an investor is to ensure his portfolio generates sufficient income to support both him and his son.
For income I like buying shares and investment trusts
Munro has been a carer for his son, Hector, who has severe autism, for the last 20 years. Since his wife, who was the main earner, died six years ago, he has been living off the proceeds of his investment portfolio.
He said: “We do have a voracious appetite for income. I’m not really interested in stocks or funds where the yield is less than 3%. My aim is to beat inflation so my income doesn’t decline in real terms.”
But he says he is also very conscious about capital preservation. “I want to ensure that the investment portfolio we’ve built up, not only support me for my lifetime, but provides financial security for my son in future.”
Diversification has been one of the ways he hopes to do this. Munro says he has around 75 different holdings, including unit trusts, investment trusts and direct share holdings. Typically he has no more than 2% in any one holding. This means problems with one sector or company have a more limited impact on his overall return.
As he has not been in paid employment for much of his adult life Munro does not have a workplace pension to fall back on.
Winning Investment Trusts
One of his most reliable income generators has the City of London Investment Trust (CTY). This invests in financial service companies that serve the small business and professional services sectors.
This investment trust is one of just a handful of trusts that have paid a rising dividend for more than 40 years.
Munro says: “The shares I’ve owned have gone up in value by about 68% since I first invested in this trust in 2009.”
Another key holding is Edinburgh Investment Trust (EDIN). Although it lost its star fund manager Neil Woodford relatively recently, Munro is sticking with this trust - which again has a great long term dividend record. It has grown its dividend payout every year since 1973, with just two exceptions: 2004 and 2005, when dividend payments were at least maintained.
Morningstar fund analysts agree with his assessment.
They give the new fund manager Mark Barnett a Bronze Rating, reflecting his excellent long term track record with Invesco Perpetual – which has the mandate to run this trust. The trust has a Five Star Rating which shows reflects its strong outperformance, relative to peers, in recent years.
They describe Barnett as a “highly capable manager who has demonstrated his skills at running equity income funds… Investors are in safe hands at Edinburgh Investment Trust.”
And Mixed Stock Selections
Not all Munro’s holdings have delivered such positive returns in recent years. He admits he has had his fingers burned with Sainsbury’s (SBRY).
“I thought this would be a safe and steady stock: people always need groceries, and the company seemed to have a progressive dividend policy. At the time I bought it in 2009 it was already a little out of favour, so I thought things could only get better.
“But the arrival of discount supermarkets, like Aldi and Lidl, proved things could in fact get worse.”
Despite a recent rally – the share price rose 5% after the latest set of results – Munro says he the current price is about 20% less than what he bought it for.
Morningstar equity analysts are far from convinced that this short-term rally signals a return to better times. “We think investors should consider purchasing Sainbury’s only if they have a high tolerance for risk and a long time horizon.”
They have given it a Medium Uncertainty Rating, primarily because of the increased competition in the supermarket sector, potentially driving down costs and obliterating margins.
Munro says he is considering selling, particularly now the dividend has been reduced from around 5% to around 3%.
In contrast he has made significant gains from investing in multiplex cinema chain, Cineworld (CINE). Again this has been a long-term holding - he’s had it since around 2010.
“I didn’t know much about the company at the time, but it fitted in with theme of ‘affordable luxury’ that I was focusing on. It has done very well since. The dividend has grown and it’s up by around 150% over the period I’ve held it.”
He also holds some unit trusts – mainly run by Fidelity or Henderson – but most of these are long-standing holdings, from when his main investment focus was simply using his ISA allowance.
“I’m happy to keep these invested; but for delivering an income I’m more interested in buying shares and investment trusts, where dealing and management costs are lower," he said.
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