This article is part of Morningstar’s Guide to Income Investing. Whether you are looking grow your pension pot, or invest for retirement income, this week we have all the news, information and education you need.
Alain Fox takes an active interest in his investment portfolio, which he has constructed to ensure his income keeps pace with inflation.
I have been particularly pleased with the performance of the investment trusts
“I have a workplace pension, but unfortunately this was not index-linked, so since my retirement the value of it has fallen in real terms,” he said.
His State Pension does offer some protection against inflation but Fox said that in the early years of his retirement the annual rise was often “quite meagre and didn’t always fully reflect the rising cost of food or energy”.
In order to maintain his standard of living Fox invested his ISAs and his private pension plans alongside those of his wife, Margery in a range of funds with the aim of delivering capital appreciation and income.
“I am 80 now, so my focus is turning more towards income,” he said. “Capital appreciation in the future will be less important, though I want these investments to continue to provide an income for my wife should I die first.”
Capital Appreciation and Income
Fox, a retired solicitor, holds a diverse portfolio investing in shares, open-ended funds and investment trusts. Fox says: “I have been particularly pleased with the performance of many of the investment trusts, so they now account for the lion’s share of my portfolio.”
He particularly favours larger global trusts.
“I don’t want to be buying and selling shares and shifting assets around at my age. I am happy for the managers to make those decisions in order to grow the dividends paid,” he said.
He has a long-standing investment in Alliance Trust (ATST) which has been through a period of upheaval of late. The well-known fund manager Katherine Garrett-Cox has now stood down from the board of this giant Dundee-based trust and there will be a ‘decoupling’ between the trust and the fund management division. Measures have also been put in place to reduce costs and narrow the discount.
Morningstar fund analysts have awarded the trust a Neutral Rating due to these changes, though past performance ensures it has a four-star rating. Morningstar analysts says the changes bear ‘close watching’ but at present ‘are not cause for alarm’.
Fox says he is sticking with this investment. “It has served me well over the long term. I first invested in Alliance Trust through a PEP. Hopefully these latest changes will improve performance.”
Global Investment Trusts with Bite
He also has long-standing investment in other large global trusts, including Witan (WTAN) and Scottish Mortgage (SMT).
Witan has a five-star rating, and its managers have a Silver Rating, reflecting Morningstar’s confidence in their ability to outperform peers.
Morningstar fund analysts say Andrew Bell, the manager and chief executive officer, is serving shareholders well. “[His] strategy is clear and well executed, the fund is competitively priced, and results are solid.
“Since Bell took over [in 2010] results have improved. The board has maintained its excellent track record of paying a rising dividend each year for four decades.”
Scottish Mortgage has an even more impressive long-term track record. It too has a five-star rating from Morningstar and the veteran manager, James Anderson, has a coveted gold-star rating.
Morningstar says: “Scottish Mortgage Trust remains one of our favourites for global equity exposure. The style the managers follow epitomises long-term investing. Anderson is genuinely obsessed with the long term when looking at companies, and doesn’t get caught up in short-term trends or market noise.”
This, Fox says, perfectly reflects his own philosophy. “I want good long-term investments that I can buy and hold. Of course, I understand that there will be some volatility along the way but I don’t want to be chopping and changing holdings as one sector or region dips in and out of fashion. This is expensive and you run the risk of jumping ship just as the market bottoms out.”
Fox says he isn’t solely focused on global trusts - although there is a large cap bias to his portfolio. He also holds Edinburgh Investment Trust (EDIN) which has more of a UK focus. This also has been subject to manager changes in recent years - with Mark Barnett taking over from the star fund manager Neil Woodford
Despite this change at the top, the trust still has its five-star rating from Morningstar, and the new manager has a Bronze-medal rating, reflecting Morningstar’s confidence in his ability to maintain the trust’s performance compared to peers.
Analysts says: “We think Barnett is a highly capable manager who has proved his skill at running UK equity-income funds.
“While we have reservations over the scale of assets he now manages and the demand that puts on his time, we have sufficient conviction in his abilities to reinstate our Analyst Rating at Bronze.”
“Solid Blue Chip Shares”
Fox says also holds a smattering of direct shareholdings, including Shell (RDSB), BHP Billiton (BLT), British American Tobacco (BATS) and Unilever (ULVR).
He says: “I’ve held these through my stockbroker account for many years. They are solid blue chips that, on the whole, pay decent dividend yields.”
He adds: “I have come a cropper buying shares direct over the years. I’m old enough to have invested in Polly Peck, which obviously went belly-up and also suffered losses with Marconi and BAE Systems (BA.).
“As a long-term investor the difficulty is selling when you’re making decent gains.”
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