Despite still being in his 40s, Michael Passco is planning to retire next year. One of the main invstment goals for the 49-year-old, who works in IT, has always been to retire early and gain financial independence — and his portfolio of investment trusts and ETFs is helping him do just this.
Michael has been investing for 23 years, although he started his pension even earlier. He says: “It’s hard to recall exactly what got me started, but I remember early on being persuaded by literature from Templeton Emerging Markets (TEMIT) about why emerging markets looked attractive." To this day, his portfolio is still heavily skewed towards emerging markets and Asia.
But as his investments have grown in value over the years, Michael has switched away from unit trusts and Oeics, and opted to use investment trusts and ETFs instead.
He says: “There is some advantage in unit trusts, particularly for those starting out and looking to drip feed money into the market on a regular basis, as there is no cost to buying.”
However, he says the fees charged by many fund supermarkets can be considerably cheaper for those holding investment trusts or other direct shareholdings, once portfolios reach a certain size.
He explains: “I’ve used Hargreaves Lansdown for years and am very happy with its service. It charges a platform fee, but this is capped at a maximum of £45 a year for those with investment trusts.
“For those investing in funds there is no cap, which on a large portfolio means you could be paying hundreds if not thousands of pounds more a year. Fees are important as these can erode into the value of your investments over time.”
Because of the additional costs in buying and switching investment trust holdings, Michael doesn’t drip feed money into the market, but tends to invest larger lump sums periodically. “There might be a flat £12 fee to buy an investment trust. If you were putting in £100 a month this would soon add up, but if you can make a one-off payment of £5,000 this is a fairly negligible fee.”
Emerging Markets Bias
When it comes to his investment trusts holdings Passco says some of his best returns have come from emerging markets.
He says: “Over the long term, Fidelity China Special Situations (FCSS) has probably returned the biggest profit. I bought this trust in around 2002 after asking my partner where I should invest that year’s Isa. She suggested China.”
Over the medium term, Russia has proved to be a good market. Michael says: “I currently hold JPMorgan Russian Securities (JRS). This has an incredibly low PE ratio, but kicks out a huge dividend, and has gone up quite a lot in recent years.”
Over the shorter term, recent investments into Latin America have proved lucrative. Around a year ago Michael invested in BlackRock Latin America (BRLA), which has a strong exposure to Brazil. According to figures from Morningstar, the trust has delivered a 39.18% return over the past 12 months.
Michael says: “This has done extremely well, although I appreciate these are only one-year figures — so there’s a bit of luck involved as well as judgement.
“However, I invested for sound reasons. I was looking to diversify my portfolio and realised this sector as a whole was looking quite unloved. Discounts on many trusts in this region had widened so this seemed like a good opportunity to invest.”
While Michael likes to invest in trusts when they are trading at discounts, he says it’s important to look at longer term trends too, rather than just the absolute level. “If discounts are at the wider end of the scale, then there seems a good chance they might narrow again in future,” he says. “Similarly if discounts are low when compared to historical levels I would be less keen to invest. If I want to gain access to this particular sector I might look at ETFs instead.”
Michael likes that ETFs can provide a low cost alternative to many actively managed funds, and unlike investment trusts don’t incur a stamp duty charge. But he points out that while they are extremely cost effective in the developed US, UK and European markets, charges tend to be higher elsewhere.
“For example, if I’m looking to invest in Russia or China then the charges are probably closer to 0.75%, which doesn’t look that dissimilar to the charges on an actively managed investment trust,” he explains.
Wealth Preservation
Still, Michael is conscious that a successful investment isn't always the one that has delivered the greatest return over a set period. For example, he invests in Capital Gearing Trust (CGT): "In this 10-year bull market it has been a laggard, but it's done exactly what it says on the tin: low draw-down, steady growth with low volatility.”
The trust, which is managed by Peter Spiller and Alastair Laing, aims to preserve the wealth of shareholder and achieve absolute total returns over the medium to longer-term. It has a four star rating from Morningstar, reflecting the fact that it has performed well against peers in its sector.
Michael says: “One of the most important lessons I’ve learned, though, is to keeping investing. Whether I invest in Russia or China, or pick Trust A over Trust B is secondary really."
One decision that has made a particular difference to him was to keep investing through market downturns - whether it was the financial crash of 2008 or the dotcom crash in 2000.
“At one point in 2008 my pension was worth less than the total value of my contributions, but I kept investing and putting more money in," says Michael. “In some ways I am fortunate, in that I have a salary that pays enough for me to save a decent amount each month. But I think the choice to keep investing through more difficult times that has really helped boost overall returns.”
Looking ahead, Michael hopes his investment portfolio will enable him to enjoy a good standard of living for another 40-plus years. He plans to continue being an active investor, reinvesting income and moving assets as and when underlying conditions change.
“At the moment Brexit does worry me. I think political risk can often be underestimated, whether its Trump and trade wars or problems with Russia and the Crimea.
“With Brexit I think I will either end up substantially richer or substantially poorer, depending on how it pans out. I don’t want that coin toss, but can’t avoid it. However I am sticking with my investments for now.”
