Adrian Faulkner has been investing for decades and seen a number of stock market crashes along the way – but this year’s one prompted him to reconsider his entire investment strategy.
Adrian, 59, likes to invest for income, choosing funds and stocks that will pay reliable dividends while also growing his money. The raft of businesses cutting their pay outs this year has made him question just how reliable a strategy this is. With big blue-chips cancelling their dividends, Adrian has dumped his ETF investments.
“Usually, in a sell-off, dividends are less volatile than share prices. In the financial crisis, shares fell around 50% but dividends only dropped by 20%,” he says. “This time round, the reverse seems to be happening. Dividends are falling at a faster rate than share prices.”
Investing for Income
Adrian retired at 51 from a career in the pharmaceutical industry thanks to a generous final salary pension scheme and a long-standing investment portfolio. For the first few years of retirement, he was able to live off the dividends paid by his investments and so managed to put off making withdrawals from his pension until age 55. He adds: “Currently my pension is supplemented by these dividends. I have always believed in spending less than I earn and investing the difference.”
Adrian, who lives in Wakefield with his wife, first started investing in the 1980s, when Personal Equity Plans (PEPs) were first introduced. These were subsequently replaced by Isas in 1999 and Adrian has continued to make the most of these tax-free savings plans. He now has a self-invested personal pension (Sipp) with Hargreaves Lansdown as well as an number of Isas, including ones with AJ Bell, Halifax Sharedealing and Interactive Investor.
Over the years Adrian has invested in a whole range of different funds, including unit trusts, investment trusts, ETFS and individual shares. “I eventually settled on a portfolio that was predominantly made-up of index trackers and ETFs”, he says. “But the coronavirus pandemic has made me re-evaluate things, and I have now significantly changed my approach.”
Previously Adrian held a number of Vanguard ETFs, including its FTSE 100 ETF (VUKE) and FTSE 250 ETF (VMID). But the recent dividend payout from these low-cost tracker funds was 75% lower than he received a year ago. Now he has offloaded these funs and is looking to reinvest the money in investment trusts.
All Change Please
Investment trusts are able to hold in reserve a proportion of their gains and this cash can be used to support dividend payments in difficult years. As a result, they tend to be reliable dividend payers; indeed a number of trusts have been dubbed so-called dividend heroes as they have grown their dividends for 10, 20 or even 50 years in a row.
Adrian has 30% of his portfolio in UK equities through holdings such as City of London (CTY) and Dunedin Income Growth (DIG), and almost a quarter in global equities through the likes of Scottish American (SAIN) and Scottish Mortgage (SMT). He also has money in Asia Pacific trusts such as Henderson Far East (HFEL) and Schroder Oriental Income (SOI).
The rest of his portfolio is split between high yield bonds, property and commodities, with investments in New City Merchants High Yield (CMHY), Standard Life Investments Property (SLI) and BlackRock World Mining Trust (BRWM). Each of these sectors account for around 10% of his overall portfolio.
Many of these are highly rated trusts. Scottish American, for example has a Bronze Morningstar Analyst rating and Scottish Mortgage, has a Silver Analyst rating.
Scottish American is run by Baillie Gifford’s Toby Ross and James Dow. Morningstar analysts rate the company’s approach to managing portfolios “based upon fundamentals regardless of benchmark constitution”. Indeed, Baillie Gifford is rated highly on the “parent” criteria because of its “long-term investment-led approach, low turnover of key staff, and alignment of interests with investors through the partnership structure.” Another positive is that fees on the trust are modest. Over five years it has delivered total annualised returns of 14.09% (based on share price rather than NAV).
Buy and Hold
Meanwhile Scottish Mortgage is another stalwart in the Baillie Gifford stable. It has been a stellar performer in recent years, delivering total annualised returns of 28.50% over the past five years (again based on share price) – more than twice its benchmark.
While the trust has delivered good returns in recent years, Morningstar analysts have recently downgraded it from a Gold to Silver rating. The trust invests in high-growth companies that are often disruptors in their sector or region and can, therefore, be volatile, particularly because of its exposure to unlisted companies.
Unlisted companies have caused problems with other funds, for example with Woodford Investment Management. However, Morningstar analyst Robert Starkey points out that closed end structures might be better suited for such illiquid investments and adds that the Baillie Gifford team has assembled a “robust valuation and governance framework around [its] unlisted investments, which gives comfort”.
Adrian considers himself a long-term “buy and hold” investor so isn’t as concerned about this potential volatility. He says: “My current strategy is to invest £500 a month into Fidelity Index World and then reinvest a proportion of dividends monthly into any of the above trusts that have dipped below these percentages.
He adds: “I have always believed that equities are for the long-term and I always buy when the market drops. I have faith that the stock market always recovers – that advances can be permanent but declines are temporary.”
