The AIC has collated adviser views on which investment companies work well in a pension portfolio to generate income.
It’s coming up to a year since the pension reforms were put in place and, with interest rates at a record low, income is still proving to be a key area of interest for investors. The Association of Investment Companies (AIC) has collated views from financial advisers on which investment companies work well in a pension portfolio to generate income throughout the year.
Tim Cockerill, Investment Director at Rowan Dartington recommends: Perpetual Income & Growth, Bankers and International Public Partnerships.
Gavin Haynes, Managing Director of Whitechurch Securities recommends: City of London Investment Trust and Troy Income & Growth.
Neil Mumford, Chartered Financial Planner at Milestone Wealth Management recommends: Bankers, Witan, Murray International, Perpetual Income & Growth, City of London Investment Trust and Troy Income & Growth.
Financial adviser comments
Tim Cockerill, Investment Director at Rowan Dartington said: “Income in retirement is one of the biggest concerns and challenges for everyone. The ideal is an income which is reliable, can grow and is at a level which enables living standards to be maintained. Unfortunately the amount of income that investors can generate is probably the biggest challenge and this is predominantly determined by how large your pension pot is. That aside it’s important to diversify your income stream – fortunately the investment company universe offers income from a range of sources.
“Equity income provides investors with a level of income ranging from 2%-5% and the potential that this income will grow as the underlying dividends grow. As the underlying source of the income is very diverse (because of the number of companies held) the risk to the dividend being cut is considerably reduced – although still possible. Furthermore, additional protection for the dividend comes in the form of ‘reserves’; income which has been accumulated for later distribution, usually at times when there are dividend cuts. This enables the investment company’s dividend to be maintained during a shortfall.
“Perpetual Income & Growth – managed by Mark Barnett, yields 3.2%, is trading at NAV, has reserves of approximately 1x and has a long track record of delivering solid returns. Bankers, which is managed by Alex Crooke of Henderson is yielding 2.8%, not too high an income but the dividend has not been cut in 49 years and is 2x covered. This trust taps into the experience of six managers using their best ideas to build the portfolio.
“Infrastructure investment companies are an asset class that has been growing in recent years offering a high yield (4%-7%) and this is a different source of income. The underlying projects have contracts which secure their income stream for many years, and it’s usually paid on the basis of the project being available, rather than the extent of its use. Volatility is low and correlation to other asset classes low too. International Public Partnerships is invested in over 100 such projects, ranging from courts to energy transmission cables – it is yielding 4.6% and is on a premium of 9%. Whilst performance won’t be ‘equity like’, modest returns are probable over the long-term and this is what INPP has delivered.
“Combining investments from these asset classes will provide investors with a robust income, likely growth of income over time and the potential for capital appreciation.”
Gavin Haynes, Managing Director of Whitechurch Securities said: “For investors looking to generate income within a pension I believe that dividend producing investment trusts make an excellent core holding within a portfolio. Two trusts that I would recommend are City of London Investment Trust and Troy Income & Growth.
“I believe that City of London Investment Trust is an excellent core holding for investing in UK dividend stocks. This is a mainstream UK income and growth trust managed by Job Curtis. The trust has an exceptional record of increasing dividend growth (every year since 1967) as well as beating the FTSE All Share index over the short and long-term. Based on the conservative investment philosophy and strong manager track record I believe this to be an excellent UK equity income trust for investing in a pension.
“Troy Income & Growth managers, Francis Brooke and Hugo Ure, take a relatively cautious approach to UK equity income investing which is ideal for pension investors. The fund is positioned for the long-term, and they favour robust companies with steady and increasing dividend yields. The trust has an excellent track record for growing dividends and its long-term risk adjusted returns are also in keeping with its cautious mantra. The current yield on the trust is 3.4%.”
Neil Mumford, Chartered Financial Planner at Milestone Wealth Management said: “We feel that the best way in which to produce income for clients is to blend a portfolio of multi-asset unit trusts with investment trusts, as this allows us to control the risk whilst providing for an attractive level of income which should over time increase. The addition of investment trusts within an income portfolio is a must and by using internationally based trusts for diversification such as Bankers and Witan, which may have lower yields of about 2.5%, but their dividends have increased year on year above inflation, making them extremely attractive. Murray International, despite its recent poor performance, is currently yielding 6% and therefore is paying patient investors who are willing to accept volatility on their capital. These mixed UK Stalwarts such as Perpetual Income & Growth, City of London and Troy Income & Growth form a powerful foundation of a growing income base for clients to consider.”
Annabel Brodie-Smith, Communications Director at the AIC concluded: “For those requiring an income in retirement investment companies have a number of income benefits that make them hugely valuable. They have the ability to retain income to pay out when times are tough and are particularly suitable for income generating assets like infrastructure and property. For those that can accept the risks, investment companies bring their numerous income advantages to a long-term income portfolio in retirement.”
|The AIC has published this research as part of its series ‘Freedom in Pensions’ looking at how investment companies can be used to build a long-term pension portfolio, as well as their unique advantages in delivering a higher or growing income in retirement.|