James Carthew

 

James Carthew of Marten and Co says that the diversification found in well managed investment companies can deliver the right balance of income and growth.

 

 

We live, as in the words of the Chinese curse, in interesting times.

 

As any saver knows, interest rates are so absurdly low that some people are questioning whether cash ISAs are worth the bother. Low interest rates are holding back returns on annuities as well, so much so that the majority of retirees are expected to embrace their new freedom to do something more creative with their pension pot. But what are the alternatives?

We think savers and retirees should consider the attractions of investment companies.

First a plea. Whatever you are thinking of doing with your money, don’t gamble it on one or a handful of superficially attractive investments. Whether we are talking about your hard earned savings or the pension you have spent the best years of your life accumulating, you cannot afford to risk losing all or most of your money if that cast iron bet turns to rust. The key to avoiding this is diversification – spreading your eggs across a number of baskets.

 

Investment Companies

 

If you haven’t got an enormous pool of money to play with, then buying a global investment company will achieve this for you. Funds like Witan, Scottish Mortgage, Foreign & Colonial and RIT Capital are global growth trusts that invest in many different companies all around the world. They aren’t the highest dividend payers, they pay dividends of between 1% and 2% of their share price at the moment, but they have made you between 9% and over 16% a year on average for the last ten years.

There are global income funds too though.

 

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Funds like Murray International, Scottish American and BlackRock Income Strategies have yields over 4% and they have returned between 7% and over 12% a year over the last ten years. You might have noticed that these returns are lower than those of the growth funds. It is often true that you have to give up some capital growth to get a higher income.

Funds like these, which invest mostly in shares of listed companies, can be attractive because the income they generate (from the dividends that the companies pay them) can grow in-line with or ahead of inflation.

‘Funds like these, which invest mostly in shares of listed companies, can be attractive because the income they generate can grow in-line with or ahead of inflation’

The Association of Investment Companies has published a list of 16 investment trusts that have grown their dividend every year for the last 20 years and a further 18 that have a record of at least ten years of dividend growth. These are led by City of London, a fund investing in UK companies, which has grown its dividend every year for the last 50 years and still sits on a yield of 4.3% today.

 

Regions

 

If you have enough money to spread your investment across a number of funds, then you can afford to be a bit more inventive. Over the past few years a number of regional funds have been launched that try to generate income from investments in places like Asia, North America and Latin America.

There are funds that specialise in property, infrastructure and renewable energy – many of which yield between 4% and 7%. There are funds that lease out planes, ships and all manner of equipment that yield more than 7%. Finally, there is also now a sizeable selection of funds that invest in various forms of debt these often yield 5% or 6% but some yield as much as 11%.

‘Funds like these, which invest mostly in shares of listed companies, can be attractive because the income they generate can grow in-line with or ahead of inflation’

None of the investment companies that specialise in debt has a sizeable allocation to what is termed investment grade debt (debt issued by companies that the ratings agencies think are most likely to pay it back). Some of these funds bump up their yields by offering to take the first loss in the case that the borrower struggles to repay all or part of its debt. Some of them borrow money at low rates and lend at higher rates.

Recently funds have been launched that specialise in so-called peer to peer loans. Some of these funds are quite complicated and here a simple maxim applies, if you aren’t 100% sure you understand what you are investing in and the risks involved, stay well away.

 

If you are trying to put together a portfolio that can generate an income for your retirement or build up a nest egg with your ISA money, you can use the QuotedData (www.quoteddata.com) website to compare funds, rank dividend yields and get useful information on how they work too.

 

One thing to remember, investment trusts / companies have a great advantage when it comes to consistency of dividends, they can dip into their reserves to maintain their dividends in bad years. This is not an option that’s available to open-ended funds but it should help you sleep easier at night.

 

 

 

 

 

 





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