PENSION savers who plan to keep their nest egg invested and draw an income from it in retirement — instead of buying an annuity — will need to think carefully about how to build a diversified portfolio.
As the FTSE 100 index breaks through the 7,000 barrier for the first time,we ask a professional for tips on how readers could invest a £50,000 pension pot today, without paying for expert advice.
This week, James Maltin, investment director at the wealth manager Rathbones, suggests that retirees could draw on the capital in their pension as well as using any income generated, such as dividends. But to do this, he warns, they will need to ensure that their portfolio grows — so they do not run out of funds before dying.
Maltin, 39, has worked for Rathbones for a decade. He previously worked at HSBC managing investments for pension funds and charities. In July he will cycle the 2,200-mile Tour de France route to raise money for Cure Leukaemia (justgiving.com/james-maltin).
He believes a “lot of nonsense is spoken in the financial world, and a great deal of drivel concerns income. The segregation of capital and income has led to confusion and a blurring of objectives. So it is time to revisit the basics.
“In retirement, you may need to draw on some of the capital in your savings as the income may not be enough. To ensure this is possible, and you don’t run out funds, focus on three key aspects of investing: how the portfolio is growing (capital growth), income generation and costs.
“If I were to allocate £50,000 of my savings for this purpose, it would be in three investment trusts focusing on UK and US shares. One would concentrate on income, one on growth and the other a mix of the two. The annual income my portfolio would generate would probably be a little less than 2%, or £1,000, but with the potential for growth. But the key total return figure — the income and growth combined — should be greater than if you put all the money into income-paying funds.”
City of London
Up 10.1% over a year; historic yield, 3.8%; ticker, CTY
This is my income-generating investment. Launched in 1891, it is one of the world’s longest- established investment firms. Its objective is to provide long-term growth in income and capital, and it has certainly achieved this over time. Without fail, it has increased its dividend in each of the past 48 years.
Investing in a portfolio of the UK’s biggest dividend payers, its three biggest holdings are HSBC, Royal Dutch Shell and British American Tobacco. The annual charge is also low at 0.35%.
I would invest about £15,000 of my £50,000 here.
Gabelli Value Plus
Up 1.8% since launch; yield, 2%; ticker, GVP
Marc Gabelli at Gamco Investors, one of America’s best-known fund managers, is an excellent example of someone who seeks out undervalued companies and I would invest about £20,000 in his trust. The fund launched last month, meaning this is the first time UK investors have been able to benefit from Gabelli’s expertise.
Gamco Investors was started in 1977 in America by Gabelli’s father, Mario. Since then, its investment style has delivered returns of about 16.8% a year and lost money in only four of those 38 years — a remarkable achievement.
The portfolio is largely in cash, having been launched only recently, but the fund will be invested in 40 to 60 companies on the US stock market. Don’t let the fact that the American market is trading near to its all-time high put you off; Gabelli believes there are still significant opportunities. The annual charge is 1%.
Up 21.6% since launch; yield, 0%; ticker, 0QXZ
This trust focuses on generating growth rather than income, so is ideally combined with the other two trusts.
This is also a relatively new trust for UK investors, having only launched in October last year. But again the manager behind it, Bill Ackman, has a great track record.
He has generated a total return of almost 700% since 2004 with the American version of the trust. Last year alone it was up by about 40%.
While history does not repeat itself, it does sometimes rhyme, to paraphrase Mark Twain. So while we cannot say that this investment will serve its shareholders as well as its parent company has done in the past, we should take some comfort from its track record.
I would invest my remaining funds here. The charges are relatively high at 1.5% a year plus a performance fee, but I believe this is justified.