Sometimes, as a personal finance editor, it is difficult to tell readers what to do with their hard-earned savings in response to events in the wider economy or financial markets.
Stick or twist? Hide under the bedsheets, or take advice from a calm, kindly independent financial adviser?
It is especially difficult when these same loveable people are dependent upon the income from their savings and investments to give them the financially secure retirement they so richly deserve.
Since 2008, when the financial world went into virtual meltdown (a time wonderfully captured in recently released film The Big Short – a must-see for all with a vested interest in the financial services industry), it has been practically impossible to advise those who are absolutely averse to investment risk. For these people, cash rules – always and forever.
Yes, you can tell savers to ensure their cash deposits always fall within the cover afforded by the Financial Services Compensation Scheme. And you can remind them that because of Europe’s ridiculous string of meddling directives, the cover for deposits has just been reduced by £10,000 to £75,000 (thank you Europe).
In the case of some institutions, it means the £75,000 cover is spread across a number of savings brands – so savings with Halifax, Bank of Scotland, Birmingham Midshires, and some AA and Saga accounts all count as one in the eyes of the FSCS. How the regulator allowed this to happen beggars belief, but I do not wish to digress.
For the past eight years, ‘shop around’ has been my mantra for risk-averse savers. Chase best rates and avoid savings rate cuts – savers in 93 separate savings accounts saw their rates shaved in December, according to the latest data from financial product scrutineer Moneyfacts – an appalling state of affairs.
“For the past eight years, ‘shop around’ has been my mantra for risk-averse savers” Jeff PrestridgeAnd of course, fill your boots when treats such as National Savings’ 65+ Guaranteed Growth Bonds come along. Sadly, with a general election more than four years away, there is no chance of further pre-election sweeties from the Government’s savings bank for the foreseeable future. Maybe in 2019.
With Bank of England governor Mark Carney now signalling that interest rates will probably not rise this year as a result of a deteriorating world economy (and a fragile UK economy), savers can expect little but the most meagre of returns from their hard-earned cash deposits. Or as one newspaper chose to explain it: “Another year of cheap mortgages. Great news for homeowners but bad news for savers.” Absolutely frustrating.
Equity income has proven an attractive alternative for those prepared to expose their long-term savings to the vagaries of the stock market. It has proved a shrewd strategy since 2008 as investors have enjoyed a sustained period of dividend and stock market growth.
Yet the outlook is now not so pretty. Falling commodity prices, geopolitical turmoil in the Middle East and a slowdown in China’s economic growth have ravaged stock markets. Dividends are also being cut. Equity income is no longer as sexy an alternative as it was.
With dividends under pressure, it is heartening to note that more financial advisers are waking up to the income protection offered under the umbrella of an investment trust.
I have long been an advocate of investment trusts that strive to generate a combination of income and capital growth for investors. Unlike their unit trust or Oeic counterparts, their quest for income growth is assisted by their ability to put income into reserves in the good years to draw upon in the difficult years when the dividend income from underlying investments is under pressure.
This ability to smooth income payments should not be under-estimated. According to the Association of Investment Companies (AIC), there are 36 investment trusts that have grown their dividend payments every year for at least the past decade. Indeed, Bankers, a global trust managed by Henderson, has just confirmed its 49th year of consecutive dividend increases. Hugely impressive. Only City of London, also managed by Henderson, has a comparable income record.
At the end of last year, I offered readers of The Mail on Sunday a list of these income-friendly investment trusts (it contains lesser-known names such as Brunner, Merchants, Temple Bar and Witan). My email account went into subsequent meltdown (a bit like markets), proving that there is a huge appetite out there for equity income, even when markets are as frothy as they are. Indeed, I am still getting requests for the list despite a further deterioration in world stock markets.
The AIC says that in the first three quarters of last year, purchases of investment trusts on platforms by advisers and wealth managers (the likes of Transact, Alliance Trust Savings and Ascentric) totalled £549m, 55 per cent higher than for the first nine months of 2014.
Interestingly, the most popular trust sectors were all those with an income bent – global and UK equity income, as well as less conventional generators of income such as direct property and infrastructure.
According to Tim Mitchell, head of investment trust sales at JP Morgan Asset Management, more financial advisers are now looking at trusts as a way of providing clients with “attractive levels of dividend income”. With the AIC determined to provide more training for advisers who want to get to grips with investment trusts, I am sure these vehicles will play an increasing role in the construction of income-friendly investment portfolios for clients.
As you well know, income – even better, a growing income – is the holy grail for many investors. Income-oriented investment trusts can help you deliver it.
Jeff Prestridge is personal finance editor of the Mail on Sunday
