Assuming investments are an end rather than a means.
Investing is not a sport. It’s not something to do for its own sake. It’s something to do to help fulfil your financial purpose.
For that reason — and not because of anything the financial media or investment industry says — investing is critically important. Solid investment performance means you can fulfill your objectives more fully, whatever they are. That’s just true.
So, always think about investing in the context of your own purpose. You’re not investing to compete or compare. You’re investing to help accomplish what you want to.
Think about what this means for investment risk and return . Ask yourself, “How much risk am I willing to take to dream as big as I want to dream?” Maybe you’ll discover you can fulfil your dreams while taking less risk than you are currently. In that case, it’s our responsibility as advisers to help you do that. Or maybe you’ll find you want to take a little more risk to dream a little bigger. That, too, informs our actions as advisers.
Investing isn’t about comparing a line on a piece of paper with another line on the paper; that would be an end in itself. Rather, investing is a means to achieve something far more personal and real.
Stock markets never move in a straight line. But over the long term, investing in FTSE 100 and FTSE 250 shares has proved time and again to be an effective way to build wealth.
Averaged out, the FTSE 100 and FTSE 250 indexes have delivered an average annual return of 9.3% since the early 1990s. Based on this figure, someone who invested £400 a month for the last 30 years could have made a brilliant £779,708 to retire on.
I’m confident these long-term records will last. But which shares would I buy to target a nest egg for my retirement?
Market growth
Defence shares like BAE Systems (LSE:BA.) could provide significant returns as the world embarks on what looks like a new cold war.
The firm has had significant share price gains since early 2022. And I believe the bull run has much further to run following Russia’s invasion of Ukraine.
Countries across the West are ramping up military spending, in what some describe as the most dangerous decade since World War II. Fears over Russian and Chinese expansionism are fuelling growth in defence budgets. Lasting concerns over the Middle East and terrorist threats are also supporting arms demand.
In the UK, both the Conservatives and Labour have pledged to lift defence spending as a proportion of GDP, to 2.5%. Spending is also steadily increasing in the US, the world’s biggest military power.
Sales soar
As a top-tier supplier to both countries, BAE Systems is already reporting a significant uplift in demand. It enjoyed £600m worth of new orders in 2023, which in turn pushed its order backlog to a record £69.8bn.
And the company plays a critical role in some of the world’s biggest defence programmes. As a major submarine builder, for instance, its technology will provide a vital role in AUKUS security pact between the US, UK, and Australia. The total cost of the programme is estimated at $268bn-$368bn up until 2050.
For the near term, BAE has predicted sales growth of 10% to 12% this year, up from 9% last year. Underlying earnings before interest and tax (EBIT) are therefore tipped to increase between 11% and 13%.
On the downside, I am concerned about the growing threat of supply chain issues for defence companies like this. This week Airbus issued a profit warning on account of “persistent” problems sourcing parts. Enginebuilder Rolls-Royce has also cautioned of “continued industry-wide supply chain challenges” in recent weeks.
Reassuringly expensive
Any problems here could have significant consequences for BAE Systems’ share price. Its 140%-plus rise since the start of 2022 leaves it trading on a high price-to-earnings (P/E) ratio of 22.2 times.
This is well above the company’s five-year average of 15 times. And it means investors could charge for the exits if any bad news comes down the line.
Still, I think BAE shares are worth this premium valuation. A strong track record of execution, expertise across many sectors, and robust market outlook means its share price could continue rocketing.
This is a non-independent marketing communication commissioned by Schroder Investment Management. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Over the six months to 31/03/2024, Schroder European Real Estate (SERE) produced an NAV total return of -1.3%. The main contributors to this were a 4.6cps reduction in property valuations, and 3.2cps of rental income. After paying dividends of c. 3.0cps, the closing NAV per share was 123.6cps, and overall NAV was €165.3m.
The trust paid two quarterly dividends of 1.48cps, for a total of 2.96cps. Dividends were 109% covered by EPRA earnings. SERE currently yields c. 9% (as at 20/06/2024). SERE’s EPRA earnings increased 3% to €4.3 million compared to the previous six months, primarily due to rental growth offsetting the impact of higher interest costs.
The decline in capital values was driven by a continuation of yield expansion for property valuations. Over 12 months the portfolio produced a total return of 0.6%, and 3.1% p.a. over three years and 6.2% p.a. over five years.
The strongest returns over the period came from SERE’s industrials assets, c. 30% of the portfolio, with the Venray asset producing a total return of +4.9%, Nantes +4.1% and Rennes +3.6%. Conversely the car showroom in Cannes produced a total return of -7.0%, while other German and Dutch office and industrial assets saw small negative total returns as capital value declines weighed slightly more heavily than the income returns generated.
The portfolio void rate was 4% of estimated rental value and the portfolio weighted average lease length is 3.7 years. 80% of rental income is subject to annual indexation with the remaining 20% linked to a hurdle (typically 10%).
SERE has net gearing of c. 24% LTV and no further debt expiries until June 2026 and a low average interest cost of 3.2%. There is c. €26m of cash which gives management the flexibility to allocate capital on earnings-enhancing initiatives on the existing portfolio or to make further acquisitions.
Over the period, SERE’s discount widened slightly from c. 38% to c. 40%, and while its direct peer group average only consists of SERE and one other trust, for reference the Morningstar UK Commercial Property peer group average discount is c. 26%T.
Sir Julian Berney Bt., chair, said: “Despite macroeconomic headwinds, the resilience of the portfolio together, with local sector specialist teams, has delivered rental growth, largely offsetting the impact of higher interest rates. Management has successfully completed the recent re-financings which, combined with significant cash reserves, has further strengthened the balance sheet. The company provides a compelling and differentiated investment proposition compared to our UK-listed peers. We have the flexibility to grow earnings through exposure to strongly performing assets in higher growth European cities, as well as executing on value-enhancing asset management opportunities.”
Kepler View
Post results the ECB cut interest rates for the first time in five years, so it’s fair to ask how Schroder European Real Estate’s (SERE) yield stacks up against relevant bond yields. SERE’s dividend yield is hovering around its lifetime high in absolute terms, c. 8%, and the spread over 10-year German government bonds, yielding c. 2.5%, is therefore c. 5.5 percentage points, above the five-year average. This covers the pandemic period and so arguably the average is skewed higher than it might otherwise be. Either way, SERE’s dividend yield, which is fully covered, is in the territory where, in our view, a discount recovery looks plausible with further rate cuts.
Underlying SERE’s dividend yield of c. 8.0%, the net initial yield on the portfolio is now 6.8%, and so again, a significant spread, 4.3 percentage points, over the same government bond yield. SERE has continued to see rental growth through the higher interest rate cycle, with almost all leases linked to inflation in some form, including 80% on annual inflation indexation, and in the last six months SERE saw EPRA earnings grow by 4%. During the period when inflation was running much higher, and one might reasonably have asked how strong indexation really was, the team continued to put through inflation-linked rental increases, demonstrating the strength of the portfolio.
In our view the final piece in the puzzle for investors will be a stabilisation of capital values. SERE saw a 3% drop in the portfolio valuation over the six months, with the positive total return made up by the income return. With the market currently pricing further rate cuts this year, this point may not be too far away, which puts the spotlight firmly on SERE’s discount to net asset value of c. 40%, a level that is as wide as it has ever been aside from some brief one-day volatility during the pandemic, as the chart below illustrates. SERE’s net gearing, 24% LTV, (32% of net assets), is about average for listed REITs and there are no further re-financings until 2026. There is also enough cash for the team to consider either earnings-enhancing initiatives within the existing portfolio, or to acquire further assets, which could further enhance earnings. Thus, we think the recovery potential is strong and the macro factors that could drive that are starting to fall into place.
Caledonia Investments PLC ex-dividend payment date Chelverton UK Dividend Trust PLC ex-dividend payment date Downing Strategic Micro-Cap Investment Trust PLC ex-dividend payment date Ecofin US Renewables Infrastructure Trust PLC ex-dividend payment date F&C Investment Trust PLC ex-dividend payment date JPMorgan European Discovery Trust PLC ex-dividend payment date JPMorgan Global Emerging Income Trust PLC ex-dividend payment date Lowland Investment Co PLC ex-dividend payment date Personal Assets Trust PLC ex-dividend payment date Residential Secure Income PLC ex-dividend payment date Sirius Real Estate Ltd ex-dividend payment date TR Property Investment Trust PLC ex-dividend payment date Urban Logistics REIT PLC ex-dividend payment date Value & Indexed Property Income Trust PLC ex-dividend payment date
The number of funds trading at 52-week high discounts still in single digits, but what did new entry Diverse Income Trust announce two days after its discount set a new high for the year that will likely mean the fund won’t make it onto next week’s list?
ByFrank Buhagiar
We estimate six investment companies were trading at 12-month high discounts over the course of the week ended Friday 21 June 2024 – two less than the previous week’s eight.
Of the six funds on this week’s list, only one is a conventional equity-focused trust – Diverse Income (DIVI). The year-high discount of -10.37% was set on 18 June 2024. Chances are though the UK equity income trust won’t feature on next week’s Discount Watch List. That’s because two days later, DIVI announced it had agreed a lower fee structure with Premier Portfolio Managers. The fee cut appears to have done the trick – by close of play on Friday 21 June 2024, the discount had narrowed to -9.28%.
That means five alternatives account for the rest of the 52-week high discounters. Of these Aquila European Renewables (AERI) warrants a mention. For much of the week, the discount was hovering around the mid-20s. That all changed on 20 June 2024 when the company gave an update on itsongoing strategic review. Turns out, an offer for the company was received but not at a level that caught the eye. The Board is therefore continuing to assess all options and will look to provide a further update ahead of the upcoming continuation vote that is due to be held in September 2024. The lack of any meaningful news perhaps the reason why the discount widened to -31.55%.
Office buildings are like “melting ice cubes” for investors because of how fast they are depreciating in the current market, according to the chief executive of one of the UK’s largest listed landlords.
Andrew Jones leads LondonMetric, which will break into the FTSE 100 this week after a series of deals culminating in a £1.9bn all-share takeover of smaller rival LXi, completed this year. The company now ranks third by market capitalisation among UK real estate investment trusts (Reits).
But unlike most other listed landlords Jones said LondonMetric did not have a fixed speciality in a particular real estate sector such as offices or warehouses.
“Very few Reits over the last 15 years have pivoted their strategies,” said Jones, who founded the company as Metric Property in 2010. He partly blames the sector’s “habit of clinging to historical specialism and not wanting to evolve” for the decline of the listed real estate market in comparison to private funds. A decade ago, LondonMetric had as much as a quarter of its portfolio in offices but it has sold out of the sector since then.
Jones said that a trend for shorter office leases, stricter environmental criteria and higher tenant expectations of facilities all meant that “[office] obsolescence has sped up over the last 20 years” — particularly since the pandemic and the rise of hybrid working.
“The money required to keep [offices] fit for purpose is rising quicker than the rents,” he said.
His comments come at a difficult time for commercial property investors. Rising interest rates have driven down values across the sector but offices have also been hit by worries about demand, as companies embrace hybrid working. European office values have fallen about a third on average since their recent peak in 2022, according to consultancy Green Street.
That drop has been painful for many real estate investors, who traditionally allocated a third or more of their capital to offices. Among large listed landlords, British Land and Land Securities both have multibillion-pound portfolios in London.
Office owners and some analysts argue that widespread negativity about office investments ignores a split in the market — with a shortage of top-quality space in demand and a glut of older buildings. Jones believes it will be difficult for the sector to escape disruption by technology, in the same way that online retail devastated the value of shopping centres. “Everybody will claim they have the best, greenest office building and the most experiential shop,” he said. “The fact of the matter is we have too many offices and too many physical retail destinations.”
LondonMetric’s £6bn portfolio has some eclectic leftovers from its spate of acquisitions, including garden centres and car parks. The company said it had already reached deals to sell £140mn of LXi’s extraneous assets, and is looking to get rid of its remaining £35mn of offices.
Jones favours the roughly 45 per cent allocated to warehouse investments, alongside large holdings in what he calls “convenience retail” — typically small grocers such as Aldi, roadside convenience stores or discount retailers. The LXi takeover added a large portfolio of “entertainment” assets, including Alton Towers and Thorpe Park.
The theme parks exemplify a distinctive feature of LondonMetric’s approach, which is a preference for “triple net” leases, where the tenant pays all the upkeep costs. These leases are more common in the US, while many UK landlords prefer to retain more control of their properties to boost their value through active management.
“I think a lot of people in our industry associate activity with success,” said Jones. “Income and income compounding should be the bedrock.”
As for upcoming activity, LondonMetric will be busy selling some properties that it picked up through its takeovers, as well as assessing deals to buy smaller Reits.
How average savers can turn £180 a month into a lifelong second income
Story by John Fieldsend
A recent study put the average UK household saving at £180 a month. Putting a couple of hundred away monthly is to be applauded and this level of saving can even lay the groundwork for a lifelong second income.
More and more people are targeting this kind of income too. Some 4,000 people have reached £1m in ISAs now with around half of them hitting the figure in the last year alone.
Reaching the million-pound mark given the deposit limits on those accounts is impressive indeed, but such a large nest egg isn’t needed for a life-changing income.
Losing cash
I’ve been working towards something like this myself, and for me, financial security is what appeals most. The State Pension isn’t really enough to live on (and only 38% of under 35s expect to receive it). Plus near-double-digit inflation makes saving in cash look unattractive.
Inflation is a killer for average savers. Our society is built around low levels of inflation, it’s true. While keeping cash circulating benefits an economy, it hurts savers who see their cash lose value constantly.
Even single-digit levels of inflation can be devastating. A 5% inflation rate means prices double after just 14 years. In other words, a £3 sandwich becomes £6. Perhaps more pertinently, £1,000 of savings will have the buying power of £500.
While current inflation levels are unusually high, whichever way you slice it, all of us are seeing our cash being worth less and less. And with money losing value, I see inflation-beating investments as a no-brainer.
Let’s waste no more time then. On to the strategy. My plan essentially requires two things: a return above inflation and compound interest over decades.
What I’m doing
For inflation-beating returns over years and years, I see no better option than investing in high-quality stocks.
I invest the same way as billionaire Warren Buffett. He doesn’t buy stocks for a few days, but for a few decades. He says his “favourite holding period is forever”.
Slow and steady
By looking long term, I can enjoy the inflation-busting effect of stock market returns while avoiding the erratic ups and downs of day-to-day share price moves.
Better still, £180 a month is more than enough to dip my toe in the water. These days, fees to buy stocks are only a few pounds with modern platforms like Hargreaves Lansdown or AJ Bell that make it simple for anyone to invest.
And as for picking the stocks? Well, the Foolish musings of this very website are as good a starting point as any!
The post How average savers can turn £180 a month into a lifelong second income appeared first on The Motley Fool UK.
Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.
Hi Anthony, It would be really helpful if you could maintain a link on your site which takes readers to your current Snowball portfolio please. Many thanks RT
There is a link from the search engine, ‘current portfolio’.
I will post any changes for the portfolio but it is best if everyone carries out their own research before parting with any of the hard earned. Everyone will be at a different stage of their accumulation/de-accumulation journey, so when I bought is not really relevant. When I started the portfolio the plan was a dividend yield of 5% but as the underlying Investment Trusts fell in price the yield rose and the current plan is for a dividend re-investment at around 7% plus. GL
Income drawdown vs an annuity – or both? How to invest your pension and live off it in retirement
Do you want investment growth AND a guaranteed pension? How to combine drawdown and annuities to maximise retirement income
Income drawdown depends on investment performance, and though this is more likely to be successful the longer you are invested, the returns to your fund will be volatile from one year to the next.
There are no guarantees, but you have control over the level of income you receive and can vary it over time.
From a £75,000 fund you could expect a drawdown policy to provide an annual income from age 69 of around £6,100 which may last until 90 if investment performance is good.
An annuity does provide a guaranteed level of income until you die, but the annual figure would likely be lower at around £5,750 per annum at current rates.
£££££££££££££££
For me it’s a dividend re-investment plan every day, thru thick and thin.
There will be plenty of thin.
If investment performance is good.
Do u really want to gamble your retirement income of the vagaries of the market ?
