DIY Investor Diary: why investment trusts form bedrock of my portfolio

In the latest article in our series, a DIY investor explains his approach to paying himself an income at retirement, shares his top tips for investment success, and acknowledges a ‘weakness’ in knowing when to sell.

12th September 2023

by Kyle Caldwell from interactive investor

In our new DIY Investor Diary series, we speak to interactive investor customers to find out how they invest in funds and investment trusts, what their goals and objectives are, current issues and concerns regarding their portfolio, and what they’ve learned along the way.

For income-seeking investors who want a regular cash flow, the investment trust structure is arguably more attractive than open-ended funds. This is because investment trusts do not have to distribute all the income generated by their assets every year, as up to 15% a year can be retained in so-called revenue reserves. When there’s an income shortfall, those reserves can be utilised to keep dividends flowing.

In contrast, funds are required to pay out all the income they receive each year from the underlying investments. Therefore, when there’s an income drought, funds have no option but to cut their dividends, as was the case during Covid-19 and the global financial crisis. Most investment trusts, however, retained or increased their dividends by dipping into their reserves.

Therefore, if consistency of income is of high importance, investment trusts may be better than funds, which are structured as unit trusts or OEICs.

The DIY investor who features in this article is 79 and taking advantage of the investment trust structure to supplement his retirement. He takes around £10,000 a year from his investments – held in a SIPP and an ISA – with investment trusts forming the bedrock of his portfolio.

He has a number of high-yielding trusts including 

Henderson Far East Income  

Henderson High Income Ord 

However, he also has lower-yielding trusts that strike more of a balance between delivering both capital growth and income. Among the holdings are 

F&C Investment Trust Ord 

Caledonia Investments Ord  

Witan .

He says: “I am using my investments to pay myself an income, taking £10,000 a year. This mainly comes from dividends paid, but I am also prepared to sell down or sell out of a holding.”

As well as investment trusts being consistent income payers, with nine trusts in the 50-year plus dividend club, another feature of investment trusts that is typically beneficial is their ability to gear (or borrow) to invest.

While this can go the other way, by causing greater losses in falling markets, over time stock markets generally rise. As a result, long-term investors in a geared investment trust can see their returns turbocharged.

“The ability to gear is one of the main reasons why I like investment trusts over funds. I have also benefited from some very nice special dividends over the years, particularly from Caledonia. Elsewhere, Henderson High Income has done exceptionally well for me, while I like Witan because it always just chugs along.”  

This investor also has some individual stocks, favouring reliable dividend-payers, including 

Imperial Brands 

British American Tobacco 

 Legal & General Group 

Phoenix Group Holdings 

However, due to other commitments, having taken up a new position as president of a sports club, our DIY investor is increasingly preferring outsourcing the stock picking to a fund manager.

“As I have less time to focus on my investments, I have been adjusting the portfolio to become more self-managing.”

In hindsight, he says, “a lesson I have learned over the years is that I should have just stayed with investment trusts over individual shares”.

He adds: “After all, the fund managers have better insight into sectors and the stock market in general than I do.”

However, buying an investment trust at the wrong time can lead to an unsatisfactory outcome. One example cited, which he has now sold, is Smithson Investment Trust Ord 

The trust, managed by Simon Barnard, applies the investment philosophy of Terry Smith’s Fundsmith Equity fund, but instead focuses on global smaller companies deemed too small for the original Fundsmith.

While Smithson’s performance in 2023 has picked up, 2022 was a year to forget as its share price dropped 35.2% and the net asset value (NAV) of its companies fell 28.1%. For comparison, the MSCI World Small and Mid Cap Index declined by 8.7%.

Knowing when to call it a day on an investment is viewed by many as harder than hitting the buy button. Some of this stems from behavioural finance biases, including inertia.

Our DIY investor says that the difficulty of knowing when, or whether, to sell “has been my biggest weakness”.

His top tips for other DIY investors is to think long term, be patient, and watch out for fund charges. On the latter point, he says that investors need to always bear in mind that however a fund performs “the fund management firm still gets its fee”. Therefore, it is important to monitor fund performance and assess whether you are getting value for money.

How to decide whether to sell a fund

Among the questions fund managers ask themselves when deciding whether to hit the sell button is whether, over the long term, the drivers for the company are still in place, and whether the valuation has become too rich.

For funds and investment trusts, the same logic applies. First, step back and try to understand why the fund is underperforming.

If it is because the region it invests in, or the investment style, is out of favour, then a period of subdued short-term performance can perhaps be forgiven.

You could view it as a good time to buy more if you think prospects for the region the fund invests in, or the types of shares it holds, will likely improve over time.

However, if it has been a favourable market backdrop for the fund and it has still notably underperformed peers, then investors need to weigh up whether to hold on in the hope that performance improves, or hit the sell button. Ultimately, it is a judgement call that only you can make.

BRLA Black Latin America leaves the watch

As the price rose by 28% this year the yield has fallen to 5.8%.

This dull-and-reliable investment offers stability amid stomach-churning volatility
This company’s stable share price and attractive cash returns make it favourite for top fund managers

Algy Hall

19 May 2025

Questor is The Telegraph’s stock-picking column, helping you decode the markets and offering insights on where to invest

We all crave fun and excitement. In the stock market, that means dull-and-reliable investments often get overlooked. But during periods of stomach-churning volatility, as we have experienced during 2025 so far, the virtues of the dull stuff suddenly become much clearer.

Dull-and-reliable investments tend to make themselves known through two key attributes. One is relatively stable share prices. The other is attractive cash returns; what could be duller after all than a business with nothing more exciting to do with its cash than to dutifully hand it back to its owners.

US employee benefits specialist Unum displays both these characteristics. This may help explain why top investors have been increasing their bets on its shares.

Nine of the world’s best fund managers, all among the top-performing 3pc of over 10,000 equity pros monitored by financial publisher Citywire, hold Unum’s shares. And increased smart money interest has this month seen the company propelled to be among the 74 constituents that make up Citywire’s Global Elite Companies Index, which represents the very best ideas from around 6,000 stocks held across the portfolios of the world’s best money managers.

Unum is an insurance company that specialises in selling a range of work-related financial protection and wellbeing services through employers and also directly to individuals. Its portfolio includes disability, life, accident, critical illness, cancer, dental and vision cover.

Offering such a broad range of policies makes it attractive as a one-stop-shop to clients, especially as employers increasingly look to compete for staff based on the overall benefits they offer as opposed to just salary.

Unum is more profitable than most of its peers. Its leadership in disability insurance is a particular advantage that underpins its competitive position. The complexities of disability insurance limits competition and differentiates Unum to customers. This is reflected a return on equity of over 20pc reported by Unum in 2024. Meanwhile, book value per share has grown at an annualised rate of 9pc over the last ten years.

The company generates large amounts of cash from its business, too, which it returns through share buybacks as well as dividends. Buybacks have more than halved Unum’s share count since 2007.

Buybacks are only a real benefit to shareholders if the shares bought offer the prospect of a good return. Fortunately, in the case of Unum this looks like the case based on its shares’ forecast free cash flow yield of over 10pc and a price equivalent to less than nine times forecast earnings for the year ahead.

Unum has said it will aim to buy back between $500m (£376m) to $1bn of shares this year and is forecast to pay out over $300m in dividends. Taking buybacks at the proposed mid-point, that’s equivalent to a hearty total shareholder yield (buybacks and dividends as proportion of market capitalisation) of 7.3pc.

British buyers of the shares, which are available through all the UK’s main brokerage platforms, need to fill out the correct paperwork to minimise withholding tax on dividends and should also check for any additional overseas dealing charges.

The company looks particularly well set up for cash returns given there is $2.2bn of liquidity at the holding company level, which is expected to rise to $2.5bn by the year end. That’s well above a target level of about $500m.

The strong financial position has been helped by a reinsurance deal covering a $3.4bn chunk of Unum’s closed book of long-term care insurance policies, equating to 20pc of the total.

Closed books are made up of policies that have previously been sold and are still being serviced but are no longer being marketed. The deal reduces risk as well as freeing about $100m of capital.

Business risks have also been reduced over the last several years by moving the investment portfolio into safer assets.

However, taking on risk is what the insurance game is all about, which means the possibility for upsets always exists. One such recent worry for investors has been an uptick in disability claims in Unum’s first quarter. Management believes this is nothing out of the ordinary, though, and consistent with long-term trends.

More generally, sales growth and premiums are both strong and the company believes digital investments will continue to help it attract new customers while nudging up the persistency of policies that have already been taken out.

There’s plenty to take comfort from. During times of uncertainty, that’s a valuable thing, especially when it is accompanied by large cash returns.

Questor says buy

Ticker: NYSE: UNM

Share price: $82.15

Now SEIT have declared their dividend, the income for the first six months should be in excess of £4,792.00, so on track for the fcast earnings of £9,120.00

The above figure does not include the dividend from VPC which will be paid next week.

SDCL Efficiency Income Trust plc

(“SEIT” or the “Company”)
Interim Dividend Declaration

SDCL Efficiency Income Trust plc is pleased to announce the fourth quarterly interim dividend in respect of the year ending 31 March 2025 of 1.58 pence per Ordinary Share, covered by net operational cash received from investments.

The shares will go ex-dividend on 12 June 2025 and the dividend will be paid on 30 June 2025 to shareholders on the register as at the close of business on 13 June 2025.

The Warren Buffett indicator suggests that shares are expensive. But Stephen Wright feels investors should think carefully about what to do.

Posted by Stephen Wright

MotleyFool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Billionaire investor Warren Buffett has a well-known metric for measuring stock market valuations and it indicates that share prices – specifically US ones – are expensive at the moment. 

Given that US companies account for almost 70% of the global equities, it’s probably fair to say this means stocks as a whole are expensive. But what should investors do about this?

The Buffett indicator

Buffett’s famous metric involves comparing the market value of equities with gross domestic product (GDP). And on this basis, US equities look unusually expensive at the moment.

Source: Longtermtrends

The so-called Buffett indicator has a decent history of being a good indicator of a stock market crash. Unusually high levels have often been followed by a sharp downturn in share prices.

Right now, the metric is the highest it has ever been, but I’m wary of making predictions on this basis. The main reason is that it’s been high for some time.

The Buffett indicator has been at unusually high levels since 2019. But the only stock market crashes in that time have been attributable to other things – Covid-19 and US trade tariffs.

Valuations

I don’t think valuation metrics are a good indication of what stocks are going to do in the near future. But they do mean that the effect on share prices can be dramatic if something happens.

From a long-term perspective, the picture is slightly different. One reason for this is that there can be cases where valuation multiples don’t give a good indication of how expensive an individual stock is. 

Polaris (NYSE:PII) is a good example. The firm is one of the leading manufacturers of recreational vehicles, including boats, motorcycles, and snowmobiles.

At a price-to-earnings (P/E) ratio of 56, the stock looks very expensive. But I think this is a case where things aren’t quite what they seem at first sight.

A stock that’s cheaper than it looks

Polaris relies on consumers having disposable income. And a lot of its sales involve financing, which means high interest rates can dampen demand and weigh on margins, leading to profits falling away. 

This is what has been happening recently and that’s the risk with this business. Furthermore, it makes the firm’s dividend look unsustainable if things don’t pick up reasonably quickly.

If this trend reverses however, the stock could look very cheap at today’s prices. And Polaris has generated average annual earnings per share of just over $5 over the last 10 years. 

On this basis, the current share price implies a P/E ratio of around 8, which looks much more reasonable. So despite the high valuation multiple, I don’t actually think the stock is that expensive.

Investing in an expensive market

I think the Buffett indicator is worth paying attention to. But I’m not making plans for a stock market crash based on the historically high reading at the moment.

Instead, I’m looking for individual stocks to buy. And one type of opportunity is where unusually low earnings are making share prices look more expensive than they are.

Polaris is one example I think is worth considering right now. The P/E ratio might be high, but there’s a clear reason why this shouldn’t necessarily put investors off.

DIY Investor Diary: how I invest to preserve wealth

In the second article in a new series, a DIY investor explains how he spreads risk, including owning a mix of active and passive funds, and having a separate cash pot to avoid selling investments when stock markets are volatile.

by Kyle Caldwell from interactive investor

In our new DIY Investor Diary series, we speak to interactive investor customers to find out how they invest in funds and investment trusts, what their goals and objectives are, current issues and concerns regarding their portfolio, and what they’ve learned along the way. The premise is to try and provide inspiration to other investors, and we would love to hear from more people who would like to be involved.

One of the golden rules of investing is to spread risk far and wide by having a diversified portfolio. This is achieved through mixing a range of stock market investments with other investment types, primarily bonds and commercial property.

The theory is that different types of investments are unlikely to all outperform or underperform at the same time, which therefore reduces the volatility of your overall portfolio. Due to the fact that investments perform differently relative to each other every year; a mixed investment approach gives a portfolio ample opportunity to grow, while at the same time guarding against serious short-term losses.

The second DIY investor in our new series is not only diversified by asset class, but has also spread risk by owning a mix of active and passive strategies.

The DIY investor, who is a 63-year-old male and retired a couple of years ago, is not currently drawing on his investments, but has put a plan in place to do so in the coming years.

Given that the ISA will be utilised first, our investor has structured this tax wrapper to be less risky than the SIPP. It has greater exposure to income-producing assets. Overall, it contains 17 holdings, with 13 active funds. His holdings include Fundsmith Equity, Personal Assets Ord.

The SIPP contains 15 holdings, of which 10 are a diverse spread of passively managed index funds, including L&G International Index, Vanguard LifeStrategy 80% Equity, and Vanguard Global Small-Cap Index, Scottish Mortgage Ord 

‘The SIPP allows me to be riskier, but I do want to sleep at night’

Overall, he prefers investment trusts to open-ended funds. “The long-term performance of investment trusts tends to be better,” he says. “They are also more visible, in having annual reports to read through. And I find they are also cheaper than funds as well.” 

In addition to the ISA and SIPP, he has a cash buffer equivalent to around five years of forecast expenditure.

He says: “As I intend to access the ISA first, the SIPP allows me to be riskier. But I do want to sleep at night. I want to preserve wealth and not lose it, rather than attempting to punch the lights out.”

Both the diversification in how he has structured his investments, and the cash buffer, help to keep a lid on risk. By having a separate cash pot, he says that “this protects [him] from having to sell investments if there’s a major market downturn”. 

He also intends to keep risk in check in future years by taking the income produced by the fund (the ‘natural yield’). This will involve switching from accumulation share classes to income share classes.

In a scenario where stock markets fall sharply, taking the natural yield from a portfolio helps protect the value of investments and allows them the chance to recover.

He says: “I will be aiming to take the natural yield from the ISA, but for any gaps, I can always sell fund units. By having five years’ worth of expenditure in cash, this will hopefully protect against any major market downturn.”

‘My views on active vs passive funds have changed’

While he has a mix of active and passive funds, this DIY investor is increasingly favouring the latter approach for its simplicity in providing the return of a stock market minus the fees levied, which tend to be low.   

He is not alone. There’s been a big shift towards passive strategies over the past 15 years. In 2007, before the financial crisis, the amount held in tracker funds was £29 billion, which at the time represented 6.3% of the total held in all funds. Today, there’s around £300 billion invested in total. This is about 20% of the funds industry, according to trade body the Investment Association (IA).

He says: “My views on active versus passive funds have changed over the years. Active funds require dedication and time, whereas in hindsight I could have kept it more simple by just keeping the returns in line with the market with a passive fund. When you plot the performance of passive funds over five and 10 years, you can see the returns have been good enough.

“I am now questioning why I am bothering with active funds. Fund managers retire (or jump ship or are moved on), and investment styles go in and out of fashion.”

There are various factors influencing the popularity of simply buying the market through an index or exchange-traded fund (ETF), with one being that some investors are losing faith in the ability of active fund managers to outperform a comparable stock market. 

Sticking with Scottish Mortgage

Our investor looks to ensure that the active funds he owns are offering something genuinely different compared to what an index fund or ETF can offer. One example is Scottish Mortgage, which attempts to find exceptional growth companies, both publicly listed stocks and private firms (which amount to a maximum of 30% of the portfolio).

Scottish Mortgage’s short-term performance has come off the boil, due to its investment approach suffering in a higher interest rate environment. However, its long-term returns are stellar. Over 10 years, its share price total return is 320% versus 200% for the average global trust. Over one and three years, however, it has lost 18.5% and 18.0%.

Our DIY investor says: “With active funds, I am trying to fill in what is missing from an index fund, while avoiding paying a high fee. Scottish Mortgage certainly ticks the boxes. It provides exposure that I won’t get in an index fund.” 

Our investor acknowledges that there are occasions when it is worth considering converting paper gains into real profits.

He says: “I am a buy and hold investor, but there are times when you do need to take profits. I took some profits from Scottish Mortgage when it had a really strong period of performance following the Covid-19 pandemic, but I kept most of it and I should have sold more. However, I am still confident for its prospects over a 10-year time horizon.”

Lessons learned as a DIY investor

While hoping Scottish Mortgage’s fortunes change for the better, one investment that will not see all the losses recovered is the fund formerly managed by Neil Woodford. It was not a huge holding, so while the losses were unwelcome, they were easier to stomach. 

He had formerly invested in Woodford when he worked at Invesco, prior to the former star investor setting up his own fund management firm. A lesson learned from the saga was that the “worst thing a fund manager can do is something different”, as opposed to sticking to the investment strategy in place. In hindsight, he says: “The fund was not doing what I bought it for.”

Other key lessons he has learned are to avoid panic-selling, as over time the stock market recovers its poise, and that timing the market is virtually impossible. 

Our DIY investor also avoids investing in things he doesn’t fully understand. For this reason, he doesn’t invest in bonds, instead preferring to gain bond exposure through the index funds he owns and some of the active funds. “I would sooner leave bond exposure to the professionals, such as Capital Gearing and Personal Assets,” he says.

Finally, he stresses the importance of fund charges, which are one of the only things DIY investors have control over. Fees are central to the active versus passive fund debate, and, as our investor says, it is a question of whether “active funds reward [you] for the additional risk”.

Story by Royston Wild
 

Young female analyst working at her desk in the office© Provided by The Motley Fool

Real estate investment trusts (REITs) can be effective ways to target a large and growing passive income over time.

Like any dividend share, the levels of income they pay are linked to the amount of earnings generated. However, REIT obligations state they must pay a minimum of 90% of annual profits in dividends in exchange for tax breaks. So investors often enjoy better income visibility with these assets.

Here are two top investment trusts that have grabbed my attention today. As well as offering that security, they also have the sort of dividend yields that suggest above-average passive income over the near term. So I feel they’re worth a closer look.

Dividends are never, ever guaranteed. But if broker forecasts prove accurate, a £15,000 lump sum investment spread across these stocks will deliver a £1,088 second income just for their current financial years.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Euro star

Though its 15 different assets, the Schroder European Real Estate Investment Trust invests in what it deems ‘winning cities’ across France, Germany and The Netherlands. These are locations that have significant scope for long-term growth.

While it’s focused on commercial assets, the trust spreads its exposure across multiple industries including retail and offices. This geographical and sector diversification helps it navigate weakness in particular areas and deliver a stable return over time:

Source: Schroders

Higher interest rates have been a problem across the REIT complex in recent years. And this Schroders trust could experience more stress than UK peers if the US and EU engage in a bloody tariff war.

However, lower inflation in the eurozone compared with Britain suggests the threat here could be less severe. Indeed, news last week that German consumer price inflation (CPI) fell to 2.1% in May — fractionally above the ECB’s target — is an encouraging sign.

At 66.8p per share, the Schroder European Real Estate Investment Trust trades at a 31.5% discount to its net asset value (NAV) per share. I think it demands serious attention at this price.

A ‘safe’ selection

To my mind, Primary Health Properties is one of the most secure passive income shares to consider today. It’s why I hold it in my Stocks and Shares ISA.

As the name implies, it focuses on the primary healthcare sector and operates 516 GP surgeries and other medical centres in the UK and Ireland. This isn’t just a rock-solid sector that’s immune to economic conditions, it’s one with substantial growth potential as governments act to divert patients from crammed hospitals to get treatment elsewhere.

Another reason I like Primary Health Properties is the majority (89%) of its rental income is bankrolled either directly or indirectly by government bodies. This provides earnings with another layer of security.

As I say, REITs like this are vulnerable to unfavourable interest rate rises. This particular one could also come under pressure if UK health policy changes.

But I hope these dangers are reflected in its low valuation. At 100p per share, the trust deals on a sub-1 price-to-book (P/B) ratio of 0.9.

The post 2 REITs to consider in June to target a £1,088 passive income! appeared first on The Motley Fool UK.

SERE

18 December 2024

SCHRODER EUROPEAN REAL ESTATE INVESTMENT TRUST PLC

(“SEREIT” or the “Company” and, together with its subsidiaries, the “Group”)

French tax disclosure update

Schroder European Real Estate Investment Trust plc, the company investing in European growth cities and regions, provides a tax disclosure update.

As previously announced, the French tax authority is proceeding with a tax audit in relation to the Group’s French tax structure.

In the Group’s 2024 Annual Report it was disclosed that the range of potential outcomes indicates a possible exposure of between €nil and €12.6 million, excluding potential penalties.

As part of the ongoing tax audit, a formal ‘Proposal for Adjustment’ has been received from the French tax authority which includes a proposed penalty on any tax found ultimately due. Including the application of interest and penalties, the potential exposure for the Group is expected to be up to €14.2 million.

Based on external tax and legal advice received at the time of implementation, and which has continued to be reviewed on an ongoing basis, the Board continues to believe that an outflow is not probable and therefore no provision is recognised.

The Group disagrees with the ‘Proposal for Adjustment’ and will continue to contest its position and will provide further updates as required.