David Kempton.

My core trusts and ETFs for income and growth

Experienced private investor David Kempton shares the investment companies, exchange-traded funds and government bonds giving him a mixture of growth and stability this year.

Any of the current geopolitical threats could escalate at any moment, yet markets remain calm and services continue as normal in the developed world. The S&P 500 is even on an official bull run to a high of 4,850, up almost 26% from the low last March.

I continue to seek refuge in a significant holding of short-dated UK government bonds with a low coupon. I want the yields to be almost entirely capital gain, which has zero tax liability in gilts, and not interest income, on which I would pay my marginal tax rate.

Gilts

JJI use the excellent abbreviated gilts list in Saturday’s Financial Times from which I chose my current holdings:

Treasury 0.125% 2026, redemption yield 4.01%.

Treasury 0.5% 2029, redemption yield 3.74%.

ETFs

For income I have selected from the Just ETF website, which shows the top 50 exchange-traded funds (ETFs) with the highest dividend yields. Pick your own risk-reward from those on the list.

I have bought small amounts in: 

Brazil HSBC MSCI Brazil UCITS ETF USD yielding 9.4%;

Asia Pacific iShares Asia Pacific Dividend UCITS ETF on 5.9%;

Equity Europe Dividend iShares Euro Dividend UCITS ETF 5.9%;

Equity United Kingdom Dividend iShares UK Dividend UCITS ETF 5.5%,

Equity World Dividend Global X SuperDividend UCITS ETF USD distributing 11.9%;

and Equity United States Technology Global X Nasdaq 100 Covered Call UCITS ETF USD distributing 10.9%.

Infrastructure and property

Currently some of the listed infrastructure funds offer useful risk-adjusted returns with high quality cash flow from a portfolio of critical assets. Now that interest rates are perceived to have peaked, discounts have narrowed and it seems a good moment to gain exposure to the sector.

I have bought International Public Partnerships (INPP), which holds a diversified portfolio of infrastructure assets in UK, Europe, US and Australia. The shares, on current discount to asset value of 17%, yield 6%.

For yield I have also bought AEW UK Reit (AEWU), which has a portfolio of 36 smaller office properties, retail warehouses, high street retail, and industrial warehouses. On a discount of 20%, it yields 8.5%, although the dividend has been uncovered in recent years.

In the Renewable Energy sector I hold Bluefield Solar Income Fund (BSIF), invested in UK solar energy infrastructure on a discount of 17% and yielding 7.4%.

Rockwood for UK

I am not alone in believing that there is terrific value in UK markets, where, according to Citywire analysis, the number of British stocks being backed by the best-performing global fund managers has doubled in the last year.

After the US and China, Britain remains the third-largest tech economy in the world, with Google announcing a $1bn data centre for north London and Microsoft planning to spend $2.5bn on AI data centres nationwide. 

I don’t currently hold a FTSE 100 focused fund, bearing in mind that 75% of blue-chip earnings are generated abroad, making such funds really a sterling bet on the world’s economy.

I have, though, increased my holding in Rockwood Strategic (RKW), the smallest of the renowned Christopher Mills Harwood stable with only £58m of assets in a tightly focused portfolio of 19 UK small-cap stocks.

With the shares now on premium of 1%, the performance is exceptional with one-year and three-year growth of 19% and 72%. 

JAM today

A US holding is essential since you must have some interest in the magnificent seven. Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla are now worth more than the combined markets of Japan, UK and China!  

US politics baffle the world, but a Trump victory in November would clearly be good for their economy as fortress America draws inwards, focusing on its own indigenous resources, whilst minimising global investment, financial support and dependency – all essentially bad for their allies. 

My US exposure remains in JP Morgan American (JAM) predominantly invested in the shares of larger quoted companies with maximum 10% in smaller companies.  It still looks best-of-breed to me, with one-, three- and five-year performances of 31%, 53% and 126%.

Japan

I have held CC Japan Income and Capital Growth (CCJI) for some years but it remains one of the best options in the sector with growth over one, three and five years of 20%, 41% and 54% while the shares still stand on a 7% discount and yield 3%.

Although the Japanese recovery is struggling to gain momentum and GDP contracted in the third quarter as inflation eroded purchasing power, recovery is forecast in the second quarter of 2024, when wage growth is expected to pick up.

By the second half of the year, moderating inflation and accelerating wages should bring a stronger recovery. 

Emerging markets

In common with many investors, I currently avoid China; global investors have switched to the benefit of other Asian regions and emerging markets.

I have bought Vietnam Holding (VNH), which is invested in high-growth companies in Vietnam and actively managed with a high-conviction portfolio. On a 7% discount with one-, three- and five-year performances of 18%, 65% and 94%, it looks attractive to me.

India, now with the world’s largest population and democracy, has overtaken Britain to rank fifth in global economies. Apple set the trend by transferring iPhone manufacture from China to India, where labour costs are one-third, and is already exporting $1bn of units every month. 

I hold India Capital Growth (IGC), predominantly invested in mid- and small-cap Indian stocks. The shares offer a narrow 2% discount with one-, three- and five-year total returns of 40%, 104% and 104%. 

I also hold Blackrock Frontiers (BRFI), invested in companies operating in less-developed countries outside the MSCI World index including, Brazil, China, India, Korea, Mexico, Russia, South Africa, and Taiwan. On an 8% discount, the performance over one, three and five years is 9%, 34% and 33%. 

Healthcare and technology

Healthcare and technology must be part of any medium-term portfolio and I hold Polar Capital Global Healthcare Trust (PCGT) with its long-term diversified healthcare industry portfolio, invested 58% in the US, on a discount of 6%. The performance over one year, three years and five years is 4%, 37% and 73%

I have added to my holding in Allianz Technology Trust (ATT), which is invested in global technology companies, currently 95% US, on a 6% discount with one-, three- and five-year performances of 48%, 4%% and 149%. 

Gold and bitcoin

Clearly in today’s insecure world, there must be a holding in gold and I have added to my two funds:

Ninety One Global Gold 1 Acc GBP (AEE1) – primarily invested in the shares of global companies involved in gold mining and related derivatives.

Meanwhile, Wisdom Tree Physical Gold (PHAU) is designed to offer cost-efficient access to the gold market by providing a return equivalent to the movements in the gold spot price backed by physical allocated gold held by HSBC Bank. 

I have had exposure to Bitcoin since 2020, but never directly into the myriad of direct investments. Instead, I hold KR1 (KR1:AQSE), a fund on the Aquis Stock Exchange which invests in blockchain ecosystem projects and digital-based assets.

There are several collective funds in the space, but over the last three years this fund has done me well. The US Securities and Exchange Commission (SEC) this month approved the first ever ETFs tied to crypto. That should give the sector some credibility, though there’s still no understandable dynamic.

Blackrock and Fidelity also plan to launch funds, which will be interesting.  

Uranium

In the resources sector, my largest exposure is now uranium, where the price should remain strong as demand increases to feed the current 450 worldwide nuclear power plants in 32 countries with 60 more under construction – all the while global supplies remain constrained by the current geopolitical issues.

Geiger Counter (GCL) invests primarily in the securities of companies involved in the exploration, development and production of uranium. On a discount of 13%, over one, three and five years the shares have provided total returns of 38%, 125% and 212%

10 shares to give you a £10,000 annual income in 2024

Once again, our head of equity strategy’s portfolio has generated more than the required annual income, and the yield from company dividends is way above the most generous bank account.

10 shares to give you a £10,000 annual income in 2024
Once again, our head of equity strategy’s portfolio has generated more than the required annual income, and the yield from company dividends is way above the most generous bank account.

by Lee Wild from interactive investor

After 14 years of either declining or historically low interest rates, UK savers finally had something to cheer at the end of 2021. Rates started rising and didn’t stop until they reached 5.25% in August last year. But while higher savings rates are good news for those seeking risk-free returns, sky-high inflation and a buoyant stock market meant the best opportunities for both income and growth in 2023 were found elsewhere.

Britain’s flagship FTSE 100 index grew less than 4% on a share price basis last year. Despite making a record high and briefly exceeding 8,000 for the first time in February, it spent most of the year between 7,350 and 7,750.

However, the total return, which includes dividends, was 7.9%. The FTSE 250 index managed 8%. Those diversifying their portfolios with overseas assets would have done even better. America’s Nasdaq tech index delivered almost 54% on the same basis, Japan grew 28% and European bourses were up by a fifth.

Best rates on easy access savings accounts last year, according to our monthly income screener column, were 5.3%, and 5.5% for easy access cash ISAs. You could have got 6.2% on a one-year fixed rate bond.

But with CPI annual inflation anywhere between 10.4% early in 2023 and 3.9% in November, every percentage point was crucial to generating a positive real-terms return. Now, in 2024, savers will be forced to make some big decisions if interest rates do start to fall in a few months’ time, as expected.

Income portfolio performance in 2023
The objective is to generate at least £10,000 of annual dividend income over the 12 months, using a diversified basket of 10 shares. Ideally, the value of the portfolio would also be higher at the end of the year than at the start; but income is the priority.

When I put the portfolio together a year ago, I anticipated a dividend yield of 6.4%. I wanted a diverse basket of shares, so sacrificed yield in some cases. But there were still some chunky prospective dividends in there, and the likes of Legal & General Group
LGEN
1.04%

British American Tobacco
BATS
1.09%

and M&G Ordinary Shares
MNG
0.55%

delivered the goods. Over the year, my 10 stocks generated £10,660 of income for a yield of 6.8%.

Biggest contributors to the excess income were Sainsbury (J)
SBRY
2.99%

with 24% more than I’d expected, Taylor Wimpey
TW.
0.27%

(17%) and SSE
SSE
0.12%

(12%). Diversified Energy Co
DEC
0.77%

was the biggest positive surprise, generating an extra 27%. However, its share price was also the biggest negative in the portfolio.

Having invested £158,000 in the portfolio to generate that level of income, I ended the year with £147,461 for a decline of 6.7% and total return of 0.1%. Diversified accounted for £6,900 of the lost capital.

Normally, an investor would not churn their portfolio at the end of each calendar year but, as I point out each time, this portfolio starts the year with a clean slate. It means the exercise remains relevant for anyone who shows an interest, whether existing investor or newbie. That also means there will be some changes in the line-up for 2024. Here are the stocks that stay, those that don’t and some new entries.

The shares that stay in 2024
Six companies in the 2023 portfolio are kept for this year’s basket of 10 income stocks. Not all of them had a spectacular 2023, but each delivered a generous dividend and provided valuable diversification, while four of them also chipped in a market-beating capital gain.

Last year I switched out of Persimmon
PSN
0.28%

and into Taylor Wimpey. That proved to be a wise decision, the latter’s share price ending the 12 months up 23% and yielding 8.2%. The payout was deemed safer than housebuilder peers because its dividend policy is not based on earnings cover targets. Instead, the company promises to return 7.5% of net asset value, giving investors “increased certainty of a reliable income stream throughout the cycle.” That’s good enough for me, especially as a likely decline in interest rates this year should support the housing sector.

Sainsbury’s also did me proud, my estimate of a 4% dividend yield proving conservative. A 5% payout generated almost £1,000 for the portfolio, while the share price ended the year up 8%. There’s not much to choose between Sainsbury’s and Tesco
TSCO
2.79%

in terms of share performance, but the former has a much better yield.

I’m keeping M&G in the portfolio for a fourth year because it continues to deliver the goods. A steady share price performance over the past few years and one of the best blue-chip yields around make it impossible to reject the asset manager. Yes, plenty have been predicting a dividend cut for years, but the company repeats that its policy of “delivering stable or growing dividends to our shareholders remains unchanged.”

GSK
1.58%

had been ever present in these income portfolios since launch before losing its place in 2021 following the decision to ‘rebase’ its dividend. The payout still isn’t great, but diversification into the defensive pharma sector made up for last year’s modest prospective yield of 4%. As well as making a solid contribution to the income strategy, the share price grew by 10%. I’m sticking with the drug giant this year for the same reasons.

There’s wasn’t much to choose between the high street banks last year, confirmed by their share price performance over the 12 months. None covered themselves in glory, despite much higher interest rates, and Lloyds Banking Group
LLOY

shares fell 19%. But it’s a well-run company and has avoided any shocks, unlike some peers. Its shares have spent most of the past three years in a 40-50p range, and there’s little to suggest they’ll be worth significantly less in 12 months’ time, so I’m locking in a 6.6% yield.

Legal & General shares were pretty much flat in 2023, but a 7.7% dividend yield made a welcome contribution toward our £10k target. A near two-year downtrend appeared to end in November as the insurer’s shares rallied with the rest of the market. L&G shares sit near an 11-month high and offers an 8% yield and, having outperformed rival Aviva

last year on both share price and dividend, albeit marginally, I’m sticking with L&G in 2024.

Heading for the exit
If six stocks stay, it must mean four stocks have been shown the door. Three are punished for an underperforming share price and deteriorating outlook, but utility SSE gets the boot for committing the cardinal sin – cutting the dividend. This was flagged by the company before I picked it for the 2023 portfolio, but there was still an attractive yield to be had before the payout was rebased for the year to 31 March 2024. There are better yields than SSE’s 3.5% elsewhere in the sector.

British American Tobacco
BATS

three-year run in the portfolio ends now. It’s always delivered the dividend it promised, but the capital depreciation has been significant (25% in 2023). The shares are cheap on a price/earnings basis compared to the FTSE 100 average, but I just don’t see enough potential for significant recovery in the near term.

Since launch, I’ve always set aside one or two spots in the portfolio for more speculative income plays, typically with higher yields. I don’t invest as much in them as I do the blue-chips, just in case. Often it pays off, and when it doesn’t, the lower investment and diversification within the portfolio protects both income and capital.

Diversified Energy had been in the portfolio for three consecutive years because strong free cash flow meant regular and very generous dividends – it yielded over 9% in each of the first two years and 12.6% in 2023. But a lot’s happened over the past year – US gas prices have declined, the company listed its shares in New York after a 20 for 1 share consolidation, and now there are concerns in the US regarding its well retirement and emissions information.

A 57% slump in the share price means the already high-yielding stock now offers a dividend yield of around 30%. Understandably, alarm bells are ringing loud, and despite still impressive free cash flow, the payout looks vulnerable. It seems an irresponsible and unnecessary risk for this year’s portfolio.

Sylvania Platinum Ltd
SLP

inclusion in the portfolio has been brief, despite achieving a 7.6% dividend yield. It all seemed rosy when I explained the rationale a year ago – running platinum group metal (PGM) processing plants across South Africa’s lucrative Bushveld complex, owning exciting mining rights, high margins and return on capital, reasonably priced shares, and a generous dividend.

But October’s annual results were poorly received, and the share price decline has accelerated in recent weeks. Platinum and palladium prices both fell in 2023, and Sylvania shares suffered a 42% capital loss amid an uncertain year ahead for the industry.

Four more for 2024
Energy company SSE has generated a healthy annual income above 5% for the past two years, but after deciding to rebase the dividend for 2023/24, the forecast yield drops to 3.5%. That’s why I’m going back to National Grid
NG.

a defensive stock which offers an inflation-linked dividend and attractive yield of 5.7%. It’s a well-run business, and some analysts believe the market is overlooking long-term asset growth in UK electricity networks and US networks.

Both Imperial Brands
IMB

and British American Tobacco are among the highest yielders in the FTSE 350, but while BAT’s three-year stint in this income portfolio started well, the capital loss in each of the past two years, particularly the 30% slump in 2023, has been disappointing. Imperial fell too, yes, but the decline in the last calendar year was a more modest 12.8%. And while both share prices had followed similar trends, a divergence became obvious last October, widening during December when BAT said it would write down the value of its acquired US cigarette brands by £25 billion.

Bed and ISA: the handy tax trick to boost your wealth
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And for the two more speculative spots, I’ve dialled down the risk and brought in Rio Tinto Registered Shares
RIO

. The mining heavyweight had been in this income portfolio for three years until I switched it out last year when fewer special dividends meant a much lower prospective yield.

While there are still plenty of issues around demand and production overhanging the industry, Rio has promised “total cash returns to shareholders over the longer term to be in a range of 40% to 60% of underlying earnings in aggregate through the cycle.”

Morgan Advanced Materials
MGAM

is the smallest company in this year’s portfolio at £800 million, but it yields over 4% and offers exposure to the industrials sector. Morgan manufactures advanced carbon and ceramic materials used in wind farms and plane engines.

At third-quarter results in November, the company maintained its forecast for annual organic revenue growth of 2-4%. It also expects “good growth” in the first half of 2024 and further margin expansion following recent sequential improvements. The dividend is both generous and well covered by earnings, while the valuation is also attractive at 11 times prospective earnings.

Company

Share price 24 Jan 2024 (p)

Sum invested (£)

Percentage of the portfolio

Prospective dividend yield (%)

Expected annual income (£)

Lloyds Banking Group
LLOY
0.04%

42.2

20,000

12.3

6.6

1,328

GSK
GSK
1.58%

1,554.8

20,000

12.3

3.7

740

National Grid
NG.
1.00%

1,033.5

20,000

12.3

5.7

1,142

Sainsbury (J)
SBRY
2.99%

283.6

20,000

12.3

4.7

931

Legal & General Group
LGEN
1.04%

253.4

15,000

9.2

8.4

1,264

Taylor Wimpey
TW.
0.27%

144.3

15,000

9.2

6.2

936

Rio Tinto Registered Shares
RIO
1.42%

5,494.0

15,000

9.2

6.5

969

M&G Ordinary Shares
MNG
0.55%

224.6

13,000

8.0

9.4

1,226

Imperial Brands
IMB
0.48%

1,916.5

13,000

8.0

8.0

1,036

Morgan Advanced Materials
MGAM
1.66%

273.5

12,000

7.4

4.4

527

Total

163,000

100

6.2%

£10,098

The most consistent global funds of the decade

Passive funds are more consistent performers year in, year out, than actively-managed strategies.

By Matteo Anelli,

Senior reporter, Trustnet

Passive global equity funds have been more adept at consistently beating their benchmarks than active funds during the past decade.

Trustnet has analysed the performance of funds in the IA Global sector and reveals that in the past 10 years, the strategies that beat the most common benchmark – the MSCI World index – more consistently are, perhaps surprisingly, trackers. Passive funds pulled ahead by a few percentage points every year, consistently delivering for their investors.

A mere five funds managed to outperform the MSCI World index in eight or more years from the past 10.

Of those, only one is actively managed: Amadeo Alentorn’s Jupiter Merian World Equity fund – although this is unsual as it holds more than 300 stocks. The managers use a systematic approach, tilting the portfolio around themes such as growth, value and momentum, shifting when they believe different parts of the market are going to be in vogue.

As such, they do not make big bets on individual companies, instead aiming to beat the benchmark each year by smaller margins by making these tactical decisions.

Jupiter Merian World Equity has performed strongly for similar reasons to the passive funds in the list. Recently, the portfolio benefited from having all the so-called ‘Magnificent Seven’ stocks among its top 10 holdings – with the other three being Visa, Novo Nordisk and Adobe.

The most consistent performer of the past decade was a passive giant, iShares Core MSCI World UCITS ETF. It beat the bogie in nine years out of 10 (2015 was the outlier).

This £53.5bn behemoth has done slightly better than the index it is trying to replicate almost every year – and has done so whilst charging only 0.2%.

The vehicle is on the radar of FE Investments’ analysts, who like “the focus on transparency and efficiency across iShares’ index funds and ETFs” as well the investment process.

“To supplement fund returns and compensate for the trading costs involved with direct ownership of the securities, the fund manager engages in stock lending. This is a common process in long-term investing, where a select third party borrows a limited amount of the passive fund’s holdings in exchange for a fee,” they explained.

“As a security measure the borrower will place a collateral deposit with an independent intermediary, which is generally of similar or higher-quality. When reinvested, profits from stock lending reduce the effect of management fees, further minimising overall tracking difference to the index.”

Moving down the list to the funds that outperformed the MSCI World index eight years out of 10, L&G Global 100 Index Trust and HSBC MSCI World UCITS ETF were unlucky in 2014 and 2015 – the only two years when they didn’t exceed the most common benchmark for their sector.

L&G’s strategy stands out because it does not lend securities in retail-facing products in order to minimise exposure to additional risks. It also keeps costs down at just 0.14%.

The Vanguard FTSE Developed World ex-UK Equity Index fund does engage in securities lending (although it typically won’t lend more than three percent of its portfolio) and it too convinced the FE Investments team.

“Its structure facilitates Vanguard’s heavy cost-cutting approach, which is ultimately a great benefit to the end investor,” the analysts said.

“The firm applied a new pricing model at the end of 2017 for their index funds, which works by adjusting the price for all investments on a given day up or down according to the inflows or outflows in and out of the fund.”

One explanation for why active managers have struggled to consistently beat the MSCI World is its concentration, with the US market making up the largest chunk. Here, trying to deviate from the index can penalise active managers, because the best performance has come from the ‘Magnificent Seven’ biggest stocks, without which US growth would look anaemic.

The above Trusts are relatively safe shares to build a firm foundation

for a portfolio. No guarantees but each Trust pays a dividend

for re-investing in the portfolio.

U could then add some higher yielding Trusts which by their nature

are more risky.

Using the TR column, whilst that shows a capital gain can be

made if u invest at an opportune moment, it’s very

unlikely similar returns will be achieved until the next

market crash.

SMT

Darvas box. Of use if u traded the double bottom, with the

chart sell to book the Santa Rally profits.

As the Trust pays a minimal dividend, trade only with a stop loss.

 Shares magazine

FIRE: financial independence, retire early. Is the movement a plan worth pursing or a pipe dream?

Discover how real-world proponents of this mantra are looking to take control of their own financial destiny

Many people dream of retiring early to pursue their real passions before they get too old to enjoy them. Is it just a pipedream or could it be a reality for some people?

This feature explores the pros, pitfalls and practicalities of the so-called FIRE movement which is gaining increasing traction. A recent AJ Bell Money & Markets podcast discussion on the subject provoked a strong response from listeners which suggests the FIRE movement has struck a nerve within a certain cohort of investors.

Throughout the article we share a selection of the opinions and first-hand experiences of real investors who are, to a greater or less extent, part of the movement (though in the interests of their privacy, real names have been changed).

WHAT IS THE FIRE MOVEMENT?

The acronym stands for financial independence, retire early and it was born in the US more than 30 years ago after authors Vicki Robin and Joe Dominguez coined the phrase in their book Your Money or Your Life.

In its simplest form financial independence isn’t about being rich but having enough stashed away to provide financial security. It’s about taking back control and living on your own terms.

As one correspondent William explains: ‘Just about everyone retires at some point. There is nothing special about the dates set by the government or the actuaries. Plan your own. Financial independence allows you to choose what you want to do – that might mean continuing in the same job.’

While there is not one single manifesto or handbook for the FIRE movement there are several key principles underpinning it:

Save as much of your income as you can (potentially up to 70%);
Live very frugally (make do and mend, buy second hand, limit impulse purchases);
Pay off any debts, including your mortgage;
Invest spare funds in low-cost tracker funds to benefit from the returns of the stock market.

Many bloggers on social media pushing the FIRE movement make it sound easy to achieve but that does not paint an accurate picture. If you have children, for example, then putting a large chunk of your income aside may not be realistic.

For most people, the best way to think about FIRE may be as something you can take some inspiration from rather than follow religiously. The idea of squirreling away as much cash as you can is a good one. Going through your regular outgoings to work out where you could be making savings – even if it is only once or twice a year – is an excellent discipline to get into.

Paying off debts where you are able to is also a worthwhile goal, particularly in the current high interest rate environment, as is keeping your costs down when investing.

Some FIRE proponents do not give up work entirely, they may continue to work part time. The key ambition is to create a level of financial flexibility which allows you to make your own choices.  

ACHIEVING A PLAN TO RETIRE EARLY

Phil decided very early on in his career that he didn’t want to keep working until he was 65 and hatched a plan in his 20s with the goal of retiring in his 40s.

He knew he would have to put a good chunk of money aside each month to reach his goals. Fortunately, Phil was in a position where he only spent half of his monthly salary to maintain his lifestyle.

‘I never sacrificed experiences like holidays,’ Phil told the AJ Bell Money Markets podcast. For material things like an expensive car, he settled for a decent car instead.

Phil seemingly never missed an opportunity to squirrel away extra cash into his investment portfolio. Take his mortgage for example.

When he took the mortgage interest rates were 13% and although they subsequently fell towards 3% Phil maintained his higher repayments which meant he was able to pay off the mortgage in his mid-to-late thirties.

In turn this gave him more disposable income to add to his pension pot. Phil is now a few years into his retirement. Planning early and investing half his monthly salary has so far worked out well.

THE EXPERT VIEW

Director of public policy at AJ Bell, Tom Selby, says one of the most important aspects of an early retirement plan is the idea of sustainability. Making a realistic plan which provides security against life’s inevitable ups and downs is crucial to enjoying the benefits of early retirement.

It may seem an obvious point but bear in mind that if you want to retire before you turn 50, assuming you start work at 20, retirement may last longer than your working life.

The earliest someone can access their private pension is 55 which increases to 57 years of age from 2028. Someone retiring before that needs to find other forms of income such as ISAs and buy-to-let rental income.

The state pension is accessible from 66 years of age and currently stands at £10,600 a year. For investors planning further into the future it is worth pointing out that the state pension age increases to 67 from 2028 and 68 from 2046.

Selby reminds investors that the earlier they access a pension pot, the less amount of time investments have to grow and benefit from the compound returns offered by financial markets. Leaving a pension untouched for a further 10 years could make a considerable difference. For example, a pension pot growing at 7% a year will nearly double over a decade.

Some people may be able to live off the annual dividends and fixed income payments out without selling any investments. This leaves the capital in the portfolio unencumbered so it can keep growing.

The sizeable increase in interest rates over the last two years has made a big difference for investors seeking income.

AN IFA VIEW

Independent financial adviser Lena Patel says more clients are asking if they can retire early.

Before launching into cash flow modelling and looking at levels of income Patel asks clients to define what early retirement means for them.

‘It is important to have a vision of what retirement means,’ says Patel. The reality is that people don’t think much about what makes them happy and how to lead a fulfilling life after stopping work.

Patel believes more education is needed and could be provided earlier on in life to encourage people to make plans for how they want to live later.

Putting cash away which is attached to reaching specific life goals is more powerful than simply encouraging a client to feed their pension pot. Making sacrifices are easier to stomach when they are attached to non-financial rewards.

Happiness for some people means slowing down and working part time rather than stopping altogether. For others it may involve going on more holidays or pursuing latent passions.

As always, personal circumstances play a big role is shaping what is possible. Those with children at school or university are in a completely different situation to single parents.

Patel believes the FIRE movement has legs with more people looking to take control of their own futures as the retirement age is pushed further into the future. 

IGNORE DIVERSIFICATION AT YOUR PERIL

Investment performance is an important ingredient in achieving financial freedom. Whatever an investor’s risk appetite, it rarely pays to ignore the benefits of diversification.

Spreading investments across different companies, sectors, geographies, and assets reduces overall portfolio volatility. One of our previous examples, Phil, has a cautionary tale which underlines the risk of putting too many eggs into one basket. Intent on putting as much as he could into his investment portfolio Phil added to an already generous company share purchase scheme.

The company he worked for was then taken over by US security systems company Tyco International in an all-share transaction. He had no idea what was about to happen next, but the company became embroiled in one of the largest fraud scandals in the US in the early noughties.

CEO and chair Dennis Kozlowski and finance chief Mark Swartz were prosecuted for stealing $600 million from corporate coffers and subsequently went to jail.

The shares that Phil owned plunged almost 80% overnight and it taught him a lesson about the virtue of spreading his investments and the pitfalls of too much concentration.

ENJOYING RETIREMENT IN SPAIN

Andy is 63 and his wife is 62 and they retired 11 years ago to relocate from the UK to Spain. They maintain a good lifestyle living off the income generated from SIPPs, offshore Spanish-compliant bonds and pensions from previous employers.

‘We have managed to live within our income generated from these sources and our assets have still grown from our original inputs. We look forward to receiving our state pensions in a few more years but see this as a bonus and not something to be relied on,’ says Andy.

WHY RETIRING MAY BE HARDER THAN YOU THINK

People will always find ways to fill their time, so boredom is rarely a factor but dealing with the mental side of retirement should not be taken lightly. Phil said he found it difficult in the first few years after stopping work and did some part-time jobs to help him cope mentally. It was less about the lost income and more about the loss of his professional identity.

‘I can’t emphasise enough it is a tough transition,’ cautions Phil. Spending years developing professional skills which are then ‘tossed away’ could feel like the equivalent of a physical loss.

Another early retiree, Jeff, had a similar experience saying he ‘missed work’ in the first few months after retirement in 2021. ‘Too much time on our hands. Summer is fine, not so much the winter months,’ laments Jeff.

‘Our experience over the past two years, is less with financial worry, but more to do with being active as we have been our whole lives. Yes, we are holidaying more but we find we don’t wish to go on endless cruises.’

ROY TAKES RISKS TO ESCAPE THE RAT RACE

Roy is in his late 60s and quit the ‘rat race’ in 2012. He started investing in the 1990s. The 1997 Asian financial crisis which began in Thailand before spreading to other countries and raised fears of a global financial meltdown.

UK bank shares got caught in the crosshairs and Roy borrowed half a year’s pay to buy shares in Barclays (BARC) and NatWest (NWG).

His thinking was that ‘at worst’ he would be paying an affordable loan for a few years. In the event, Roy made an 80% profit in around nine months.

Roy repeated the same trick a few years later during the dotcom bust and once again borrowed half a year’s pay to put into the stock market. He walked away with a 110% profit in 18 months.

Looking through the rubble left by the collapse of the split capital investment trust market Roy was able to pick up some amazing bargains as the survivors were paying huge dividends while growing underlying capital.

After the 2007/8 financial crisis Roy was able to pick up UK housebuilders Taylor Wimpey (TW.) and Barratt Developments (BDEV) on the cheap and made around 150% over two to three years.

Roy’s last big gambit came in 2014 when he sank a whole year’s net pay into online fashion retailer Boohoo (BOO:AIM) around three months after it listed on AIM via an IPO (initial public offering).

Within a few months Roy was staring at a 50% loss after the company disappointed investors in its debut trading statement. Roy decided to ‘tough it out’ and three years later sold out for a 300% profit.

Most of the proceeds were used to repay his buy-to-let mortgage which today provides Roy with a 4.5% annual yield on its current value and 12% on its purchase price. It is worth saying the risks Roy took would not be suitable for most investors and investing with borrowed money is never advisable.

Roy describes himself as being in the middle band of the FIRE community, which he says is between subsistence and overt wealth.

HOW MUCH IS ENOUGH?

Our earlier contributor Phil knows how much income he needs each year and if everything goes to plan, he expects his pension pots to run out of cash when he reaches the ripe old age of 104. (See the section on life expectancy to get an idea of Phil’s odds.)

That may seem like an optimistic scenario in one sense, (living a long life) but cautious in the sense Phil could potentially spend more cash each year.

Here it is worth repeating Tom Selby’s wise words on sustainability. Phil’s plan provides peace of mind even in the event of some unexpected bills.

The rule of 25 is a popular method used by some investors to estimate when they have enough to retire. It says an investor needs a pension pot which is 25 times future expected annual expenditures.

US financial advisor William Bengen devised the plan based on a 30-year retirement time frame. It may not be suitable for investors retiring at 40 who expect to live into their 80s.

The idea is that taking 4% out of a pension pot each year will see it last around 30 years. It has the advantage of being easy to understand. As an example, an investor targeting an annual income of £40,000 a year before tax in retirement would need a minimum £1 million portfolio (£40,000 x 25).

On the other hand, there are no guarantees. Bengen’s original analysis showed it worked about 90% of the time. It also makes no distinction between withdrawing income and capital. Selling shares to take income reduces the capital value of a portfolio and reduces the future level of income, everything else being equal. Another wrinkle to consider is the rising cost of living.

A portfolio which grows above the rate of inflation maintains the spending power of the income that is generated and allows a retiree to keep up with rising costs. Until the onset of the pandemic, inflation had been negligible for more than a decade. That has since changed dramatically and today inflation is a significant factor to consider.

Let’s say inflation remains at around 4% a year for the next decade. In effect, this will reduce the real value of a pension pot by half.

Dean is a reluctant member of the FIRE movement having been forced to retire early due to being made redundant at the start of the pandemic.

‘Expect the unexpected, black swan events are now not uncommon,’ cautions Dean.

‘Do a worst-case scenario cash flow statement and then sense check it. If I have done a cash flow analysis in 2020 or 2021, I certainly would not have accounted for the price of food to have risen 30% (between October 2021 and October 2023) and still be rising at over 10%.’

‘No wonder these FIRE bloggers are young – they are also naïve – I suspect they just want to make money and haven’t really understood middle age,’ says Dean.

James is 43 years old and achieved FIRE in 2021 and moved his family from London to the countryside which freed him of the mortgage. Plans to stop working have been put on the backburner for now.

‘With the current period of high inflation, our annual expenses have risen a lot and our pot is no longer big enough to see us all the way to the end (using the 4% rule).

‘I see having a good job as an excellent offset to high inflation so have decided to carry on doing four days for the time being,’ adds James.

FACTORING IN LIFE EXPECTANCY

New data from the ONS (Office for National Statistics) shows that average life expectancy for both men and women in the UK has dropped significantly since the pandemic.

Life expectancy at birth was 78.6 years for men and 82.6 years for women in 2020-to-2022, down from 79.3 years for men and 83 years for women in 2017-19.

This means life expectancy at birth has dropped to the same levels seen in the period from 2010 to 2012 for women and slightly below for men over the same period.

The same change has been seen in life expectancy for people aged 65 which has fallen by 22 weeks and 15 weeks for men and women respectively.

It is unclear if the previous growth trend will reassert itself but with scientific advances in healthcare coming thick and fast, it would be unwise to bet against it.

In 2020, the number of people reaching 100 increased 20% from the prior year to reach a new high of 15,384 souls. Over the prior two decades the number of UK centenarians has increased by 58%.

DISCLAIMER: AJ Bell, referenced in this article, owns Shares magazine. The author (Martin Gamble) and editor (Tom Sieber) own shares in AJ Bell.

Harmony Energy Income Trust plc
(the “Company” or “HEIT”)

Trading Update

Harmony Energy Income Trust plc, which invests in battery energy storage system (“BESS”) assets in Great Britain (“GB”), today provides a trading update ahead of the publication of its quarterly Net Asset Value update and audited annual results later this month. 

Weaker Revenue Environment in 2023 and January 2024

BESS revenues for the year ended 31 October 2023 were markedly lower than revenue generated in the same period in 2022. Whilst a reduction from the remarkable highs of 2022 was expected and built into third party revenue forecasts, the scale and the speed of the reduction has exceeded market expectations.

There are multiple drivers of this reduction in revenue, both macro and sector-specific:

·      Saturation of ancillary service markets. The high rate of build-out of BESS in GB led to saturation of ancillary services and has driven clearing prices to record low levels.  This was widely anticipated and the Company positioned its 2-hr duration portfolio specifically to protect against this event and take maximum advantage of the inevitable shift by BESS towards wholesale market revenue strategies and the Balancing Mechanism (“BM”). 

·      Reduction in wholesale power price volatility and spreads. As a 2-hr duration portfolio, this is more relevant to the Company than ancillary services.  Wholesale spreads in FY 2023 and FQ1 2024 have narrowed primarily due to a reduction in natural gas prices, itself due to milder than expected weather and high levels of European reserves.  In addition, GB has imported a large volume of energy from Europe (via interconnectors) and high consumer prices have encouraged a material reduction in consumer energy usage.

Wholesale price spreads are forecast by independent experts to increase during 2024 and beyond. This is driven by a range of factors including increased consumer energy demand (as the cost-of-living crisis eases), continued electrification of the country’s heating and transport infrastructure, greater penetration of intermittent renewables and an increase in pricing for natural gas and carbon.  

·     Implementation issues with National Grid ESO (“NGESO”) Open Balancing Platform (“OBP”). Another key factor in recent revenue weakness is NGESO’s continued sporadic use of BESS in the BM. Despite a well-publicised policy and comprehensive plan from NGESO to increase BESS dispatch rates in the BM via process and software enhancements over 2024 and 2025, the December 2023 launch of the new “bulk dispatch” software was curtailed due to technical issues. Since its re-launch on 8 January 2024, NGESO appears to only be using OBP intermittently, with the Company’s portfolio seeing some days of high BM volume, and some of zero.  BESS projects utilise algorithms and AI software to execute revenue strategies, and so the inconsistent use of OBP by NGESO not only limits BESS volumes in the BM, but also creates uncertainty over how much daily capacity BESS can dedicate to other strategies and services.  The Investment Adviser continues to have dialogue on this topic with NGESO directly and also via stakeholder interest groups.  NGESO has a published ambition to operate the GB system with zero carbon emissions by 2025 (i.e. reducing its use of coal and gas). A consistent use of OBP in relation to BESS by NGESO would, in the Investment Adviser’s opinion, not only help accelerate NGESO’s progress towards this goal, but also result in a near-immediate and marked increase in the Company’s revenue performance. 

Despite the conditions described above, the Company’s operating Portfolio continues to out-perform peers (on a £/MW basis).  The Company’s Pillswood (Phase 1) and (Phase 2) projects ranked #1 and #3 respectively for the calendar year 2023, and every one of the Company’s five operating assets appear in the Top-10 leaderboard for January 2024 (excluding non-BM units and estimated revenue from the Embedded Export Tariff) (Source: Modo Energy).

Operational free cash flow is forecast to increase in 2024 as the Company’s remaining three projects (c. 236 MWh / 118 MW – c.30% of the current portfolio) complete construction and begin operations. The Company has sufficient cash reserves to complete construction of these projects.

In addition, revenues going forward will be supported by the Company’s existing Capacity Market contracts, for which delivery only began in October 2023.

Postponement of First Quarterly Dividend for FY2024, and Strategy for 2024

In line with its stated dividend policy, the Company distributed 8 pence per share to Shareholders in relation to FY ended 31 October 2023.  The first quarterly distribution in relation to FY 2024 (2 pence per share) was expected to be declared later this month and paid in March.  However the Board, with support from the Investment Adviser has resolved to postpone this declaration.

While the reasons for the recent low revenue environment are understood, and the market conditions are expected to improve, the short-term outlook remains uncertain.  If these conditions do continue for an extended period, this will impact on the ability of the Company to declare and make distributions.  It is well understood that BESS revenues can vary across the course of a year and therefore prudent cash management is required. 

The Board recognises the importance of dividends to Shareholders and therefore is preparing to implement a series of short-term actions which would better position the Company for long-term stability and growth. These actions will include a restructuring of the Company’s existing debt facilities (to reflect that 70% of the portfolio’s MW capacity is now operational), coupled with one or more asset sales.  Any cash proceeds from such sales would be used, in priority, to reduce gearing and then to fund future dividend distributions for FY 2024 and 2025. These distributions could take the form of income and/or capital distributions.  The ambition of the Company remains the payment of 8 pence per share per annum. Any funds available after the payment of dividends could be used to repurchase shares. Further updates will be communicated to Shareholders in due course.

REGIONAL REIT Limited

Q4 Trading Update and Year-End Portfolio Valuation

98.6% Rent Collection for 2023

Regional REIT (LSE: RGL) today announces its portfolio valuation as at 31 December 2023 and a positive update for both EPC ratings and rent collections.

Full Year 2023 Valuation and Portfolio Update

·    Portfolio valuation £700.7m (2022: £789.5m)

·   The like-for-like value of the portfolio decreased by 5.9% from 30 June 2023 to 31 December 2023 after adjusting for capital expenditure, acquisitions and disposals during the period (5.5% excluding capital expenditure adjustment)

·   Total rent collection for 2023 is currently 98.6% compared with 97.9% for the equivalent period in 2022

·    Gross annualised rent roll £67.8m (2022: £71.8m); ERV £87.0m (2022: £92.0m)

·    Equivalent Yield 9.9% (2022: 9.0%)

·    Excellent progress on EPC ratings with c.73% of the portfolio EPC C or better

·    144 properties (2022: 154); 978 occupiers (2022: 1,076)

·    Total disposals in 2023 of £26.1m (before costs)

·    Portfolio: offices (by value) at 92.1% (2022: 91.8%), industrials 3.2% (2022: 3.1%), retail 3.1% (2022: 3.6%), and Other 1.7% (2022: 1.4%)

·    England represented 78.4% (2022: 78.3%) (by value), Scotland 16.2% (2022: 16.7%) and Wales 5.4% (2022: 5.0%)

·    EPRA Occupancy (by ERV) at 80.0% (2022: 83.4%)

·    Average lot size c. £4.9m (2022: c. £5.1m)

·    Net loan-to-value ratio 55.1% (2022: 49.5%)

·    Group cost of debt (incl. hedging) 3.5% pa (2022: 3.5% pa) – 100% fixed and hedged

·    Weighted average debt duration 3.5years (2022: 4.5 years)

Stephen Inglis, CEO of London and Scottish Property Investment Management, the Asset Manager, commented:

“2023 was one of the most challenging years for REITs in recent memory and Regional REIT was not immune from the macro-economic difficulties faced by the sector. Whilst valuations have been impacted, the Asset Manager’s active asset management initiatives continued to mitigate some of the impact on the portfolio. The leasing market was slower than anticipated largely due to the uncertainty around working patterns and the geopolitical situation impacting inflation and interest rates, but with some stability we are witnessing increasing numbers of enquiries for our assets.

“Notably, the Company continued to achieve a strong level of rent collection thanks to its high-quality tenant base. The ongoing asset disposal programme continues to achieve the latest valuations.

“It is pleasing to note that substantial progress has been achieved in improving the EPC rating of the portfolio. Over the course of 2023 the number of properties rated EPC C and above has improved to in excess of 73% of the portfolio.

“The LTV continues to be a key focus of the Board and the management have a plan to reduce LTV to the long term target of 40% through selective sales and repayment of debt. The senior debt is 100% fixed, swapped or capped and will not exceed 3.5%. The Company is actively exploring a range of refinancing options for the retail bond given its near-term maturity date.”

Rent Collection 2023 Update

The Company is pleased to report that as at 30 January 2024, Q1 2023 collections amounted to 99.7%, Q2 2023 to 98.5% and Q3 2023 to 98.2%. Currently, Q4 2023 rent collection, adjusting for monthly rent stands at 98.1%, which is above the equivalent period in 2022, when 95.6% had been collected. The total rent collection for 2023 is currently at 98.6% (see below) compared with 97.9% this time last year.

%	Q1 2023	Q2 2023	Q3 2023	Q4 2023	YTD
Rent paid	99.7	98.4	98.1	97.3	98.4
Adjusted for monthly rents	0.0	0.0	0.1	0.7	0.2
	99.7	98.5	98.2	98.1	98.6

Table may not sum due to rounding.

The Company remains supportive of its tenants and is in ongoing discussions with occupiers regarding the balance of the outstanding rent. It expects to collect the vast majority of the outstanding rent in due course.

Gresham House Energy Storage Fund PLC

Share Buyback Programme

Further to the announcement on 1 February 2024, the Board of Directors of GRID today announces the commencement of a Share Buyback Programme. The Company will review the Share Buyback Programme on an ongoing basis in the context of its capital allocation decisions, as well as the discount to NAV at which the shares are trading at any given time.

The Company has engaged Jefferies International Limited (Jefferies) as buy-back agent in relation to the Share Buyback Programme on a discretionary basis within certain pre-set parameters. The maximum price payable per share (exclusive of expenses) will not exceed the higher of: (1) 105 per cent. of the average market value of the Company’s Shares for the five business days immediately preceding the day on which such Share is contracted to be purchased; or (2) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange.

Share buybacks under the Share Buyback Programme will be made pursuant to the authority granted to the Company at its general meeting held on 30 May 2023 which limits purchases of shares by the Company in the market to up to 14.99% of the Company’s then issued share capital.

The Company will announce any market repurchase of Shares on the business day following the calendar day on which the repurchase occurred. The Company intends that the repurchased shares will be held in Treasury.

The Company is satisfied that it is not currently in a closed period, nor is it party to any inside information which has not previously been disclosed via Regulatory Information Service.

The Company shall not (i) exercise any influence over how, when or whether Jefferies effects share buybacks or (ii) change the number of shares, price or timing of the purchases.

It’s all about choices.

Memo to myself ONLY buy shares that are going up, u then u will

have a 60/40 chance of printing a profit.