Investment trusts – the perfect product for a reliable retirement income

If you want a very long-term investment that produces an income into your retirement while preserving your capital, buy an investment trust, says Merryn Somerset Webb.

Old lady jogging in the park  © Getty Images

You are in "critical denial" about your future, rejuvenation guru Aubrey de Grey told his audience at the Longevity Forum at the Royal Institution in London this week.

You are assuming that the world will continue as it is, that ageing is natural and inevitable and that the social, economic and career systems we currently live with are set in stone. You are wrong.

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If you focus on your health, the odds are you will live a lot longer than you think. Failing a nasty illness, you are already good to keep going into your early 90s, and possibly longer.

We already know longevity is malleable, that we can influence how it happens if that were not the case the UK would not display the range of age expectancies it does. Walk a lot, do a little weight-bearing exercise, stop smoking, stay thin, fast occasionally, sleep well and stick close to your family and you could make it into your late 90s or early 100s. You might also do so in good health.

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If you are fit, longevity experts say your physical and cognitive abilities will fall by about 0.5% a year in old age. If you are not, it'll be 2%. These experts no longer talk about lifespans. They talk about rising health spans increasing the time you spend in good health and about rising longevity as a side effect of this.

If that isn't how you see old age, the experts at the forum would say you are looking at it the wrong way. Instead of assuming you will be bored, ill and broke, you should assume you will be healthy, productive and engaged with society. Think of the whole thing as extending your middle age rather than dragging out your old age. That said, you are still going to need a financial product that works with your own uncertainties one that can at least match, and preferably beat, your own lifespan.

Investment trusts have stamina

This brings me to one of my favourite financial topics, investment trusts. You want longevity? This lot have it. Last year, the oldest of the lot (and one I own), the F&C Investment Trust, celebrated its 150th birthday; Dunedin Income and Growth is 146 years old; Scottish American is 144; the JPMorgan American Investment Trust is 136 years old; and The Mercantile Investment Trust is 133. How do they do it? In the same way you are going to do it inside a correctly structured environment.

An investment trust is simply a company set up with the purpose of investing in other companies. Its capital is permanent. You can buy and sell the shares in it but not actually withdraw the capital. That makes it a great structure for holding illiquid assets and anything you want for the long term. You can sell shares in a FTSE 100 stock any minute you like. It takes a while to sell a solar farm, an airport or portfolio of unlisted companies just ask Neil Woodford.

Permanent capital also attracts good managers, lured by the opportunity to manage money and be a genuine long-term investor without the endless distractions of investors buying and selling units. Fund managers hate admin just as much as the rest of us.

Then there are the boards. And this is where I think investment trusts really come into their own. As companies, they have boards of directors. As the custodians of a listed company, those directors are obliged under section 172 of the Companies Act 2006 to have a mind to the needs of all stakeholders. But their main priority is always going to be the longevity of the company and the needs of their shareholders who can and do turn up to AGMs to complain if they aren't convinced.

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They also tend to be shareholders themselves. As Investec Securities' Skin In The Game report shows, nearly all board directors hold shares in their trusts (and often hang on to them long after they leave the board). The board is entirely independent of the fund manager, who is simply a contractor to be hired or fired as needs be. This means that investment trusts are generally not susceptible to the usual downfall of open-ended funds, where asset gathering is prioritised over performance.

Directors may be happy to issue more shares in their trusts if the market is interested in them doing so. But they will also have two things in mind: first, to use economies of scale to bring down the costs of the fund and, second, to make sure their trust stays at a size that will make it investable for wealth managers which matters for the longevity of the fund.

What they won't be thinking about is the profit margins of the fund managers they employ to run their money. And quite right too. The system isn't perfect (the directors of Woodford Patient Capital did not cover themselves in glory, for example) but it mostly works very well. Investment trusts have a long-term record of outperforming open-ended funds, possibly for all the reasons listed above although historically lower fees have played a part.

An excellent alternative to an annuity

My point here is that when you are looking at healthspan extension, you don't want to lock yourself into anything you can't unwind in the long term (say, an annuity) but you do want good performance from an asset that displays its own healthspan. Investment trusts are a good answer. They could perhaps be an even better answer.

One more thing that investment trusts can do is turbo-charge their dividend payments by paying them partly out of capital. Before the pensions reforms, I hugely disapproved of this. The very idea of returning people's own capital to them as income seemed nuts to me, particularly given that capital gains tax is much lower than income tax. If you want your capital back, I told readers, just sell some shares. But in this new world, I get it.

Ask anyone what they want from a retirement financial product and they'll describe an annuity, but one where they don't lose control of their capital. That is not possible.

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However, a product that provides what today passes for a high yield (say 5% to 6%) and allows you to hang on to most of your capital (with market risk, of course) is possible. It is also exactly what a large well-managed multi-asset trust with an independent and competent board could provide.

Most financial advisers will tell you that you must have a plan; you must have targets; you must know what you want from your money. This is nonsense what you really need is an income and the knowledge that you aren't locked into anything, that you have options for whatever your uncertain but exciting future might bring. Here's wishing you a long healthspan.

  • This article was first published in the Financial Times
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