What ‘buy-and-forget’ investors really need

A personal pension or Sipp is an effective retirement plan for the self-employed or directors alongside a workplace pension, or those in retirement to draw an income.

Not everyone has the time or inclination to self-research, select and monitor funds or investment trusts, preferring to enlist the help of a professional.

One of the simplest and cheapest ways to do this is using a global investment trust such as Alliance Trust.

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It has several characteristics that make it a strong choice for long-term ‘buy-and-forget’ investors with diversification being the most obvious. Different parts of the portfolio are outsourced to expert managers to run as sub-funds with the trusts holding hundreds of underlying stocks worldwide.

Diversification can however make topping performance tables a challenge in the short term. But in the long term, achieving solid, reliable outcomes is easier as no individual holding or manager’s troubles will adversely impact the whole portfolio.

Size is another benefit as Mick Gilligan, head of managed portfolio services at wealth manager Killik, explains: “With scale comes lower costs: fixed costs such as directors’ fees are lower as a percentage of total assets, and bid/offer spreads are lower.”

Trust managers are also in a stronger position to negotiate more competitive fees with the underlying managers, given the chunky mandates on offer.

So despite a double layer of charges (for the trust and for the sub-managers), the ongoing charges figure (OCF) for Alliance Trust at 0.64%, is competitive. There are cheaper multi-manager trusts but these tend to use in-house teams and funds so offer less diversity.

A one-stop shop for new investors

For novice investors, allowing experts to do all the heavy lifting is appealing and managers of these trusts have amassed considerable expertise in identifying and monitoring ‘best of class’ sub-managers. Conversely, if a sub-manager persistently disappoints then it’s the trust managers’ job to take action, and if necessary move that mandate.

Professional portfolio management also means investors get ‘special access’ to say sub-managers who normally run institutional money or are based overseas.

The trust manager is also responsible for asset allocation. As David Henry, a portfolio manager at wealth manager Quilter Cheviot, puts it: “There’s a danger of becoming a financial magpie and being attracted to the next big shiny things, which would probably have been technology and the US over recent months. If you have a manager who has the discipline and expertise to look also at more out-of-fashion areas with potential to rebound over the long term, then it’s a pretty attractive package.”

Alliance Trust’s specialist managers deliberately avoid taking big bets on specific countries, sectors or styles (favouring only growth or value stocks, for instance), on the grounds that macroeconomic outcomes are so complex and difficult to predict.

Instead, their focus is on identifying the best companies with genuine long-term competitive advantage and strength. The integration of environmental, social and governance (ESG) factors into the stock-picking process underpins that perspective.

Income in retirement

Conventional wisdom might push investors to sell out of non-income-focused holdings at retirement to boost yield. But, as Henry points out, by focusing too much on yield, they risk missing out on other high-quality investment opportunities.

“I prefer to take a total return approach with pension money and have a stable, sustainable yield, rather than chasing an income of 4 or 5%,” he comments. “We’re trying to keep as many equity options on the table as possible at that stage – and the need to manage portfolio volatility means it’s worth having exposure to other asset classes as well.”

He maintains global generalist trusts are suitable for those in retirement since they are not specifically run as income-producing investments, but many members of the global sector are AIC Dividend Heroes, with decades of consistent dividend growth behind them.

Thus, F&C has a 450-year dividend growth record; Alliance Trust’s has 54 years.

Find out more about Alliance Trust