Frequently asked questions (FAQs)
Below are answers to a selection of questions which are frequently asked by members via the Your views page. The questions will be added to over time and are grouped into the following broad categories:
Investment trusts
What are they?
Investment trusts or investment companies are like other publicly quoted or listed companies such as Shell or Glaxo but, instead of managing oil or pharmaceutical assets, they manage investments on behalf of their shareholders. These investments can span a broad range of financial assets (such as equities or bonds) and physical assets (such as commercial property). Whatever the type of investment, the idea is that investors gain exposure to a balanced portfolio of assets which is professionally run by an expert manager.
This form of 'collective fund' has proved a popular way for investors to invest their savings. Trusts have been around for a long time - the first (Foreign & Colonial, now F&C) was established in 1868. Today there are around 400 investment trusts in total managing assets approaching £300bn. A few of the largest are constituents of the FTSE 100 index and many more - just over a third - are constituents of the FTSE 250 index.
How do they differ from unit trusts?
Investment trusts differ in a key number of ways, including:
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What are their key advantages and disadvantages?
Because trusts are closed-ended, their managers are not forced to buy or sell investments simply because investors are buying or selling the shares. They are therefore better suited for the long-term investor. They are also particularly well suited for the more illiquid asset classes such as property, private equity and small companies.
Together with prudent use of gearing, this focus on the market rather than short-term investor money flows usually makes for better portfolio management over time. This is why investment trusts have on average not only outperformed their open-ended cousins but, unlike unit trusts or OEICs, also the underlying markets.
A key disadvantage is share price volatility because, like other listed companies, the price is largely governed by supply and demand for the shares - prices are not directly linked to the NAV. This is another reason investment trusts are best suited to the long-term investor. Lack of liquidity for smaller trusts can occasionally be another.
How are they regulated and governed?
All investments trusts are regulated by the Financial Conduct Authority (FCA). The board of directors is accountable to the regulator and shareholders for the manager's appointment and performance of the company. The Association of Investment Companies (AIC) is the trusts' trade body - its website contains useful information.
What do they cost to deal?
As with any listed share, there will be brokerage commission to pay and usually Stamp Duty on purchases.
Investment approach
What investment principles are adhered to?
Details of the website's investment principles are given on the Investment policy page. In summary, the website recognises the importance of (1) keeping investment simple, (2) remaining invested whilst achieving diversification as an investment journey progresses, (3) rebalancing when necessary, and (4) focusing on the long-term when assessing sentiment and fundamentals - volatility is therefore seen as an opportunity.
Why are options not used?
Investment is best kept simple to succeed. Complexity adds cost, risks confusion and usually hinders performance. This philosophy applies to all ten portfolios. Accordingly, the portfolios also tend to avoid derivatives, hedge funds, structured products and stop-loss policies.
Why do the portfolios remain invested?
Few markets rise without interruption - corrections are part of the investment cycle. However, the portfolios remain invested in their search for good quality companies because they are adhering to a tried and tested investment principle. The website’s Investment policy page, the Commentary page piece 'Staying invested' (6 July 2017) and further references since explain why.
What is meant by ‘portfolio balance’?
Enthusiasm for an investment should always be tempered with the need to maintain portfolio balance. No matter how compelling the investment case, an overly aggressive tilt towards a particular holding or theme raises a portfolio’s risk profile and can unduly affect long term performance should it go wrong. Resisting temptation is just as important as backing conviction – within balance!
What is meant by the term ‘holistic view’?
An ‘holistic’ view is taken of each of the ten portfolios. Changes should be judged as part of the whole, rather than simply a list of individual trades, as their management reflects a range of factors and financial metrics. Examples include:
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How often are the portfolios re-balanced?
Rebalancing is one of the first principles of investing, and yet it is often overlooked. It is a consideration when portfolio changes are made and is therefore ongoing. However, large market movements may, in themselves, warrant a rebalancing. The portfolios recognise the importance of keeping dealing costs to the minimum required to achieve objectives. For general guidance, the website’s Investment policy page, the Commentary page piece 'Rebalancing pays dividends' (7 September 2015) and further pieces since explain our approach.
Why is diversification important?
Few financial investments will escape a market correction unscathed. However, appropriate diversification relative to remit should help to reduce the extent of losses from any market falls. Diversifying portfolios away from equities towards other 'less-correlated' assets (i.e. bonds, precious metals, commodities, infrastructure, renewable energy, commercial property, cash, etc) helps to achieve this. Such investments can also assist portfolios in raising income levels as the investment journey unfolds. The Diversification page has more details.
How many asset classes should one employ when diversifying?
The answer, as with investment generally, is to keep it simple. As Warren Buffet once suggested, wide diversification is only used when investors do not understand what they are doing. The portfolios essentially employ up to nine asset classes (inc. cash) as the five-portfolio risk-adjusted investment journey unfolds.
Why do cash levels vary at times?
Although the portfolios' investment approach is to remain invested and add value over time, there will be occasions when cash levels are a little higher than usual whilst investment opportunities are being considered.
What portfolio benchmarks are used?
The LISA, Spring and Thematic portfolios use the FTSE All-Share (total return) index – in part reflecting the fact that when the portfolios were launched the UK market was a much larger constituent of benchmarks more generally. The Summer, Autumn and Winter portfolios are monitored over time against the MSCI PIMFA Growth, Income and Conservatives indices respectively. The asset allocation weightings of the indices can be found at www.pimfa.co.uk
The WMA (Wealth Management Association), PIMFA's predecessor, changed the provider of its indices from FTSE to MSCI in February 2017. The historical data of the MSCI WMA indices (now MSCI PIMFA) was created using the same historical asset allocation weightings as was used for the FTSE series - so returns are very closely allied. Accordingly, the portfolios have used this data from 1 January 2017.
Trust research
What factors influence trust selection?
Factors taken into account when selecting investment trusts include the reputation of the manager, the underlying strategy, the outlook for the sector or region, the discount and valuation of the investment trust relative both to the peer group and its own recent history, the level and cost of any gearing, the level of management fee, and extent of revenue reserves (particularly if investing for income). Research is usually complemented by direct conversations with the managers and our own calculations regarding valuation metrics including performance relative to the relevant universe and peer group. The Commentary piece 'Private investor seminar speech' (22 February 2018) discusses the issue in more detail.
What tools are used to monitor discounts?
We do not rely on other investment platforms as some do not show historical data accurately, while 'live' discounts are not displayed. We undertake our own research, and discounts relative to their ranges are calculated individually using information sourced directly from the company in question.
Which method is used to measure discounts?
When evaluating discounts, the portfolios: (1) use the NAV including current income (rather than capital only) where relevant; and (2) measure NAV with any debt priced at market value (rather than the price when eventually redeemed) - this is the more 'conservative' approach, as our valuation metrics are related to the present given debt can be traded prior to redemption, whilst NAVs should also reflect expensive debt.
Can the buying of investment trusts on premiums ever be justified?
We take the view it can be justified provided various factors are in place, including the track record of the fund manager, the outlook for - and pricing of - the underlying portfolio, and the yield and outlook for dividend growth. A further consideration is the need to view a portfolio 'holistically' and not just as a collection of individual trades. The Commentary page piece dated 22 February 2018 and further pieces since explain our approach in more detail.
Why do companies buy-back their own shares?
Usually, it is because company directors consider the shares too cheap relative to prospects, and buying shares from the market can help to narrow the discount if conducted in a disciplined and structured way.
Income matters
What is the income objective of the portfolios?
The policy for those portfolios where income is an important part of the remit is to steadily grow the level of income generated courtesy of dividend growth and portfolio changes as necessary - the yield being a function of portfolio value. Such an approach is particularly important for our higher-yielding Autumn, Winter, Dividend and Overseas portfolios. All portfolio yields are detailed on the Rationale and portfolio pages.
How are portfolio yields calculated?
Each portfolio yield is calculated as the total value of all annual dividends currently being paid by its holdings, together with any interest from cash, divided by the total portfolio value including cash. The figure therefore takes into account investment trust management charges. The Rationale and portfolio pages show all portfolio yields as at the date of the last portfolio trade and at the end of each month.
How do the portfolios treat the income generated?
All income, whether dividends or interest, is retained within the portfolios to help fund future investments.
What does the term 'total return' mean?
The term is a means of measuring performance over a specific timescale which encapsulates the capital gain or loss of the assets being managed plus the income generated by way of dividends and interest. It is the most widely used and fairest measure of performance for both portfolios and benchmarks, in part because it captures the reality that certain investments may fall shy in share price terms but more than make up for any shortfall over time once dividends/interest are taken into account.
What does the term 'revenue reserve' mean?
Unlike their open-ended cousins, investment trusts are able to retain or 'carry forward' accumulated income, whether in the form of dividends or interest or both, which can then be distributed in the future. This store of accumulated income is called the 'revenue reserve', and its value is usually expressed in terms relating to the period it covers the present annual dividend - usually in terms of months.
Why is 'dividend diversification' important?
Given dividend cover can often vary across regions, the portfolios look to ensure adequate diversification when sourcing income provided this adheres to their risk profile - whether by company size, geography or theme. The Commentary page piece 'Dividend discipline' (10 August 2017) and further pieces since explain our approach in more detail.
Portfolio management
What factors influence the number of portfolio holdings in the five-portfolio investment journey?
Being live like all the portfolios, they reflect the tendency to have fewer holdings at the start of an investment journey.
What factors should influence each portfolio's minimum value?
This largely depends on personal circumstances, including investment objectives, portfolio value relative to the overall value of one’s financial assets, and dealing costs relative to portfolio size. Portfolio performance relative to benchmarks over time should also be considered. The website recognises that portfolios tend to be smaller when starting, that it is important to keep portfolio changes to the minimum required to achieve objectives, and that such changes should be cognisant of portfolio size - with smaller percentage changes, when necessary, focused on the larger portfolios. Otherwise, in large part, there is no restriction when it comes to portfolio value or type of investment wrapper used.
What factors determine the choice of portfolio?
Again, this largely depends on investment objectives including risk profile, income requirement and time horizon, and on the value of an investment portfolio relative to other assets. The terminology of the 'seasonal' portfolios reflects an investment journey, and each therefore conveys the stage of that journey rather than the age of the investor!
How do the portfolios invest cash?
Investing cash - particularly if starting from scratch - is seldom easy. One factor is the size of portfolio holdings relative to dealing costs. Past experience suggests a piecemeal approach - committing over a period of four to six months, trying to buy on market setbacks, and investing in tranches. But given that markets tend to rise more than they fall, 'pound-cost averaging' can have its disadvantages - despite the better peace of mind it usually allows. As ever, there is no exact format.
What is meant by the term 'top-slicing'?
The website uses the expression to denote a reduction in size of holding, usually following a good run and when funds are required for other investment opportunities.
What is the best approach when transitioning between portfolios?
As with investing from cash, there is no fixed answer when transitioning from existing portfolios. It depends on such factors as the extent of common holdings, the extent of dealing charges relative to portfolio size, and how quickly an investor wishes to be positioned accordingly. If time is not a factor, it is often better not to rush.
Website questions
How does a member obtain an extra 30-days free membership?
As highlighted in more detail in the Commentary piece ‘Gesture of thanks when referring a new member’ (14 September 2019):
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What services are available on the My account page?
The page is designed to centralise a range of services which are personal to each member, whether having paid for an annual subscription or undertaking a trial. It is therefore only accessible once members have logged in, and the link will then be found in the footer of each page. It is anticipated that further services will be added over time.
The page allows members to:
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When are portfolio changes reported and explained?
Members are sent an email whenever any page of the website is updated. Changes to all website portfolios are therefore reported on the day they happen (via the Dealing page), as are adjusted portfolio breakdowns and yields (via the relevant portfolio pages and Rationale page). Changes are explained usually within a few working days of being made (via the Commentary page).
How are portfolio page breakdowns calculated?
The % given for each holding on the portfolio page denotes its size relative to the total value of the portfolio at the date given (in brackets), rounded to the nearest ½%. The calculation is undertaken for all holdings in those portfolios where a change is made and, as for all portfolios, at the end of each month (as denoted by the date).
How does the Dealing page report weightings following portfolio changes?
When portfolio changes are reported in real time on the Dealing page, the new and old weightings of those holdings involved are calculated to one decimal place in order to assist members monitor progress - these figures are then rounded to the nearest ½% when denoted on the portfolio page.
Do the old % weightings on the Dealing page always match the last reported breakdown?
No - occasionally there is a difference because of price movements over time between reporting updates. For example, a trade reported as 'Added (to 4.9% from 3.4%)' when the last reported portfolio page breakdown gives the holding in question a weighting of 3.0% is accounted for by the price having advanced the 0.4% in the intervening period.
Does the website comment on corporate actions and portfolio holdings once bought?
Yes, and this includes the regular ‘Sector and company news’ Commentary page pieces and updates on the Trust of the moment page. Otherwise, members should assume any absence of comment signifies (1) we are content with our weightings and so will not be participating in any corporate actions, and (2) we are content with portfolio holdings until changes are made.
Can members renew their annual membership early?
Although we are proud of our high retention rate in relation to existing members renewing their annual membership, a few members continue to miss website updates not realising their membership has expired. To assist, each update email now reminds all members of their expiry date if within 30 days, and that renewing early within this period will ensure their new one-year membership will follow on in its entirety once the current membership expires.
How can ex-trial members subscribe for annual membership?
Those trial members returning to subscribe for annual membership after their trial has expired should go to the 'Existing member' box on the Subscription page to log on using their old username and password - should either or both be forgotten, then click on the Forgotten password link on that page. Members will then be able to purchase a subscription via the My account page.
Can the website's text size be made larger?
Yes. At the top right-hand page, members will see the letters AAA in ascending size with the first A being the website's original text size - just click on the size which is most suitable. All linked pages, including the Dealing, Commentary and Trust of the moment pieces, also benefit from this choice. Once chosen, the text size will remain constant for all pages until logged out.