INVESTMENT STRATEGY
SCHRODERS
NEW PENSIONS
FREEDOMS
- NEW OPTIONS
T
he pension freedoms
introduced in April are likely
to see many people remain
invested into their retirement
instead of buying an annuity. The
type of investment best suited to
this new approach has been hotly
debated, but it is clear it must be
consistent, diverse and provide
growth.
GROWTH
For a retiree with 20 to 30 years
of retirement ahead of them,
dividend growth is likely to be
more important than the headline
dividend as their income needs to
keep up with inflation.
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A fund’s potential to increase
dividends year-on-year is also an
attractive proposition for income
investors – something the Schroder
Income Growth Fund plc has done
since inception in 1995.
There is another nuance in the
current environment. With UK
and US policymakers on the cusp
of raising interest rates, companies
that offer a fixed level of income
are likely to become less popular.
Companies that also offer growth in
their dividends are unlikely to come
under the same pressure.
It is also worth noting that a high
absolute level of dividends could be
a sign of distress: companies with
Investment trusts with a
history of increasing their
dividend are one option
for retirees who want
their income to keep
pace with inflation
high dividend yields could be those
where the market is concerned
the dividend is at risk. The income
investor may buy at a yield of 7 to
8 per cent, but their annual income
will fall if the company then lowers,
or abandons, its dividend.
CONSISTENCY
While no investment can match the
guaranteed returns of an annuity,
investors need reassurance that a
trust has exhibited consistency of
income payments in the past and
can continue to do so in future.
Investment trusts have something to
offer in this regard – they can reserve
a portion of each year’s income in
trustnetdirect.com
buoyant times to pay it out in leaner
ones, leading to greater consistency
of payouts for investors.
Many investment trusts have built
up significant reserves on which
they can draw. They can also pay
income out of capital if they choose,
giving them greater flexibility. The
Schroder Income Growth Fund plc
holds about 4 per cent of its net asset
value as reserves, equal to around six
months’ worth of payouts.
Another tool investment trusts
can use is gearing, meaning they
can borrow extra money to invest.
This can boost returns but also
introduces extra risk; the gearing on
the Schroders Income Growth Fund
plc currently sits at 9.2 per cent.
Equally, for many investment
trusts, the board makes the
commitment to pay a dividend.
The board ensures the manager
remains wedded to this goal and
will challenge them if it isn’t met.
This differentiates investment trusts
from open-ended funds.
DIVERSITY
The investment trust structure also
allows managers greater flexibility
in the investments they choose.
Trusts have a fixed pool of assets
and managers do not have to
navigate inflows and outflows. This
is important as dividends in the
UK equity market can be relatively
concentrated if investors are
confined to the most liquid parts.
There is considerable dividend
diversity in the market. A recent
Capita report found that rather
than income stalwarts such as
healthcare or utilities, it was areas
such as construction, general
retailers, household goods, media,
telecoms (fixed line), property and
technology sectors that posted the
strongest growth in dividends at the
start of this year.
This diversity is important.
Targeting an absolute dividend yield
MANY INVESTMENT
TRUSTS HAVE BUILT UP
SIGNIFICANT RESERVES
ON WHICH THEY CAN
DRAW. THEY CAN
ALSO PAY INCOME OUT
OF CAPITAL IF THEY
CHOOSE
at the expense of either diversity
or growth in income is likely to be,
at best, a short-term strategy and at
worst, will put investors at risk. This
is particularly true in the current
environment where certain parts of
the market look vulnerable.
Incorporating stocks from abroad
is important when building a
diversified dividend portfolio. The
Schroder Income Growth Fund
plc can invest up to 20 per cent of
its assets in non-UK stocks. This
diversity helps ensure consistency,
giving the managers a broader
choice in more difficult conditions.
The new pension freedoms offer
many options for investors to
build and increase their retirement
income. An investment trust cannot
replace an annuity, but it has certain
characteristics that ensure payouts
are likely to be more consistent,
diverse and exhibit stronger growth
than many other options. As such,
we believe they merit consideration
within a retirement portfolio.
The Schroders Income Growth
Fund plc is managed by Sue Noffke,
who has been with Schroders
for more than 20 years. It aims to
provide growth of income in excess
of inflation, and capital growth as a
consequence of the rising income. It
targets the attractive income growth
potential of UK companies and has
increased dividends each year for the
past decade.
Schroder Income
Q2 2014-
Q2 2013-
Q2 2012-
Q2 2011-
Q2 2010-
Growth Fund plc
Q2 2015
Q2 2014
Q2 2013
Q2 2012
Q2 2011
NAV total re