TIME TO LOOK AT INCOME

Moneybox Man has turned his anxious eyes away from the Greek Economy,  and has been looking at three stocks for income, that might be conveniently purchased within an ISA. High-dividend stocks are best in an ISA because you don't have to tell the tax man about them.

The first is Invesco Leveraged High Yield. (See other posts). Moneybox Man put £6,300 into it exactly two months ago. The price has gone down slightly, but the NAV has gone up - making it a classic buying opportunity for the sharp-eyed investor, for it is now at a discount of almost 9%, whereas Moneybox Man only got in at 8.8%

A less exciting but very solid long-term income buy is Vanguard Equity Income Fund. This is a new tracker from the US Vanguard Group, and has a TER of only 0.25%. You can read about it here Normally to invest in the fund you have to put up £100,000, but using the Alliance platform you can invest any sum you like.

Thirdly, what about some cumulative irredeemable preference shares? Moneybox Man has just increased his holding in Aviva 8.75 Cum Irrd Prefs in order to boost his income. These are, of course, shares in one company, but they are very well protected.

Basically, preference shares get paid before ordinary shareholders. So if there isn't much profit, the prefs scoff it all. Secondly, these are "cumulative" - meaning that if Aviva fails to pay a dividend for a year or two, the preference shareholders have to be paid all their back dividends before anybody else gets anything.

Irredeemable means that Aviva will not redeem the shares at £1 each. There isn't actually much point in their trying, because the shares are currently valued at around £1.13p.

This means that you don't actually get 8.75% interest, but around 7.2%. The money is paid into your account twice a year.

Do you know a bank that will pay you 7.2% interest on your money, tax-free?

To buy Aviva go to the Alliance TRADING CENTRE. Then pick "Investment Trading" then "Trade Now"

The code to enter on the Alliance website is for Aviva prefs is AV.A

For Invesco Leveraged it is ILH

For the Vanguard Fund, you go to the first box on the trading screen, fund supermarket, press "trade in funds" and the code is VVUKEI 

THE CALM BEFORE THE STORM

"The markets are up, but its just the calm before the storm" - that was the view of the fortnightly seminar in the Tannochbrae Inn on Monday. Moneybox Man is 20% cash, and he yearns for the markets to fall so that he can get it invested. He takes little comfort in the fact that the £12,000 he put into James Anderson's Scottish Mortgage and Sue Rippingale's Scottish Oriental, exactly a month ago, is now worth £13,954. This investment, however, did win him a bottle of Scotch for best pick-of-the-year so far, very prettily presented by Miss Muddled, Middlesex.

Several seminar members, including the entire Bank of England Monetary Policy Committee, gave Bewitched, Beckenham advice on how to invest the remainder of her portfolio cash once she has subscribed to ISAs for his year and next year. The answer is to open a dealing account on line at Alliance Trust, and put the money in by debit card.


When to buy? That's the question!

TAKING THE PLUNGE

You may remember that I wrote to Alastair asking him how I should invest my money, thinking that as Chancellor of the Exchequer he would know everything. He told me "Moneybox Man knows everything!" and last week very kindly gave me and Miss Muddled a lift to Ullapool in the Queen's helicopter. It was a wonderful seminar (you were terrific doing the Highland Reel)  and I now want to invest my money. But how do I actually start? How do I take the plunge? Bewitched, Beckenham

Well, Bewitched Beckenham, the first thing to do is go to the Alliance Trust on line here and open a stocks and shares ISA for the current financial year. You don't have to put any money into it yet, but if you go through the formalities of opening it, you will be in a position to move swiftly when you want to (just as you did when Wee Willie Killicrackie of Dundee made those unfortunate advances last week at the buffet). All you have to do at the Alliance website is click "New Client" then click "ISA stocks and shares", confirm that you do not have a financial adviser - and fill in the form. If you were over 50 you would be allowed £10,200 for this year, but as you are clearly nowhere near 50 you will only be allowed £7,200.

When this account is opened you will be able to put the money in when you like (before April 5) very simply by debit card - and then when you feel like it you will be able to buy something!

I will be happy to talk you through that when you are ready. Or Alastair will. Or Wee Willie, of course.

After April you will be able to put a further £10,200 in for the next financial year.

TEN TRUSTS FOR STORMY WEATHER

ULLAPOOL SEMINAR PICKS ITS TRUSTS FOR THE LONG TERM

Ten trusts that will give you a decent income, long term capital growth, and protect your savings in stormy weather! There was warm applause in the Bonny Prince Charlie Function Room as Alastair announced the winners


INCOME WITH GROWTH IN THE LONG-TERM

Temple Bar

Edinburgh

Finsbury Growth and Income

Henderson New Star Asian Dividend Income Unit Trust


Temple Bar has increased its dividend every year in the last 25 years, and has an excellent growth record under manager Alastair Mundy. Like the Edinburgh Trust it is cautiously managed, and in both cases you get a sizeable chunk of Britain's biggest and most well-run companies - Glaxo, BP, Vodaphone, etc.

Edinburgh is a billion pound long-established trust now in the hands of Neil Woodford,  manager of the hugely successful Perpetual High Income Fund. The research resources behind Perpetual High Income are therefore available at no extra cost.

Finsbury is a much smaller UK trust with an individualist flavour. "The portfolio is full of companies whose products taste good – such as Diageo, Dr Pepper, Fullers, Marstons, Unilever and Youngs” says dashing manager Nick Train, who recently made a killing out of Cadburys.

Henderson Asian Dividend Income UT is the only unit trust to be selected. The seminar would have gone for Henderson Far East Income Trust, but this is so successful that it is currently at a premium of nearly 4%. Last autumn Henderson launched the Asian Dividend UT with the same manager, Mike Kerley, and the same remit. It has an initial charge of 5% but this can be reduced to 0.25% if bought on the Alliance Platform. It has an annual charge of 1.25%, but the agents' commission element will paid directly to you, again if bought via Alliance. (Fund symbol is EXPG)


GROWTH FROM THE WORLD'S ECONOMY


Murray International

Scottish Mortgage

Templeton Emerging Markets

Scottish Oriental Smaller

Hansa A

Murray International is run by sturdy Bruce Stout.  He earlier told the seminar: "Following last years stock market rally of relief, this year stock markets must deal with reality. The withdrawal of unorthodox policies and tightening monetary policy at a time of such economic fragility is bound to cause uncertainty. A solid buy-and-hold approach ignoring short term fluctuations, will remain central to our investment strategy going forward" (Applause)

Scottish Mortgage is a big, big internationalist trust with £1890 million of capital spread round the world. It has over 50% invested in Europe and the US, and is a big supporter of companies like Amazon and Google.  It has an excellent manager in James Anderson. It has very low expenses and a decent 2% dividend.

Templeton Emerging Markets is run out of Singapore by Dr Mark Mobus. It has a superb long term record. Co-manager Tom Wu works out of Hong Kong. The trust is big in China and Brazil.

Scottish Oriental is run by Sue Rippingale out of Hong Kong (see previous post) and is the only investment trust managed by the Australian First State Group. It specialises in smaller companies, where there is the maximum opportunity for growth. Expect it to be highly volatile - it has fallen from 434p a share to 389p in the last few weeks.

Hansa looks after the investments of the Solomon Family, and takes up large positions in companies where it thinks there is money to be made. It has a major holding in Oceans Wilsons, an emerging markets company that runs the ports of Brazil (and donates each year to a charity to rescue abandoned children in Rio). Hansa has had a bad couple of years, and is at an unusually wide discount.

PROPERTY

TR PROPERTY

Invests in property companies across Europe.

The ten trusts listed above give an average yield of 3.3%. A £100,000 portfolio therefore would return £3,300 a year in dividends.

Moneybox Man is hooked on yield. He would add two trusts out of the following.


Invesco Leveraged High Yield

Invesco Leveraged High Yield has a dividend of 8.6%. The value of the shares, however, has fallen by over 50% in the last decade. Yet look at the last 12 months - it's shares are up by 110% but its NAV by 160%. Volatile, but with terrific managers, take the dividends gratefully and don't pay attention to the share price (which anyway could easily double in the next decade).

Henderson High Income

Henderson High Income has 25% in bonds, and the rest in high-yielding equities, which inevitably means Vodaphone, BP, etc. It's well managed, and has an average risk rating and an excellent yield of 7.25%

Henderson Diversified Income

Covered in a recent post, this has an income of 7% from bonds.

Adding two of these high yield trusts will boost income significantly, and generally make life more interesting. A portfolio of £120,000 would yield 4.1% - that's £4,100 a year in dividends

A QUOTE FOR A STORMY DAY

"Picking developed world currencies now is like being asked to choose between horses in a glue factory – they are all knackered"
Recounted by Nick Train who manages Finsbury Growth and Income - a trust with a portfolio "full of companies whose products taste good". Finsbury has lots of shares in Cadburys, and the seminar enjoyed a lavish distribution of creme Easter eggs as they watched markets across the World fall, in the TV Lounge of the Tannochbrae Inn. Outside the skies over Ullapool were dark and stormy. Soon it will be time to invest!

MORE FIXED INTEREST FUNDS

Two trusts from Henderson complete our portfolio of investment trusts for the long-term investor. The Henderson High Income Trust is 25% invested in fixed interest bonds and the like. Its NAV has been rising faster than its share price, which means it is currently on a discount. Its yield is 7.3% which is excellent. It consistently outperforms its competitors. The second trust is also from Henderson -  Henderson Diversified Income Ltd which is entirely devoted to bonds and secure loans, with only 14% in "junk" bonds and another excellent dividend of 7%, though it's TER is high at 1.43%.

The trust's co-manager, Jemma Bernard, confided to the last seminar that she aims for "consistently high income, capital preservation over all periods and the prospect of capital growth over the long term." This fund has also been increasing its value faster than its share price, and is on a discount. A sound buy for income, which should stay steady whatever the ups and downs of the market.

The next seminar will pull together the trusts reviewed over recent months, and ask: "Is this the time to buy?"

Step-by-step guide to investing: Seminar 15

Bonds are less risky and volatile than shares, we are always told, and come what may they will react differently; bonds tending to move up when shares tend to move down. Moneybox Man is not convinced. The bond world is distorted by the Bank of England's printing of £200 billion and could do funny things.

Certainly, if you buy National Savings products then your money will be safe. But will it actually earn anything for you? Will it give a return that's better than inflation, even? If you buy monthly income bonds and put in more than £25,000, you will get a magnificent 2%!! Hurrah, when inflation has just reached 3%!! And you will be taxed.

Index-linked bonds give you 1% tax free, which is at least something if you are a high rate taxpayer, but really tax ought to be avoided whatever you do. 

The price of total security is too high; the "total security" itself too notional. There are better things a prudent and sensible investor can do with their money.

Take, for example, the Invesco Leveraged High Yield Income Trust. Dripping with danger, you might think - leveraged, which means they're borrowing money to invest with; high yield meaning they're putting the money into bonds with a low rating - BBs and CCs rather than straight As! (See last posting).

But the managers are the redoubtable Paul Read and Paul Causer. They run the Invesco Perpetual Monthly Income Plus fund. Moneybox Man has shares in Monthly Income Plus, and is very satisfied. They pay 7.38%, tax-free in an ISA. They have risen in value by 36% since Moneybox Man bought them in 2002.

Read and Causer put your money to work. The Invesco Leveraged High Income Trust pays over 9%, has a TER of 1.4, and is at a discount of around 6%.

I missed the seminar because of the snow, and now I don't understand about gilts and junk bonds. What am I going to do, Moneybox Man? And how will I get to next week's seminar? Miss Muddled, Middlesex
Don't worry, Miss Muddled Middlesex. You can come to the next seminar with Alastair, who has been given the use of a helicopter of the Queen's Flight as part of his price for supporting Gordon Brown. As for bonds and gilts as such like, you need to know only the following.

• A bond is simply lending £5,000 or whatever to somebody, and they promise to pay you the money back in a fixed time, say five years, together with a fixed rate in interest per year. To confuse people they call the dividend the "coupon"
• A bond is called a gilt when it's a loan to the government. In the old days these bonds had gilt edges. They can't physically put gilt edges on them now because Gordon Brown sold all our gold reserves at the lowest price that gold reached in the last decade.
• Junk bonds are loans to companies that are not perceived as being totally secure financially. Instead of having an AAA rating they might only have a BBB. These companies have to pay a higher rate of interest to get your money.
• Note that if the United Kingdom loses its AAA rating in the next few months, because the Bank of England is printing all that money, then gilts will have become junk bonds, and the world will have turned over and the stars will fall from the skies.

See you next week in the Bonnie Prince Charlie function room, Miss Muddled!

A CARTOON FOR THE WEEKEND

The putsch is over - Hoon executed on College Green, Hewitt in hiding, six cabinet ministers still under interrogation.  The prime minister now walks Alastair Darling's little Scottie dog at nights, part of the price he has paid to retain the chancellor's dubious loyalty. Passing the Embankment paper-recycling bin he empties his briefcase into the fourth slot.

On Monday the Moneybox Man seminar will meet to consider where money can best be kept in banks and bonds.

Step-by-step guide to investing: seminar 14

Unlike the friendly but totally useless sloth,  South American markets promise to be industrious, vibrant, and dynamic in the next decade. This should prove rewarding for the awesome Templeton Emerging Markets Trust, managed by the fabled Dr Mark Mobius and his team of 35 portfolio managers round the world, who speak 22 languages and dialects between them.

The trust - known as TEMIT - is on a discount to NAV of around 7%, and although it's very much a long-term growth trust, it does pay a modest 1.3% annual dividend. Moneybox Man is hooked on yield, and feels physical pain at the thought of buying a trust yielding less than 4% - but in the case of TEMIT and Sue Rippingall's Scottish Oriental he is very much a buyer.

AULD REEKIE'S PREDICTION FOR 2010: IT'S ALL GOING TO HAPPEN AGAIN!

Through the mists that swirl round his mountain eerie, Auld Reekie made his end-of-year financial predictions to assembled anorack-clad, thermos-clutching, shivering fund managers. This year his words were dim and quavering... "How can the worst financial crisis in 80 years be over in six months?" he asked. "How can the Bank of England print £200 billion pounds of monopoly money without inflation? And what will happen when they stop doing it?"

The fund managers waited for the answer, but Auld Reekie just shook his head and tottered back into his cave.

Moneybox Man remembered Cummings' cartoon of 1979, and noted that The Conservative Government then had to tackle a deficit of some £9 billion, whereas the deficit in the spring of 2010 will be almost £70 billion.

Savage public spending cuts... a collapsing housing market when interest rates rise... no wonder Auld Reekie tottered.

All the more important, says Moneybox Man,  to assemble a list of sound, cautious, well-managed Investment Trusts,  that can be bought when the time is right!

We will next look at cash, fixed-interest, corporate bonds and the like. (Not that Moneybox Man actually likes any of them at the moment).

Step-by-step guide to investing: seminar 13

A spectacular "Highland Fling" by the girls from Aberdeen Asset management was the highlight of the festive Christmas seminar, held as always in the Bonnie Prince Charlie function room, Tannochbrae Inn, Ullapool. Earlier, before tucking into the mince pies with a dram or two of whiskey, Merryn Somerset Webb of Moneyweek told us why it is that 68 per cent of Investment Trusts with a history going back over 30 years have beaten the stock market averages, whilst only a pathetic 28 per cent of Unit Trusts have done the same.

So what’s the secret? It is partly the “closed ended” structure. Investment trust managers can’t be forced to sell out of positions by investors looking to redeem shares in the same way that unit trust managers can, so they are more able to look to the long term.

It is partly down to the gearing (unlike unit trusts, investment trusts can borrow money to invest). Gearing boosts returns in rising markets and, as over the long-term the market generally does rise, it clearly contributes to out-performance.

Then there is the board of directors. Investment trusts are listed companies and, as such, have boards. These boards, charged with looking after the interests of shareholders, can – and do – shift between managers as they see fit.

Finally, there are fees. According to Lipper, the average investment trust has a total expense ratio (TER) of around 1.4 per cent and a third have TERs under 1 per cent. Contrast that with unit trust charges, which average well over 1.5 per cent and which have risen steadily over the past decade.

Overall, all this makes me a great fan of investment trusts. Current favourites? The Schroder Japan Growth Fund, which is trading at a discount of around 14 per cent to its net asset value (NAV) – making it a bargain if you think (as I do) that the Japanese market is underrated.

I’m also interested in Alliance Trust, which has just completed a buyback of its own shares. The trust has underperformed the market this year, thanks to its low-risk approach to investing (no bad thing) and is currently trading on a 17 per cent discount to its NAV. It also has a 41-year record of consecutive dividend increases. I suspect there is a value opportunity there.

So there we have it. Low fees, directors to scrutinise the manager, the ability to hold on to good stock when the markets are tumbling, and the ability to borrow money and enhance performance when the markets are rising.

Before wending our separate ways (and our thanks to Wee Willie Killicrankie the fourth of Perth, for giving Alastair Darling a lift to Edinburgh Airport in his helicopter) the seminar had an informal discussion about corporate bonds and fixed interest Investment Trusts. More of this to come!

A GUEST EDITOR SPEAKS OUT

Merryn Somerset Webb, feisty and amazingly clever editor of Moneyweek tells it as it is
 
Study after study has shown that the average fund manager under-performs the stock market and that the fees he charges to do so pretty much guarantee the ongoing poverty of his clients.

That should make it clear that the average investor should bypass active funds and stick to tracker funds or a variety of cheap exchange traded funds.

But if this is all so obvious, why are there still well over 2,000 actively-managed unit trusts for sale in the UK? And why do we buy them?

It is partly about ignorance of course – marketing material for most funds tends not to mention the high odds of failure.

But it is also about hope: the returns from the main indices seem so paltry (let’s not forget that even after this summer’s mega rally, the average investor has only broken even over the last decade), that we can’t give up the idea that it is possible, with a little sense, to do better.

So, we keep buying the funds and we keep paying the fees.

The good news is that there is a cheaper way to keep the dream alive: the investment trust sector.

Recent research from Money Observer shows that, over the last 30 years, investment trusts have significantly outperformed unit trusts. For example, of the 51 investment trusts that have a track record going back 30 years, 68 per cent beat the index. Of the 82 unit trusts with similar records, a mere 28 per cent did the same.


Merryn will join us at the last Step-by-Step seminar before Christmas (Dec 23, 11am, Bonnie Prince Charlie function room, Tannochbrae Inn, Ullapool) where she will reveal the secrets behind the success of Investment Trusts.

A cartoon for the weekend

ADDING PROPERTY TO THE PORTFOLIO

TR Property invests in property and property companies across Europe and gives a solid dividend of 3.7%. A long time favourite of Investment Trust followers, it is less volatile than property companies that invest directly in bricks and mortar. The TER is a respectable 0.79% but performance fees last year pushed it up to 1.65%. It is on a discount of around 8%.

Moneybox Man bought TR Property in 1999, when the shares were 44.5p each. They stagnated for a year or two, then crept up to 52p a share. They are now 157p a share, which is low compared to the recent past.