European Assets Trust

Audaxer

short_butt_sweet wrote: »

well, RPI since 1972 has been about 5.7% compounded. so the capital return alone has slightly more than kept up with inflation. which is pretty good.

I'm not sure I'm understanding that about compounding RPI. If RPI was an average of 2.5% per year, the capital would grow on average at 2.5% per year, whereas EAT capital seems to have grown at an average of 6.4% per year without reinvesting dividends.

also, if long-term compounded returns are X%, that does not imply that X% is a safe withdrawal rate. because of sequence of returns risk, the safe withdrawal rate is lower than the expected return.

I'm not saying 11.9% would be a safe withdrawal rate, but if an IT or fund is paying 6% in dividends, although the capital is going to be volatile, if it's a good established IT or fund, I can't see it eating up all the capital. So if you had no intention of ever selling the capital, you would still continue to get the dividends based on the yield as it was at the time you invested, would you not?

I know it's sacrificing growth, but if only 4% is meant to be a safe withdrawal rate from a growth portfolio, then could an income portfolio be a better option if you have no plans to sell the capital?

takesyourchances

I hold a few k in EAT as part of a wider portfolio and have no plans to sell as it's buy and hold for me and reinvest the dividends from it. It was considered a good buying price several months back and now it's dropped 20% from I bought, the capital movement is not concerning me as it's buy and hold so see it as a chance to put another couple of K in to boost the dividends. It's part of a broad IT spread and will be topping up some other holdings too.

Audaxer

takesyourchances wrote: »

I hold a few k in EAT as part of a wider portfolio and have no plans to sell as it's buy and hold for me and reinvest the dividends from it. It was considered a good buying price several months back and now it's dropped 20% from I bought, the capital movement is not concerning me as it's buy and hold so see it as a chance to put another couple of K in to boost the dividends. It's part of a broad IT spread and will be topping up some other holdings too.

In your position I would be thinking is it worth reinvesting the dividends now, or holding on to them for a bit longer and reinvest when there may be bigger falls in the capital value, resulting in higher dividends when you need them.

takesyourchances

Audaxer wrote: »

In your position I would be thinking is it worth reinvesting the dividends now, or holding on to them for a bit longer and reinvest when there may be bigger falls in the capital value, resulting in higher dividends when you need them.

The couple of thousand I am planning to top up with is from p2p I've sold out of so waiting on funds clearing. I understand what you mean but I tend to invest in the present as goodness knows if I wait will it fall more or rise, 20% down would be decent from I last bought EAT.



Do you hold it or thinking of it?

short_butt_sweet

Audaxer wrote: »

I'm not sure I'm understanding that about compounding RPI. If RPI was an average of 2.5% per year, the capital would grow on average at 2.5% per year, whereas EAT capital seems to have grown at an average of 6.4% per year without reinvesting dividends.

that was just to put the figure you gave, of 6.4% capital-only returns, in context. inflation over the period was about 5.7% compounded, so that was about 0.7% real capital growth compounded.

so if inflation is 2.5% in some future period, you couldn't expect capital returns of 6.4% in that period. you might expect more like 3.2%. just as a very, very rough idea.

in any case, the dividend payment policy of EAT has changed since 1972. so i don't think you can validly extrapolate from its past returns anyway.

it's also pretty dubious extrapolating from any investment's past returns, even without a change in policy. though it's not quite as bad doing it over a 46-year period as over (say) a 5-year period (when it's for a collective investment).

I'm not saying 11.9% would be a safe withdrawal rate, but if an IT or fund is paying 6% in dividends, although the capital is going to be volatile, if it's a good established IT or fund, I can't see it eating up all the capital. So if you had no intention of ever selling the capital, you would still continue to get the dividends based on the yield as it was at the time you invested, would you not?

having just checked exactly what EAT's dividend policy is ... it's to pay 6% of its NAV at 31 december in dividends over the next year ...

so it's not going to eat up all the capital, but it could gradually shrink it. when the total returns (on the investments EAT holds) are under 6%, it will shrink. and that's something that could very easily happen, not just in individual year, but over decades or longer. if it shrinks, then both the NAV of each share, and the dividends paid, will be shrinking, since the latter is just a percentage of the former.

and that's just for the nominal returns. real returns could shrink even faster.

this dividend policy is rather different from the policy adopted by investment trusts which boast about how they haven't cut the dividend for decades.

I know it's sacrificing growth, but if only 4% is meant to be a safe withdrawal rate from a growth portfolio, then could an income portfolio be a better option if you have no plans to sell the capital?

the 4% figure is debated, but leaving that aside ...

no, there is no reason to think that a higher safe withdrawal rate applies to an income portfolio.

in any case, EAT is not trying to mimic a "safe withdrawal" strategy. that latter involves setting an initial withdrawal amount (as 4% or 6% or whatever, of your initial capital value) and then adjusting that amount to keep up with inflation each year. EAT is instead paying out an explicitly variable amount every year, which can go up and down (and has done).

Audaxer

short_butt_sweet wrote: »

that was just to put the figure you gave, of 6.4% capital-only returns, in context. inflation over the period was about 5.7% compounded, so that was about 0.7% real capital growth compounded.

so if inflation is 2.5% in some future period, you couldn't expect capital returns of 6.4% in that period. you might expect more like 3.2%. just as a very, very rough idea.

I'm not sure that's right. If the average annual RPI is say 2.5%, then 5.7% compounded as you say is the equivalent of total return on an investment, i.e. if you invested £100k and got an average return equivalent to RPI of 2.5%, in your example the compounded return over that period of time would be 5.7%. Likewise the average return on EAT was 6.4% and compounded into Total Return was 11.9%. So as I see it the capital growth on EAT after inflation is the difference between 2.5% and 6.4%, which is 3.9%.

this dividend policy is rather different from the policy adopted by investment trusts which boast about how they haven't cut the dividend for decades.

That's true, so taking an example like City of London IT, you make only be getting 4% yield but you would be more confident of getting a growing dividend every year irrespective of the capital balance.

no, there is no reason to think that a higher safe withdrawal rate applies to an income portfolio.

I'm sort of coming to that conclusion, but saying that there are a number of experienced investors on this forum who have high yield income portfolios that seem to produce consistently high levels of income even through equity crashes.

short_butt_sweet

Audaxer wrote: »

I'm not sure that's right. If the average annual RPI is say 2.5%, then 5.7% compounded as you say is the equivalent of total return on an investment, i.e. if you invested £100k and got an average return equivalent to RPI of 2.5%, in your example the compounded return over that period of time would be 5.7%. Likewise the average return on EAT was 6.4% and compounded into Total Return was 11.9%. So as I see it the capital growth on EAT after inflation is the difference between 2.5% and 6.4%, which is 3.9%.

i think there's some confusion here. where did the 2.5% figure come from? RPI from 1972 to now was about 5.7% compounded, not 2.5% compounded.

That's true, so taking an example like City of London IT, you make only be getting 4% yield but you would be more confident of getting a growing dividend every year irrespective of the capital balance.

more confident? i'm not sure. i was mainly pointing out that their dividend policy is different's from EAT's policy.

like EAT, city of london IT can pay out dividends which are greater than the dividends they've received in the year. but presumably they don't aim to do so routinely. they probably would to cover a dip in dividends, if dividends seem likely to recover in a year or two. but if the dividends they received fell, and didn't look like recovering any time soon, perhaps they'd cut their dividend, too.

and if they didn't cut, their capital would be at risk of shrinking.

so there are no certainties. though i think i would feel a bit more secure about income from city than from EAT.

londoninvestor

short_butt_sweet wrote: »

also, if long-term compounded returns are X%, that does not imply that X% is a safe withdrawal rate. because of sequence of returns risk, the safe withdrawal rate is lower than the expected return.

That's one factor, but in the other direction you've got the fact that you aren't immortal.

So for a 60-year retirement, the SWR is most likely to be below the long-term total real return (because of sequence risk, as you say). But for a 5-year retirement the SWR will be above the expected return, because all you need to ensure is that the pot doesn't go to zero in five years.

Audaxer

short_butt_sweet wrote: »

i think there's some confusion here. where did the 2.5% figure come from? RPI from 1972 to now was about 5.7% compounded, not 2.5% compounded.

Sorry, I hadn't realised that the average RPI was 5.7% over the last 40 years, but I see now that it was due to the particularly high inflation rates in the 1970s. I had been thinking the average inflation rate was about 2.5%. I hope its not more than that going forward as most of my DB only increases at RPI up to a maximum of 2.5%.

Alexland

Audaxer wrote: »

I hope its not more than that going forward as most of my DB only increases at RPI up to a maximum of 2.5%.

My parents are around 15 years into taking their DB pensions and the indexation capping has already become noticeable. Although it sounds about right at first glance the problem is that some years you get lots of inflation (and get capped) and other years you don't get much at all so the result is that even if the long term average stays at 2.5% you will still see your spending power reducing.


Alex