Investment - Accumulation vs Income

Alexland

Thrugelmir said:

Investment trusts can also distribute capital reserves now. Makes for good PR for the trust concerned to say we've paid increasing levels of income for 50 years. 

Yes although I sense that many boards are still trying to avoid exhausting their revenue reserves and as they know shareholders don't want to see capital being sold down. Having switched our S&S ISAs to a quality investment trust it is very nice to know we own a good mix of companies at reasonable prices with a regular smoothed dividend every quarter. The costs are a bit higher than a cheap tracker or multi asset fund but the enhanced market gains from the leverage should more than cover the difference. I dig into the companies held in our investment trust and am not particularly worried about them but then I look at our global trackers and get a bit frustrated at how much lower future returns might be.

Bravepants

Alexland said:

Thrugelmir said:

Investment trusts can also distribute capital reserves now. Makes for good PR for the trust concerned to say we've paid increasing levels of income for 50 years. 

Yes although I sense that many boards are still trying to avoid exhausting their revenue reserves and as they know shareholders don't want to see capital being sold down. Having switched our S&S ISAs to a quality investment trust it is very nice to know we own a good mix of companies at reasonable prices with a regular smoothed dividend every quarter. The costs are a bit higher than a cheap tracker or multi asset fund but the enhanced market gains from the leverage should more than cover the difference. I dig into the companies held in our investment trust and am not particularly worried about them but then I look at our global trackers and get a bit frustrated at how much lower future returns might be.

Hope you don't mind my asking on a public forum... Is it just the one IT that you hold? Is it an international IT or a UK one?

Alexland

Bravepants said:

Hope you don't mind my asking on a public forum... Is it just the one IT that you hold? Is it an international IT or a UK one?

For the S&S ISAs it's Murray Income MUT which is mostly UK with some international. The only negative aspect is the dividend increases have been a bit low but in recent periods the total return has been comparable with a global tracker (despite the poor performance of the UK market) and it gives some home bias to our overall set of investment accounts.

Prism

Alexland said:

Thrugelmir said:

Investment trusts can also distribute capital reserves now. Makes for good PR for the trust concerned to say we've paid increasing levels of income for 50 years. 

Yes although I sense that many boards are still trying to avoid exhausting their revenue reserves and as they know shareholders don't want to see capital being sold down. Having switched our S&S ISAs to a quality investment trust it is very nice to know we own a good mix of companies at reasonable prices with a regular smoothed dividend every quarter. The costs are a bit higher than a cheap tracker or multi asset fund but the enhanced market gains from the leverage should more than cover the difference. I dig into the companies held in our investment trust and am not particularly worried about them but then I look at our global trackers and get a bit frustrated at how much lower future returns might be.

I'm not sure that revenue reserves really matter and rarely seem to be promoted. From what I can tell most trusts simply reinvest the dividends like we would and then if needed sell capital when they themselves pay a dividend out. I'm not sure how many keep a separate pot of cash anymore and if they did it would certainly be a performance drag.

Alexland

Prism said:

I'm not sure how many keep a separate pot of cash anymore and if they did it would certainly be a performance drag.

The revenue and capital reserves are both just accounting entries but it still gives income shareholders peace of mind to know their dividends in bad years are being supported by retained income not capital. Unlike an open ended fund, a trust does not need to hold cash in order to service redemptions and will often have a flexible cash loan arrangement in place as part of their leverage so should never be a forced seller. Cash can still be useful if the board decides to buy back undervalued units when the trust is trading at a discount. But yes given capital reserves can be a very high proportion of a trust's overall NAV then it would be very damaging to keep them as cash!

Thrugelmir

Alexland said:

Prism said:

I'm not sure how many keep a separate pot of cash anymore and if they did it would certainly be a performance drag.

The revenue and capital reserves are both just accounting entries but it still gives income shareholders peace of mind to know their dividends in bad years are being supported by retained income not capital. 

Bottom line is that the shareholder is getting cash that is fully priced into the NAV.  Targetting out of favour IT's at significant discounts is generally a more profitable activity. Though one needs a lot of patience and confidence to keep building a holding up. 

bostonerimus

jamesd said:

JohnWinder said:

Thank you. Both historical reasons, front loading charges and no computers, are now history. I'm putting my hand up to vote for one fund with the convenience for investors to elect taking or reinvesting distributions according to their changing needs. And in setting it up they can make it do-able online.

One fund is less convenient for investors outside a tax wrapper.

You don't escape your liability for income tax and capital gains tax by having accumulation units, it just becomes harder to get the numbers you need to fill out your tax return because:

1. You don't have a clear report of distributions (whether interest or dividends) to use because they are reinvested behind the scenes in accumulation units.

2. You don't have a clear picture of capital gains because you have to strip out the effect of all of the internal reinvesting to work out the taxable gain.

So if outside a tax wrapper, pick income units if you want a simpler life. Inside one the tax is irrelevant but you might want the income to pay charges, reinvest elsewhere or withdraw without any need to sell, even if you're picking based on total return not what's distributed

In market downturns income units also have the advantage that you're getting pure income out without any selling of the depressed value capital. With accumulation units you've no choice but to get a chunk of sold capital at the same time

Having retired I'm now gradually preferring income units whether inside or outside a tax wrapper for the reasons given, particularly the selling capital during downturn one during drawdown. I still invest based on total return but the extra benefits that income units can offer are interesting.

Yes the way the funds are taxed is very important. The US does not have two types of funds, just one fund where you can chose to reinvest distributions or not, but whatever you choose the capital gains, dividends and interest will appear on you annual tax statement from the fund house and you will have to pay tax on them.

jamesd

Sea_Shell said:

In a downturn would the INC units still be providing the level of income you may need?   You may still need to sell capital units.

ColdIron said:

That's what a decent sized cash buffer is for. While the capital value can drop alarmingly, dividends usually fare much better. 

I don't expect income units to ever deliver enough income because that would compromise total return way too much. But as ColdIron suggested they do extend the time that cash and bonds can last until it becomes necessary to sell equities.

jamesd

JohnWinder said:

Lastly, if none of that works for you outside a tax wrapper, buy the one and only fund and from the start elect not to reinvest. Doesn't that work?

Assorted ways work for assorted different circumstances. I'm more discussing where the feature differences of each type can be useful.

A twenty year old investing inside a pension probably doesn't need to care because the nuances just wont' matter much, except the rebalancing or different investing potential of taking income and that can be achieved in other ways.

JohnWinder

eskbanker said:

Am I missing something here or .....is this a solution looking for a problem?

Shocking_Blue said:

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https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000MC3M

Do you see any potential issue with the relatively high Japan exposure?

With a strong exposure to consumer defensive, this looks interesting. Would there be an Acc version of this, do you know? Or if not, are you aware of a similar fund by a different provider as an Acc?
Thanks

Well, that's one of the problems.