Monday, 29 April 2013

Aberdeen & Greggs Update

Good news and not-so-good news this morning. Aberdeen Asset announced their half year results and the share price rose 8% to 452p - Greggs issued a trading update and the sp fell 8% to 425p.

Aberdeen Asset Management

Money continues to flow into the equity markets and ADN seem well placed to take full advantage. Assets under management increased 13% to £212bn and profits increased 37% to £222.8m.

CEO, Martin Gilbert said:

"It has been a strong first half to the year with investors' appetite for risk assets returning. As a result we have seen healthy net new business flows which, combined with performance by global markets, has generated strong growth in our revenue and in profit margins. We remain cautious on the market outlook but believe our fundamental approach to investing will continue to serve our clients' long term needs".

Demand from investors has been so strong, they have needed to moderate the inflows to their emerging markets funds so as not to compromise on quality.

They also announced a 36% uplift in the interim dividend to 6p. I have therefore revised my full year figure to 14.5p which puts it on a forward yield of 3.2%.


Greggs statement is for the 17 weeks to 27th April - although 10 new shops have been added in the new year and sales overall are up 3%, the like-for-like sales are down 4.4% and the management have said that profits for the full year are likely to be slightly below the lower range of market expectations of £47.5m (£51.9m 2012).

On the positive side, they have completed 59 out of the 250 shop refurbs planned for 2013, the frozen 'bake at home' range in conjunction with Iceland is successful and the business remains highly cash generative and maintains a strong balance sheet.

Given the current outlook, I am not expecting much (or any) uplift in the dividend this year - at the current level of 19.5p the shares are yielding 4.6%.

Fingers crossed the new CEO can turn things around over the coming 12 months.

Wednesday, 24 April 2013

DS Smith Group (SMDS)

In a pre-close statement today for the year to 30 April, international packaging company DS Smith announced that profits would be at the upper end of expectations on sales of around £3.7bn - an increase of 90% on 2011/12.

Following the acquisition of SCA Packaging last year, the company have been able to make better than expected savings of 40m Euros.

Miles Roberts, Group Chief Executive, said:

"We are delighted with the substantial operating, financial and strategic progress made in the past year, in what has been a transformational period for the Group and our people. Looking ahead, whilst the European packaging market remains competitive, we expect to make further significant progress. Our Packaging businesses continue to grow as we leverage our enlarged and strengthened geographic footprint and further develop our commercial proposition, particularly with our largest pan-European customers.

We look forward to delivering further substantial progress in the coming year."

Mr. Market likes this statement and the shares are up 6% to 230p in morning trading. At the halfway point last December, the board felt confident enough to increase the interim dividend over 30% to 2.5p - if this is repeated for the full year, the dividend will increase from 5.9p (adjusted) to 7.6p and giving a forward yield of 3.3%.

SMDS was a new addition to the income portfolio last year - as usual, just a ‘half’ - maybe its time to top up to a full holding weight but I will probably wait for the full year results to be rolled out in June.

As ever, please DYOR.

Tuesday, 23 April 2013

First Quarter UK Dividend Report

Capita Registrars have issued their 1st quarter report for 2013. The report compares dividends paid by UK companies and also looks at predictions for the whole year.

Stripping out one-off events, the underlying dividend payments grew at 6.1% compared to Q1 last year. The prospective yield has fallen to 4% compared to 4.5% at the start of the year - this is a result of rising share prices.

The bulk of dividends are paid in quarters 2 & 3, therefore it is difficult to read too much into the Q1 report, however the forecast for the full year is a slowing of the growth rate of dividends from 9.2% in 2012 to 8.6% this year. I will settle for this given this figure would be 2.5x the current rate of inflation.

Over 90% of dividends derive from FTSE 100 companies,  in fact over 50% come from just 5 dividend stalwarts - Shell, Vodafone, AstraZeneca, BP and GlaxoSmithKline. (Banking giant HSBC is usually in the top 5 but doesn’t appear this year as the dividend payment was brought forward to December).

Some of the more consistent performers over recent years (in addition to the above) are BHP Billiton, SSE, Imperial Tobacco, National Grid and BT.

A total of £14.1bn was distributed in the first quarter and the forecast for the full year is just over £80bn - this includes an estimated £1.9bn of special dividends (compared to £6.8bn of specials paid in 2012 - notably Vodafone).

Monday, 22 April 2013

Investing for Income - Part 3

Earlier in the month I started off this series looking at individual shares (part 1) followed by investment trusts (part 2). In this third and final part I will look at the use of fixed income investments (FI). These can take many forms - gilts, corporate bonds, retail bonds, permanent interest bearing shares (PIBS) and preference shares are some of the more popular.

There are still some attractive FI investments on offer, and as equity prices surge their yields decrease so, as and when an opportunity for rebalancing the overall portfolio arises, it may be worthwhile to have a closer look at FI.

Flavour of the month at the present time seems to be an almost weekly offering of new retail bonds. With the comparatively low rates from cash deposits - 3% if you tie up your cash for 5 years is currently the best on offer - the chance of a steady 5% or 6% return is certainly tempting. For me, as with equities, I would not be interested in chasing higher yields and compromising on quality.

Although I have tended to avoid OEICs for equities, the charges for some of the so called ‘clean class’ of FI funds are reasonably competitive - a common figure is around 0.75% - so they could well be worth a look for those preferring a managed approach.

Using FI for Income

Some years back when I was giving some thought to my income portfolio, I decided it might be a good idea to include some bonds and fixed income as part of the mix. This was largely due to the higher immediate yield on offer - at the time some yields were over 10% - combined with the desire to provide some diversity and also stability. At the time, the yields on gilts did not look particularly attractive (and still don’t) so I settled on a mixture of PIBS from Coventry BS and Nationwide BS, preference shares and corporate bonds.

Although the income does not rise to keep pace with inflation (which is the big attraction of equities), if you start off with a reasonably high yield on the FI part of your portfolio, it can take many years before the purchasing power is overtaken by the lower yielding (but rising) equity yield.

Criteria for Selection

The starting yield should be significantly greater than cash deposits - say 100% more as a rule of thumb. If I were starting today, I would therefore be looking at a starting yield over 5% or 6%. This is to compensate for the absence of a rising yield to keep pace with inflation.

The institution offering the FI security must be robust and have strong fundamentals. I therefore avoid the ‘junk’ end of the FI spectrum.

Diversify -  a reasonable mix of PIBS, corporate and retail bonds, and preference shares.

Buy & Hold Strategy

For me, the holding of FI securities are a means to an end. They provide a fairly stable, predictable fixed income for a known period of time. They are currently set up to bridge the gap between where I was when I purchased a few years back, and leading up to state pension age. At that point or shortly before, I will review the FI portfolio.

Unlike with equities, it is not therefore a buy and hold for the long term - more like a buy for convenience for the medium term.


With my current broker, Sippdeal, there is the additional costs of an extra £20 for the telephone trade if the transaction cannot be traded online. Other than this, it should not involve any ongoing costs or charges to hold PIBS and preference shares in a FI portfolio.

With some of these PIBS and preference shares, the spread between buying/selling price can be wider than with shares. A specialist broker such as Collins Stewart recommended by Mark Taber of Fixed Income Investments  may be worth considering. 

One recent innovation is the setting up of a Fixed Income Order Book by City and Continental Securities - as this becomes more widely used, it should help to improve liquidity and reduce spreads on PIBS and other fixed income securities. Here’s a link with more details (FIOB)

For corporate bonds, I use iShares Corporate Bond (ex financials) - ISXF - which has charges of 0.4% p.a. With investment trusts I hold New City High Yield (NCYF) which has annual charges of around 1.1%.

A recent innovation from Investec Bank in conjunction with FTSE, has been the launch of a retail bond index. Possibly the most useful aspect to investors is the FTSE ORB Total Return Index (ORB = Order Book for Retail Bonds), which computes the return with the price performance and interest payments of each bond within the universe, and the Gross Redemption Yield. Here’s a link for those interested 


In 2012, the FI part of my portfolio provided better returns than shares or investment trusts. The results were - shares up 9.5%, investment trusts 11.5% and fixed income 25%.

The income or coupon on most FI is paid gross so I try to make sure they are held within my ISA otherwise the income would become taxable. In contrast, there is no more tax to pay on dividends from shares held outside of an ISA (for basic rate taxpayers).

This concludes the three part mini series looking at income. If anyone has other ways they generate income to beat cash deposits, leave a comment below.

Sunday, 21 April 2013

Yer Nature!

I was out with my usual walking group yesterday and the conversation turned to the most beautiful places in the world. Some said China, others the Lake District, one suggested the Norwegian Fjords.

For me it would be hard to beat the English countryside in Spring. In the bluebell woods, alongside the stream were ribbons of celandine intermixed with wood anemone - their petals turned upwards to face the morning sun. Further along, this gave way to a carpet of wild garlic - lovely peppery leaves in a mixed green salad! Also, on a south facing sunny bank, the first bluebells were just starting to show.

Nestling on the banks of the canal were common dandelion, daisy and nettle - also the odd primrose - a little late for the time of year. On the water were mallard, moorhen, swans and tufted ducks with their distinctive black & white plumage.

We saw/heard many wild birds - nuthatch, blackbirds, buzzard, swallows (just arrived), lesser spotted woodpeckers rattling a distant oak tree, chaffinch and blue tits - to name a few of the ones I know.

I know this is a finance blog, but for me, without all of these things, life would be all the poorer - riches come in many forms!

Thursday, 18 April 2013

Henderson Far East Income IT (HFEL)

This is one of three investment trusts in my income portfolio covering the quickly growing emerging markets of Asia - alongside Schroder Oriental Income and recently acquired Aberdeen Asian Income. It is managed by Michael Kerley who has many years experience in this area of the world.

HFEL has just issued its half year report for the 6 months to 28 February 2013. NAV is up 23.5% on a total return basis (including income). I am expecting dividends for the full year to be around 17p per share which will give a running yield of 4.7% based on the current share price of 360p.

The portfolio covers a huge region from China to Australia including Singapore, South Korea, Taiwan, Thailand and Indonesia. Unsurprisingly the ongoing charges of around 1.2% p.a. are a little higher than your average UK growth & income trust. Transaction costs amount to an additional 0.15%.

The outlook remains positive despite the tensions caused by the situation in North Korea

“We remain positive on the outlook for the region in the medium to long term but recognise that market direction will be dictated by global factors in the short term. The improving growth outlook in China and the tentative signs of recovery in the US should be positive for Asian economic and equity market growth. Valuations in Asia are attractive relative to their own history and other world markets and companies are cash rich with tremendous potential to increase dividends over time.”

More on this one after the full year report in early November.

Wednesday, 17 April 2013


Tesco joined the portfolio in January 2012 following a disappointing Christmas trading update which saw 20% knocked off the share price - I was in good company as Warren Buffett was also topping up his holding for Berkshire Hathaway, although my purchase was a little more modest than the £480m spent by Buffett - on the other hand, Neil Woodford was disposing of his holdings at Invesco Perpetual Income and Edinburgh investment trust.

So, 15 months down the line and the share price has more or less recovered and is up around 25% from a low point of 300p.

The past year has been spent trying to get the UK operation back on track as it accounts for over two thirds of Tesco group revenues, and in particular, food sales which account for around 90% of the UK total.

The company have just issued their full year results - here’s a link via Investegate.

The board confirm their intention to exit their US operation, Fresh & Easy and this has wiped £1.2bn from profits. A further £804m has been written off against this years profit in relation to 100 UK property sites which are deemed no longer viable. As a result, profits are reduced from £4bn last year to just under £2bn - the forecast for the coming year is £3.5bn.

On the positive side, the final dividend has been maintained at 10.13p and provides a yield of around 3.9% at the current price of 375p. Online sales increased 13% to over £3bn for the first time and they are making progress in turning around the UK operation.

Overseas, profits have been affected by the introduction of restricted opening hours in South Korea whilst in Europe, the austerity measures and economic conditions have contributed to a poorer return than expected. In Asia sales increased 6% but profits declined by 10% - in Europe, sales increased 2% but profits were down by 33%.

It looks like new CEO, Phil Clarke has put in place a decent strategy to turn around Tesco's fortunes but I suspect its going to take some time before shareholders see any significant benefits. I am happy to continue to hold but would probably not be adding until the picture becomes a little clearer.

In the words of Warren Buffett: “Value investors are not concerned with getting rich tomorrow. People who want to get rich quickly will not get rich at all. There is nothing wrong with getting rich slowly.”

Monday, 15 April 2013

Investing for Income - Part 2

Last week I started off this series looking at individual shares. In this second part I will look at the use of investment trusts. Some years back, I decided to run parallel portfolios for income - one using  shares and the other using investment trusts. The core of the IT portfolio is set out in this recent post.

Using Investment Trusts for Income

I prefer to use trusts rather than funds (OEICs) as they usually have lower costs and the income is more predictable. Investment trusts have the ability to hold back up to 15% of income in the good years and use these reserves to maintain dividend payments in years when income from the underlying holdings is not so good. The effect is to smooth dividend payouts over a number of years.

Many investment trusts have a record of paying steadily rising dividends over decades. For example, City of London has paid increased dividend payments in each of the past 46 years, for Bankers from the global growth sector it is 45 years, Temple Bar and Murray Income are both in their 29th year.

                                                      Criteria for Selection

My plan was to put together a ‘basket’ of around 10 to 12 investment trusts based on the following-:

* As with the shares portfolio, the starting yield should be above the level of the best cash deposit account - so currently above 2.75%.

* A rising level of dividends over the past 5 years (at least) and preferably much longer.

* Diversified - sectors include UK growth & income, UK growth, UK smaller companies, international growth, international growth & income, Far East, North America and finally, UK high income.

* Low ongoing costs (formerly total expense ratio).

* The trusts market cap should be a reasonable size, generally above £250m.

* A decent level of revenue reserves - preferably over 100% of dividends paid in the previous year.

* A good and consistent level of total return over 3, 5 and 10 years compared to other trusts in the same sector.

* A modest level of gearing - probably under 10% but the lower the better.

Most of these criteria can be gathered from the AIC website  or Trustnet but for some, such as revenue reserves, you will probably need to check out the latest annual reports.

Buy & Hold Strategy

As with my shares portfolio, the basic idea is to buy around 10 to 12 investment trusts and hold for the long term - maybe the next 20 to 25 years. The core portfolio is more or less complete - as with shares, I maintain a watchlist of half a dozen ‘reserves’ which may come into play at some future time. In fact, one of these reserves, Aberdeen Asian Income (AAIF) was purchased in the past week.

Again, there is not a great deal to be done but sit back a collect the dividends and monitor the half yearly and annual reports. As an income investor, the main thing I look for is a gradually rising dividend to keep pace with inflation. In the past year the average uplift in payouts was just over 5% whereas with the shares it was more like 12%.


One of my criteria for selection is choosing trusts with low charges - some ITs such as City of London, Law Debenture and Bankers have costs of around 0.4% and compare favourably with some of the low cost trackers.

With some of the smaller investment trusts - say those with a market cap below £200m - the costs tend to be a higher percentage as they are unable to benefit from economies of scale compared to the larger trusts such as Murray International and Edinburgh.

Not only are ongoing charges generally lower than OEICs - around 0.5% to 1% less, but portfolio turnover rate (PTR) is usually lower. The average PTR for OEICs is around the 60% mark - this can add a further 1% to the ongoing charges - as a rule of thumb, add 0.2% in charges for every 10% of portfolio turnover. With investment trusts, the PTR is usually quite a bit lower and on my particular portfolio and adds less than 0.1% to overall charges. (PTR does not have to be disclosed and is not included in the ongoing charges).


As with my individual shares, I do not measure performance of the investment trusts against any particular benchmark. I do, however compare performance against my portfolio of shares - the object being to see if I can beat the professional investment trust managers. Over the 3 years that I have been running the comparison, the trusts have so far always managed to keep their noses in front.

In 2012, investment trusts delivered a total return of 11.5% for the year compared to 9.5% for the shares portfolio (the FTSE 100 TR was 10%)

A more detailed step-by-step guide on this approach to generating income is contained in my ebook "Slow & Steady Steps..."

In the third and final part I will take a look at the use of fixed income.

first swallow spotted yesterday - must be summer!

Saturday, 13 April 2013

I Might Lose Money on the Stockmarket

Many people are looking for better returns than the miserable rates offered by the banks and building societies in the current climate. Time and time again they will read articles about investing on the stockmarket for better returns but most will avoid this option - the two main reasons they give are:

a) it's too complicated, and

b) the fear of losing money

Well yes, it can take a little time to get to grips with the basics of investing. One of the reasons for starting this blog was to pass on some of the knowledge I have picked up over the years based on my own experience of investing. I have written several articles on what I consider to be my basics for starting out as an investor and these are all together under the ‘basics’ tab above.

In addition there are many excellent articles on the blogs mentioned under the ‘useful sites’ tab. It just takes a little time to become familiar with the investing ‘landscape’ - it may help to make a few notes as you go.

If, having read these basics, you still think it is too complicated, that’s not a problem - investing is not for everyone. However, if you feel you understand the basics - the other obstacle to address is quite a big one for many - the fear of losing money. After all the stockmarket is risky, isn’t it?


Warren Buffett said “Risk comes from not knowing what you are doing”. To accurately assess your decisions, you therefore need as much information as possible.

If you know very little about investing and someone at the local pubs tells you 5 years back they were advised to invest on the markets and they lost half their money, you may conclude the markets are very risky and not for you. In 2008, the FTSE 100 was at a similar level to today - over 6,350, however 6 months later and it had dropped over 40% to below 3,800.

If you have worked your way through some of the articles and maybe read a couple of good books - Tim Hale’s “Smarter Investing” for example, you will be in a much better position to make an informed decision. You may conclude that cash deposit rates are likely to remain low for many years and are unlikely to provide a return to keep pace with inflation. You may think there’s a reasonable likelihood of getting a better return from equities and possibly bonds. You understand about spreading the risk via diversifying and asset allocation - you know about keeping costs to a minimum and you are looking long term. Crucially, you accept the stockmarkets are very up and down and you believe you can cope with this volatility.

The point is, reliable information will help to displace ignorance. Without this information you are trusting to luck and any decision to invest will be more like a gamble with a high probability of failure. If things don’t turn out as hoped, this will reinforce the uninformed prejudice that stockmarkets are risky.

By educating yourself, you become far more empowered and can therefore take a more measured approach, risk is more accurately assessed and the element of luck and gambling are eliminated and replaced with a more realistic expectation of the rewards you can reasonably expect from the risk you have intelligently taken.

Of course, you may well go through this process of learning all the basics and then decide, for the time being, you are content with the lower returns on cash deposits. I think it makes a huge difference to know that, should you change your mind at some point in the future, you have other options available.

What do you think about returns on cash deposits? Are you afraid of losing money investing on the stockmarket? Leave a comment below.

As ever, slow and steady steps….!

Tuesday, 9 April 2013

Investing for Income - Part 1

The Bank of England have kept the bank rate at 0.5% for the past four years. As a result, many savers and pensioners have been forced to move their savings away from the traditional cash savings accounts offered by banks and building societies and look around for alternatives. Some are turning to the stockmarket in their search for higher returns.

So, how to go about getting a better return - this was the question I was asking myself in 2009 and the answer seemed to be a combination of fixed income, individual shares and investment trusts. The attraction of the fixed income element - mainly PIBS and preference shares, is the immediate higher return - in 2009, some PIBS were yielding over 10% p.a. - however the downside to fixed income investments is the fixed rate of return which will be eroded by inflation over time.

To counter this and secure an income that rises each year (hopefully) a little ahead of inflation, it is essential to invest in equities. Therefore around 60% of my investments are split between individual shares and investment trusts.

In this first part, I will outline my strategy for securing a reasonable return of income using individual shares. Although the markets have seen a strong rally in recent months, it should be possible to secure a starting yield of around 4% without compromising on quality.

Using Shares for Income

Since I first acquired some shares in Abbey National BS in the late 1980s, I have liked the idea of holding individual shares - in the earlier years more for growth but increasingly in recent years the emphasis has been more towards income.

I have built up a portfolio of shares based on the following criteria -

Starting yield at least equal to the best current savings rates (at present around 2.75%) but not too high - a dividend of say 50%- 60% above the FTSE average might be my limit.

A record of rising dividends over the past 5 years (at least) and dividends covered by earnings of at least 1.6x, but preferably 2x and above.

Not too much debt (gearing) and if there is net cash on the balance sheet so much the better. Additionally, I look for companies that have a rising level of free cash flow - this is where the dividends will be paid out from.

Diversify - I select shares from different sectors of the market - industrials, mining, pharma, media, household, supermarkets etc. These will mainly be selected from the FTSE 350 but I am not averse to including the odd smaller company.

Finally, and probably something difficult to define - quality. Some companies will be better than others when it comes to generating a sustainable and growing level of profits and dividends over many years. The sort of share you can buy and hold forever. Sometimes it can be tempting to acquire an ‘average’ company with a higher yield, but for my money, over time, quality will always provide the better returns.

Quality Shares

My fellow blogger Miserly Investor recently posted an excellent article on the attributes of a quality company - here's a link

The main points for me are to identify companies than can deliver a sustainably high return of cash on capital employed (ROCE). Dividends are paid in cash so a company that has a record of rising dividends is likely to have a steady flow of cash coming into the business.

Another factor is the dividend payout ratio - the level of profits paid out in relation to the percentage of profits reinvested into the business. The lower - ideally below 50% - the better. If most of the profits are being paid out as dividends, this could indicate the dividend level may not be sustainable.

One other aspect I look out for as a sign of quality is some form of competitive advantage  - this could be in the form of a worldwide patent on a new product or more commonly, an attractive  brand which can maintain strong consumer loyalty and be rolled out globally. Warren Buffett coined the term ‘economic moat’ to describe a business’ competitive advantage that keeps other companies at a disadvantage. He said :

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors".

A good example of such a company in my current portfolio is Reckitt & Benckiser .

Buy & Hold Strategy

Over recent years I have assembled a portfolio of around 20 shares. I try to buy at a reasonable price and there have been plenty of opportunities to pick up quality companies over the past couple of years when markets have fallen quite sharply. The intention is to hold for many years and harvest the steadily rising dividends each year - I maintain a watchlist of possible additions but I will try to maintain the total number held at around the 20 mark. If one or two shares on the watchlist become a compelling ‘buy’, I will take a closer look at the shares in the existing portfolio to see whether any are showing signs of the story having changed since purchase.

Now the portfolio is more or less completed, there is not really much to be done - in fact, the hardest part of running the portfolio is doing nothing! Most of the income is withdrawn to cover living costs so there is now not much in the way of dividend reinvestment.

I will monitor annual reports and dividend news and tend to look at portfolio total returns on a quarterly basis. I use a spreadsheet to keep track of dividends and forecast yield. That’s just about it.


As we have seen (here), it’s important to keep costs as low as possible to maximise investment returns. With many of the shares, I will purchase an initial stake and top up to a ‘full’ holding at some later date. So, there is the initial purchase costs - typically £9.95 but which could be £1.50 using the regular investing option, and stamp duty of 0.5% - barring any takeover bids, that’s just about it. There are no annual management costs and also no platform costs from my online broker. Therefore maintaining an individual shares portfolio should be the most cost efficient way of holding equities for the long term - even cheaper than a Vanguard tracker!

In the next part I will take a look at the use of investment trusts for income and in the final part look at fixed income options.

Saturday, 6 April 2013

Choosing Your Online Broker

When I first started investing in the late 1980s, there was no internet and the buying and selling of investments was done by post with either a traditional stockbroker or for trusts and funds via the provider.

Today, most diy investors will invest online with an execution-only discount broker. I first registered online with Interactive Investor - I recently moved over to Sippdeal when ii introduced its quarterly charges.

With online brokers, your investments are held in a nominee account which means you will not receive a share certificate so there is no ‘paperwork’ to attend to. The online execution-only broker is not legally permitted to offer advice to its customers.

Some Things to Consider

1. Does the broker offer the type of investment you wish to hold in your portfolio? Seems fairly obvious but some brokers currently do not offer, for example, Vanguard low cost trackers. Others will offer only a limited range of investment trusts etc.

2. Charges - is there an annual fee? Is there a fee for holding low cost trackers which pay no (or minimal) commission to the broker?

3. If you will hold mainly funds (OEICs), does the broker rebate some or all of the commission? Is there a dealing fee for buying and selling the funds?

4. What range of analysis tools are offered? It can be an advantage to view your portfolio online and also to maintain a ‘watchlist portfolio’ of investments you may wish to follow and analyse for the future. You may wish to filter shares for things like size, dividend yield, cover etc.

5. If you will be drip-feeding your money into the investments over a prolonged period, it will make sense to choose a broker who can offer a low cost regular investment option.

6. If you are likely to hold shares and/or investment trusts, check the situation regarding re-investing of dividends - is there a facility for this to be done automatically and if so, is there a charge?

7. Check if there are additional charges for telephone trades - with my former broker, interactive investor, the fee was £10 for both online and telephone trades. With my new broker Sippdeal, its an extra £20 for telephone trades.

8. Check the level of exit fees in the event you wish to move to another broker. Typical fees are usually based on whether you wish to transfer your portfolio over without having to sell and then repurchase with the new broker and will be around £20 - £30 per line of stock. Obviously, if you hold many different investments, it could be very expensive to transfer out.

9. Is it likely you will want to hold overseas listed investments? If so, make sure this option is available and check out any additional costs.

10. Finally, having narrowed down the list of candidates, you may want to give the broker a call to confirm everything is still in accordance with your research and also see how their customer services respond to your questions.

There is therefore no single best broker, the best one for any individual will be the one that ticks the most boxes according to that individuals specific situation and requirements.

A couple of comparison sites which may help are The International Investor   and  Monevator .

Of course, you are not limited to just one broker for all investments. You could use one for your sipp and a different one for your stocks & shares ISA or non-isa trading account. You could use one for low cost trackers and a different one for shares and investment trusts.

If using more than one broker, just be aware that with ISAs, you can only fund a single broker with your allowance for any one tax year - it cannot be split between two brokers in the same year.

Some Popular Brokers to Research

Sippdeal -

Hargreaves Lansdown -

Cavendish -

Halifax Sharedealing -

Alliance Trust -

TD Direct -

Charles Stanley -

Selftrade -

Iweb -

Tuesday, 2 April 2013

Low Cost Index Trackers

When I started to take a serious interest in investing, the main choice would be between direct shares, unit trusts and investment trusts. I have long been aware of the importance of keeping costs to a minimum and so invested largely in shares and investment trusts.

Low cost index trackers - funds or ETFs - were not an option 20 years back however, if I were starting my investing career today, I ‘m sure these would feature quite prominently in my portfolio.

Low Cost

As I pointed out in a recent article - Avoid High Charges - to get the best returns from investments, it is important to keep costs as low as possible. Trackers do not need to research companies, they do not need to pay for star managers and there is much less portfolio turnover compared to a managed fund. Therefore the total charges for many of the lower cost trackers like Vanguard and HSBC will be around the 0.5% mark - this could easily be 2% less than many of the managed funds which are heavily advertised in the financial media when you take into account the hidden extras like portfolio turnover and soft commissions.

Index Tracker

The tracker fund or ETF tries to match the index it follows or tracks as closely as possible. There are many  trackers to cover any index you may desire - some common ones will be the FTSE 100, the FTSE All Share, the S&P 500 (USA), FTSE All World (ex UK), and Emerging Markets.

Trackers -v- Managed Funds

Over the longer periods, say 5 years +, most studies are fairly clear - the average low cost tracker will out-perform the average managed fund.

Of course, there will always be the handful of star managers who can consistently produce good returns - the likes of Neil Woodford at Perpetual or Bruce Stout at Aberdeen spring to mind - but your chances of finding such a manager at the start of your investing journey are very slim, probably less than 1 in 10.

One of the big reasons most managers fail to beat their benchmark consistently is the effect of fund charges - typically around 3% every year which is a big drag on performance - whether the manager is good, bad or indifferent, the funds all seem to charge the same ongoing charges.

So, you have maybe a 10% chance of selecting a fund that can deliver a decent return or you can choose a low cost tracker with a 100% chance of matching the index (tracking error aside).

Unless you are confident a managed fund can make a difference, for my money, most small investors will be better served over the longer term by low cost trackers.

Finally, beware of the actively managed funds that are little more than closet trackers but charge you 4 or 5 times the cost of a tracker for the privilege.

Variations in different sectors

Recent research by AWD Chase de Vere over a 10 year period shows that in almost every sector, the average fund failed to beat the index - the only sector where managed funds outperformed were smaller companies with a return of 213% over the 10 years compared to just 110% for the FTSE small cap index.

In the UK all funds sector, active funds returned 123% (after charges) compared to 132% for the all share index. In the USA, the average fund underperformed the index by 11%, in Europe 16%, Asia 45% and with emerging markets the average managed fund underperformed the index by 68%.

Patrick Connolly of AWD Chase de Vere said: "Our research shows that many investors are continuing to waste money by paying active management fees for consistent underperformance."

Charges for holding low cost trackers

With the introduction of  the Retail Distribution Review (RDR) in January, many platforms have been reviewing their charging structures. Until recently, there were usually no additional costs for holding low cost trackers in your portfolio however as many platforms have started to rebate some or all of the commissions they receive from the higher charging funds, they have started to charge customers for holding funds that pay little or no commission e.g. Vanguard.

These costs vary from broker to broker - Hargreaves Lansdown charge a flat £2 per month per holding; Sippdeal charge a flat £12.50 per quarter for as many funds as you like. Depending on the size of your investments and how many trackers you may wish to hold may determine the better broker for your particular needs. It will also vary if you want a mixture of funds, shares and ETFs for example and whether you have an ISA or SIPP.

You will need to investigate which is the most cost efficient way to invest, otherwise your savings on costs could be cancelled out by platform/broker charges.

To compare fees and brokers, check out the comparison table on Monevator.

So, low cost trackers could be a very good choice for many small investors - legendary US investor Warren Buffett says "A low-cost index tracker is going to beat a majority of the amateur-managed money or professionally managed money." - who am I to disagree!

As ever, slow & steady steps…..