Thursday, 31 March 2016

City Merchants HY Trust Results

The stock market essentially deals in two kinds of asset; shares and bonds. These investments have very different characteristics. Shares make you a part-owner of a company whilst bonds, being debt instruments, turn you into a lender.

As a shareholder you've got to be fairly optimistic about your company's prospects; expecting that its shares will produce a better return than its bonds. In contrast, bondholders can be pessimists; as long as the company or government generates enough money to pay the interest they'll still be paid even if the shareholders are having a tough time.

They say shares are for optimists, bonds are for pessimists. I am still fairly optimistic on equities which is why I continue to maintain a 60:40 balance but there’s no harm in hedging your bets and bumping up immediate income with fixed interest, high yielding trusts.

Similar to my other holding in this sector New City Trust, City Merchants investment objective is to seek to obtain both high income and capital growth from investment, predominantly in fixed-interest securities.

It is almost a year since I purchased this IT for my ISA as a replacement for a few sales from my shares portfolio including Charles Stanley and Diageo.

The overall portfolio is fairly defensive with a significant proportion of higher quality companies which the management consider to be ‘default-remote’.

They have this week announced final results for the 12 months to 31st December 2015 (link via Investegate).

Net assets have declined by -2.8% however taking the full year dividend of 10p per share into account, the total return was +2.7%.


The dividend target for the trust is 10p per share paid quarterly. This amount was paid in 2014 and 2015 and remains the target for the coming 12 months. At the current price of  178p the shares offer a yield of 5.6% which is obviously attractive compared to the rates on offer from our banks and building societies.

CMHY -v- FTSE All Share Index (click to enlarge)

Of course, the share price will move around as can be seen from the chart and this may provide opportunities for a better yield at certain points.

For me, the trust provides some diversity to equities and a steady quarterly income stream.

As they say, slow & steady steps….

Thursday, 24 March 2016

Next - Full Year Results

NEXT is a FTSE 100 retail company with a market cap. of ~£10bn. It trades from more than 500 stores in the UK and Eire and almost 200 stores in more than 30 countries overseas. Online shopping was introduced in 1999 and the entire book became available to shop from on the internet, page by page – another first in home shopping in the UK. NEXT Directory now also serves customers in around 70 countries outside the UK.

They have today issued full year results to 31st Jan 2016 (pdf link via Next plc). Retail stores and its online business both continued to deliver growth to lift profit before tax 5% to £821.3m , with earnings per share up 5.4% to 442.5p (2015 419.8p).

Sales are up 3% to £4.15bn .

Commenting on the results, Lord Wolfson warned:
"In many ways we have more to do than ever before with complex challenges to our working practices across product, marketing and systems", Wolfson said. "It may well feel like walking up the down escalator, with a great deal of effort required to stand still".

"The year ahead may well be the toughest we have faced since 2008.  We are very clear on our priorities going forward and whatever challenges we may face, it is important that we remain focused on ensuring that the Company's product, marketing, services and cost controls all improve in the year ahead".

They are forecasting sales growth of around 1.5% for the coming year, profits around the same as 2015 with total shareholder return of around 5% or 6% including special dividends and share buybacks.

The share price has seen some weakness since the start of the year and although the results were actually ahead of expectations, the downbeat warning has sent the share price into a tailspin - currently down ~12% to £58 at the time of posting. The shares were trading at a high of ~£80 this time last year, so a fall of over 25%!

Unfortunately, this volatility is one of the downsides of holding equities in general and individual shares in particular and the main reason I have decided to wind down my shares portfolio and focus on my investment trusts and index funds.


On a more positive note, the board have declared a final dividend of 105p making a total of 158p for the year - an increase of 5%. In addition there have been special dividends of 230p, the latest being 60p per share paid in February.

Next anticipate distributing £200m to shareholders in 2016/17  I am hoping there will be more special dividends to come over the coming year and will therefore hold the shares for the time being. They may well however elect to implement a buy-back of shares given the current price weakness. Either way, if they can return a total of £3.88 over the coming year, the forward yield is an attractive 6.7% which should provide support for the price to recover.

My sense is that the sell off has, as usual, been over-done but then what do I know - the markets are almost always efficient!

Leave a comment if you have any views on Next.

Finally, have a great Easter break - take it easy!

Monday, 21 March 2016

Vanguard UK Equity Income Fund - One Year On

It is just 12 months on since my initial purchase of this UK income index fund.

The Vanguard fund tracks the FTSE UK Equity Income Index, which I understand was specially commissioned by Vanguard from the FTSE index compilers.

And the idea is simple: to give investors access to a broad range of dividend-paying securities from across the FTSE 350, while reducing the risk of being overly invested in a small number of high-paying shares or particular industry sectors by limiting the percentage of the index invested in any one company or industry.

Here, in essence, is how the FTSE UK Equity Income Index is constructed:

  • All stocks not forecast to pay dividends over the next 12 months are screened out.
  • All investment trusts and REITs are removed.
  • The remaining shares are ranked from highest to lowest by forecast annual dividend yield.
  • Stocks enter the index in order of their forecast annual dividend yield, until the total shares held in the index equals 50% of the float-adjusted market capitalisation of the available shares.
  • The number of shares in any one business is restricted to a maximum of 5% of the total value of the index.
  • The maximum amount invested in any industry sector is restricted to a maximum of 25% of the total value of the index.
  • The index is re-balanced twice-yearly. A stock remains in the index until its forecast annual dividend yield is no longer in the top 55% of qualifying shares; a stock that is not already in the index will qualify for inclusion if it falls within the top 45% of qualifying shares -- a 'buffer zone' that exists to minimise costs.

The Vanguard fund holds around 130 companies - the top ten holdings include all the usual suspects - Vodafone, Glaxo, Unilever, BATS etc. Other top 50 holdings include some of my individual share holdings - Next, L&G, Sky, Berkeley and BHP Billiton.

Ongoing charges are 0.22% and also a one-off dilution levy of 0.40% on purchase. In addition, my broker AJ Bell make a charge of 0.20% for holding funds (no such charges for holding shares, investment trusts or ETFs). The total charges therefore are not excessive and certainly compare with say City of London IT - which incurs no broker platform charges but just the trust's ongoing charges of 0.45%.

The current yield is around 4.7% based on projections from last years distribution. Dividends are paid out half yearly in June and December.


The index fund was purchased close to the market top when the FTSE 100 was closing in on 7,000. After May it was downhill all the way until mid February by which point it had retreated over 20%.

Over the 12 months to end February, the index fund is down 8.4%. My initial purchase price was £177.50 compared to the price today of ~£162. It was funded from the sale of several individual share holdings including - Nichols, Hargreaves Lansdown, DS Smith and Sage Group.

1 yr chart -v- CTY
(click to enlarge)


The fund has so far provided income payments of 397.56p in June and 379.36p in December - a total of 776.92p which represents a yield of 4.38% on the cost of purchase. The income distribution represents the combined dividends received (less costs and fund charges) so, unlike investment trusts which hold reserves to smooth out the income payments, I will not know exactly what payment will be received in my ISA until it actually arrives. For example, the income distribution for the previous year was 708.8p and in 2013 699p.

Given that a number of companies have announced dividend cuts in recent months, I am expecting some reduction to the 2016 distributions over the coming year. These are mainly commodity focussed companies such as BHP Billiton, Rio Tinto, Anglo American and Antagofagasta but also include Standard Chartered Bank, Rolls Royce and Centrica. The combined cuts so far announced in 2016 amount to ~5bn. Capita’s Dividend Monitor is predicting the first fall in dividends since 2010.

It will be interesting to see how some of my managed income-focussed investment trusts such as Edinburgh, City of London and Murray Income for example compare to the Vanguard index fund over the coming year or two.

I now use the Vanguard fund as an additional benchmark against which to compare returns for my equity income portfolio - individual shares and investment trusts.

Wednesday, 16 March 2016

New Lifetime ISA from April 2017

In his budget today, the Chancellor introduced a big incentive for younger people to save for the future.

With the new Lifetime ISA,(pdf link) from next April anyone between the ages of 18 and 40 yrs can save as much or as little as they wish up to a maximum of £4,000 per annum. For savings up to the age of 50 yrs, the government will add a 25% bonus i.e a max. of £1,000 at the end of each year.

Therefore someone contributing the maximum from their 18th birthday could save £128,000 by the age of 50 yrs and receive total bonuses of £32,000.

Assuming a modest return on investment of 5% and taking into account platform/fund charges of 0.5%, the pot would grow to around £350,000 by age 50 yrs and the with no further contributions, to £543,000 by the age of 60 yrs. Worth thinking about folks! (calculations via Candid Money)

The ISAs will operate similar to the existing system and individuals could have more than one Lifetime ISA - but only pay into one in any single year. They can choose between cash ISA or Stocks & Shares ISA

The money can be used towards the deposit for a first home worth up to £450,000 or can be saved as a nest egg for retirement and taken tax-free from the age of 60 yrs. Unlike pension savings, withdrawals can be taken at any time before 60 yrs subject to the loss of bonus and also a 5% charge.

A couple can each save up to £4,000 each - so £8,000 max. and get a £2,000 bonus on top.

From next April, the ISA limit - including Lifetime ISA - will rise from £15,240 to £20,000.

More details on this will emerge later in the year following industry consultations.

Thumbs up from me...what do others think - leave a comment below.

Tuesday, 15 March 2016

Legal & General - 2015 Final Results

L&G is a large FTSE 100 company with a market cap of around £14bn employing over 8,000 people serving 10 million customers. It is responsible for investing over £500bn worldwide with operations in USA, France, The Netherlands, Egypt, India and the Gulf. However the UK still accounts for the majority of its business.

They are the UK’s leading provider of individual life insurance as well as a market leader in group protection, annuities and workplace pensions. L&G are a top 20 global asset manager and one of Europe’s largest institutional asset managers as well as being the UK’s largest investment manager for UK pension schemes.

The shares joined my portfolio for the first time in March 2014.

Legal & General has a diversified business model with ~33% of the firm’s operating profit coming from UK insurance, 23% from retirement products, 23% from investment management, 13% from investing its own capital and 7% from the company’s American operations.


The Company has today announced full year results for 2015 (part 1of 3- link via Investegate). The results show adjusted earnings up 11% to 18.58p and profits up 14%. The current P/E ratio is a modest 12.4.

The full year dividend is lifted by 19% to 14.4p (2013 11.25p). The dividend had more than doubled in size since 2011 (6.4p), with UBS earlier forecasting that growth in the distributions would have to slow to 6% a year between 2016 and 2019. The shares are currently yielding 6.2%.

International expansion should open up further opportunities for the group. Last October, L&G signed its first bulk annuity contract in the US. The US defined benefit market is four times larger than the UK and demand for de-risking solutions is growing rapidly. The deal gives L&G an important foothold in this market, and the opportunity to build its market share.

Nigel Wilson, Group Chief Executive, said:

"Over the last 4 years we have delivered sustained growth, net cash has increased 10%, EPS has increased 11% and the dividend increased by 20% on average each year.

We had already moved to a capital-lite model for UK pension risk transfer business in anticipation of the new Solvency II regime and we will use our Solvency II surplus capital of £5.5bn to continue to deliver on our strategy. We have a robust business model which has proved to be adept and resilient in dealing with fiscal and regulatory changes in our sector.  We are planning for more global economic and market volatility and are well positioned for continued pressure on pricing and changes in product mix in our industry".

Rather perversely, the share price has fallen ~5% on the announcement. As far as I can see, the results are more or less in line with expectations and I can therefore see no fundamental reason for the mark down from Mr. Market which I suspect may well be a short term blip.

I will continue to hold for the final dividend and beyond.

As always, please DYOR

Monday, 14 March 2016

Murray International - 2015 Final Results

The trust aims to provide both capital and income growth from a portfolio that is predominantly focussed on global equities.

According to figures from the Association of Investment Companies, £1,000 invested over the past 10 years would have produced a total return of £2,140. With one or two exceptions, the dividend has grown or been held in each of the past 40 years. Dividend growth over the past 5 years is 5.3% p.a.

Murray International (MYI) has today reported results for the full year to 31 December 2015 (link via Investegate).


For a third consecutive year, the trust has not managed to outperform its benchmark. The NAV total return for the year was just -7.8% compared to +2.6% for the benchmark - comprising 40% of the FTSE World UK Index and 60% of the FTSE World ex-UK Index.

The trust had outperformed the benchmark index for the previous 11 consecutive years!

The reasons for the underperformance are an underweight position in USA - similar to the previous year, foreign exchange considerations, a reduction in the premium to NAV which turned from premium to discount over the past year, and an over-exposure to areas heavily dependent on exports in commodities to China such as S. Americas.

Lets not forget that these are active decisions taken by the manager which, so far, have not worked out to the advantage of shareholders in recent years - another reason to support the argument for passive index funds!

The management charges to Aberdeen have reduced by 2.6% to £7.0m (2014 £7.2m). However, as net assets have fallen by 12%, the total charges have increased to 0.83% of net assets including transaction costs. The management have agreed a marginally better deal on charges for 2016 and also the performance fee has been dropped which is good news.

As ever, the analysis of the global economy provided by Bruce Stout is well worth the read - he concludes his report:
"Predicting the future against a backdrop of unrecognisable factors is arguably futile.  The global economic landscape that prevails today cannot be found in any textbook or indeed in the historical experience of even the most seasoned investor.  It is most definitely unfamiliar.  From an economic perspective events of the past few years make no sense!  Governments across the globe have expanded sovereign balance sheets beyond breaking point through irresponsible excessive money creation to achieve virtually nothing.  Growth in the developed world constantly disappoints, debt levels have expanded significantly and living standards, at best, have stagnated. Sadly none of this should come as a surprise. Failure to grasp the nettle of chronic debt dependency and unsustainable consumption expectations remain the Developed world's Achilles heel. Politically unpalatable and economically unviable, realistic redress is constantly shunned by policymakers persistently procrastinating with less painful options.  Artificially depressing bond yields may have bailed out the banks, but responsible savers still foot the bill.  Yet still the unorthodox monetary intervention continues.  It is common knowledge that repeatedly pursuing the same actions expecting a different outcome is the definition of madness.

Unfortunately the stated aims and actions of numerous Central Banks today are symptomatic of exactly that. Against such a backdrop of unfamiliarity and uncertainty, investment must focus on what is familiar.  Good companies, possessing strong balance sheets producing affordable products people need offer potential stability.  Where geography of origin or market periodically attracts scorn then opportunities to acquire at discounted valuations will be embraced.  Global diversification, firmly out of fashion in an increasingly concentrated global financial landscape, will be maintained.  Whilst anything other than a challenging year ahead with potentially increased volatility appears unlikely, Murray International will continue to strive to navigate a smoother course in pursuit of its investment objectives".


On the dividend front, they are proposing to hold the final payment of 15.0p making a total for the full year of 46.5p - an increase of 3.3% on the previous year (45.0p). The revenue for the year however was only 45.7p (2014 40.8p) so the full year dividend has once again not been entirely covered by income and the management have dipped into reserves to make up the increase in payout. This is obviously not a sustainable position longer term however reserves are still more than double the dividends paid out over the past year.

At the current price of 880p the shares yield 5.2%.

MYI had been one of the cornerstones of my income portfolio for several years but shortly after last year‘s results, I decided to reduce my ISA holding (also Murray Income & Temple Bar) and move the proceeds to Vanguard LifeStrategy 60. I will continue to hold the remainder for the time being in the hope that the manager can get the trust back on track - if not, I suspect the board may be looking around for a replacement!

Leave a comment below if you hold this investment trust.

Thursday, 10 March 2016

Amec Foster - Full Year Results

Amec Foster Wheeler are a FTSE 250 company with a market cap. of ~ £2bn. It's main markets are in the energy services and engineering sector, with major operations centers based in the UK and Americas and offices and projects in around 40 countries worldwide.

Its goal is to deliver profitable, safe and sustainable projects and services for their customers in the oil and gas, mining, clean energy, environment and infrastructure markets, including sectors that play a vital role in the global and national economies and in people’s everyday lives.

Customers, in both the private and public sector, are among the world’s biggest and best in their fields - BP, Shell, EDF, National Grid and U.S. Navy to name just a few.

They have today released results for the full year to 31st December 2015 (link via Investegate). The dramatic fall in oil and commodity prices has obviously had an impact on earnings and profits.

Adjusted profits are down -7% at £374m - earnings per share of 67.7p (from continuing operations) down -15% on the previous year.

Amec announced plans to sell its Global Power Group unit and halve its net debt in the next 15 months through non-core disposals.

CFO and acting CEO, Ian McHoul said
"Our focus is to maintain our solid operational performance and drive our cost reduction and efficiency programmes. We are also making good progress with our portfolio review, and have identified a number of non-core assets, including GPG, which we intend to sell over the next 15 months. We are targeting to halve our net debt over this timeframe, from disposal proceeds together with the cash generated from our core businesses. The successful refinancing we announced last week further strengthens our position.

"2016 is expected to be another year of challenging market conditions across upstream Oil & Gas and Mining. However, our exposure to a number of end markets, including downstream Oil & Gas, renewables and government work means we expect to see only a slight fall in like-for-like revenue, and a reduction in trading margins significantly less than the decline in 2015"

The company recommended a final dividend of 14.2p per share, which together with the interim dividend of 14.8p takes the total dividend to 29p, down from 43.3p in 2014.

3 yr price chart (click to enlarge)

As can be seen from the chart, the share price has fallen over 50% in the past 18m or so. Combine this with a 33% reduction in the dividend and it is not a welcome picture for the small shareholder. However the results are not as bad as some expected and if they manage to reduce the debt arising mainly from the acquisition if Foster Wheeler, and there is an upturn in the oil and engineering markets in the coming year, I think this could be an excellent recovery play. I will therefore hold for the time being and await further progress.

At the time of posting, the share price is up ~6% at 490p giving a yield of 5.9%.

Monday, 7 March 2016

Changes to Tax on Savings & Investments

Over the past few days I have been getting up to speed with the changes to the way savings and dividends will be taxed starting in the new tax year next month

From April 6th, there will be a new Personal Savings Allowance which introduces some big changes in the way savings are taxed. It is estimated that over 90% of savers will as a result pay no tax on their savings. Most savers will get up to £1,000 interest tax-free.

Until now 20% tax has been automatically deducted from interest on savings - basic rate tax payers would pay £20 tax on every £100 of interest on their savings. From 6th April, interest on savings will be paid gross i.e. without deduction of tax.

Basic rate tax payers will therefore save up to £200 tax on their savings. The allowance for higher rate tax payers is £500 so they also will save up to £200 tax.

Those with incomes of less than £17,000 will pay no tax on savings, even where it is above £1,000 as this will be covered by their personal allowance.

The PSA is separate to the personal allowance relating to tax on incomes. For the new tax year 2016/17 everyone can earn £11,000 before income tax is paid.

What Type of Savings are Covered?

In addition to the usual bank and building society savings, the new rules also cover peer to peer lending, savings in credit unions. as well as interest on investments such as corporate bonds and gilts. It will also cover interest distributions on investments such as OEICs and Investment Trusts - but not dividend distributions.

What About Dividends on Stocks & Shares?

From 6th April 2016 these also will change and the old Dividend Tax Credit will be replaced by a new Dividend Allowance of 0% tax on the first £5,000 of dividend income each year **.

Therefore you could have an income portfolio of £125,000 yielding 4% and not pay any tax. You could even have investments of £500,000 yielding 1% and still receive this income tax free.

Of course it would be sensible to take advantage tax breaks and hold investments in an ISA. The limit for the coming tax year remains at £15,240 rising to £20,000 from April 2017.

Investors who receive over £5,000 dividend income (outside of their ISA) will pay tax of 7.5% for basic rate tax payers but a hefty 32.5% for higher rate tax payers. This is designed to deter owners of businesses who have gained an advantage in the past by taking income in the form of dividends rather than salary.

I suspect I will not really be affected by these changes as my investments are held with my S&S ISA (and SIPP) but I guess its always as well to be aware of these changes.

(** Will fall to £2,000 from April 2018)


Friday, 4 March 2016

My Investing Strategy Plan

The markets have been extremely volatile in recent weeks. Less than a month back, the FTSE 100 had slumped to 5,537 and I suspect some investors will have questioned whether they should be cutting their losses and seeking the exit door. The returns on cash deposits are historically low but at least there is no risk to capital.

In the past three weeks the FTSE has rallied over 10% to 6,200 - where to next is anyone's guess!

As we probably all know, equities will probably provide a better return than cash over the longer periods but over one, two or even three years, its probably down to the toss of a coin. You need to be invested for a min. of 5 yrs and maybe 10 yrs to have a decent probability of a better return. Therefore it is important to have a good plan before setting out - a plan which will help to keep you in the game over the longer term and particularly when the going gets volatile.

My strategy is implicit from many of the posts over the past 3 years but I thought it was about time it was brought together in one consolidated point for future reference.

“Have a plan. Follow the plan, and you’ll be surprised how successful you can be. Most people don’t have a plan. That’s why it’s easy to beat most folks.” (Alabama football coach Bear Bryant).

I have a rough outline of the investing strategy in the back of an old exercise book - a few crossings out and amendments over the years. I have it constantly imprinted in my mind and it influences each and every investment decision I undertake.

It is not a lengthy document and I like to keep things simple.

My Investing Strategy

1. Philosophy - I recognise there is no such thing as a perfect strategy and that what follows is good enough and will be tweaked and amended from time to time as required to meet changing circumstances. I will try to keep costs to a minimum. I will try to simplify my investments over time.

2. Time Horizon - now in my early 60s I am thinking possibly the next 20 yrs - max 25 yrs.

3. Goals - I am now retired so one of the main  considerations will be to preserve the capital accumulated so far as I do not expect to be adding to it.

After this the main aim is to generate a significantly better average return than I can get from my building society and to keep ahead of inflation.

From this return, I will draw ~4.0% ‘income’ each year.

I would like to pass on a significant proportion of my capital to children and grandchildren - assuming it is not used for care home fees!

3. Asset Allocation - I believe diversification by asset class, geography and strategy is a one of the best forms of risk management. Since taking early retirement in 2008, my allocation has been 60% equities and 40% bonds and other fixed income. This seems to have worked for me so far and therefore I will keep to this for the next 3 years. I will then gradually start to reduce equities and increase bonds - a 2% reduction in equities each year until the mix becomes 40% equities.

4. Passive or Active - The core of my portfolio will increasingly comprise low cost, globally diversified index funds and ETFs. In addition I will keep the faith with my managed investment trusts which have found a way to collectively outperform the market consistently over many years.

5. Income - The purpose of setting a goal to generate a better return than cash deposits is to provide income. The income will be a mix of natural yield from my investments combined with an annual sale of units from my LifeStrategy index funds.

I will maintain a cash buffer of ~10% in respect of the LS funds to cover years where there are negative returns.

There is no perfect strategy. Different plans will suit different investors with different circumstances. I suspect the best plan is one which is more likely to ‘fit’ with the individuals psychological make-up and is therefore most likely to keep them in the game and get them to their destination.

…the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness. (Warren Buffett)

If you have any thoughts on investing strategies, feel free to share them with other readers…leave a comment below.

Tuesday, 1 March 2016

Coventry BS - 2015 Results

I like this mutual building society and have been a saver with them for many years. They are the third largest BS in the UK (behind Nationwide and Yorkshire) and have assets of £34 billion.

Consumer champion, Which?, recently rated Coventry the highest scoring UK building society featured in the Which? results table for customer satisfaction. In 2015 the consumer organisation Fairer Finance independently assessed the performance of the largest financial service brands in terms of customer happiness, trust, complaint handling and transparency. It rated us No.1 for both savings and mortgages.

I have held a significant percentage of their PIBS in both my SIPP and ISA for several years. They are due to be called (redeemed) in June 2016.

The Society have recently issued their full year results for 2015(link via Investegate)

Profits before tax are up once again by £14m to £216m (2014 £202m) - an increase of 7%.

As a holder of their PIBS, the item I always look for is their core tier 1 ratio which is an indicator of the strength of the company. This ratio has increased yet again to 29.4% and continues to be the highest of any UK financial institution (bank or building society).

They have maintained their high credit rating throughout the financial crisis and are the only major high street bank or building society not to have been downgraded over recent years.

Given the strength of the Company, I fully expect the PIBS to be redeemed at par 100p in June. They were first purchased in 2009 and again in 2010/11 for between 87p and 91p so there will be some capital appreciation combined with the annual payments of interest.

I will now need to consider some options for reinvesting the proceeds in my SIPP and ISA.