"Why I'm Investing for Income"

Investor Views: Private investor Michael Tarn has switched his focus from growth to income since retiring, and is hoping these fund managers can deliver

Emma Simon 18 November, 2020 | 11:30AM
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 Woman for piggybank

After retiring in his late 50s, Michael Tarn has changed his investment strategy to focus more on income. He hopes his dividend-paying stocks will help ensure a good standard of living throughout his retirement.

Michael, who previously worked in financial services, invests through Isas and self-invested personal pensions (Sipps) and also has a company pension from the years he worked at an insurance company and large private bank. 

He says: “I have been investing for about 15 years, initially because I could see how you could get better growth compared to the returns on savings accounts. I try to ensure my savings are invested in a tax-efficient manner, so I’ve been utilising my Isa allowance and consolidating some smaller pensions from previous employers.” 

Since the introduction of pension freedom rules in 2015, he has also tried to maximise his pension contributions to take advantage of the tax relief on these savings. Since retiring, Michael has put some of his Sipp into drawdown and taken a tax-free lump sum from the pot, but he does not yet take a regular income from the pot and keeps some of the money invested.

When it comes to choosing individual funds, Michael tries to diversify across different geographic regions and asset classes. He likes to find fund managers with good track records, who he believes are likely to deliver better returns in the long run than a fund that simply tracks market returns. 

Michael says: “In recent years I have invested heavily into funds run by two excellent fund managers – Terry Smith and Nick Train – and these have turned out to be successful investments for me.”

He invests in two Fundsmith funds, the investment fund house set up by Terry Smith, initially choosing the Smithson Investment Trust (SSON) in 2016, which has a global remit, focused on small- and medium-sized companies.  Since investing, he has seen a 58% return on his money.

Why I Like Fundsmith

Since then Michael has also invested in the firm’s flagship Fundsmith Equity fund, a global large-cap fund with a Morningstar Analyst Rating of Gold. 

Morningstar analysts say fund manager Terry Smith has a good long-standing record and takes a “highly structured disciplined investment approach”. Morningstar adds: “The investment philosophy is to buy and hold, ideally forever, high-quality businesses that will continually compound in value.” 

It adds: “While returns have benefited from style tailwinds since launch, we believe Smith has added significant value above and beyond the strategy's style bias.” Since investing in 2017, Michael has seen a 68% return on his money. 

Elsewhere, Michael has also made very good returns on the LF Lindsell Train UK Equity fund, which has a Bronze Morningstar Analyst Rating. He says: “I have made a 32% return on this fund, but did sell about half of my holding in 2018 to take some profits.”

Morningstar analysts say the fund benefits from a highly experienced and long-standing manager and a unique, well-structured investment approach. However, concerns over capacity management and the strategy’s ability to maintain purity of process with such a large asset base saw the fund downgraded at the end of 2019. 

Morningstar adds: “The crux of Nick Train’s investment philosophy lies in the belief that a highly concentrated portfolio of high-quality, cash-generative, strong, and easily understood business franchises will outperform the market and reduce volatility over the long term.” 

A highly concentrated investment portfolio can present risks, particularly if areas avoided outperform. But despite these inherent risks, the returns for this fund over the longer term have been “stellar”. 

Investment Trusts for Income

Michael has more recently purchased some shares in Silver-rated Finsbury Growth & Income Trust (FGT), which is also managed by Nick Train and fits with Michael’s strategy of shifting to more income-focused investments. 

He says: “Due to my retirement, I have changed strategy with my Isa and opted for funds that deliver a good dividend income. My aim is to only take natural dividends from these holdings, leaving the capital to continue to grow. 

However, with this year’s market downturn, Michael has been reinvesting dividends to try and buy more units in his investments while they are cheaper and recoup some of the losses from the sell-off. Given the market turmoil, he has also taken strategic positions in some more defensive funds such as Troy Trojan and Aegon Diversified Monthly Income. 

But Michael, who is married and lives in Northumberland, hasn’t completely lost his appetite for more speculative investments: “I have more recently invested in the metal palladium via an exchange traded commodity (ETC) fund. This is clearly a more speculative investment, but I think investments in precious metals like this could provide a good return. I have only held it for a short while but have seen a 6.6% return on my money since August.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk

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