Retirement investors looking to generate sustainable income should consider investing in a diversified portfolio of different types of investments. This is because combining various asset classes that have low correlations with each other provides downside protection during tough times, helping you to generate superior risk-adjusted returns.
Asset classes
Beyond equities and bonds, investors should also consider investing in property and alternatives, such as private equity, infrastructure and credit investments, to further broaden a retirement portfolio. Directly investing in such asset classes can be a difficult job, but there may be a simpler option.
There are a number of investment trusts which are invested in a wide range of assets, and they are structured as companies, enabling them to trade on the stock market like regular shares. As such, they can be held in a stocks and shares ISA or a SIPP for maximum tax efficiency.
Commercial property
One example is the Standard Life Investments Property Income Trust (LSE: SLI) which invests in a diversified portfolio of commercial properties. The trust seeks to generate an attractive level of income with the prospect of capital growth as well.
Jason Baggaley, who has been running the trust for almost 10 years now, has a preference towards higher-yielding properties with active asset management opportunities. Through refurbishments and lease renewals, Baggaley seeks to increase rental income and enhance capital value. The fund is a top performer in the direct property sector, after having delivered a net asset value (NAV) total return of 83% over the past five years.
The portfolio is mostly invested within the three main commercial property sectors of retail, office and industrial. Shares in the trust currently yield 5%.
Closed-ended structure
Property is an asset class which seems particularly suited to the closed-ended structure of investment trusts because of the illiquid nature of property. With a fixed number of shares in issue, investment trusts don’t have to sell assets when investors withdraw their money from the fund.
By contrast, open-ended investment vehicles such as unit trusts and OEICs are sometimes subjected to trading suspensions during times of market stress, when they are unable to raise sufficient cash to meet redemptions from investors. Investment trusts meanwhile, due to supply and demand, can see their shares trade at a discount or a premium to their NAVs.
Peer-to-peer lending
Elsewhere, the Funding Circle SME Income Fund (LSE: FCIF) is also worth a closer look. Launched only back in 2015, the fund invests in loans to small businesses in the UK, US and Europe.
I’m sure many of you have heard of peer-to-peer lending — it’s an increasingly popular option for individuals seeking better returns than those offered by savings accounts. But rather than invest in loans directly through a P2P platform, you can buy shares in such an investment trust and have your investments handled by a professional fund manager.
Investing this way also gives you exposure to business loans from overseas instead of limiting them to domestic borrowers as required by peer-to-peer platforms.
This Funding Circle operation invests in a diversified pool of loans to small businesses originated from the Funding Circle marketplaces. The portfolio is geographically split between the UK (67%), US (23%) and continental Europe (4%).
Shares in the trust currently yield 6.2%, with the fund trading at a 5% premium to its NAV.