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I forgot to update the portfolio! I’ve been leaning so hard into my passive investing persona that I fell asleep at my spreadsheet and didn’t twig when the 1 July Q2 deadline sailed by.
The markets are a distant background rumble to me right now. Oil price up, oil price down. Another day, another prophecy of AI doom.
It’s not that I don’t care. It’s just that the question being asked, it cannot be answered.
The question? Always being some variant of, “What’s the next big thing?”
Answers on a postcard
Here’s the story of the year so far, told in straight lines:
Data from justETF. The chosen ETFs are proxies for the Slow & Steady portfolio’s holdings, plus gold and commodities.
Gold is the loser year-to-date, commodities the winner.
Meanwhile, previously unloved emerging markets and property are the cream of the equities crop.
Who had that marked on their card for 2026?
Here’s the story again, told in wobbly lines of uncertainty:
Gold (red line) hit a new high in early March before dropping 23%.
Buying opportunity or time to get out?
Commodities (grey line) looks like it’s commanded by the Grand Old Duke of York. The changeable duffer perpetually marching his hard assets up and down hills. You want some?
Emerging markets (blue line) have now beaten the MSCI World over the last three years. That’s a comeback worthy of the WWE, given how the new challengers had been roundly pummelled by the developed market champs for 15 years following the Credit Crunch.
Me? I’m happy to own it all and let the chips fall where they may.
Portfolio-o-vision
Here’s the portfolio holdings and long-term annualised returns since kick-off in 2011.
The Slow & Steady is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £1,360 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and find all the previous passive portfolio posts in the Monevator vaults. Last quarter’s instalment can be found here.
All returns in this post are nominal GBP total returns unless otherwise stated. Subtract about 3% from the portfolio’s annualised performance figure to estimate the real return after inflation.
The full growth picture looks like this:
In real-terms, the portfolio is still 2.6% below its December 2021 peak. Another quarter or two of progress could push it to higher ground once more.
It has to be said though that we’re coming up for five years underwater since inflation spiralled. By contrast, recovery from the Global Financial Crisis took less than three years for a 60/40-type portfolio.
Unfortunately, trad 60/40 portfolios have a history of suffering like this during severe bouts of inflation. Consider adding some additional protection to yours.
New transactions
Every quarter we plough another £1,360 into the market’s black earth and hope we’ll harvest plenty of corn later. Our stake is split between our seven funds, according to our predetermined asset allocation.
We rebalance using Larry Swedroe’s 5/25 rule. That hasn’t been activated this quarter, so the trades play out as follows:
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.18%
Fund identifier: GB00B84DY642
New purchase: £108.80
Buy 40.8946 units @ £2.66
Global property
iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.18%
Fund identifier: GB00B5BFJG71
New purchase: £68
Buy 25.5016 units @ £2.67
Developed world ex-UK equities
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%
Fund identifier: GB00B59G4Q73
New purchase: £503.20
Buy 0.5631 units @ £893.61
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.06%
Fund identifier: GB00B3X7QG63
New purchase: £68
Buy 0.18 units @ £377.84
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.29%
Fund identifier: IE00B3X1NT05
New purchase: £68
Buy 0.1189 units @ £572
UK gilts
Vanguard UK Government Bond Index – OCF 0.12%
Fund identifier: IE00B1S75374
New purchase: £285.60
Buy 2.1189 units @ £134.79
Royal London Short Duration Global Index-Linked Fund – OCF 0.27%
Fund identifier: GB00BD050F05
New purchase: £258.40 + £118.92 dividend
Buy 343.9562 units @ £1.097
New investment contribution = £1,360
Trading cost = £0
Average portfolio OCF = 0.17%
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Take it steady,
The Accumulator
I often wax lyrical about bargain hunting among investment trusts trading at a discount – that is, trusts whose shares trade for less than Net Asset Value (NAV).
Think buying £1 coins for 90p.
We’ve also written reams over the years on investment trusts as a potential source of steady income.
Former Monevator contributor The Greybeard had a lot to say about it – although he grew frustrated by the relentless pushback from hardcore passivistas.
More recently I’ve launched an investment trust income model portfolio for Moguls members.
I won’t rehash the whole active/passive debate with respect to income today. If you’re a passive investor but you have an open mind, I’ve written a Mavens post on using ETFs to do much the same.
But if you’re a global equities tracker and drawdown diehard, probably best to wait for the next article!
Give peace a chance
Just briefly for those on the fence – or simply confused – I’m not saying the average person would do better stock picking investment trusts to grow their capital.
I’m not even saying they would do better – certainly not that they’d see higher total returns – living off the natural yield from income investment trusts in retirement.
Rather, I see advantages to an actively managed income approach (less stress and income volatility, no planned capital depletion, lower infirmity risk) that make it worth considering. To the extent that I’ll probably go down this route myself when I do throw my portfolio into decumulation mode.
Okay, enough said. Let’s now consider where my hobby of investment trust dumpster diving could dovetail with an investor’s income goals.
Discounts and income from investment trusts
Firstly, a quick reminder about how discounts work:
It’s often the case that the share price of an investment trust trades at less than its NAV per share.
Remember, the NAV is – in theory – the best estimate of what the trust owns, minus any debts.
Clearly, buying shares for less than they are worth may present an opportunity. Price is what you pay but value is what you get, to quote Warren Buffett.
For instance, the fictitious Monevator Investments plc may trade for £1.20 a share, despite its NAV per share being £1.60.
In this case, a buyer is getting £1.60 of underlying assets for just £1.20.
Bargain! The share is trading at a discount to NAV:
The discount is (£1.60-£1.20)/£1.60 = 25%
In principle, you get more for your money when you invest at a discount. Hopefully in time the discount will narrow, pulling the share price back up towards the NAV and amplifying your returns.
So much for – fingers crossed – capital gains from discounts.
But what about income?
Yielding to the discount
The crucial thing to grasp is that any cash paid out by a trust is unaffected by the discount. 1
Let’s say Monevator Investments has a NAV of £1.60 per share, as above, and that it pays an annual 8p per share dividend.
If you were to calculate the yield based off the NAV, this represents a yield of 5%:
- Dividend/NAV = 8/160 = 5%
However this trust is trading at a 25% discount. We can buy the shares for £1.20.
Yet the dividend payout is still 8p per share. So for someone buying the shares today in the market, the yield they’ll get on their investment is:
- 8/120 = 6.7%
All things being equal, this higher yield is locked in. Provided the cash payout remains at least 8p, then this investor’s annual yield on cost of their Monevator Investments shareholding will be 6.7% – regardless of whether the share price rises or falls, or whether the discount closes.
Of course, dividends from decent income investment trusts tend to rise over time, as do their NAVs. Though sometimes dividends can be cut, too.
That’s a discussion for another day. The point is the chunky discount here has boosted the purchasers’ starting income yield, compared to if they were buying the shares at NAV – let alone a premium.
Note that in both cases – whether the shares are priced at NAV or at a 25% discount – the underlying assets (represented by the NAV) generate enough income for the trust to pay an 8p dividend per share.
When you buy for only £1.20 due to the 25% discount to NAV, you are getting the same 8p at a cheaper price. But because each share costs only £1.20 instead of £1.60, the same lump sum investment would buy more shares – and therefore more of those 8p dividends.
For example:
- No discount (£1.60): £10,000 buys 6,250 shares × 8p = £500 income
- 25% discount (£1.20): £10,000 buys 8,333 shares × 8p = £667 income
Happy days.
A striking hypothetical example of higher income returns
Generally investment trusts trading on discounts don’t draw attention to the fact. Their annual reports will wave their hands about what they’re doing to close the gap, and direct your attention to graphs of rising NAVs over time, or photos of employees from portfolio companies curing cancer or drilling for oil.
So the following illustration in a recent presentation from an investment trust I hold – Canadian General Investments Trust (LON:CGI) stood out:
Source: Canadian General Investments
For a cluster of reasons we don’t need to get into, Canadian General’s whopping 40% discount to NAV is pretty much out of its control. 2
While CGI has sometimes traded at NAV – usually during commodity booms – a big discount is typical.
Hence management has a reason to turn this bug into a feature with this table. And what it’s illustrating is exactly what I’ve explained above.
The table simplistically assumes a 10% annual return – high but less than CGI’s long-term track record – split between 7% capital gains and a 3% dividend. All the income is presumed to be paid out.
If you were to buy $100,000 of Canadian General as a hypothetical open-ended / mutual fund – that is, with no discount – then for your hundred grand you’d get $3,000 paid out as a dividend income.
- That is, 3% of $100,000 = $3,000
However at a 40% discount to NAV, your $100,000 is buying you $166,667 of Canadian General’s assets:
- 3% of $166,667 = $5,000
Your income is higher from day one, just as we’ve already seen in my example above.
From there, the company compounds NAV at 7% and holds the 3% payout (of NAV) steady. The discount stays at 40%:
By year 20:
- 3% of $602,775 = $18,083
We can also work out the ongoing yield on cost of your initial $100,000 investment:
- $18,083/100,000 = 18% on your original purchase price.
A very nice income if you can get it.
Discounts are a bonus for income investors
There’s plenty of slips betwixt cup and lip and all that. Dividends can be cut. Canada is an odd place to put a lot of your money. Canadian General’s exposure to US assets muddies the picture.
But that’s all for another discussion. Here I’m just focused on the mechanics of discounts and income.
You see, readers often ask me why I should expect a discount to close.
The simplest answer is that most usually do, eventually, at least for a time and in the absence of structural impediments such as those at Canadian General.
But the point here is that if you’re an income investor after natural yield, then it doesn’t matter. You can simply aim to buy and lock-in a high starting yield and then let the income roll in. (Touchwood!)
Buy in the sales
Unfortunately, the top flight of dedicated UK equity income trusts rarely if ever trade for anywhere near 25% discounts. Their income underpinnings, steadier investments, and decent long-term records tend to curb such extreme dislocations.
However they can reach discounts of 10% or so when out of favour, or in wider times of distress.
Still, the same income-enhancing argument holds for more specialist trusts, too, where we have seen much chunkier discounts.
For years even income seekers bought infrastructure trusts on a premium, for reasons I never understood. However as I covered on Moguls, in early 2025 they were trading on 25-30% discounts. That meant income yields of 8% or more for new money buying the likes of HICL (LON: HICL).
Such super-wide discounts have now closed, though you can still bag HICL at a 15% discount. (Disclosure: I hold.)
Property trusts and many REITs are still on big discounts to NAV, for what that’s worth.
And there remain a few – troubled – renewable trusts on big discounts touting very high yields for the brave.
Despite misgivings, I’ve dipped a little toe in with Greencoat UK Wind (LON: UKW), currently on a 22% discount and yielding 10%.
Looking to the long-term
Infrastructure, property, and even renewable investment trusts have all traded at premiums to NAV in the past. I’m not saying they will again (especially not renewables). But as we’ve seen, for braver income seekers that might not matter, just so long as the dividends keep flowing.
Still, I’m more confident about the very long-term with Ye Olde UK equity income trusts – those of the much-vaunted (and debated) Dividend Hero variety.
Anything else is a bit of a special situation when it comes to long-term income.
And yes, to belabour the point: this is active investing. Nobody needs to pipe up that a global tracker will outperform in the long run or that discounts might be flagging bigger risks or mention Neil Woodford.
I get it and I mostly agree. So should anyone who goes down this path. Do your own research!
But personally, I’m starting to think I might smooth the transition from accumulation to decumulation by opportunistically buying – and then looking to hold – these income trusts as I head towards drawdown.
That would probably be much less stressful than switching overnight from an accumulation to decumulation portfolio – albeit likely at some cost to my returns.
Indeed as I get closer to the end than the beginning, I have started making tentative stabs at building up a natural yield again. Ironically this takes me back – philosophically – to where I started as an investor.
True, I’m still finding it hard not to trade when the discounts close, or some other shiny object pops up…
But as I transition at least a chunk of my portfolio towards income, maybe that illustration from Canadian General will help me stay my hand.