Don’t overlook investment trusts for your pension

Both these trends mean that SIPP investors have simultaneously reduced their exposure to investment trusts. The investment trust universe not only offers no passive strategy options – funds are universally actively managed – but it’s also short on proxies for cash savings.

So what’s the problem if pension savers want passive funds and cash?

For one thing, now feels like the wrong moment to go all-in on passive funds. The current uncertainty and volatility of global stock markets leaves investors in indices too exposed to wild swings in sentiment, but creates real opportunities for active stock pickers. As for money market funds, retired savers may be attracted to the reduced risk that they offer, but like cash they deliver little or no growth to sustain them in their later years or protect the purchasing power of their savings from inflation.

Of course, that’s an argument for active investment and risk-on assets generally – but there is also a case to be made specifically for investment trusts. And that case is a strong one, both during the accumulation phase of pension saving (when you’re building up your fund) and the decumulation phase (when you’re taking money out of it to live on).

In the accumulation phase, your goal as a SIPP investor is simply to build as large a pot of pensions savings as you can. Your time horizon will naturally be long-term: even in your fifties, you’ve probably still got another decade to go before you start drawing down on your pension pot.

In which case, investment trusts’ consistent record of outperforming other types of investment fund should get your attention. The Financial Times has just published an excellent and exhaustive review of the challenges facing investment trusts today, but one of the graphics in the article really stands out: it shows the average performance of investment trusts versus the average performance of open-ended funds, with the former in the lead over every time horizon from one year to 20 years. Notably, that gap gets bigger the longer the time period you look at.

Past performance, as we know, is no guide to the future, but the explanations for the outperformance of investment trusts are as relevant as ever – their ability to take on gearing and a structure that encourages long-termism, for example. Why wouldn’t you want exposure to such advantages in a pension pot where you’re looking to maximise growth over the long term?

As for savers in retirement, it’s just as important to get the investment strategy right, arguably even more so given that you’re no longer topping up the fund. Assuming you’re in an income drawdown arrangement, taking income directly out of your pension pot, you want to both secure a decent income and be confident your savings will last for as long as you need them. In which case, you want a reliable income stream from funds that can also continue to deliver growth.

Here, investment trusts again offer an advantage. Uniquely, they can retain dividend income in good years to sustain pay-outs in more disappointing periods. This makes it easier for them to provide the reliable income that retired pension savers need while still offering exposure to assets with the potential to increase in value.

The bottom line? The most savvy SIPP investors recognise investment trusts have a valuable role to play in retirement planning strategy. Let’s hope the penny drops for more investors soon.