If you aspire to a comfortable retirement, particularly if you'd like to retire early, building up the value of your pension quickly is crucial. The mathematical 'rule of 72' tells us that an investment that increases in value at 7.2% a year will double its price in a decade. Push the annual return to 10% and you'll get there in 7.2 years, thanks to the power of compounding. And if you can achieve 14.4%, your money will double in just five. Or, if you remain invested for the original 10 years, you'll have twice as much money. Sounds tempting!
Over the long run, a low-cost FTSE 100 tracker or a diversified portfolio of individual stocks stands a good chance of exceeding the first of these growth rates by perhaps 1% a year, while some of the big-name growth- and small-cap investment trusts have achieved the second. But the third? Annual mid-teens historical returns are generally confined to risky and volatile microcaps -- too risky for retirement money for some -- and to funds investing in specialised sectors and strategies. They're niche products so you shouldn't be overexposed to any one of them, but as part of a portfolio that includes some household name investment trusts, they could play a vital role in ensuring your retirement is more comfortable -- and arrives sooner -- than a boring tracker could achieve.
Burford Capital(LSE: BUR) is the world's leading litigation funder, backing corporates in commercial and intellectual property disputes and enforcing judgements for a share of the awards. It has returned a spectacular 484.8% in the past five years, a figure unlikely to be repeated as the business is now mature. Nevertheless, an average annual return of 20-25% could be within reach. Profits are dependent on judicial decisions and exchange rates (most cases being in the US), so volatility may be high, making this a choice for investors with long time horizons.
International Biotechnology Trust(LSE: IBT) has achieved the highest five-year return in the hot biotech sector, at 221%. With rich countries facing ageing populations and major medical breakthroughs increasingly achieved through technology, I believe IBT's mix of medics, scientists and financiers are well placed to continue generating 25-30% a year from a global mix of listed and unquoted investments. The trust recently introduced a 4% annual dividend -- great for retirees, but those not yet in drawdown should reinvest it.
Private equity-owned businesses generally outperform listed ones. But, as the name suggests, the asset class is seldom available to the public. A few listed private equity trusts represent the exceptions, Pantheon International(LSE: PIN) being the UK's longest-established and, in my view, best. Returning 168.3% over five years, it's hugely diversified, by fund manager, stage, scale and geography, so the 11.8% annual NAV return achieved since inception, which includes a big hit following the global financial crisis, could be beaten. Second biggest holding in my SIPP.
A handful of fund managers aim to achieve private equity-like returns by investing in small firms where they believe they can exert influence on management to execute strategic change. The shining star among these is Strategic Equity Capital(LSE: SEC), which has generated a 177.2% return for investors over five years. Its share price slightly in 2016 because it moved from trading at a premium over Net Asset Value to a discount, as the small-cap IT sector fell out of favour. This makes it a smart buy now, raising the probability of achieving 12-15% a year growth going forward.
In April 2016, the Government reduced the Life Time Allowance (LTA) for pensions to £1m, which will grow in line with inflation. Truth told, assuming a withdrawal rate of three percent, equating to a £30,000 annual income at today's prices, many people would struggle to retire on much less. So while it sounds like a lot of money, a £1m pension pot doesn't equate to a millionaire lifestyle.
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Mark Bishop owns all four shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.