2 investment trusts I’d pick for a starter pension portfolio today

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When you’re approaching pension age, I think the best investments to go for are mature companies which are generating sacks of cash and paying out sustainable and rising dividends. Safe income is what I’d want, not the risk of unproven prospects.

But when I talk to young people who are just starting out and have decades of investing ahead of them, they tend to think that’s a bit boring and want some excitement from growth opportunities. And I think that’s fine, as they can spread the risk out over time.

One approach is to look for companies with great potential, which have yet been realised. And that, as it happens, sums up Caledonia Investments(LSE: CLDN). As well as holding some big international stocks, the investment trust also looks to acquire smaller companies with growth potential and then puts in the effort to achieve it.

Cracking return

On Tuesday, the firm announced its most recent success after the sale of Choice Care Group, a provider of residential services for people with learning disabilities and mental health conditions. The disposal of its 87.4% stake has netted Caledonian £99.4m in cash (including pre-sale dividends of £7.1m).

Considering it paid £49.5m initially for it, invested a further £5.4m in the business, and has also received earlier dividends of £6.1m, that looks like it’s been a canny deal. In fact, it represents an internal rate of return of 14.3%, and a money multiple of 1.9 times. That’s a top result.

The proceeds will be put towards repaying cash drawn under the company’s loan facilities for the acquisition earlier this month of Deep Sea Electronics, an electricity generator and intelligent battery charger specialist.

Caledonia’s dividend yields are modest at around 2%, but it’s raised its dividend for 51 years in a row now. The shares are currently trading on a discount to net asset value of 24%, even after gaining 40% in the last five years.

Go for growth

Another way to spread the risk of going for smaller growth companies is to buy an investment trust that specialises in them. So I do like the look of the Standard Life UK Smaller Companies Trust(LSE: SLS).

As it says on the tin, the trust invests in smaller companies in the UK, looks for growth, and seems to be rather good at it.

A share issue related to the reconstruction of the Dunedin Smaller Companies Investment Trust has led to a fall back in the share price since early October, but we’re still looking at 46% share price appreciation over the past five years, compared with the FTSE 100‘s meagre 5% gain.

Some dividends

And though the trust is firmly chasing growth, it’s still paying a modest dividend too, which has been yielding around 1.5-2% in recent years.

What an investment trust like this relies on is having a good manager and, as my colleague Rupert Hargreaves has pointed out, in Harry Nimmo they have one of the top smaller-companies experts in the business.

At 9.5%, the trust is trading at a smaller discount to some of its peers, but after the recent share price dip, I reckon that makes it look like pretty good value.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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