11th April 2014 by Cherry Reynard
Income seekers have often turned to investment trusts, whose ability to reserve income in good times to pay it out in leaner times often provides a more consistent yield. However, this week saw a stark warning from Winterflood that many income trusts might come under pressure if interest rates were to rise.
The group pointed out that trusts paying an income of more than 5% were trading on an average premium of 3.4% at the end of February. This compares to a discount of 4.8% in January 2013. Investors risked losing capital if that income stream was to become less valuable, as would happen in a higher interest rate environment. It warned investors to be careful not to overpay for income.
There was better news elsewhere for the sector. Investment trusts have historically had two problems when competing with OEICS and unit trust: they didn’t pay commission and access through platforms was limited. The Retail Distribution Review banned commission and so dealt with one side of the problem, but platform access has remained patchy. None of the major fund supermarkets – Fidelity FundsNetwork, Cofunds or Skandia – offered more than a minimal range of trusts.
This week there were signs of that changing, as Cofunds chief executive David Hobbs said that the platform still planned to offer trusts in future. This is in spite of postponing plans to launch investment trusts on its platform late last year and dropping a potential deal with Barclays Stockbrokers, which would have brought investors access to individual equities, including trusts. This is potentially good news. Cofunds white-label their platform for a number of brokers and the wider access should give investment trust investors more options when buying.
Elsewhere, it was a quiet week for results. The Baillie Gifford-managed Scottish American Investment Company, gave a quarterly update, showing a fall in net asset value of 1.7%, compared with a 0.5% return from the trust’s benchmark. The share price fell harder – down 5.6% – as the trust moved from a premium to a small discount.
New manager Dominic Neary took over the trust in February and has since increased the direct property weighting over the period, buying a new commercial property in Leicester.
The only other major moves for the trust over the period were partial sales of Progressive, Baidu and Vodafone. Otherwise the top twenty holdings remained largely unchanged.
The Invesco Perpetual UK Smaller Companies trust also reported during the week. It saw strong results for the year to 31 January, with the net asset value rising 31.4%. However, this was marginally behind the trust’s Numis Smaller Companies Index benchmark, which returned 31.8%. Jonathan Brown, previously co-manager, has taken over at the helm of the trust since the start of this year in anticipation of the retirement of Richard Smith.
Featured trust – Threadneedle UK Select Trust Limited
The board of the Threadneedle UK Select Trust Limited (previously UK Select) received a ringing endorsement of its decision to switch management from SWIP to Threadneedle as the trust reported a rise in net asset value significantly ahead of its benchmark for the twelve months to 31 December last year. This was the first full year with Threadneedle in charge.
New manager Simon Brazier and his team at Threadneedle steered the trust’s net asset value 28.1% higher on a total return basis compared with the 20.8% total return from the FTSE All-Share Index. The trust had a cyclical bias during the year, with larger positions in industrial and consumer discretionary stocks. It did well from holdings in BT Group, Breedon Aggregates and housebuilders Persimmon and Bellway. The trust also participated in IPOs such as Royal Mail, which performed strongly.
The trust’s discount moved in substantially after the announcement that Brazier was taking over as manager and it now trades at a small premium. As a result, the biggest gains for investors have probably been made. That said, the company is introducing gearing with a £5m loan facility. This could make a big difference on what is still a relatively small trust at £39m. It has a dividend yield of around 2.3%, which should ensure its ongoing popularity.
Adviser pick – Tim Cockerill, head of research, Rowan Dartington
Aberdeen – New Dawn
“This is a trust we’ve used in the past, but it hasn’t had a great year. Aberdeen’s style is to focus on high quality companies and hold for the long term. It has worked well over time, but it didn’t work last year. Their bottom-up approach meant they were overweight in markets such as India, and in some Hong Kong real estate. The holding in Standard Chartered didn’t work out either. All these negative factors came together and the trust is now out of favour. It trades on an 11% discount and it might just be a time to put money in -the long-term story for Asia is strong and Aberdeen has a solid process.”
Morningstar downgraded the £2.55bn Foreign & Colonial Investment Trust to a bronze rating after last month’s announcement that long-standing manager Jeremy Tigue is to resign.
Winterflood endorsed the private equity sector, saying that while valuations had movedhigher, the sector should be a beneficiary from the improving economic environment. It recommends Pantheon International, currently on an 18% discount, and also HG Capital and Standard Life European Private Equity.