Investment trusts – fertile ground for income seekers after all?

9th May 2014

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Despite a number of interest parties raising concern that investment trusts are no longer a fertile stomping ground for income seekers, research released this week by Oriel Securities showed that the number of trusts paying has high yields has increased significantly over the last 10 months. The research found that a combination of weakening share prices and dividend growth had conspired to push 16 trusts to a yield of over 4%, compared to 10 in August last year. Financial journalist Cherry Reynard reports.

Oriel highlighted a number of new entrants, including Schroder Oriental Income, Murray International, Aberdeen Asian Income and Scottish American. In many cases the trusts had had a clear bias to emerging markets and had suffered in the rout at the start of the year.  However, the research showed that investors are still having to pay up for yield. Of the 16 trusts, only five currently trade at a discount – BlackRock World Mining, BlackRock Latin America, Middlefield Canadian, British Assets and Schroder Oriental.

Elsewhere there was widespread support for the launch of Hargreaves Lansdown’s investment trust research service. Trade website Financial Adviser quoted Association of Investment Companies communications director Annabel Brodie-Smith saying: “It is great to see Hargeaves Lansdown taking notice of investment companies and providing better information for investors, allowing them to research all collective fund options available.”

The new service from Hargreaves covers 400 trusts, and includes performance details, stockmarket statements, discount/premium information, recent trading history and top 10 holdings.

It was a quiet week for results, with just a handful of trusts updating the market. Alastair Gunn’s Jupiter Dividend & Growth Trust reported growth of 1.7% in the most recent quarter, against a drop of 1.5% in the FTSE All-Share. Gunn built a new position in ITV, believing it should be a beneficiary of the UK recovery, and Ryanair, which has unveiled a number of new self-help initiatives. The trust sold out of positions in Spirax-Sarco and Halma to mitigate the current strength of sterling.

The Troy Income & Growth trust delivered a total return of 7.6% over the six months to 31 March 2014, against a return of 4.8% from the FTSE All-Share Index. The trust did better in the weaker markets seen since the start of the year than in the more buoyant markets that characterised the end of 2013. It also benefited from minimal exposure to life insurance and gambling.

The City of London investment trust also gave an update. It showed an NAV rise of 0.4% against a drop in the FTSE All Share of 0.6% for the 3 months to 31 March. Manager Job Curtis took new positions in Anglo American, Old Mutual and Syngenta and increased gearing from 7.5% (at 31 December 2013) to 8.6% (at 31 March 2014).

Trust in focus: Scottish Mortgage

Baillie Gifford-run Scottish Mortgage announced a buoyant set of results this week, showing a rise in net asset value for the year to the end of March of 23.1%, compared to just 6.8% for the trust’s benchmark FTSE World Index. Discount movement produced an even puncher share price return of 28.9%. Over the period, the trust’s assets hit £3bn.

The performance was generated in spite of manager Tom Slater’s chunky holdings in China. He said in October last year that the trust’s position on China was as out of sync with wider markets as it had ever been and he retains large positions in Chinese internet stocks such as Tencent and Baidu.

Slater also has significant weightings in technology stocks such as Amazon, Google and Facebook.  This has hurt performance significantly over the past three months – the trust’s NAV has dropped 7.6% over the period, compared to a fall of 0.1% for the wider global sector. The trust has also moved back to trading at a discount, which has hurt share price performance. Nevertheless, it remains top quartile over one and three years.

The trust remains one of the industry’s stalwarts. Slater has set out his stall clearly in favour of targeting high growth sectors and geographic regions. It has been successful in the past, as the last year’s set of results show, but inevitably there will be times when investors have to feel some pain.

Top tip: Danny Cox, head of advice, Hargreaves Lansdown

“City of London (managed by Job Curtis at Henderson) is one to consider for long-term investors. It’s a UK equity income fund focused mainly on larger companies. Curtis adopts a reasonably cautious approach. He looks for companies offering an attractive dividend yield, robust balance sheets and strong cash generation. He also likes businesses with assets, whether tangible – such as a property portfolio – or intangible – such as a strong brand. He generally aims to avoid overly indebted businesses and as well as drilling down into a company’s finances will assess its competitive position and quality of management. The trust has an excellent record of dividend growth as well, but it does trade on a 1.2% premium at present.”

Broker changes

Winterflood highlighted British Empire Securities as an alternative to its core recommendations of RIT Capital Partners, Scottish Mortgage and Witan in the Global sector. The group said: “This fund is a highly specialised investment trust both in terms of its investment approach and the nature of its portfolio. The fund is managed by John Pennink and Joe Bauernfreund of Asset Value Investors (AVI), a boutique that focuses on identifying value opportunities amongst asset backed companies. Their emphasis is on companies with defensive earnings profiles, strong balance sheets, and high dividend yields. The portfolio is focused with around 40 holdings that include holding companies, both in Europe and Asia, closed-ended funds, particularly listed private equity funds, and property companies.”

It adds: “It is difficult at present to find value in the investment trust sector. Discounts are at historically narrow levels, with many funds trading on a premium or around NAV. British Empire is an exception, being one of the few large liquid funds that is available on a mid teens discount.”

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