Investment trusts for income seekers
Income-seekers should bear in mind that investment trusts enjoy several advantages over their unitised counterparts, writes Fiona Hamilton. The most notable is their ability to put aside up to 15% of revenue in good years, which can be used to bolster their payouts in tougher times.
Lower fees and charges also give trusts an edge, because that leaves more of the revenue to be distributed, while if a trust's shares sell at a discount to net asset value (NAV), their yield will be higher than the yield on the underlying portfolio.
Trusts are also better suited to investing in more illiquid asset classes, which may also be higher yielding, and they can divide up their income and capital returns between different share classes.
Our experts below provide five of their best ideas.
Ecofin Water & Power Opportunities
Price 111p Discount 32.6% Yield 4.4% TER 2.02%
The ordinary income shares of Ecofin Water and Power Opportunities (ECWO) illustrate the split-capital approach. They are favoured by James Burns, who leads Smith & Williamson's investment trust team. Ecofin invests internationally in utilities, infrastructure and energy.
Burns notes that the ordinary income shares are part of a complicated capital structure, which leaves them highly geared. That leaves them vulnerable to a major setback. However, this is offset by the 33% discount to net asset value, which lifts the yield to 4.4%. Dividends are paid quarterly and have grown 30% over two years.
Price 901p Premium 7.4% Yield 4.1% TER 1.23%*
This global trust has achieved 14.3% annual dividend growth over five years. Its shares yield 4.1% despite trading on a substantial premium. It is the income choice of Brewin Dolphin's veteran trust guru, John Newlands, who has been one of our most successful trust-pickers.
With a strong emphasis on Asia and emerging markets, Murray International's (MYI) total returns have been well ahead of most other global trusts since Bruce Stout took charge in 2004. "Stout seems to possess the uncanny knack of identifying the world's trouble spots while simultaneously spotting value that others have overlooked - what he calls GASP (Growth at a Scottish Price)," comments Newlands.
Utilico Emerging Markets
Price 149p Discount 6.5% Yield 3.6% TER 2.64%*
An emerging markets flavour is also favoured by Jean Matterson, a partner at Rossie House Investment Management. She says: "Utilico Emerging Markets (UEM) has investments in growing parts of the world, trades on a high single-figure discount and has a yield of 3.6%." The trust has grown its dividend by over 14% a year over five years.
F&C Commercial Property Trust
Price 103.9p Premium 10.4% Yield 5.8% TER 2.11%*
James Brown of Winterflood Securities focuses on an illiquid asset class by making F and C Commercial Property Trust (FCPT) his income tip. Thanks to its heavy weighting in central London, it has been "the stand-out performer among UK property funds" he says. Despite trading at a premium to NAV, its shares offer a meaty yield, although there has been no dividend growth in five years.
Price 765p, Discount 8.0%, Yield 3.7% TER 0.74%
The trust had to hold its dividend two years ago, but is now back to growth. Its shares are on one of the widest discounts in the UK growth & income sector and yield 3.7%. They are backed by Charles Cade, head of investment trusts at Numis Securities.
"James Henderson has managed Lowland Investments (LWI) since 1990 and has a strong track record through a value approach. The trust is differentiated from its peers by its diversified portfolio spread evenly between large, mid and small caps," Cade says.
*Total expense ratios do include a performance fee.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
This article was taken from the January 2012 issue of Money Observer.
Subscribe to Money Observer
Subscribe for just £1 and receive 3 issues
New subscribers can take advantage of this fantastic deal with a money-back guarantee if you decide Money Observer isn't for you.