Interactive Investor

'Buy' sign over UK equity income trusts

27th April 2016 13:07

Kyle Caldwell from interactive investor

Discounts on UK equity income funds have widened since the start of the year, opening up a "buying opportunity", according to broker Stifel.

The sector's average discount has widened from 1% to 5% at the end of March.

Over the past couple of weeks, however, discounts have tightened slightly, to 4%.

The discount move has been put down to tax-year end selling, with investors moving to take profits after a seven-year bull market. The upcoming Brexit vote has also played its part, reducing risk appetite.

Investor confidence returns

Iain Scouller, analyst at Stifel, comments: "Many equity markets had a dreadful start to this year, with the FTSE 100 falling 11% in the first six weeks of the year. In this type of environment, some investors understandably become concerned and reduce exposure to equity investments.

"The resultant outflows often lead to a widening of discounts. With markets having recently recovered, investor confidence is returning and this demand may be helping to encourage some discount narrowing."

Scouller also points out that dividend yields of 3 to 5% offer good value for investors.

Lowland investment trust, one of our sister magazine Money Observer's Rated Funds and on a 3% discount, is one of the nine funds trading on a discount, shown in the table below.

Another Rated Fund, Diverse Income trust, is trading on the biggest premium, 5%.

For those looking for a bargain, the trust with the widest discount is Schroder Income Growth, on 8%, followed by Dunedin Income Growth, Murray Income and Temple Bar, all trading at a discount of 7%.

TrustShare price (p)Discount/premium (%)Dividend yield (%)
City of London3803 prem.4.2
Diverse Income Trust935 prem.3
Dunedin Income Growth2217 disc.5.1
Edinburgh IT6801 prem.3.6
F&C Capital & Income2674 prem.3.8
Finsbury Growth & Income5930 prem.2.1
Invesco Income Growth26010 disc.3.9
JPMorgan Claverhouse5636 disc.3.9
Lowland1,3003 disc.3.2
Merchants Trust4105 disc.5.9
Murray Income6667 disc.4.8
Perpetual Income & Growth3763 disc.3.4
Schroder Income Growth2458 disc.4.2
Standard Life Equity Income4241 prem.3.5
Temple Bar1,0457 disc.3.8
Source: Datastream via Stifel. Data correct as at 25/04/2016.

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.