The high-yielding trusts more popular than ever

Interest rates – and, as a consequence, savings rates – have been at record lows since 2009, triggering a well-documented hunt for high yield. And investors, advisers and wealth managers are increasingly turning to investment trusts, according to latest stats from the Association of Investment Companies (AIC).

While equities like Shell and BP, and enhanced income funds, have been offering market-leading payouts, the AIC has just revealed record figures for investment trust purchases.

Trust purchases by advisers and wealth managers hit an all-time high over the 12 months to the end of March at £777 million. That's up 11% on calendar year 2015, when £698 million was piled into closed-ended vehicles.

In addition, Q1 2017 was the second-highest quarterly period for purchases of trusts at £246 million. That's a year-on-year increase of 85% and 25% more than the previous quarter.

The only quarter that beats it was the second three months of 2015, which coincided with the launch of star fund manager Neil Woodford's maiden eponymous investment trust, Woodford Patient Capital.

Specialist debt was the most popular sector with advisers and wealth managers in first-quarter 2017. It's the first time it's topped the list, accounting for 14% of all investment trust purchases during the period.

It looks to be an area that could come more into focus, with Woodford and Invesco Perpetual's Mark Barnett among those taking positions in Honeycomb Investment Trust, which listed back in December 2015.

Although it's early days, the trust has impressed and is the third-best performer in the sector over a one-year period. It's returned a healthy 23% and is up over 18% year-to-date. There's an 8% yield, too.

And income was name of the game in Q1, with UK Property Direct sector coming in second place with 13% of purchases and UK Equity Income fourth with 10%. They were split by the Global sector (12%).

Ian Sayers, chief executive of the AIC, pointed out that UK Property Direct was the most popular sector for the two previous quarters, "no doubt largely due to the problems of open-ended property funds last year".

"But it's interesting to see that the specialist debt sector, which focuses on illiquid debt, has taken the top spot for Q1 2017," he added. "It seems that buyers on adviser platforms are becoming increasingly aware of the strength of the closed-ended structure for accessing illiquid assets."

Woodford also has a holding in the P2P Global Investment Trust in which wealth manager Psigma also has a stake.

Daniel Adams, senior investment analyst at Psigma, says there are risks attached to debt trusts, including discount risk. That reared its head with P2P after a 24-month run of positive net asset value (NAV) growth.

But concerns over that level of growth, driven by investors' cautious approach in the wake of the Brexit vote, saw the trust slip to a 25% discount to NAV.

"As NAV growth picked up, inline with the managers' deployment of capital after the Brexit vote, investors returned and the discount closed to 10%, so you had a 15% swing in the share price on very little fundamental news," Adams explained.

He continues that, with the likes of peer-to-peer lending relatively new innovations, another potential risk is that trusts investing in it, which tend to be even newer concepts, are unproven over different economic and investment environments.

The sector average payout is above 6%, with some of the highest-yielding, including Carador Income, Ranger Direct Lending and Fair Oaks Income, paying over 10%.

Combine this with share price gains of 20%-plus from Carador, Fair Oaks and Honeycomb, and they seem a pretty compelling proposition.

But Adrian Lowcock, investment director at Architas, says that, while the sector has been growing in popularity for a number of years, investors need to be careful.

"It is ultimately comprised of a number of sub-sectors and these can be fairly niche," he explains. "Even with investment trusts, which at least build a diversified portfolio of products and loans, investors really need to do their homework before investing as debt can be complex."

Total adviser purchases of investment companies have risen more than threefold since 2012, mainly brought about after the Retail Distribution Review banned advisers from accepting commission on purchases of open-ended funds.

However, there's still a long way to go to match sales of open-ended funds, which also made a record in April, according to Investment Association figures released early this month.

An increase in the annual ISA allowance to £20,000 this year is said to be behind £4.9 billion of inflows during the month, up from £4 billion the month before, typically the busiest time of year for fund purchases.

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.