Investment trust swaps: UK Equity Income
In the first of a new series, FE Trustnet looks at the best trusts in the closed-ended version of one of the IMA’s most in-demand sectors.
By Joshua Ausden, News Editor, FE Trustnet
Friday August 17, 2012
The advantages of investment trusts over their open-ended rivals are well documented. Their relative cheapness, ability to gear and lower turnover, as well as the fact that their managers don’t have to contend with mass inflows and outflows, mean they tend to outperform more traditional funds – particularly over the long-term.
As yet, these advantages have largely gone untapped by retail investors, as trusts are not widely available on all platforms. However, with many anticipating this to soon change as a result of the Retail Distribution Review (RDR), there could be a significant uptake of closed-ended portfolios in the next few years.
IMA UK Equity Income is one of the most popular areas with retail investors, but the majority of inflows into the sector go into just a handful of funds.
Neil Woodford’s Invesco Perpetual Income
and High Income
portfolios have combined assets under management (AUM) of over £21bn – around 38 per cent of the sector total, which comprises more than 100 portfolios.
Some experts are beginning to worry about the capacity of these two funds and while investors may opt for one of the many other portfolios in the IMA universe, there are plenty of top-rated trusts in the IT UK Growth & Income sector.
The most obvious choice for those already invested in one of Woodford’s funds is the Edinburgh Investment Trust. At £1.16bn, it is smaller and more nimble than its open-ended counterparts and is also yielding more at present – 4.4 per cent compared with around 3.7 per cent from the two funds.
Performance of trust vs sector and index over
Source: FE Analytics
Its income focus, strong record over three and five years and the calibre of manager has led to it trading on a premium to NAV of 5.6 per cent, which is the highest in the sector.
For those wanting something a little bit different from Woodford’s defensive style, FE Alpha Manager Nick Train’s Finsbury Growth & Income Trust
is an option.
The highly concentrated portfolio of just 26 stocks is more cyclically focused than Woodford’s, and features financial services companies Schroders and Rathbones, as well as consumer goods firms such as Heineken and Kraft Foods, in its top-10 holdings.
It is generally more volatile than Woodford’s trust and tends to outperform in down markets; however, it more than makes up for this during up periods and its long-term record is second to none.
According to FE data, it has returned 234.96 per cent over 10 years – almost 50 per cent more than its closest equity income rival.
Performance of trust vs sector and index over 10-yrs
Source: FE Analytics
This fund is unlikely to appeal to income-seekers, however: its one-year historic yield of 2.7 per cent is below average for an equity income trust.
It has a TER of 1 per cent and is on a premium of 0.8 per cent.
For investors looking for something a little bit more adventurous than these tried and tested portfolios, Gervais Williams’ Diverse Income Trust
The manager, best known for his success with Gartmore’s small cap range in the 1990s and 2000s, invests across the market spectrum.
He has some exposure to large caps – Vodafone, for example, is a top-20 holding – but most of the trust's assets are invested in small and mid caps.
In a recent interview with FE Trustnet
, Williams highlighted the lack of diversity among large cap equity-income portfolios, as a large portion of their yield comes from just a handful of stocks.
The trust was only launched in April 2011, but has had a good start, delivering returns of 7.52 per cent compared with just 1 per cent from the All Share.
The £48.3m trust has a target yield of 4 per cent, although it is currently a little higher than this. It is on a premium of 1.7 per cent.