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The highest-yielding investment trusts

Neil Woodford’s Edinburgh Investment Trust has slipped down the list following strong share-price performance.

Thomas McMahon

By Thomas McMahon, Senior Reporter, FE ...
Tuesday April 16, 2013

Only 14 equity investment trusts are currently paying out more than 4 per cent, meaning investors have limited choice if they want a significant premium over the FTSE All Share’s 3.4 per cent yield.

A strong year for the stock market has seen share prices on trusts rise and discounts narrow, squeezing the yield paid out to investors.

This means they are likely to have to put their money in a highly geared trust or one seeing share price falls to get the biggest returns, according to data compiled by Oriel Securities.

The study excluded trusts with less than £50m in AUM.

Some trusts such as Acorn Income IT offer comparable yields but are also excluded from the list thanks to their split-capital structure, whereby zero-dividend preference shares are used as borrowing facilities to boost yield for ordinary investors.

The Merchants Trust currently has the highest yield available, at 5.4 per cent.

The £440m trust is run by Simon Gergel for Allianz and focuses on FTSE 100 companies, with Royal Dutch Shell, GlaxoSmithKline and BP the three largest holdings.

It has outperformed its FTSE 100 benchmark in both NAV and share price terms over one and three years.

Performance of trust vs index over 3yrs

ALT_TAG

Source: FE Analytics


However, Iain Scouller, analyst at Oriel Securities, said: "The trust is normally quite highly leveraged – this was 23 per cent of NAV on 28 February."

"The leverage was one factor helping Merchants to outperform the FTSE 100 index total return benchmark over the year to 28 February, with the NAV total return up 21 per cent versus a rise of 12 per cent for the index."

AIC data shows the gearing remains high, at 21 per cent.

The trust is on a discount of 2.7 per cent, which helps to boost its headline yield figure.

Ongoing charges are 0.66 per cent according to the AIC.

Henderson High Income Trust is currently yielding 5.3 per cent, according to Oriel data, despite sitting on a premium of 2.6 per cent.

The five crown-rated trust invests in larger and smaller companies, and also uses gearing extensively – 24 per cent of NAV according to the AIC.

The £146m trust is run by Alex Crooke and is more diversified than Merchants, with 103 holdings to the former’s 49.

The trust has a performance fee on top of ongoing charges of 0.89 per cent.


BlackRock Commodities Income IT
yields a healthy 5.2 per cent, with a more modest gearing of just 8 per cent of NAV.

The portfolio is diversified geographically in terms of exposure, although with a bias towards North America. It has a higher weighting to oil and gas rather than mining.

Commodity funds have been under pressure recently, and the fund has lost 5.5 per cent in NAV terms over the past year and 18.3 per cent over three.

This means that investors will have to take on a substantial amount of risk to maintain the high yield.

The trust is on a premium of 1.5 per cent and has ongoing charges of 1.29 per cent.

BlackRock World Mining IT also appears on the list, with its yield boosted by even worse NAV performance – down 22.6 per cent over the past year.

Performance of trust vs benchmark over 3yrs


ALT_TAG

Source: FE Analytics


The trust is yielding 4.1 per cent and is on a discount of 3.3 per cent, according to Oriel data.

Shires Income is yielding the same as BlackRock Commodities Income – 5.2 per cent – and has a better track record in capital growth terms, with NAV up 24 per cent over the past year.

Run by Ed Beal for Aberdeen, the portfolio diversifies away from the large cap names that dominate its top-10 with an 8.2 per cent holding in the Aberdeen Smaller Companies High Income trust.

It also has 27.2 per cent in fixed income, meaning that it arguably should not qualify for this list.

In total, 48 per cent is exposed to the financial sector, an area many managers are avoiding, although a large amount of that comes through bond rather than equity positions.

The trust has ongoing charges of 1.09 per cent.


Highest-yielding trusts

Name
Yield (%)
Premium/discount (%)
Merchants Trust 5.4 -2.7
Henderson High Income
5.3 2.6
BlackRock Commodities Income 5.2 -1.5
Shires Income 5.2 1.7
European Assets 5 -2.8
British Assets 4.7 -5.5
Henderson Far East 4.6 1.7
Middlefield Canadian Income 4.4 4.4
Dunedin Income & Growth 4.2 0.1
Standard Life Equity Income 4.1 -3.3
City of London 4.1 2.9
BlackRock World Mining 4.1 -11.9
Scottish American 4.1 0.7
Schroder Income & Growth 4 -0.1
FTSE 100 3.5 na
FTSE 250 2.6 na

Source: Oriel Securities


For investors who want UK exposure, the City of London Investment Trust is yielding 4.1 per cent, with modest gearing of 8 per cent of NAV.

However, Standard Life Equity Income has the same yield and is on a discount of 3.3 per cent, compared with the City of London’s 2.9 per cent premium.

Neil Woodford’s (pictured) Edinburgh Investment Trust is no longer an option though, thanks to its success. ALT_TAG

"Unfortunately Edinburgh Investment Trust has fallen out of our list of 'high yielders' following a 9 per cent rise in the share price in the last couple of months," Scouller said.

"This has had the impact of reducing the yield from 4.1 per cent to 3.8 per cent. This price rise has lifted Edinburgh from trading on a 2 per cent premium to a 5 per cent premium."

Scouller added: "Funds investing overseas with high yields include European Assets (5 per cent yield), where the board resets the rate of dividend annually and this is partly financed by paying out capital."

"Henderson Far East Income has a yield of 4.6 per cent, with investments in Asian and Australian equities and preference shares."

"British Assets has a yield of 4.7 per cent and the discount is currently relatively wide, at 6 per cent."

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none Apr 16th, 2013 at 03:00 PM

I think the underlying comment is most useful

Reply
dlp6666 Apr 16th, 2013 at 02:26 PM

This is extremely useful, but could we please have comment and analyis on the anticipated sustainability and continuity of these relatively high yields?

For instance, City of London has increased its dividends for over 40 years so that will most likely continue.

But others may be 'overpaying', or depleting their revenue reserves - information would be useful, please.

Reply
John Clark Apr 16th, 2013 at 05:57 PM

Merchants Trust has increased its dividends every year for the last 30 years (but not always in line with inflation) whilst British Assets has increased its dividends long-term but not every year.

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