FE Alpha Manager Mark Barnett’s £1bn vehicle is by no means the oldest or most established in the IT UK Equity Income sector, but Peters says no trust comes close to matching its track record since its launch in 1996.
“When trying to identify the perfect equity income trusts, you need to look at three things,” he explained.
“First of all you need to find one that is better than an open-ended fund, and then one can that can use its structure to outperform its rivals from a capital appreciation point of view, and grow its income faster than inflation.”
“From this point of view, it’s got to be Perpetual Income & Growth IT. Barnett has fully justified his reputation in the investment trust sector. He is the absolute best when it comes to growth and income.”
Peters’ comments come in light of a recent study by the Association of Investment Companies (AIC), which highlighted the investments that have reported the highest number of annual dividend increases.
The City of London IT and Bankers IT top the list, having increased their dividend for 47 consecutive years to 2014. The likes of the Alliance Trust, Foreign & Colonial IT and the Brunner IT have achieved the feat for more than 40 years in a row.
Source: FE Analytics
Unlike their open-ended rivals, which have to pay all of the income accrued by their investments at set intervals, closed-ended funds are able to retain a portion, thus making it much easier for them to raise their dividend year-on-year. For investors who decide to live off income from investments rather than reinvesting it, this is hugely attractive.
Gearing can also help an investment trust increase its income, as leverage not only gives capital growth a kicker but dividends as well.
“Through good times and bad, through boom and bust, through wars and the recent credit crunch, investment companies continue to produce unparalleled dividend track records,” said Annabel Brodie-Smith, communications director at the AIC.
Peters agrees that the ability to smooth out dividends is an advantage, but believes too much emphasis is placed on this.
“A trust may well be able to grow its dividend every year for 30 or 40 years, but if this isn’t at a faster rate than inflation, then for people who are using investment trusts to pay their gas bill, these figures lose their significance,” he said.
He highlights the Alliance Trust as one that hasn’t been able to increase its dividend at the rate of inflation, unlike the Perpetual Income & Growth IT, which he says has managed the feat in every year since inception. Eighteen years is enough for the trust to make it on to the list, though.
The AIC has dividend growth data going back five years. This shows the Perpetual Income & Growth fund has annualised dividend growth of 6.8 per cent over the period, which compares with 3.3 per cent for City of London IT and 3.6 per cent for the Alliance Trust.
“[Trusts with a long track record of growing their dividend] are a positive thing, and it’s great trusts have these structures to help them. However, I just think investors need to delve a little deeper.”
Peters adds that some investment trusts on the list have increased their income from very low levels, and have uncompetitive yields compared with their rivals. The F&C Global Smaller Companies IT, for example, is currently yielding just 0.82 per cent.
Although Peters is keen not to play down the importance of dividend growth, he says investors shouldn’t automatically dismiss a trust because it doesn’t appear on the "dividend heroes" list, or even if it has cut its dividend in recent times.
“If you look at the City of London IT, it is perfectly good and solid, but is it doing anything better than you can get in the open-ended universe? I’m not so sure,” he said.
“On the other hand, if a trust or fund pays out a lower dividend one year but can deliver a better longer term growth rate and better overall returns, is that a bad thing?”
“Admittedly I’m not taking the income out, but it’s still something to consider.”
Peters points to the Finsbury Growth & Income trust – which cut its dividend in the aftermath of the financial crisis – as an example of a trust investors shouldn’t ignore.
“[Manager Nick] Train was incredibly apologetic, but have investors regretted holding his trust over the past five years? Absolutely not.”
Finsbury Growth & Income IT is the third best performer in its IT UK Equity Income sector over the period, with returns of 273.82 per cent.
Performance of trust, sector and index over 5yrs
Source: FE Analytics
Peters says that the smoothing effect on dividends can at times have a negative impact on capital growth, as some investment trust managers dip into the returns they have made to help prop up their dividend.
He adds that certain trusts – such as Thomas Moore’s Standard Life Equity Income IT – have restrictions in what companies they can invest in, as their boards are so keen for them to hit their yield and dividend growth targets.
“There’s a big debate about whether a board should do this,” he said. “For this reason, there’s more of a case for holding Moore’s [Standard Life UK Equity Income Unconstrained] fund, even though trusts are supposed to have an advantage in the area of producing income.”
As well as excelling from an income perspective, Barnett’s five crown-rated Perpetual Income & Growth trust has consistently outperformed from a capital growth perspective. These two combined have ensured it is a star performer in its IT UK Equity Income sector.
According to FE data, the trust has significantly outperformed its FTSE All Share benchmark over one, three, five and 10 years, and is top quartile in its sector in every case. Over the past decade, for example, the trust has returned 242.98 per cent, compared with 127.68 per cent from the index and 150.22 per cent from the sector.
Performance of trust, sector and index over 10yrs
Source: FE Analytics
Unusually for a geared investment trust, Barnett’s vehicle has been significantly and consistently less volatile than the All Share, with a lower max drawdown over the past decade. In 2008, the trust lost just 15.03 per cent, compared with 29.93 per cent from the index and 36.49 per cent from the average UK Equity Income trust.
Peters says the manager uses the same approach in running the trust as he does with the hugely successful Invesco Perpetual UK Strategic Income fund. The big differences, he says, are that Barnett can build up dividend cover and use gearing to give his investment decisions more impact.
“If you ask Mark, he’d tell you they are run in exactly the same way,” he said. “The biggest difference is that the trust uses leverage, which he has a lot of flexibility with.”
“The board has a 20 per cent maximum for his gearing, and he’s been very flexible with it.”
“As with the fund, he takes very strong views on certain sectors and stocks, which differs from something like City of London IT which is more benchmark aware.”
Both Invesco Perpetual UK Strategic Income and the Perpetual Income & Growth IT have a significant tilt towards healthcare and telecoms, and have exactly the same companies in their top-10. The trust is currently 13 per cent geared.
Peters believes there is a possibility that Perpetual Income & Growth and the Edinburgh Investment Trust, which Barnett has recently taken charge of in place of the exiting Neil Woodford, could merge.
He says he would welcome this move, as it would give Barnett more time to meet with companies rather than handle administrative matters.
“I think there is a very strong case for these trusts to merge,” he said. “It would mean him going to one board meeting rather than two, which is only a good thing.”
The Perpetual Income & Growth IT has ongoing charges of 0.94 per cent, but also charges a performance fee. It is yielding 3 per cent, and is on a 0.9 per cent discount.
