These drivers have seen many trusts in the IT UK Equity Income sector trade close to or above net asset value (NAV) in recent years.
However, a more turbulent period for risk assets – and especially the rotation out of small and mid-caps – has seen discounts widen more recently.
According to AIC data, 14 out of the 18 closed-ended funds in the sector are now trading on a wider discount than their one year average.
For investors who want to up their exposure to the sector as a result of the recent de-rating, we compare and contrast two of the most experienced and highly-rated managers in the equity income space: James Henderson and Mark Barnett.
Both hold the coveted FE Alpha Manager rating and, according to F&C’s Peter Hewitt, are two of the best fund managers in the business.
Henderson’s Lowland Investment Company was launched in January 1990, while Barnett took over the Perpetual Income & Growth Investment Trust in August 1999.
Barnett also recently took over the popular Edinburgh Investment Trust, following Neil Woodford’s departure from Invesco Perpetual.
Both managers have a strong long-term track record. According to FE Analytics, Lowland and Perpetual Income & Growth have beaten the FTSE All Share by more than 300 percentage points since Barnett took over his portfolio in August 1999.
Henderson’s trust has beaten Perpetual Income & Growth by around 25 percentage points over that time, but it has been considerably more volatile.
Performance of trusts vs index since Aug 1999
Source: FE Analytics
Both trusts have also comfortably beaten the index and the IT UK Equity Income sector over three, five, seven and 10 year periods.
Source: FE Analytics
Winterflood’s Simon Elliott says Perpetual Income & Growth has been less volatile than Lowland because the two managers have very different approaches.
“First and foremost, these are very good trusts with good long-term track records, but the way in which they have got those returns has been very different,” Elliott said.
“Barnett (pictured) is benchmark unconstrained and has an emphasis on value, taking an absolute return view on the companies he holds. He is very happy to have a low or zero weighting to certain parts of the market. He holds nothing in banks and very little in resources, for example.”“He likes high quality growth companies. Yield is important to him, but he is more interested in companies that can grow their dividend over time and he won’t just go out and buy the highest yielding stocks.”
Elliott rates both Barnett’s Perpetual Income & Growth IT and Edinburgh Investment Trust and says the manager uses the same strategy in both portfolios.
However, he points out that Barnett has been running the former for much longer, meaning that it is a truer representation of his best ideas. This includes a higher weighting to small and mid-caps, for example.
“Perpetual Income & Growth is more ‘Mark Barnett-unconstrained’, because he will have more in smaller companies. However, you can’t overstate the differences because they are run using the same strategy and hold many of the same stocks,” Elliott explained.
That higher weighting to small and mid-caps will be one of the primary reasons why Perpetual Income & Growth has beaten Edinburgh IT over the longer term.
Performance of trusts vs sector and index over 10yrs
Source: FE Analytics
Elliott also rates Henderson (pictured) and his Lowland trust highly, but says his style isn’t for everyone.
“Henderson has an unconstrained investment approach and he isn’t obliged to buy companies he doesn’t like. He also has a value strategy, but has more of a bias towards mid and small caps than Barnett. Henderson is a stock-picker and will often make contrarian calls,” he said.“These don’t always work for him, but that is the nature of the beast.”
In a recent FE Trustnet article, Henderson described himself as a genuine multi-cap manager, though stressed small caps are likely to make up a big proportion of his portfolio.
Barnett holds 50.3 per cent of his Perpetual Income Growth Trust in FTSE 100 companies, with the likes of British American Tobacco, AstraZeneca and BT featuring in his top-10.
He has 26 per cent in the FTSE 250 index, 8.3 per cent in the FTSE Small Cap index and 10 per cent in overseas stocks.
His Edinburgh trust has 58 per cent in the FTSE 100, 21 per cent in the FTSE 250 and 5 per cent in smaller companies.
While Henderson holds mega-caps such as Royal Dutch Shell, BP, Rio Tinto and GlaxoSmithKline in his top-10, Lowland Investment Company has 35 per cent in the FTSE AIM index.
Their contrasting approaches have resulted in very different risk/return profiles, even though both are long-term outperformers.
Our data shows that Lowland has tended to fall much further than Barnett’s trust during times of market weakness. In 2008, for example, Perpetual Income & Growth lost just 15 per cent while Lowland lost close to 50 per cent.
Lowland has also been hit harder so far this year, losing 7 per cent of its value compared to gains of 2.11 per cent for Perpetual Income & Growth.
However, Henderson tends to perform much better in rising markets, which explains why it’s five year numbers since the financial crisis are much stronger.
Performance of trusts vs sector and index over 5yrs
Source: FE Analytics
Both funds prioritise dividend growth over yield.
Elliott says that Lowland’s strong share price performance in recent years has resulted in a lower yield at present; FE data shows that Perpetual Income & Growth is currently yielding 3.2 per cent while Lowland is yielding 2.7 per cent.
Barnett and Henderson’s view on income is reflected in their decision to move their open-ended versions – Invesco Perpetual UK Strategic Income and Henderson UK Equity Income & Growth – out of the UK Equity Income sector and into the IMA UK All Companies sector.
The expert’s view
Elliott says that Barnett and Henderson are among the very best in the UK Equity Income sector, but his pick out of all the trusts mentioned here is Barnett’s Edinburgh Investment Trust.
Edinburgh, Lowland and Perpetual Income & Growth are trading on around a 2 per cent discount to NAV which is wider than their one year average; however, Elliott says Edinburgh has a slight edge.
“We have recommended all three at different times, but we prefer Edinburgh at the moment. You get a slightly higher yield at 3.9 per cent and [the board] has also made its management fee much lower recently,” he said.
“It is the largest of the three trusts at £1.2bn so it is the most liquid. All the discounts are much of a muchness and we like all of the trusts, but Edinburgh would be our preferred choice at the moment.”
Barnett’s two trusts are 15 per cent geared, while Lowland is 13 per cent geared.
Lowland and Edinburgh have ongoing charges of around 0.6 per cent, while Perpetual Income & Growth’s is more expensive, charging 0.93 per cent.
