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The best investment trusts for income investors

21 October 2014

Using the FE Research team’s innovative way of assessing income portfolios, FE Trustnet looks at the best investment trusts for dividend-seeking investors.

By Alex Paget,

Senior Reporter, FE Trustnet

FE Trustnet has written a number of articles recently showing that yield is not the be all and end all when it comes to ranking income funds and, instead, more emphasis should be placed on the actual amount of income investors receive.

As has been pointed out on a number of occasions, investment trusts have one key advantage over their open-ended rivals when it comes to income – their ability to ‘smooth’ their dividend.

By that, it’s meant they can hold back 15 per cent of their earnings in good years to make sure their dividend is not only covered, but can be increased on a year-by-year basis.

However, just because a trust has grown its dividend over a long period of time, it may not have been the best option for an investor as each year’s growth could either be miniscule or even below the rate of inflation.

Therefore in this article, we approach investment trusts’ income characteristics in a similar way to the FE Research team’s strategy for ranking income funds within the IMA universe, which takes into account income growth, downside protection and then yield.


City of London IT

First on the list is Henderson’s City of London IT, which is managed by the long-serving Job Curtis and sits in the IT UK Equity Income sector.

The board has been able to grow the closed-ended fund’s dividend in each of the last 47 years; putting it joint first for income growth out of the whole AIC universe. Its dividend growth over the last five years has been 3.5 per cent, according to the AIC.

Downside protection is an important part of the income equation when it comes to investment trusts, as due to issues such as discount volatility and gearing closed-ended funds can fall a lot further than OEICs and unit trusts during times of market weakness.

Nevertheless, City of London IT has scored well in this respect as its maximum drawdown, which measures the amount investors would have lost if they bought and sold at the worst possible time, has been less than both the sector and its FTSE All Share benchmark.

According to FE Analytics, City of London has had a maximum drawdown of 40.28 per cent over 10 years, which is the fourth lowest in its 22-strong sector over that time frame. The FTSE All Share’s max drawdown over 10 years is 45.28 per cent.

The reason why the trust has scored well is because it didn’t fall as far as the sector or the index in the crash year of 2008. It also made money in 2011, when the sector and its benchmark lost money.

Performance of trust vs sector and index in 2011


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Source: FE Analytics



City of London has also outperformed from a total return point of view over five, seven and 10-year periods.

It currently yields 4.1 per cent with Curtis holding FTSE 100 mega-caps such as Royal Dutch Shell, British American Tobacco, GlaxoSmithKline, Unilever and Vodafone in his top 10.

It’s currently trading on a 2.2 per cent premium, however, which could well be a reflection of its income characteristics.

It is 7 per cent geared and has ongoing charges of 0.44 per cent.


Temple Bar IT

Like City of London, Temple Bar IT also features on the AIC’s “dividend heroes” list as it has increased its dividend in each of the last 30 years.

Its dividend growth over the last five years has been slightly muted, however, at just 3 per cent.

The trust has been managed by Alastair Mundy, who is seen by many as one of the best contrarians in the business, since October 2002.

When Mundy took over, the trust paid out around 26p per share and that has increased to 38p per share as of its 2013 dividend.

Performance of trust vs sector and index since Oct 2002

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Source: FE Analytics


Not only has the trust outperformed the IT UK Equity Income sector and the FTSE All Share over that time, it has also been top quartile for its maximum drawdown – which is 40.97 per cent – and its Sharpe ratio since Mundy has been at the helm.

In 2008, for instance, the trust lost 13.82 per cent while the index and the sector fell 29.93 per cent and 36.49 per cent respectively.

Its yield is 3.4 per cent at the moment, and like Curtis, Mundy has a high weighting to large-caps such as 8.8 per cent exposure to Royal Dutch Shell, 8.8 per cent to HSBC and 6.6 per cent to GlaxoSmithKline.

Temple Bar isn’t geared and has ongoing charges of 0.49 per cent. It is trading on 2.4 per cent premium to NAV, however.



Perpetual Income & Growth IT

The final trust to make the list from the IT UK Equity Income sector is the £850m Perpetual Income & Growth IT, which has been run by FE Alpha Manager Mark Barnett – who is now head of UK equities at Invesco Perpetual – since August 1999.

The trust has increased its dividend in every year since Barnett has been in charge.

It hasn’t cut its dividend since its launch in 1996, but its pay-out was held constant between 1998 and 1999.

Its dividend growth over the last five years has been 6.6 per cent, which is stronger than most in the sector.

The trust, which invests across the FTSE 100, FTSE 250 and the FTSE Small Cap indices, has comfortably outperformed the sector and the wider UK equity market since Barnett has been charge with returns of 389.98 per cent.

Performance of trust vs sector and index since Aug 1999

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Source: FE Analytics


It has also had the lowest maximum drawdown in the whole sector over 10 years, 32.41 per cent, which is 12 percentage points less than the FTSE All Share’s.

Perpetual Income & Growth currently has a yield of 3.47 per cent.

Unlike City of London IT and Temple Bar IT, Barnett’s trust is trading on a discount to NAV; though at 0.5 per cent it is very narrow.

The trust is also geared at 18 per cent and has higher ongoing charges at 0.93 per cent – and that doesn’t include its performance fee.


Bankers IT

Henderson’s Bankers IT, which is headed up by Alex Crooke, is the only trust from the IT Global sector which has scored well on all three characteristics. However, it too is benchmarked against the FTSE All Share.

Along with Job Curtis’ City of London IT, it has grown its dividend in each of the last 47 years. When Crooke took over the portfolio in 2003, its dividend was 7p per share and that has increased to 14p as of its 2013 dividend.

While its yield isn’t hugely attractive at 3 per cent, data from the AIC shows the trust has grown its dividend by 4.8 per cent over the last five years.

According to FE Analytics, Bankers has beaten its FTE All Share benchmark by more than 50 percentage points since Crooke has been manager with returns of 208.85 per cent. It has also beaten the sector by 8 percentage points.

It has performed well in terms of its downside protection as it has the fifth best maximum drawdown, 36.64 per cent, in the sector over that time.

Crooke currently holds 41.5 per cent in the UK, 21.5 per cent in North America, 12.9 per cent in Asia and 11.7 per cent in Europe.

Bankers is trading on a 4.38 per cent discount to NAV, having traded on a 2.2 per cent premium at points over the last 12 months.

It is geared at 3 per cent and has ongoing charges of 0.47 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.