An ageing population, five years of a next-to-nothing returns on cash and with a squeeze on incomes are some of the causes of investors being increasingly hungry for yield.
A lack of earnings growth in the re-rated UK equity market and worries that falling bond yields signify an end to the bond bull market may worry investors who rely on a regular income that grows over time.
Here, investment trust analysts Ian Scoullier and Monica Tepes tip two portfolios that currently pay a yield of more than 4 per cent and are trading on a discount.
Seneca Global Income and Growth
This £63.8m investment trust was known until recently as the Midas Income & Growth trust, but was renamed following Seneca’s purchase of Miton Capital Partners.
While the trust’s lead manager since 2005, Alan Borrows, and co-manager Simon Callow, who joined in 2008, have remained in place there has been a shift in strategy and a reduction in fees to accompany the name change, Cantor Fitzgerald’s Tepes says.
“Midas was not a big name and it has had issues such as a change of strategy and especially because of its size it hasn’t made it onto investors’ radars.”
“The new strategy is pretty unique being multi-asset with an income, which is very good for retail investors as it provides diversification in capital but also sources of income.”
“It is still small but the managers are building up a good track record since the change of mandate. They have the remit to go into new asset classes and so they have greater flexibility, which is especially useful if investors are unsure how to move between asset classes.”
Borrows invests in funds and trusts as well as equities and alternatives and has one private equity holding: AJ Bell. The holding in the financial services company is the fund’s largest holding at 3.8 per cent.
Other top holdings include the Lindsell Train Japanese Equity, Newton Asian Income, Somerset Emerging Markets Dividend Growth and GCP Student Living funds.
According to FE Analytics, the trust has returned less than the MSCI World and – marginally – the average trust in the IT Global Equity Income sector over the past three years. It made its investors 46.20 per cent compared to a sector average of 46.39 per cent. The MSCI World index gained 60.01 per cent over the same period.
Performance of trust, sector and index over 3yrs
Source: FE Analytics
However, Tepes says Borrows has managed to deliver high returns with much lower volatility.
“If you split the income yielding assets into different buckets then you have more flexibility and if one or so doesn’t materialise then you won’t be hit so hard. With such a multi-asset approach you have lower volatility,” she said.
“Income has been harder to come by recently from traditional sources and so when you are in an environment that medium-term returns are not looking as good as in the past few years, it is always better to have some flexibility in the number of asset classes you are invested in.”
“This is especially important if you want to maintain and grow your dividends.”
The trust’s current yield is 4 per cent, it has an ongoing charges figure (OCF) of 1.53 per cent and is 10 per cent geared. It is trading on a 5 per cent discount.
Schroder Income and Growth
Oriel Securities’ Scoullier says this £200m trust is relatively unknown by investors despite being from a well-known fund house.
Managed by Sue Noffke since July 2011, the trust invests mainly in large cap UK equities.
Scoullier says with a number of UK blue chip companies cutting their dividends, there is a good case for seeking income from a diversified portfolio managed by a proven fund manager.
“Schroder Income Growth fits the bill. It has consistently outperformed since Sue Noffke took over the management of the trust in July 2011, has a fully covered dividend and a growing revenue reserve”.
Since Noffke took over the trust it has returned 55.96 per cent compared to an IT UK Equity Income sector average of 48.32 per cent and gain in the FTSE All Share of 28.9 per cent.
Performance of trust, sector and index since July 2011
Source: FE Analytics
The trust currently has a yield of 3.7 per cent and is trading on a discount of 1.4 per cent.
He says since the manager took over the trust delivered three consecutive years of outperformance while using unorthodox measures to maintain income.
“Noffke has consistently been innovative by making the trust more flexible and increasing the tools she has available to generate income,” he explained.
“She introduced the use of covered calls, added a modest amount of leverage and gave the trust the ability to allocate part (maximum 20 per cent) of the portfolio to foreign stocks.”
Top holdings include Royal Dutch Shell, HSBC and AstraZeneca.
The trust has an OCF of 0.94 per cent, which rises to 1.04 per cent when its latest performance fee is included. It is 10 per cent geared.