It is often said that closed-ended funds are a good hunting for income investors as, due to their structure, they can withhold 15 per cent of their earnings each year to help them deliver a “smooth dividend” during bad years, while funds in the open-ended universe have to pay out everything each year.
It means that there are certain investment trusts – such as City of London, Bankers, Alliance Trust and Caledonia Investments – which have been able to increase their dividend every year for more than four decades.
However, in this article, we take a slightly shorter time frame and look at the trusts which have increased their dividend the most over the past five years.
Trusts’ current yield and dividend growth, total return, max drawdown over 5yrs
Source: FE Analytics/AIC
As the table above shows, two of the best performers in terms of increasing their pay-out reside in the IT Private Equity sector: F&C Private Equity and Dunedin Enterprise. Simon Elliott, head of research at Winterflood, says it is an interesting area for dividend seeking investors.
“The closed-ended structure enables funds investing in asset classes that do not traditionally generate income to provide shareholders with a yield,” Elliott (pictured) said
“Private equity is one such asset class and F&C Private Equity is an example of a fund that has introduced a policy of paying a minimum dividend as part of its total shareholder return. For investors that have an income requirement this is potentially attractive and enables them to access areas of the market that they might not otherwise have considered.”
Hamish Mair’s F&C Private Equity has had the highest dividend growth out of 350 or so trusts in the AIC universe over the past five years at a hefty 61.9 per cent.
However, before we delve deeper into the figures, it must be noted that five-year dividend growth can be quite an arbitrary figure as it may be the case that the first dividend taken into account has have come after a dividend cut from the year before. It also doesn’t tell you whether that dividend has grown in each of the last five years.
In the case of the F&C Private Equity, it hasn’t had to cut its dividend in any of the last five calendar years.
However, Cantor Fitzgerald’s Charles Tan says there is a clear reason why the dividend growth is so large.
“In 2012, the board implemented a new dividend policy as historically, private equity trusts haven’t been dividend plays,” he explained.
“The new policy was that they would pay a yield of at least 4 per cent and they would pay it through a combination of any income received or realisations. In 2010, its dividend per share was 0.8p and in 2014 it was more than 10p – which reflects that change in yield.”
According to FE Analytics, the trust has also performed well from a total return point of view as it has gained 109.20 per cent over five years, beating the sector by more than 30 percentage points in the process.
Performance of trust versus sector over 5yrs
Source: FE Analytics
F&C Private Equity is a global trust of private equity trusts, as Mair counts the likes of Stirling Square Capital, Argan Capital and August Equity Partners as top 10 holdings.
Investors should note, however, that while the trust’s current 12 per cent discount looks wide on an absolute basis, it is the narrowest it has been over the past 12 months. It’s one and three-year average discount is close to 20 per cent and 25 per cent respectively.
However, Tan says the trust should continue to perform well from both income and growth perspectives.
“With a circa 5 per cent dividend yield and a relatively mature portfolio, we believe F&C Private Equity represents a distinct offering within the listed private equity sector and should continue to benefit from NAV uplifts and income distributions from realisations in the coming years,” Tan (pictured) said.
The other private equity trust to feature on the list is Dunedin Enterprise, which has grown its dividend by 34.1 per cent over five years.
The trust has grown its dividend per share from 2.50p in 2010 to 16.5p in 2014. The board hasn’t cut that pay-out on an underlying basis either, though shareholders did receive a 22.5p dividend in 2013. However, that was due to a large special dividend that year.
Dunedin Enterprise – which is managed by Shaun Middleton and has a yield of 4.67 per cent – has underperformed against both F&C Private Equity and the sector over five years with returns of 27.57 per cent.
It has also had a larger maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – than Mair’s portfolio and its average peer over that time.
Nevertheless, it is currently trading on a 29 per cent discount, which is the third widest in the sector and wider than its one and three-year average discounts.
While yield and dividend growth are important components for income investors, stability of capital is also vital as though they may be drawing an increased level of income, it will make little difference if the actual amount of money they originally invested has shrunk.
A good example of this is with Matthias Siller’s Baring Emerging Europe Investment Trust, which yields 3.58 per cent and has had the second highest dividend growth over five years at 45.6 per cent. The board has also never cut that dividend over the last five years, increasing its pay-out from 2.9p in 2010 to 19p in 2014.
It didn’t increase its dividend last year, however.
Nevertheless, our data shows that Baring Emerging Europe has lost 21.67 per cent over five years and has had a maximum drawdown of 46.42 per cent over that time. It has underperformed against its benchmark over the period in question as well.
Performance of trust versus index over 5yrs
Source: FE Analytics
It isn’t too difficult to understand why the trust has performed poorly over recent years, given ongoing geo-political tensions in eastern Europe, political woes in Turkey and the lower oil price sending the Russian stock market into free fall.
As a result of those concerns, the trust is now trading on a 12 per cent discount, which is wider than its one and three-year average.
The other two trusts to feature on the list are Miton’s The Investment Company and The North American Income trust – which have grown their dividend by 34.5 per cent and 25.5 per cent respectively over the last five years.
The Investment Company has outperformed its sector and benchmark over that time with returns of 226.97 per cent and has had a low maximum drawdown of 18.17 per cent.
The trust, which is a UK multi-cap income portfolio, has also not cut its dividend over the last five years, but a spokesperson from Miton said the main reason why the dividend growth has been so high is due to a change in policy in 2011 when Gervais Williams and Martin Turner took charge of the portfolio.
Aberdeen’s The North American Income trust has had to cut its dividend over the last five years and has underperformed against the S&P 500 and the IT North America sector over that time.