While the highly sought after Finsbury Growth & Income trust, City of London IT with its long history of dividend increases and Troy Income & Growth trust with its zero discount policy are all trading at or above NAV, the large majority of IT UK Equity Income trusts now look attractively valued on a relative and absolute basis.
Data from the AIC shows, for example, that the sector now trades on 4.8 per cent discount but throws off a yield of 3.7 per cent.
Though there is an election on the cards and valuations on the wider UK equity market aren’t hugely attractive, the general widening of discounts within the sector is somewhat perplexing given that the hunt for yield is still ongoing with bonds and cash offering very little for income investors.
Also, as a result of their structure and ability to smooth their dividends, investment trusts are one of the best vehicles for investors seeking a growing source of income – especially if they can buy in at a wide discount.
Therefore in this article we ask leading closed-ended fund brokers which UK equity income trusts look particularly good value at the moment.
JP Morgan Claverhouse Investment Trust
First up is the five crown-rated JP Morgan Claverhouse Investment Trust, which currently trades on a 6.76 per cent discount to NAV, but has traded on a premium at points over the past 12 months.
The trust, which is biased towards large-caps, has a dividend yield of 3.32 per cent and the board has increased that pay-out in each of the last 41 years. It paid out 9.65p per share in 2002 and that rose to 20p last year.
Given the fact its investment remit was changed a few years ago, its dividend history and current discount, Numis Securities’ Ewan Lovett-Turner says the portfolio is standout value for long-term investors.
“I would say the JP Morgan Claverhouse trust is a good way for investors to get mainstream UK equity income exposure,” Lovett-Turner said. “It pays a decent yield and has been a pretty good performer since they shored up the investment approach in 2012 and since then it has been going strong.”
JP Morgan Claverhouse has been managed by Sarah Emly since June 2006 and she was joined by co-manager William Meadon in February 2012.
According to FE Analytics, the closed-ended fund has returned 67.62 per cent since the duo have worked together on the portfolio, meaning it has beaten the sector average and comfortably outperformed its FTSE All Share benchmark.
Performance of fund versus sector and index since Feb 2012
Source: FE Analytics
The trust also outperformed during last year’s difficult market backdrop and is up against the sector average so far in 2015, but due to its widening discount it is down against the index by more 3 percentage points.
JP Morgan Claverhouse’s top 10 holdings include mega-caps such as Royal Dutch Shell, HSBC and British American Tobacco but it also has 25 per cent in companies with a market cap of below £10bn.
However, investors should be aware that it is quite highly geared at 20 per cent and has ongoing charges, minus a performance fee, of 0.74 per cent.
Temple Bar Investment Trust
Next up is the Temple Bar Investment Trust, which Simon Elliott – head of research at Winterflood – says is in “nose-bleed” territory on its current discount of close to 6 per cent as it has regularly traded at or above NAV over recent years – as the graph bellows shows.
Trust’s discount/ premium over 5yrs
Source: FE Analytics
Data from the AIC shows the trust has, on average, traded on a premium to NAV over one and three years. Temple Bar yields 3.3 per cent and has also increased its dividend in each of the last 31 years. Its dividend was 25.59p in 2002 and last year it paid out 38.88p per share.
The portfolio is headed up by notable contrarian investor Alastair Mundy, who has delivered a return of 325.21 per cent since he took charge in October 2002, beating the FTSE All Share by more than 100 percentage points in the process.
Prior to 2014, it had beaten the index in each of the previous six calendar years thanks to Mundy’s focus on massively out of favour companies. However, due to his position in oil companies, his decision to buy supermarkets early and his high weighting to cash, both Mundy’s trust and Investec UK Special Situations OEIC have struggled over the last year or so.
Nevertheless, one of the positives investors can take is that his style has remained unchanged so if they were to buy in now they know they are holding companies which have just gone through a tough period in share price terms.
Temple Bar isn’t geared and has low ongoing charges of 0.48 per cent.
Lowland Investment Company
Last, but by no means least, is FE Alpha Manager James Henderson’s Lowland Investment Company, which is a genuine multi-cap portfolio.
Henderson targets a growing source of income rather than a high headline yield and this is shown as while the current yield is below 3 per cent, the manager has increased that dividend from 27p in 2010 to 37p last year.
Though Lovett-Turner says it is difficult to call the outlook for mid and small-caps over the short term, he says long-term investors should certainly take a close look at the portfolio given its 9 per cent discount.
Data from the AIC shows, for instance, that Lowland has traded on an 8 per cent premium at times over the last 12 months.
“It is useful for investors looking for a diversified source of income as the market-cap weighting is split a third, a third, a third across small, mid and large-caps. It means investors are insulated against the risk of the largest dividend payers possibly cutting their dividend.”
Henderson has managed the trust since January 1990 and, with him at the helm, Lowland has massively outperformed the FTSE All Share over three, five, 10, 15 and 20 years.
However, as mid and small-caps have underperformed and as a result of that huge swing in its discount, Lowland has had a terrible time of it over the past year.
Performance of trust versus sector and index over 1yr
Source: FE Analytics
Nevertheless, Elliott agrees that the trust is particularly attractive given Henderson’s track record and at its current discount. While he says it is a higher beta portfolio than many of its peers, he notes “it rarely trades out at this level for long periods of time”.
Lowland has gearing of 16 per cent and ongoing charges, minus a performance fee, of 0.59 per cent.