Finsbury Growth & Income, Invesco Perpetual Income and Growth and City of London are among the best performing UK equity income investment trusts during the periods when markets have seen their biggest crises over the past decade, according to research by FE Trustnet.
Pension investors have increasingly been building up their exposure to UK dividend paying equities in recent years in an effort to preserve a decent income yield during retirement while diversifying away from more traditional bond holdings.
While this has suited economic conditions of late, unexpected crises are a near certainty in financial markets on a long enough timeline and equities tend to be hit worse than other asset classes when sentiment is weak due to dire news or the onset of recession.
This presents a clear conundrum for retired investors who depend on their portfolios’ yield to meet their monthly requirements and do not have the tolerance for as much volatility as someone still working and with other means to generate income may have.
Over the past decade there have been two full calendar years that can be described as a ‘crisis’. In 2011 the eurozone descended into panic due to the mounting sovereign debt levels in several member states, leading to huge financial turbulence around the world.
More pertinently, in 2008 markets plunged following the collapse of Lehman Brothers, which sparked the worst stock market falls for 80 years and threatened the survival of a raft of banks and other financial institutions. The after effects seven years on are still visible with developed nations such as the UK and US grappling with huge budget deficits.
While no equity income focused trusts stayed in positive territory in both these years, several managed to so in 2011 as well as losing materially less in 2008 than any of their other peers in the IT UK Equity Income sector.
Source: FE Analytics
Charles Brand, head of portfolio management at Sanlam, says equity income funds and trusts are likely to do better when markets go down due managers in this space’s preference for companies where dividends are held in high importance.
“We believe investors should look at the implications of investing in equity income funds as volatility increases, after a relatively muted period. Dividend payments are a more stable source of returns than the often unreliable capital gains on shares, which should appeal to investors who have been unnerved by this year’s geopolitical events, many of which are likely to persist,” he said.
“A regular dividend payment provides a tangible anchor for the share price, making it less susceptible to market fluctuations. Companies with well-covered dividends tend to be less volatile and often outperform in times of market stress: this is because many companies only start paying dividends when they have become large businesses with secure lines of revenue.”
Brand adds the market has become more volatile from January 2014 to June 2015, with daily returns becoming more dispersed on both the positive and negative side.
Take, for example, the Invesco Perpetual Income and Growth trust managed by Mark Barnett since 1999. It delivered a 4.08 per cent return in 2011 against the FTSE All Share’s 3.46 per cent fall. With a 15.03 per cent loss in 2008, it almost halved the damage done to the index in a year when it fell 29.93 per cent.
It is also top quartile over one and three years and top decile over five and ten. Since the manager took over the fund it has returned 484.89 per cent while the sector average was 172.39 per cent and FTSE All Share index gained 109.86 per cent.
Performance of fund, sector and index since 1999
Source: FE Analytics
The fund also beat the market during the dot com crisis in 2000 as well as trouncing the market last year with a 9.89 per cent return when the index was largely flat, rising just 1.18 per cent.
Numis Securities’ Charles Cade is a fan of Mark Barnett’s process but says the manager’s other trust – Edinburgh – has a similar portfolio but is more compelling currently. Edinburgh has ongoing charges of 0.68 per cent while Invesco Perpetual Income and Growth charges 0.93 per cent. Both charge a performance fee.
While the latter is also on a premium, investors can get access to Edinburgh on a 1.8 per cent discount. It also makes the list of the trusts that have held up best in 2008 and 2011 but during this period it was managed by Neil Woodford.
Nick Train’s Finsbury Growth & Income trust also makes the list. The manager has a buy and hold approach that has seen the trust have one of the lowest turnovers of stocks in the industry.
The trust is the best performer of 10 years in the sector, returning 213.23 per cent to investors, more than double the gain of the index and sector over this period.
Performance of trust, sector and index over 10 years
Source: FE Analytics
Preferring firms that he believes will still be around in 50 years’ time, this has led Train to mostly hold blue chip names such as Unilever.
However, while these stocks are renowned for their safety, many experts and fund managers have become increasingly concerned that their correlation to fixed income bodes ill for the future, labelling them pejoratively as ‘bond proxies’.
Ben Willis, head of research at Whitechurch Securities, recently highlighted his concern over the likes of Train’s exposure to ‘bond proxies’.
Willis says that while he thinks Train is a skilled manager, his weighting to ‘bond proxy’ stocks like in the consumer staples sector and their recent outperformance is a worry.
“It depends on your time horizon for investment. The ‘bond proxy’ stocks he has invested in have done exceptionally well in recent years but they are now very overvalued,” Willis said.
“These companies are still likely to be good stocks over the next 10 to 20 years but the odds are stacked against them outperforming over the next two to three years, particularly within a rising interest rate environment.”
“As such, if you have benefited from his excellent performance over the last few years, and with the manager clearly signposting that this is unlikely to continue, then I would sell. It is always a difficult decision to sell a fund that could be the best performer in your portfolio – but when is the right time?”