Murray International, BlackRock Income Strategies and Polar Capital Global Healthcare Growth and Income can offer investors healthy sources of income away from the domestic market, according to analysts at Numis.
While the UK remains one of the most attractive places for dividends, it would be unwise to build an income portfolio based on the fortunes of just one part of the market (especially given the concentrated nature of the FTSE All Share) so gaining exposure to a spread of asset classes and countries is usually a prudent strategy.
In a recent review, Numis highlighted that characteristics such as dividend smoothing mean investment trusts can be an attractive option for income-seeking investors and revealed its favourite picks across all sectors. In this article, we take a look at five that could bring some valuable diversification to a UK-focused investor.
Global: Murray International
For most investors, buying into a global equity income portfolio is one of the simplest ways of widening exposure from just the UK to the worldwide stage.
Numis highlights Bruce Stout’s £1.1bn Murray International as one of its preferred global equity income trusts on the back of its strong long-term track record and the experience of the manager. However, it notes that Stout’s cautious stance and quality bias has led to a few years of underperformance.
Performance of trust vs sector and index over manager tenure
Source: FE Analytics
Since Stout took over the portfolio in June 2004, Murray International is the highest returning member of its sector with a 263.24 per cent gain. However, it is now the lowest returning over one, three and five years after the manager missed out on the strong rally in risk assets.
In February this year, Stout said he believes years of ultra-loose monetary policy has made the market “hideously disfigured” and prompted him to prioritise capital preservation. This arguably hasn’t worked out, though, as the trust is lost 13.01 per cent in NAV terms over three years.
Numis said: “We believe the best time to buy a manager with a strong long-term track record is often after a period of underperformance. At times the fund has traded on premiums in excess of 10 per cent, meaning that we have been wary of recommending the fund, but it is currently trading on a 1.4 per cent discount and we believe it is attractive for income investors.”
Murray International is currently yielding 5.4 per cent, according to the AIC, and has grown its dividend by an annual average of 7.8 per cent over the past five years. It has ongoing charges of 0.73 per cent and is 16 per cent geared.
Multi-asset: BlackRock Income Strategies
Another ‘easy’ way to gain diversification is to invest in a multi-asset portfolio, which essentially acts as a one-stop shop for gaining exposure to a wide range of assets. Numis says BlackRock Income Strategies appears to be an attractive option in this area.
The trust only has a track record going back to February 2015, which is when BlackRock took over and gave it a new approach. Prior to this, it was managed by F&C as British Assets and had gone through a period of underperformance.
Since BlackRock took over and put in Adam Ryan as manager, the trust has made a 3.96 per cent total return. This puts it in third place in the global equity income sector, where the average member has lost 1.29 per cent, and ahead of the 5.05 per cent fall in its FTSE All Share/FTSE All World composite benchmark.
Performance of trust vs sector and index over manager tenure
Source: FE Analytics
The fund targets a total return of CPI inflation plus 4 per cent over the medium term, with a focus on income generation. “We believe BlackRock Income Strategies is now a much more interesting proposition, although it is no longer a pure equity income mandate,” Numis said.
It currently has 388 holdings, with the largest being HSBC, Royal Dutch Shell, BAE Systems, Prudential and Rio Tinto. Some 55 per cent of the portfolio is in listed equities, with 27 per cent in bonds and 18 per cent in unquoted stocks, according to Numis.
BlackRock Income Strategies has a 4.9 per cent yield, is trading on a 0.2 per cent discount and is not geared. It has ongoing charges of 0.65 per cent.
Emerging markets: JP Morgan Global Emerging Markets Income
Investors wanting to tap into the strong long-term growth potential of emerging markets – or take advantage of the cheaper valuations now being seen in this market – often take diversified exposure through a global emerging markets portfolio.
One tipped by Numis is Richard Titherington and Omar Negyal’s £267.1m JP Morgan Global Emerging Markets Income. The broker points out that the closed-ended fund has performed well since launch in July 2010: FE Analytics shows it’s made a 7.59 per cent total return since then, while its average peer has made just 0.64 per cent and the MSCI Emerging Markets index has lost 2.68 per cent.
Performance of trust vs sector and index since launch
Source: FE Analytics
Titherington, who is also the chief investment officer of JP Morgan Asset Management’s emerging market equity team, assess stocks on the basis of their five-year growth, dividends and change in valuation. Most of the portfolio is held in stocks that can grow their earnings and dividends while delivering yields between 3 and 6 per cent; the rest is split between firms with yields over 6 per cent and low-yielders with the potential for dividend growth.
JP Morgan Global Emerging Markets Income is yielding 5.4 per cent and has grown its dividend by an annual average of 0.8 per cent over the past five years. It is trading on a 4.5 per cent discount, is 7 per cent geared and has ongoing charges of 1.22 per cent.
Property: TR Property
Those looking to diversify from stocks and bonds can also look at property as a source of income. Numis singles out the £934m TR Property trust and says Marcus Phayre-Mudge, who has headed the portfolio since October 2004, is “an experienced manager with a strong track record”.
The bulk of the portfolio is in property shares: 41 per cent is held in UK property equities and 52 per cent is in Europe, with an 8 per cent allocation to direct UK property. Its top holding is Land Securities at 10.2 per cent of assets, followed by Unibail-Rodamco and Deutsche Annington Immobilien.
Since Phayre-Mudge took over the portfolio it has made a 292.98 per cent total return. Sector comparisons can’t be made as it’s the only member of the IT Property Securities peer group with a long enough track record (in fact, the only other member is Schroder Global Real Estate Securities).
According to the AIC, TR Property has grown its dividend by an annual average of 5.1 per cent over the last five years and is currently yielding 2.6 per cent. It has ongoing charges (including its performance fee) of 1.57 per cent, is trading on a 6.2 per cent discount and is 15 per cent geared.
Specialist: Polar Capital Global Healthcare Growth and Income
Numis says that investors comfortable holding funds focused on single sectors might want to consider healthcare, which is often a favourite area for equity income managers to fish in.
“We believe Polar Capital Global Healthcare Growth and Income has an interesting mandate with 80 per cent of the portfolio invested in an income portfolio, which has a high concentration in global pharmaceutical stocks that generate an attractive yield, as well as medical devices, healthcare services and healthcare REITs,” the broker said.
The remaining 20 per cent of the portfolio is allocated to growth stocks in the biotech, device service and pharma sub-sectors.
An underweight to biotech means the trust has underperformed its average peer and the MSCI AC Health Care index since its launch in June 2010 with a 58.88 per cent total return. However, as the graph below shows it has also avoided the large drawdown that hit most of its peers over recent months.
Performance of trust vs sector and index since launch
Source: FE Analytics
This means it’s the least volatile member of its sector since inception and has shown less than half the maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – of its average peer at 8.04 per cent.
The trust is yielding twice that of its average peer at 2.2 per cent and over the last five years has grown its dividend by 6.1 per cent a year.
Polar Capital Global Healthcare Growth and Income is trading on a 6.1 per cent discount, is not geared and has ongoing charges of 1.06 per cent, which could be higher if its performance fee is triggered.
