Schroder Income Growth, Murray International and JP Morgan Global Emerging Markets Income are three investment trusts that are currently showing a high yield but are being tipped by analysts as some of the most attractive offerings in their respective sectors.
A note from Stifel analysts Iain Scouller, Maarten Freeriks and Anthony Stern recently highlighted 18 investment trusts that currently yield more than 4 per cent, which may be appealing to investors willing to take equity risk in this low interest rate environment.
The trust on the list with the highest yield is BlackRock World Mining, at 8.8 per cent, although the team warns the well-publicised issues in the mining sector mean there is a risk of future dividend cuts. Likewise, it says question marks are over the sustainability of dividends at high yielders like BlackRock Latin American and JPMorgan Russian, which focus on challenged economies.
However, in the following article we look at three trusts that have a relatively high yield, might be appropriate as core holdings within a portfolio and are viewed in a positive light by the analyst team at Stifel.
Most investors want to have a UK equity income fund at the heart of their portfolio and Stifel’s analysts highlights this £179.1m trust as one with some attractive features for income investors as well as a relatively high yield.
“Schroder Income Growth, run by Sue Noffke, is paying a 4 per cent fully covered dividend, is trading on a 3 per cent discount to NAV and has seen good outperformance in recent years,” they said.
Over Noffke’s time in charge of the portfolio (she took over from Sonja Laud in July 2011), its 57.48 per cent total return puts in it in the second quartile of the IT UK Equity Income sector, where the average gain has been 53.02 per cent. Its FTSE All Share benchmark has risen 29.29 per cent.
Performance of trust vs sector and index under Noffke
Source: FE Analytics
The trust has the aim of growing income in excess of the rate of inflation while securing capital growth as a result of this rising income. It has lifted its dividend every year over the past decade.
Following the strong rise in stock markets but weak earnings because of the lacklustre economic recovery, Noffke said earlier in the year that she was focusing on finding stocks on attractive valuations.
“We continue to focus on bottom-up stock selection, whereby we focus on seeking individual companies at reasonable valuations that can deliver sustainable earnings growth, irrespective of the industry or economic state,” she explained.
“We remain underweight the more highly-rated stable growth companies and have continued to look for more attractive valuations elsewhere. We have also continued to look for companies that have been long-term underperformers, but where there is the opportunity for turnaround through self-help and improvement under new management, such as Centrica.”
Currently, the trust’s largest holding is Vodafone, followed by Aviva, Legal & General, AstraZeneca and British American Tobacco. Its largest sector allocation is to financials at 37 per cent, with consumer goods accounting for 17 per cent and consumer services 14.5 per cent.
Schroder Income Growth has ongoing charges of 0.94 per cent and scrapped its performance fee in September 2014. It is 10 per cent geared and is yielding 4.21 per cent.
Since Bruce Stout took over the £1.1bn Murray International investment trust in in June 2004, it has been the highest returning member of the IT Global Equity Income sector with a 259.24 per cent return. Its average peer has made just 167.13 per cent over this time.
Performance of trust vs sector under Stout
Source: FE Analytics
However, the manager has a very cautious view on markets – believing years of unprecedented monetary easing has distorted valuations to the point where a major correction will occur at some point – and his resultant positioning has hampered returns.
Over the year to date, it has fallen 12.69 per cent in total return terms, while its average peer is up 0.65 per cent. It also one of the worst performing members of the sector on one, three and five-year views. Nonetheless, Stifel’s analysts have a positive view on the trust.
They said: “Murray International has had a tough year, with the NAV total down 7 per cent and an 18 per cent fall in the share price (capital only) compared with a 7 per cent fall in the sector average over the same period. However, this decline has resulted in an increase in the dividend yield to an attractive 5.4 per cent.”
The largest geographic allocation is to Asia Pacific ex Japan stocks at 19.7 per cent, while there’s another 17.8 per cent in Latin America and emerging markets. While these areas have been lagging over recent years, Stout is confident on their long-term prospects.
“The Chinese monetary authority’s recent decision to devalue the Chinese currency was undoubtedly the catalyst for recent market turbulence, but the precarious environment of unrealistic expectations and over valuation had existed for some considerable time,” he said in his latest update.
“Ultimately China’s determination to curb excesses and rebalance domestic economic growth is positive for global prospects longer term, but with financial markets ever fearful of deflation it may be some time before calm is restored.”
Murray International has ongoing charges of 0.73 per cent, is 16 per cent geared and is trading on a 0.55 per cent discount to NAV.
JP Morgan Global Emerging Markets Income
While Murray International has a high exposure to emerging markets, some investors may want to have a core holding that focus on these countries and the high economic growth rates they offer over the long term.
Although many emerging markets have a relatively new dividend culture compared with the developed world, Stifel has a positive view of JP Morgan Global Emerging Markets Income.
This £278.9m investment trust has been run by Richard Titherington, chief investment officer and head of JP Morgan Asset Management’s emerging markets and Asia Pacific equities team, since launch in July 2010. Over that time, its 13.52 per cent total return has been significantly higher than those made by its average peer and its MSCI Emerging Markets benchmark.
Performance of trust vs sector and index since launch
Source: FE Analytics
Titherington assesses stocks on their five-year growth, dividends and change in valuation. Most of his portfolio is 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.
The largest holding is South African international investment holding company Bidvest Group, which has investments across the foodservice, broad services, trading and distribution industries, while Taiwan Semiconductor and Polish financial institution Powszechny Zaklad Ubezpieczen also appear as major holdings.
Emerging market equities have lagged those in developed markets for a number of years, but the manager remains optimistic on their outlook: “Emerging markets may finally be approaching valuation levels that compel long-term investors to reallocate to the asset class.”
“On several measures, emerging market equities appear to be pricing in a much more negative outlook for growth and corporate profits than is perhaps justified. Although emerging markets are slowing, these economies overall are still growing, while today’s much more flexible exchange rate regimes should provide greater support.”
JP Morgan Global Emerging Markets Income is yielding 7.03 per cent and trading on a 1.90 per cent discount. It is 7 per cent geared and has ongoing charges of 1.22 per cent.
