A recent FE Trustnet article highlighted that while investment trusts have the ability to ‘smooth’ their dividends by building up revenue reserves in bad years to pay out more in more difficult market conditions, they have – on average – paid out less income than their open-ended rivals over the medium term.
The study itself centred on UK funds and trusts, with the average IA UK Equity Income fund paying out some £200 more in total dividends on £10,000 than the average member of the IT UK Equity Income sector in the five years between 2011 and 2015.
Annul and cumulative distributions since 2011
Source: FE Analytics *Figures based on a £10,000 investment in January 2011
Of course, though, there were exceptions to the rule with a number of closed-ended UK equity income funds distributing considerably more than the ‘average’ dividend-paying OEIC or unit trust over the period in question.
However, as investors are all too aware, total dividend distributions are only one part of the income puzzle. Indeed, experts argue the need to assess a portfolio’s starting yield, historic dividend growth, total return and capital preservation characteristics when judging an income fund or trust.
Therefore, in this article, we look at three members of the IT UK Equity Income sector have not only paid out more than the average, but consistently grown their dividend, outperformed from a share price point of view and protected their investors from the worst the market has had to offer over the medium term.
We start off with the highly-popular Edinburgh Investment Trust, which is has been run by FE Alpha Manager Mark Barnett since January 2014 – having previously been headed-up by star manager Neil Woodford until his departure from Invesco Perpetual.
According to FE Analytics, the £1.3bn trust was the fifth highest income-paying member of the peer group between 2011 and 2015. Investors who bought £10,000 worth of shares in the trust at the start of the period would have earned £2,524.99 by the end of 2015.
Edinburgh Investment Trust’s dividend history in pence per share over 5yrs
Source: FE Analytics
As the graph above shows, the trust has also grown its dividend in each of those years (it has actually upped its pay-out it each of the last 10 calendar years). In fact, FE data shows its annualised dividend growth over the past five years has been more than 7 per cent.
Thanks to Barnett’s investment process, and Woodford’s before him, Edinburgh Investment Trust has also performed well in other aspects.
FE data shows, for example, it has made money and beaten its FTSE All Share benchmark in each of the last five calendar years. That means the trust is comfortably ahead of the index and sector over one, three and five years on a cumulative basis.
The trust has also had one of the peer group’s lowest maximum drawdowns over five years (10.20 per cent) but one of its highest Sharpe ratios, which measures risk-adjusted returns.
Edinburgh’s starting yield is relatively low compared to others at 3.62 per cent, however, thanks to its recent outperformance and Barnett’s focus on higher quality businesses such as Reynolds, British American Tobacco and Roche – all of which have been well sought after by investors.
The trust is geared at 13 per cent, is trading on a 3.8 per cent discount and has ongoing charges of 0.61 per cent.
Next up is another closed-ended fund managed by Invesco Perpetual.
Ciaran Mallon has run Invesco Income & Growth for more than 10 years and while the portfolio isn’t as well-known as Barnett’s stable of investment trusts, it has performed well in nearly all aspects over the medium term.
While not necessarily a standout performer relative to the peer group average, it has, for example, more than doubled the returns of the FTSE All Share over five years with gains of 71.5 per cent having (like Edinburgh) beaten the index in every calendar year between 2011 and 2015.
Thanks to its performance in the likes of 2011’s European sovereign debt crisis, it has also been in the IT UK Equity Income’s top quartile for maximum drawdown and risk-adjusted returns over that period as well.
Performance of trust versus sector and index over 5yrs
Source: FE Analytics
It has also grown its dividend in each of the past 18 years and was the sixth highest-distributing member of its sector over the five years between 2011 and 2015, paying out £2,523.56 on an initial £10,000 investment.
There are a number of crossovers between Invesco Income & Growth and Barnett’s Edinburgh trust, with the likes of Imperial Tobacco, British American Tobacco and AstraZeneca featuring in both portfolios’ list of top 10 holdings.
However, Mallon has more exposure to the lower end of the UK market cap spectrum. As such, Invesco Income & Growth has a slightly higher yield of 3.88 per cent. It is also trading on a far wider discount than Edinburgh at 9 per cent, but its considerably smaller size may well be the reason for that.
It is geared at 9 per cent and has ongoing charges of 0.88 per cent.
City of London Investment Trust
The final trust on the list also holds the record of the joint-longest unbroken dividend track record as, like Bankers IT and Alliance Trust, City of London has consistently increased its dividend for a hefty 49 years.
FE data shows, however, that the trust – which is managed by Job Curtis – has also paid out more than its peers over the past five years, distributing some £100 more on a £10,000 investment made in 2011 than it’s the IT UK Equity Income sector taken on average.
City of London’s dividend history in income earned since 2011
Source: FE Analytics *Figures based on a £10,000 investment in January 2011
Curtis is renowned for his defensive approach to the equity market and though this means the trust has been relatively unspectacular compared to the IT UK Equity Income sector average over the medium term from a total return point of view, City of London has beaten the FTSE All Share in every calendar year since 2009.
Given that information, it isn’t wholly surprising to see that the closed-ended fund is up against the index over one, three and five years as well as its significant outperformance on a 10-year view.
The City of London Investment Trust has also been top quartile for its maximum drawdown and annualised volatility over five years – plus it has had the highest number positive weekly periods in the peer group over that time.
It also offers a higher dividend yield than the two aforementioned trusts at 4.2 per cent, as while Curtis owns some highly defensive companies such as Unilever and tobacco stocks in his top 10, the manager is also taking big bets on the likes of HSBC and Royal Dutch Shell.
City of London has gearing of 11 per cent, is also trading on a discount to NAV (of 2.6 per cent) and has ongoing charges of just 0.42 per cent.