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Three top-performing UK income trusts on a discount

03 February 2013

Buying a trust on a discount means investors will pay less for the cost of the underlying holdings, but will still receive the same level of yield.

By Thomas McMahon,

Reporter, FE Trustnet

It is hard to find a bargain in the closed-ended UK equity income space – the trusts are so popular that most of them are trading on a premium to NAV.

This means that investors have to pay more for a share of the trust than they would for the shares of the companies it holds.

However, there are a few solid performers still available on a discount, meaning investors pay less for a share than they would for the stock in the underlying companies.

ALT_TAG Simon Elliott (pictured), investment trust analyst at Winterflood Securities, believes in looking at total returns first rather than discounts.

"The first comment I would make is just because a fund is trading on a premium, it doesn’t mean you should ignore it."

"In fact, we do recommend trusts on premiums, because we are looking for total return over the medium-term, so on that basis there’s no reason why you should overlook a trust that’s trading on a premium of 1 per cent."

However, as FE Trustnet research shows, buying a trust on a discount also increases the income investors receive on their original investment.

If a trust is on a discount of 2 per cent to NAV then £98 will buy £100 of the underlying companies and the dividends of shares to the value of £100.

The reverse effect is achieved by buying on a premium, but Elliott says this is unlikely to have a significant impact.

"Buying a trust on a discount does not have a massive impact on the income you receive; unless you are buying something on a 20 to 30 per cent discount, it’s really not significant."

"We like Invesco Perpetual Income & Growth, run by Mark Barnett, for example, which is on a 2 per cent premium."

"However, I appreciate that some investors do like looking for a bargain, and there are some on a discount which we do like."


Lowland Investment Trust

Elliott’s first pick is Lowland Investment Trust, which is managed by James Henderson and is on a discount to NAV of 2.3 per cent, according to the AIC.

Name Lowland Investment Company
Market Cap. £289.8m
Min. Investment n/a
TER 0.92%
Yield 2.8%
Manager(s) James Henderson
FE Crown Rating 4 crowns
Discount/Premium -2.3%
Gearing 13%

"It’s got a strong long-term track record and has performed very strongly over the past three years. In fact, NAV is up 89 per cent over the last three years, yet it has been on an average discount of 3 per cent over the past three years."

Performance of trust vs sector and benchmark over 3yrs

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Source: FE Analytics

The trust has almost doubled in value over the past three years on a total return basis, according to data from FE Analytics, while the FTSE All Share benchmark is up by 36.96 per cent.

"It may be on a discount because the yield is 2.8 per cent compared with 3.5 per cent for the sector average," Elliott said.

"However, one reason the yield is low is because even though the dividend has risen, the capital value has risen even more, which means the yield appears to be getting smaller. On a total return basis, his numbers are very strong."



Standard Life Equity Income Trust

"This used to be Karen Robertson’s fund but Thomas Moore has taken it over and we rate him highly. He also has a well-established team behind him," Elliott said.

"It outperformed over the last year and on a three-year basis, although this includes a period when Robertson was manager."

Performance of trust vs benchmark since Nov 2011


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Source: FE Analytics

Data from FE Analytics shows that since Thomas Moore took over the portfolio it has substantially outperformed the FTSE All Share benchmark, making 34.06 per cent.

"The yield of 3.9 per cent is slightly higher than the sector average, but the issue is the size. It has a market cap of £127m, which is smaller than many of its well-established peers," Elliott added.

Name Standard Life Equity Income Trust
Market Cap. £126.1m
Min. Investment n/a
TER 0.99%
Yield 3.9%
Manager(s) Thomas Moore
FE Crown Rating 1 crown
Discount/Premium -3.6
Gearing 7%

Source: FE Analytics

If a trust is small, this means there is less liquidity in the shares – so there are fewer people buying and selling.

In theory this means that it would be harder to sell a holding. However, Elliott points out that roughly 30,000 of Standard Life Equity Income’s shares are traded daily, which means that a retail investor is unlikely to have a problem on this front.

He suggests that the discount – currently 3.6 per cent according to the AIC – is in part due to the manager being less well-known, rather than because of any flaws in his performance.

"The income and growth sector is very competitive. There are a number of large, well-established trusts like the Edinburgh Investments, run by Neil Woodford, and Finsbury Growth & Income, run by Nick Train."

"There are some very good fund managers in that space and I think some people are just waiting to see a longer track record from Thomas."



Invesco Income Growth

Invesco Perpetual is well-known for its expertise in the income area, which makes it surprising that this £143.2m trust, managed by Ciaran Mallon, is trading below NAV.

The discount is currently 2.3 per cent, according to AIC figures, and according to Elliott the average over the past year has been 1.6 per cent.

Name Invesco Income Growth
Market Cap. £143.2m
Min. Investment n/a
TER 0.99%
Yield 3.8%
Manager(s) Ciaran Mallon
FE Crown Rating 4 crowns
Discount/Premium -2.3
Gearing 12%

Source: FE Analytics

It has outperformed its sector and benchmark quite substantially over three years, according to data from FE Analytics.

It is currently yielding 3.8 per cent, above the sector average.

Performance of trust vs sector and benchmark over 3yrs

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Source: FE Analytics

"It’s really just in the shadow of the larger Invesco funds," Elliott added.

"It’s less well-known than other funds like Edinburgh Investments, managed by Neil Woodford, and Invesco Income & Growth."

"Woodford is well-known for his bias to certain sectors in his style of management, but this is a more mainstream portfolio with more blue chips in the top-10."

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.