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Investment trusts to build a monthly income portfolio

08 June 2015

In the next article of the series, head of content at FE Trustnet Joshua Ausden shows how investors are able to build a portfolio of top-rated closed-ended funds that pays out a dividend every month.

By Joshua Ausden,

Head of FE Trustnet Content

Changes to pension regulations are expected to boost the popularity of investment funds – especially those with a focus on paying regular income. A recent FE Trustnet poll found that 57 per cent of financial advisers are now more likely to buy funds for themselves and their clients in retirement in light of the changes.

Open-ended funds are expected to be one of the biggest beneficiaries, but another area that could stand to benefit is the investment trust sector. Trusts’ ability to ‘smooth’ their dividend by retaining 15 per cent of their annual earnings makes it much easier for them to grow their income year-on-year.

While the income isn’t guaranteed like with an annuity, this feature has allowed many to deliver unbroken yearly dividend growth over many decades. For investors relying on income in later life, this is a hugely attractive prospect.

As well as boasting strong income credentials, many investment trusts also have stellar capital accumulation records. As Neil Woodford argued in a recent FE Trustnet article, most retirement investors have a 15 or even 20-year time horizon, so have no need to obsess about capital protection. 

He and many others argue that investors should be more focused on ensuring they have a big enough overall pot to draw income from, which makes risk assets a natural home for the vast majority.

The number of investment trusts that pay an income on a monthly basis are few and far between, so investors and advisers who want dividends on a regular basis have to create a portfolio themselves. This is no bad thing of course; investment trusts can be extremely volatile and ensuring you’re diversified across a number of asset classes and holdings can help to spread the risk.



February, May, August, November

A good starting point for a portfolio of income-paying investment trusts is Job Curtis’ City of London IT, which pays out a dividend in the months of February, May, August and November. The £1.3bn vehicle has grown its income payout for 48 consecutive years – longer than any other investment trust – and the dividend is consistently well-covered.

The trust’s capital growth performance hasn’t been as exciting as most, but this isn’t what Curtis is looking for. The manager, who has been at the helm since 1991, does look to eke out value, but delivering a stable income is his priority, which means he seldom ventures far away from his benchmark.

Still, solid stockpicking and the effective use of gearing has seen the trust outperform its All Share benchmark over one, three, five and 10 years, and its sector average over one, five and 10.

 

Source: FE Analytics

Curtis has also consistently operated with less volatility, significantly outperforming the down markets of 2008 and 2011.

City of London’s solid income and growth track record has helped support the discount on the downside, with FE Trustnet data showing it’s traded consistently between -2 and +4 per cent over the past five years. The trust is currently trading on a slight premium.

It is yielding 3.7 per cent, and ongoing charges of 0.44 per cent with no performance fee is icing on the cake.

A good diversification play that also pays out an income for February, May, August and November is the £1.4bn Murray International IT, headed up by Bruce Stout.

The trust, which is currently yielding 4.6 per cent and has average annualised dividend growth of 7.8 per cent over the past five years, currently has just 11.7 per cent of assets in the UK and therefore has very little overlap with City of London. It hasn’t cut its dividend since 2000.


Stout isn’t afraid to make high conviction calls and his wariness of valuations in Western markets had led him to build up a strong overweight to emerging markets. Mexico, Brazil and Indonesia are among his largest regional positions, with a combined weighting of around 20 per cent. Unusually for an investment trust Murray International has a sizeable allocation to fixed interest, at 12.9 per cent.

The trust’s avoidance of developed market equities has led to some disappointing relative returns over the past two years, but overall its record is very strong. FE data shows Stout has returned 220.16 per cent over the past decade, compared to 126.26 per cent from its Global Equity Income sector average and 115.37 per cent from its composite benchmark – split 40/60 between the FTSE World UK and FTSE World ex UK indices.

Performance of trust, sector and index over 10yrs

 

Source: FE Analytics

Stout outperformed both his sector and benchmark in every calendar year between 2005 and 2012.

Murray International is on a 6.5 per cent premium, though it’s not been uncommon for it to trade on a double-digit premium in recent years. Ongoing charges stand at 0.73 per cent, not including performance fee, though the overall fee is capped at 0.8 per cent.


March, June, September, December

Temple Bar is another quarterly dividend-paying investment trust with extremely low fees and a strong dividend record. Ongoing charges of 0.48 per cent and 31 years of unbroken dividend growth put it slightly behind its City of London rival, but it remains very attractive for income investors.

Manager Alastair Mundy is a genuine contrarian investor, prepared to take significant positions in stocks that don’t even sit in his All Share benchmark.

His contrarian approach leads him not only to unloved cheap stocks, but it can also result in significant cash piles when he sees few standout buys. This has led him to generally outperform in falling markets, such as in 2008 when he lost more than 20 percentage points less than his peer group.

Like Stout he currently has a very cautious outlook on the world, explaining why he has a 2.1 per cent holding in physical gold and 16.2 per cent in cash and short-dated gilts.

These defensive positions have cost Temple Bar in recent years, but overall the trust has a very strong record under Mundy, delivering 335.39 per cent. This compares to 214.59 per cent from the FTSE All Share and 258.65 per cent from the UK Equity Income sector average.

Performance of trust, sector and index since Nov 2002

 

Source: FE Analytics

Temple Bar is also ahead of its benchmark over three, five and 10 years, though Mundy’s sector average has got the better of him over three and five years.

Top-10 positions include staple mega cap dividend payers such as HSBC and BP, as well as less recognised income names like Grafton Group, RBS and Direct Line Insurance.

Temple Bar is currently yielding 3.9 per cent.


Andrew Bell’s Witan Investment Trust has a number of diversification benefits for investors looking for a dividend payer covering March, June, September and December. As well as investing globally, the trust employs a multi-manager approach, allocating regional mandates to different investment teams.

Bell is invested predominantly in developed markets. The UK dominates the portfolio, making up over 40 per cent of assets, while the US and Europe have a weighting of 22.5 and 15.7 per cent respectively. The Far East is Bell’s only emerging market play, which currently has a 10 per cent allocation.

Witan has performed extremely well under Bell, almost doubling investors’ money since he took over in April 2010. 

The trust has 40 years of unbroken dividend growth and is currently yielding just under 2 per cent. It has ongoing charges of 0.88 per cent but also levies a performance fee. The trust’s strong showing under Bell has seen it move from a double-digit discount in 2010 to a slight premium at time of writing.

 

January, April, July, September

FE Alpha Manager James Henderson’s Lowland Investment Company offers greater exposure to dividend-paying UK small and mid-cap companies than most.

Such a focus can mean it’s more volatile than its peers from a capital point of view, but over the long term it’s more than made up for short-term losses with significant outperformance. FE data shows the trust has returned 184.14 per cent over the past decade, compared to 110.08 per cent from the FTSE All Share.

Performance of trust, sector and index over 10yrs

 

Source: FE Analytics

A soft patch for UK small and mid-caps has led to a bout of underperformance in recent months and Lowland has fallen from an 8 per cent premium in 2014 to a 4 per cent discount at time of writing.

As well as providing capital growth benefits, the trust also diversifies the income stream of an otherwise large-cap focused portfolio. With the exception of 2009 when it maintained its dividend, the trust has an unbroken record of income growth under Henderson since he took in over in 1990.

Lowland has a yield of 2.8 per cent, is geared at 15 per cent and has ongoing charges of 0.59 per cent – not including performance fee.

If you’re looking to give your portfolio’s capital growth potential an extra kick, Richard Titherington’s JP Morgan Global Emerging Market Income trust is a possible option.


The manager has around half of his assets invested in Asia Pacific countries such as Taiwan and China, though South Africa and the out-of-favour Brazilian and Russian markets also have sizeable weightings.

It was launched just as emerging markets suffered a significant bout of underperformance, but Titherington has performed much better than most, returning 31.57 per cent since July 2010. This compares to around 14 per cent from the MSCI Emerging Markets index and IT Global Emerging Markets sector average.

The trust’s focus on income has helped to protect against a widening discount, though it has recently fallen onto a slight discount for the first time since launch.

JP Morgan Global Emerging Market Income is yielding 4.29 per cent and pays out a dividend for the months of January, April, July and September. Its dividend is less stable than many of those mentioned here due to the kinds of markets and companies it’s investing in, making diversification particularly important. Ongoing charges are 1.33 per cent, excluding performance fee. 

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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.