The fall in the value of sterling means that investors can expect a better outlook for UK dividends, according to analysts at Numis, who reveal their favourite UK trusts for income investors.
The UK’s decision to leave the European Union prompted a slide in the value of the pound, with the currency now significantly down against the dollar and the euro.
Given that the bulk of the FTSE 100’s revenues come from overseas and around 40 per cent of FTSE 350 dividends are paid in dollars or euros, analysts expect some UK equity income offerings to enjoy a relative sweet spot.
In the following article, Numis’ analysts highlight four investment trusts that income investors should consider for their UK exposure.
First up is this £1.7bn trust, which has been headed up by FE Alpha Manager Mark Barnett – head of UK equities at Invesco Perpetual – since January 2014. Over that time, the manager has made a top quartile 28.04 per cent total return and outperformed the FTSE All Share by a wide margin.
Performance of trust vs sector and index under Barnett
Source: FE Analytics
“Our key recommendation remains Edinburgh IT, which shares the same management team, headed by Mark Barnett, as Perpetual Income & Growth, but with a more competitive fee structure,” Numis’ analysts said.
“The valuation-driven approach focuses on stock picking within a top-down macro framework and Edinburgh IT’s portfolio bears little resemblance to the FTSE All Share, being overweight tobacco, pharma and consumer goods.”
The portfolio’s top holding is US stock Reynolds American, followed by UK dividend stalwarts British American Tobacco, Imperial Brands, AstraZeneca and BP. Close to 20 per cent of the trust’s dividends come from non-UK businesses, according to Numis.
It has grown its dividend for 11 years in a row, with it being increased by an annualised 3.2 per cent over the past five years. The dividend is currently 1.1x covered and it has revenue reserves of £41.2m equivalent to 0.86 per cent of a full year’s dividend payments.
Edinburgh Investment Trust has ongoing charges of 0.61 per cent, is trading on a 6.3 per cent discount to net asset value (NAV) and yields 3.6 per cent.
FE Alpha Manager Francis Brooke has run this £217.1m trust since August 2009; he was joined by Hugo Ure in March 2009. As the chart below shows, Brooke has outperformed his average peer and benchmark during his time in charge.
Performance of trust vs sector and index under Brooke
Source: FE Analytics
Numis said: “Another favoured fund is Troy Income & Growth, which focuses on blue-chip UK listed companies with strong franchises and sustainable dividend growth.
“The fund is differentiated by a conservative approach focused on quality companies, as well as by its zero discount policy implemented by buying back shares at a tight discount and issuing on a small premium (typically +/-2 per cent).”
Among the fund’s top holdings are stocks such as Unilever, AstraZeneca, Royal Mail Group, Imperial Brands and GlaxoSmithKline. It’s largest sector exposure is to financials at 25 per cent of assets.
Looking at the trust’s income credentials, it has grown the dividend for five consecutive years – lifting it by an annualised 5.3 per cent over this period. The dividend is 1.04x covered while its revenue reserves of £2.5m are equivalent to 0.41 of a full year’s dividend payments.
Troy Income & Growth has ongoing charges of 1.01 per cent, is trading on a 1.39 per cent premium to NAV and yields 3.35 per cent.
Numis tips this £417.3m trust as another contender for a core income holding, arguing that its “mainstream” approach makes it appropriate for a wide range of investors.
Sarah Emly has managed the portfolio since June 2006 and was joined by William Meadon in February 2012. Since Emly has been on the portfolio, it has beaten its average peer but is behind the benchmark.
Performance of trust vs sector and index under Emly
Source: FE Analytics
The fund focuses on large-caps with the FTSE 100 accounting for 71 per cent of the portfolio. It has Royal Dutch Shell as its largest holding and has top 10 positions in British American Tobacco, BP, HSBC and GlaxoSmithKline.
JPM Claverhouse has grown its dividend for the past 43 years running, with the annualised increase being 4.2 per cent over the past five years. It has a 1.2x dividend cover and revenue reserves of £14m, equivalent to 1.2 years’ worth of dividend payouts.
Numis said: “We expect continued dividend growth given strong earnings growth and substantial revenue reserves of 1.2 years.”
JPM Claverhouse has ongoing charges of 1.79 per cent (including its performance fee), is trading on a 10.75 per cent discount to NAV and yields 4.1 per cent. From July 2016, the trust’s performance fee was scrapped after a small increase in the base fee.
Henderson’s Job Curtis has managed this £1.4bn investment trust since 1991. Our data on the trust only goes back to July 1994 but since then it has beaten its average peer and the FTSE All Share by around 100 percentage points.
Performance of trust vs sector and index since start of data
Source: FE Analytics
The trust has an impressive track record of dividend growth, increasing its payout for 50 straight years; over the past five years, the dividend has grown by 3.8 per cent annualised. It has dividend cover of 1.09x and revenue reserves of £30.7m are equivalent to 0.59 per cent of a year’s payouts.
This is another trust that has a bias towards large-caps and defensive sectors such as utilities and consumer goods. Its top holdings are British American Tobacco, Royal Dutch Shell, HSBC, Vodafone and Diageo.
Curtis is a valuation-driven investor and focuses on companies that are cash-generative, have the ability to grow their dividends and show an attractive yield. He also has bias towards UK businesses that face the international economy rather than the UK.
City of London has ongoing charges of 0.43 per cent, is trading on a 2.28 per cent premium to NAV and yields 3.99 per cent.