The majority of investment trusts yielding more than 4.5 per cent outperform the FTSE All Share – the natural benchmark for both sectors – in the short-, medium- and long-term.
Of the 10 trusts that are yielding more than 4.5 per cent with a long enough track record, seven have returned more than the FTSE All Share in the last decade. Of these seven, three have returned more than 100 per cent.
In contrast, only four of the nine open-ended UK Equity Income funds with a one-year historic yield of more than 5 per cent have beaten the All Share.
Performance of average funds vs index over 10-yrs
| Name |
1-yr returns (%) |
3-yr returns (%) |
10-yr returns (%) |
| Average high-yielding UK equity trust |
3.4 |
54 |
77.3 |
| Average high-yielding UK equity fund |
-2.6 |
35.6 |
61.1 |
| FTSE All Share |
-1.9 |
42.6 |
61.8 |
Source: FE Analytics
According to FE Analytics, the average high income UK equity trust has returned 77.31 per cent in the last 10 years, outperforming its open-ended equivalent by 16.22 per cent. The FTSE All Share has returned 61.82 per cent during this period.
The trend is similar in the medium- and short-term; over three years, once again seven of the 10 trusts yielding more than 5 per cent have outperformed the All Share. However, only two of the nine open-ended high income equity funds have returned more than the index.
Performance of average funds vs index over 3-yrs
Source: FE Analytics
In the last 12 months, all but two of the 10 trusts have outperformed the index.
In a recent FE Trustnet article, FE Alpha Manager Francis Brooke (pictured below right) said high-yielding UK funds tend to have much lower capital returns to compensate for the fact they have to pay a higher dividend.
"With the FTSE All Share yielding 3.5 per cent, I would argue that any fund yielding more than 5 per cent is pushing the income account very hard and seriously risking the conversion of capital to income," he explained.
However, investment trusts yielding in excess of 5 per cent have been able to maintain strong capital growth.
The Small Companies Dividend Trust, for example, which has a one-year historic yield of nearly 7 per cent, has returned 128.36 per cent in the last decade – more than twice as much as the FTSE All Share.
With a yield of 5.23 per cent, Alex Crooke’s Henderson High Income Trust has still managed to return 97.05 per cent over a 10-year period.
Brooke, who manages both open- and closed-ended vehicles, says the inherent advantages that investment trusts have over open-ended funds goes some way in explaining why high income trusts have been able to maintain competitive capital returns.
"It’s well documented that investment trusts have certain advantages that make them more appealing for a long-term investor, and this is no exception," he said.
"Trusts’ ability to gear allows them to increase both growth and income, which means they are able to keep up with the market as well as keep the yield high."
"Lower total expense ratios (TERs) also have an effect, and the fact that closed-ended managers are not as affected by mass inflows or outflows during volatile periods gives them another edge."
"Income trusts tend to hold a bit of fixed interest, which allows managers to top up the yield as well," he added.
Manager of the Unicorn Mastertrust Peter Walls says investment trust managers’ ability to smooth out the dividend yield is another reason why they can maintain high growth and income.
"While a fund manager has to pay out 100 per cent of their yield, an investment trust manager can hold back 15 per cent, making it easier for them to grow their dividend year-on-year," he explained.
"It should also be noted that there is a greater number of small cap high income trusts compared to the IMA universe, and since small caps tend to outperform in the long-term, this is likely to bring up the average."
Walls also pointed to the lower number of "weak links" in the investment trust universe as another contributing factor.