Income trusts dominate 2011 launches

New trust launches have been thin on the ground this year [six investment companies collectively raised £691m, compared with 15 investment companies raising £1.7bn in 2010], but those that have succeeded in coming to market have tended to have an income theme.

Cazenove recently pointed out that, with equity market volatility returning to crisis levels, uncorrelated – or alternative – income is becoming more attractive, and that these types of trust will continue to grow in popularity.

The launch data for 2011 certainly bears this out. Duet Real Estate Finance, in the Sector Specialist: Debt sector, was the first launch of 2011, raising £50m in March. The company’s objective is to provide shareholders, through investment in its Master fund, with regular dividends and an attractive total return while limiting downside risk to capital, through exposure to European commercial real estate debt.

The trust was on a premium of 1 per cent at 5 December 2011 and has a current dividend yield of 4.1 per cent, which seems to be following a trend for this year's launches: All but one of the trusts launched this year were trading close to par on 5 December 2011, between a 2 per cent premium and a 2 per cent discount compared with an industry average discount of 10 per cent at the end of November 2011.

NB Global Floating Rate Income, another Sector Specialist: Debt investment company, has been by far the largest launch in 2011, raising £309m back in April. It was on a discount of just -0.4 per cent on 5 December. In the Forestry and Timber sector, Forest Company raised £166m in June and has been the only launch this year that has not had an income theme. On 5 December it was trading close to par, at 0.2 per cent.

Two of the more conventional trusts launched this year also had an income theme. Diverse Income Trust (UK Growth & Income) and Henderson International Income (Global Growth & Income) were opened for business in April, raising £50m and £42m respectively. At 5 December 2011, Diverse Income Trust was on a discount of 1.8 per cent, while Henderson International Income was on a discount of 1.7 per cent. Another launch in the Global Growth sector, Damille Investments II (SFM) raised £74m.

While new issues are an interesting measure of investor sentiment, the wider investment company sector has a long and enviable reputation when it comes to dividend records. AIC research recently suggested that one-third of conventional investment companies are yielding more than the FTSE 100's average annual yield of 3.2 per cent – which is 80 investment companies out of a universe of 244 conventional AIC members. Two-thirds of these were trading at a discount to net asset value (NAV).

Investment trusts have the ability to sustain their dividends, by building up their revenue reserves in good years, allowing them to pay dividends in difficult years. They do this by squirreling away up to 15 per cent of the income they receive each year and transferring this to their revenue reserves. Known as ‘smoothing’ dividends, this is one of the defining characteristics of the sector and has helped many investment trusts to raise their dividends over many consecutive years. This can be a great comfort to investors, particularly in difficult times.

Jemma Jackson is public relations manager at the Association of Investment Companies. The views expressed here are her own.