Fund and trust yields have been falling across the board of late, but FE Alpha Manager Evy Hambro’s IT has seen its payout increase significantly recently, to 4.4 per cent at the time of writing. Hambro (pictured) says the sector is becoming more and more of an income play, which he has fully taken advantage of – not least because it has had a positive impact on the trust’s discount.
"Over the last few years we’ve decided to try and reduce the discount the trust has been trading on and in trying to achieve that we’ve increased the income that the trust is able to pay back to its shareholders," Hambro said.
"The yield on the trust today is greater than 4 per cent, having been less than 1 per cent in the past."
"We’ve managed to achieve that growth in income without forsaking capital growth."
"We’ve used the balance sheet of the trust to raise the overall income potential from the portfolio and so as a result we’ve managed to narrow the discount, which has obviously been very beneficial to all of the trust’s shareholders."
The £1bn trust is trading on a discount of 10.9 per cent, slightly wider than a week ago when it was on a 10.1 per cent discount, but narrower than its historical average.
Over the last three years, the trust has been on an average discount of 14.59 per cent, according to the AIC. This has narrowed to an average of 13.02 per cent over 12 months.
The lowest discount the trust has traded on in the last year is 8.04 per cent.
Hambro says his goal is to move the trust away from a discount on to a premium in the near-term; however, he says that will likely be more a function of the market rather than something the team can control.
"The trust started this journey on a 17 per cent discount to assets; today we’re on about an 8 per cent discount to assets. On a comparable basis, other trusts of similar size, liquidity and so on trade on about a 5 per cent discount, and many trade on premiums," he said.
"Our yield today on the portfolio is greater than many of the other trusts that are on lower discounts, so I think there’s potential for us to go to an even narrower discount in the near future."
"The market is waiting to see how sustainable the dividend yield is because this is the first year we’ve been paying out the full amount."
Hambro says one of the reasons the trust went down the path of trying to increase income in an attempt to reduce the discount rather than through share buybacks, is the feedback it had from the shareholders was that they did not want to reduce liquidity.
"There’s a lot of liquidity in the trust and there always has been. So if we were buying back shares to close the discount that would have shrunk the liquidity of the trust and they definitely didn’t want us to do that," Hambro said.
The trust has suffered a difficult period since the market crash of 2008, losing money over three and five years, though not as much as its peers in the IT Commodities & Natural Resources sector.
However, it has lagged the LIBOR Euro 3m index over each period.
Over the last decade, the trust has returned 345.59 per cent, while the sector and index have gained 267.26 per cent and 47.34 per cent respectively, highlighting the need for investors to take a long-term view with this kind of volatile asset class.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Investors should be aware that the trust is also 13 per cent geared – or leveraged. This tends to amplify underperformance when the market falls, but it is a big driver of growth on the way up.
Hambro also manages the outperforming BlackRock Gold & General fund in the open-ended space, but says the trust offers investors something different to the gold-oriented portfolio.
"The investment trust is obviously different to the Gold & General fund: it is much broader, while the fund is 75 per cent invested in gold equities."
"It’s exposed to the entire industrial metals space. The biggest theme inside the investment trust today is actually our exposure to copper. It’s a very, very large position for us in copper equities."
"A range of different types of copper equities – ones with high rates of volume growth, ones with strong, stable assets that are highly profitable, ones that have good exploration potential added to the growth that they might be having today."
"The second-biggest theme is in iron ore production, where we have a combination of existing iron ore producers and future large producers that are going through high rates of development spend."
"The newest feature of the investment trust is our exposure to royalties," he added.
The BlackRock World Mining IT has an ongoing charges figure (OCF) of 1.42 per cent.
