Beal (pictured), manager of the Shires Income IT, warns some of the best-performing companies are highly vulnerable to weaknesses in the wider economy, which could see their share prices tumble further. "As we have observed for some time, there would seem to be a disconnect between the risks inherent in the European debt crisis and the weaknesses of many major economies and the continuing increases in equity markets," Beal warned.
"Equities may represent good value when compared to other asset classes, specifically fixed income. However, in the absence of a stronger recovery in the global economy, there is a risk that earnings disappointment could result in the de-rating of share prices that have been quite strong recently."
He adds that other areas of the world are feeling the shocks of the economic slowdown, most notably as a result of slowing growth in China, which has seen mining companies battered by depressed prices and weak demand.
"The impact of falling commodity prices has been felt especially strongly in Australia, where they are now forecasting a budget deficit."
"In the meantime, there is a danger that problems in Europe return to the fore," he added.
"The eurozone reported its sixth successive quarter of negative growth. Even Germany is reporting anaemic GDP and real growth is now negative."
While the manager says banks and financial institutions have performed particularly well over the last several months, he has trimmed positions in major asset manager Schroders and insurers Prudential and Aviva.
The manager is also taking some profits from UK blue chips British American Tobacco, Whitbread and major global miner BHP Billiton and has trimmed holdings in FTSE 100 companies BG, Centrica and Pearson.
However, he says the management process of the trust remains the same – investing in good-quality companies that "can survive short-term travails and prosper in the future".
The Shires Income trust has consistently outperformed the IT UK Growth & Income sector and FTSE All Share over one, three, five and 10 years, although it is third quartile among its peers over the medium- and long-term.
Over the last five years, the trust has picked up 66.73 per cent while the sector and index have made 53.22 per cent and 40.89 per cent respectively.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
The trust has one of the highest yields in the sector, at 5.4 per cent, putting it just behind the British & American IT and the Aberdeen-run Dunedin Income Growth Trust.
Shires Income has seen varied numbers over the last 10 calendar years, strongly outperforming in 2003, 2004, 2009 and 2012, but lagging the sector and index in five of the last 10 years and so far in 2013.
Calendar-year performance of trust
| Name | 2013 (%) | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) | 2007 (%) | 2006 (%) | 2005 (%) | 2004 (%) | 2003 (%) |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Shires Income IT | 7.49 | 29.77 | -2.49 | 20.43 | 37.55 | -38.03 | -16.81 | 15.82 | 18.12 | 27.97 | 28.91 |
| IT UK Growth & Income | 13.41 | 19.98 | -1.69 | 16.91 | 25.98 | -36.49 | -6.58 | 24.67 | 22.89 | 26.5 | 26.29 |
| FTSE All Share | 7.53 | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 | 5.32 | 16.75 | 22.04 | 12.84 | 20.86 |
Source: FE Analytics
Nearly half of the trust is invested in financials, at 46.6 per cent, followed by roughly equal weightings to industrials, consumer products and services.
It is a high-conviction portfolio, with 44.6 per cent of the trust in the top-10 holdings, which include UK blue chips GlaxoSmithKline, AstraZeneca and financials Standard Chartered and Santander.
Among the trust’s top holdings are the Aberdeen Smaller Companies High Income trust, which is also wary of current markets.
Phil Webster, its manager, warns investors need to get ready for a rough ride in all markets.
"It feels like a pretty tough market to call at the moment and there are signs that volatility is beginning to pick up across both equity and credit markets," he said.
"After the run we have seen in equity markets, this isn’t a huge surprise."
The majority of the trust is invested in UK equities, but it also has 32.2 per cent in fixed interest, most of which is in the debt of banks and financial institutions.
Shires Income IT is trading on a discount of 0.5 per cent, meaning investors can access it for a lower price than the value of its assets. The trust has been trading on an average premium of 1.48 per cent over the last 12 months and a narrow discount of 0.68 per cent over the last three years.
It is geared at 23 per cent.
Ongoing charges for the trust are 1.09 per cent, according to the AIC.
