Discounts across the investment trust sector have been narrowing recently as equity markets have performed well and it is the income-producing trusts that have seen the most attention in the current ultra-low interest rate environment. Nearly every trust that pays a dividend is now either trading on a premium to NAV or a much tighter discount relative to its history.
Tepes, who is an investment companies analyst at Cantor, says that if investors who hold these dividend-paying trusts trading on a premium can find a viable alternative in the open-ended universe, then now would be a good time to switch.
"Definitely, if there is a direct open-ended alternative then now is a good time to move your money," she said.
Tepes recently told FE Trustnet that the narrowing of discounts on investment trusts is alarming and could be a signal that UK equities are now at the top of the market.
Dividend-paying investment trusts have performed particularly well of late and our data shows that the IT UK Growth & Income sector has returned more than 25 per cent so far this year while the FTSE All Share has returned 19.22 per cent.
Performance of sector vs index year to date
Source: FE Analytics
Tepes says switching doesn’t have to be a long-term decision, adding that it would help protect capital in a sell-off she thinks could be imminent and would allow investors to buy back into trusts at a better price.
"It’s all about whether or not you think you can get the timing right and whether or not you think markets will correct. I have my suspicions and I think they are due a correction over the short-term, so if you are a bit of a trader than definitely now is the time to switch," Tepes said.
She adds that although investors should consider moving their money into open-ended funds, she says they shouldn’t just buy other trusts because they look cheaper from a discount point of view.
"I am of the opinion that if a closed-ended fund has a good strategy and has delivered good risk-adjusted returns, then you have to pay up for quality. However, trusts that are still on a wide discount are cheaper because they are more risky or lower quality."
"So if there were to be a correction, then they will do worse on the downside than quality trusts," she explained.
For anyone who is concerned about their exposure to some of the higher quality – but now expensive – investment trusts, there are many examples where it is possible to find a like-for-like replacement in the IMA universe.
For instance, Bruce Stout’s Murray International trust is an investor favourite and because of that it is trading on a 9.39 per cent premium to NAV.
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, says investors could turn to the open-ended Aberdeen World Growth & Income fund instead.
Although it is run by Aberdeen’s global equities team, Morgan says Stout has a major influence on its process.
"The Aberdeen World Growth & Income fund has more of a team approach, but they are very similar portfolios except for the odd small difference. I think it is a viable alternative to Murray International, especially as the trust is trading on such a wide premium," Morgan said.
The Aberdeen World Growth & Income fund – which yields 3.9 per cent – was launched in October 2009.
According to FE Analytics, it has returned 39.84 per cent since then while Stout’s Murray International trust has returned 73.2 per cent. The closed-ended fund's NAV return has also been much greater than the OEIC's returns over the period.
Performance of fund vs trust since Oct 2009
Source: FE Analytics
However, over the last 12 months the fund’s NAV returns have beaten the trust’s.
One of the key differences between the two portfolios is that Murray International has 7 per cent in fixed interest, while Aberdeen World Growth & Income is a pure equity fund.
Nevertheless, stocks such as Philip Morris International, Roche, Standard Chartered, British American Tobacco and Taiwan Mobile feature in the two portfolios' top-10 holdings.
Aberdeen World Growth & Income has an ongoing charges figure (OCF) of 1.65 per cent and requires a minimum investment of £1,000.
It isn’t just the global equity income trusts that have seen their premiums rise.
Most of the trusts in the IT UK Growth & Income sector are now trading on a premium, such as Lowland on 3.54 per cent, Temple Bar IT on 2.1 per cent and the Merchants Trust on 1.7 per cent.
Job Curtis’ City of London IT, which holds many of the biggest dividend-payers in the UK such as Vodafone, GlaxoSmithKline, Unilever and Diageo, is now trading on a 2.36 per cent premium to its NAV.
Although Curtis’ portfolio has a high weighting to financials unlike the majority of his open-ended rivals, there is a wealth of funds in the IMA UK Equity Income sector that can give an investor similar UK large cap exposure.
Two of the most popular choices have proved to be Adrian Frost and Adrian Gosden’s £6bn Artemis Income fund and FE Alpha Manager Leigh Harrison’s five crown-rated Threadneedle UK Equity Income fund.
Another trust that has seen a high degree of interest is the Diverse Income Trust, which is managed by Gervais Williams and Martin Turner. It is now trading on a 1.2 per cent premium to NAV, but investors in that portfolio could consider Turner and Williams’ CF Miton UK Multi Cap Income fund.
Performance of fund vs trust over 1yr
Source: FE Analytics
The Diverse Income Trust and the CF Miton UK Multi Cap Income fund have also delivered very similar returns over the past year.
Both portfolios have 36 per cent in FTSE AIM stocks, around 20 per cent in the FTSE 250 and Small Cap indices and a light position in the FTSE 100. Their top-20 holdings are virtually the same, albeit with different weightings.
The open-ended fund is yielding 4 per cent, has an OCF of 1.77 per cent and requires a minimum investment of £1,000.