The average fund in the newly renamed IT UK Equity Income sector is sitting on a 0.6 per cent premium, the only mainstream equity sector not to be on a discount.
Numis analysts say that some are still worth holding on a 12- to 18-month view. The analysts take into account valuation but over this time period put an emphasis on quality of management, performance record and risk/return profile when coming up with their recommendations.
City of London
While the analysts at Numis, headed up by Charles Cade, rate the management teams of Finsbury Growth & Income and Temple Bar highly, they prefer the £1.04bn City of London trust, run by Job Curtis for Henderson.
“We believe that City of London IT is well suited as a core holding for private client investors seeking UK equity income,” the analysts said. “It has a mainstream approach focused on FTSE 350 stocks and benefits from low fees (0.45 per cent p.a. ongoing charges), an experienced manager (Job Curtis has managed the portfolio for more than 20 years), and a good long-term track record.”
The trust has returned 10.4 per cent per annum in NAV terms over the last 10 years, compared with just 8.8 per cent for the FTSE All Share.
In total return share price terms, investors have made 195.7 per cent over that time while the FTSE All Share has grown just 132.21 per cent, according to data from FE Analytics.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
“In addition, City of London’s yield of 3.8 per cent is supported by substantial revenue reserves and the company has delivered 47 years of dividend increases,” Numis said.
“The fund is issuing shares on a regular basis to provide liquidity and prevent an excessive premium from developing.”
Perpetual Income & Growth
The team also favours Perpetual Income & Growth, run by FE Alpha Manager Mark Barnett for Invesco Perpetual.
Barnett has taken over Neil Woodford’s role as head of UK equities at Invesco in anticipation of the latter’s departure in April, and will also take on management of Woodford’s multi-billion pound income funds at that time.
The fate of the Edinburgh Investment Trust, currently managed by Woodford, is unclear at this point.
“We find it hard to recommend Edinburgh IT until there is some clarity over the future management of the fund when Neil Woodford leaves Invesco at the end of April,” Numis said.
“Rather, we prefer the sister fund, Perpetual Income & Growth managed by Mark Barnett. He is an experienced manager with a stockpicking approach, overlaid by strong views on the macroeconomic outlook and unconstrained by index weightings.”
“This has led to a focus on companies in defensive sectors, such as healthcare and tobacco, at the expense of banks and resources stocks.”
“Despite Mark’s additional responsibilities once he takes over as head of UK equities at Invesco, we believe that the fund will continue to be managed independently from the group’s open-ended funds, with the ability to invest in small/mid cap stocks (currently 40 per cent of the portfolio).”
Barnett’s fund has outperformed Woodford’s in recent years in both NAV and share price terms.
Performance of trusts vs sector and index over 3yrs
Source: FE Analytics
The trust has ongoing charges of 1.93 per cent, inclusive of a performance fee, and is currently yielding 3.1 per cent. It is on a premium of 1.5 per cent, however.
Troy Income & Growth
The analysts are also backing the £145m Troy Income & Growth trust managed by Francis Brooke, despite a period of poor performance that saw it produce bottom quartile share price returns in 2012 and 2013.
“Troy Income & Growth is focused on blue chip UK-listed companies with strong franchises and sustainable dividend growth.”
“The fund pays a quarterly yield of 3.3 per cent p.a. and is differentiated by its zero-discount policy, implemented by buying back shares at a tight discount and issuing on a small premium (typically +/-2 per cent).”
“Relative performance has been dull over the past two years, reflecting the manager’s cautious approach and a greater emphasis on protecting investors’ capital.”
“Troy AM took over the management in August 2009 and Francis Brooke, the portfolio manager, has had a strong track record in an equivalent open-ended fund since 2004.”
Data from FE Analytics shows that the trust has underperformed its sector in share price terms since Brooke took over in August 2009, thanks to a dull showing in recent months.
Performance of trust vs sector and index since Aug 2009
Source: FE Analytics
It has ongoing charges of 1 per cent and is on a slight discount of 0.7 per cent, according to the AIC.
Murray International
Another trust with a highly regarded manager of a bearish temperament is Murray International, headed up by Bruce Stout.
Stout has also lagged his peers in recent months after he refused to shift into cyclicals when these sectors rallied, but Numis analysts think that the shrinking premium represents an opportunity to get into a portfolio that has recently traded on a premium far too high to be interesting.
“We regard the management of Murray International (4.2 per cent yield) and Scottish American (4 per cent) highly.”
“In addition, they offer far greater diversification of income than traditional UK Growth & Income funds.”
“We found it hard to recommend these funds while trading at significant premiums, but Murray International’s premium is now 3.4 per cent versus a peak of over 12 per cent.”
“The fund’s recent performance has been disappointing, due to the high weighting in Asia/emerging markets at the expense of the US/Japan, reflecting a concern over the outlook for developed economies once QE is withdrawn.”
“However, Bruce Stout has an excellent long-term record and we believe that now is potentially a good entry point into the fund.”
The ongoing charges on the trust are 1 per cent.
Scottish American
Baillie Gifford’s £338m Scottish American trust, managed by Patrick Edwardson and Dominic Neary, is another more defensively oriented trust to have lagged behind its peers recently.
The fund has made just 18.82 per cent over the past three years compared with 33.49 per cent from the sector. The performance has been less volatile than Murray International, however, which made significant losses after the emerging markets sell-off last summer.
Performance of trusts vs sector and index over 3yrs
Source: FE Analytics
The trust has 9.1 per cent in fixed interest and 8.9 per cent in property, with its largest equity positions in Rio Tinto, Samsung, Taiwan Semiconductor Manufacturing and Vodafone.
It has ongoing charges of 0.93 per cent and is on a 4.2 per cent premium.
