Income investing has taken a backseat to growth-strategies over the last couple of years as investors have focused on companies that have continued to expand in low-growth world.
However, there are some approaches that investors may not necessarily consider traditional income strategies but can still present them with some interesting opportunities, according to BMO Global Asset Management’s Peter Hewitt.
While there are some traditional income strategies within the portfolio, such as Murray International, the trust manager said that these strategies can be “boring”.
Having looked at some of the best ideas in F&C Managed Portfolio Trust Growth, below Hewitt outlines some of the most exciting trusts in his F&C Managed Portfolio Trust Income.
BB Healthcare
First up is the BB Healthcare Trust, run by Dr Daniel Koller and Paul Major since its launch in 2016 with Brett Darke joining the pair in 2017.
“One of the things about investment trusts which they can do because they are closed-end funds is pay dividends from capital,” Hewitt said.
“I am actually broadly speaking against that but in a modest way I think it can be quite interesting but BB Healthcare is interesting. It pays 3.5 per cent of the starting year’s [net asset value] NAV as a dividend for the next year.”
As a healthcare trust, it is more likely to be found in a growth strategy than an income fund, but by using this technique it becomes more attractive to income investors, the manager noted.
Performance of trust vs sector and benchmark since launch
Source: FE Analytics
Since its launch, the £384m trust has returned 37.27 per cent, beating the MSCI World Healthcare index and IT Biotechnology & Healthcare sector 12.23 and 3.6 percentage points respectively.
Parent company Bellevue Asset Management is based in New York, Zurich and London, giving it a wide net in terms of geography, he added.
The team is not as interested in mainstream pharmaceuticals because it sees them as “a bit boring”, although Shire is a notable exception in its top 10 holdings. However, it is not a pure biotechnology play, with only 15 per cent invested in the sector.
“The [managers] offer across the waterfront healthcare investing in things such as a managed care company in America, as well as life sciences or medical technology companies,” Hewitt said.
The portfolio, which has a maximum of 35 holdings allowed at any one time, is focused on mid- and small-caps.
“For an income portfolio where typically you are buying investment trusts with a higher dividend yield that are typically invested in mature, relatively boring companies, BB Healthcare is really interesting,” the BMO manager said.
The trust has a dividend yield of 3 per cent is 3 per cent geared and has ongoing charges of 1.38 per cent. Its shares are on a 1.5 per cent discount to NAV. All data from the Association of Investment Companies (AIC).
CC Japan Income & Growth
Up next is the £232m CC Japan Income & Growth trust – another that might be surprising to find in the income portfolio.
Launched in 2015, the trust has been the third-best performer in the six strong IT Japan sector and has outperformed the Topix index by 25.12 percentage points over the period.
Performance of trust vs sector and benchmark since inception
Source: FE Analytics
While its current yield of 2.2 per cent may underwhelm some expecting a higher payout from their income portfolio, Hewitt said when it was launched the trust had a yield of around 3-3.25 per cent.
While the strong performance of the trust has seen its yield compress since inception, Hewitt noted that the underlying dividend is still growing quite sharply.
The trust is managed by Japanese boutique asset management firm Coupland Cardiff, with Richard Aston, formerly of JP Morgan Asset Management, acting as portfolio manager.
“This is their first and only investment trust and it has been a super performer so far,” Hewitt said.
He added: “To be able to get exposure to Japan, biotech or private equity trusts that generate a dividend yield is just a bit different from, say, City of London Investment Trust where you have got very conventional, higher yielding stocks with decent dividend growth.
“While that ticks all of the boxes it is not very exciting, although an income portfolio shouldn’t really be too exciting.”
CC Japan Income & Growth is 16 per cent geared, is on a 3.6 per cent premium to its NAV and has ongoing charges of 1.25 per cent.
Henderson International Income
Another interesting holding within F&C Managed Portfolio Trust Income is the £295m Henderson International Income trust.
Managed by Janus Henderson’s Ben Lofthouse since its launch in 2011, the trust has returned 106.46 per cent over the period.
Performance of trust vs sector and benchmark since inception
Source: FE Analytics
“In the first few years overseas income was very good but actually in the last year or two (and particularly the last six months) Asia Pacific, emerging markets and Europe have all materially underperformed,” Hewitt said.
“In the long run overseas income remains a good idea, so a well-run trust like this with a dividend growth that has been really quite good – I would say high single digits –is quite important.”
The trust does not invest in the UK and is (roughly) equally a third weighted to America, Asia Pacific and Europe.
Currently the portfolio is most weighted to financials, with consumer goods, technology and oil & gas companies all double-digit weightings. Conversely, utilities, consumer services and basic materials are relatively small portions of the trust.
Henderson International Incomehas a yield of 3.1 per cent, is not geared and its shares trade at around par to NAV. It has ongoing charges of 0.9 per cent.