10 investment trusts for income investors

Investment trusts are a happy hunting-ground for value investors, writes Tony Yarrow.

In the last 10 years, the value style has faced a headwind as risk-averse investors have paid ever higher premiums for the shares of companies with highly visible cash-flows or superior growth characteristics.

At the start of 2018, this headwind turned into a hurricane. However, in the past few weeks value investments have experienced a rebound from deeply oversold levels. This recovery may turn out to be yet another false dawn, or it may evolve into a multi-year rally, as happened in the opening years of the millennium (2000-07). Investors willing to entertain the latter possibility might have started to consider possible ways in which to capture the potential returns from a return to favour in the value style.

Investment trusts are a happy hunting-ground for value investors. When assets are trading at distressed levels, the investment trusts that invest in those areas are normally at discounts, providing us with a further layer of value.

When looking for investment trusts for medium- to long-term investment, as a means to capture the value opportunity, we look for a number of attributes.

A trust must have a capable and dedicated team with long experience of running the fund, and a distinctive style with consistent performance characteristics.

The trust will tend to have good long-term performance, marred by rather weak returns over the last couple of years, but with a distinct pick-up since the beginning of September.

Management will have a strong level of conviction in the current market. This will be reflected in a relatively high concentration in the top 10 holdings, which are likely to be at least 25% of the portfolio and could be as high as 50%.

We would also expect to see a modest amount of gearing. The case for gearing can rarely be more compelling than when asset prices are as cheap and the cost of borrowing as low as they are today.

The financial sector is the largest value sector worldwide, so we would expect to see a generalist value-orientated fund to have a relatively high allocation to financial stocks, although a few of the funds in the list below are specialists where the remit doesn’t extend to financials.

For liquidity, none of the funds below are less than £100 million in size. The funds all pay dividends of no less than 4.0%, although three of them, marked with asterisks, invest in areas where income doesn’t naturally arise, so these trusts pay their dividends out of capital.

The figures below were correct at the time of writing, but fluctuate continually with the market.

Schroder Income Growth (LSE:SCF): invests in UK equities.  Market cap £200 million Managed by Sue Noffke since July 2011. Dividend yield 4.3% paid quarterly. Five-year dividend growth 23%. Discount 8.6%. Gearing 13.6%. Top 10 holdings: 52%. Top three holdings: Royal Dutch Shell (LSE:RDSB), GlaxoSmithKline (LSE:GSK), BP (LSE:BP.). Financials 22%.

Henderson High Income (LSE:HHI): invests in UK equities and bonds. Market cap £226 million. Managed by David Smith since 2014. Dividend yield 5.6% paid quarterly. Five-year dividend growth 11%. Discount 3.5%. Gearing 24%. Top 10 holdings: 28%. Top three holdings: Glaxo, Diageo (LSE:DGE), Shell. Financials 20%.

Princess Private Equity (LSE:PEY): invests in private equity globally, mainly Europe and US. Market cap £700 million. Managed – team. Dividend yield 5.8% paid half-yearly. Five-year dividend growth 11%. Discount 14.5%. Gearing 2%. Top 10 holdings = 47%. Top three holdings – Permotio International Learning, Action, Foncia. Financials 9%.

Ecofin Global Utilities (LSE:EGL): invests in the utility and infrastructure sectors globally. Market cap £140 million. Managed by Jean-Hugues de Lamaze since launch (September 2016). Dividend yield 4.2% paid quarterly. Five-year dividend growth – N/A. Discount 6.3%. Gearing 6%. Top 10 holdings: 43%. Top three holdings: NextEra Energy (NYSE:NEE), Iberdrola (XMAD:IBE), Enel (MTA:ENEL). Financials N/A.

Aberdeen Asian Income (LSE:AAIF): invests in equities in Asia ex Japan. Market cap £370 million. Managed by Hugh Young & team from launch (December 2005). Dividend yield 4.4% paid quarterly. Five-year dividend growth 14%. Discount 7.9%. Gearing 7%. Top 10 holdings: 36%. Top three holdings: Samsung (LSE:SMSN), TSMC, Tesco Lotus. Financials – not disclosed.

European Assets Trust (LSE:49BI): invests in continental European equities. Market cap £370 million. Managed by Sam Cosh since 2011. Dividend yield 5.6% paid quarterly. Five-year dividend growth 2%. Discount 8.4%. Gearing – 4% net cash. Top 10 holdings: 35%. Top three holdings: Gerresheimer (XETRA:GXI), Cerved Information Solutions, Forbo Holding. Financials 15%.

BlackRock World Mining Trust (LSE:BRWM): invests in the shares of mining companies, with some fixed interest, royalties and derivatives. Market cap £600 million. Managed by Evy Hambro (since 2008) and Olivia Markham (since 2015). Dividend yield 6.0% paid quarterly. Five-year dividend growth 5%. Discount 13.7%. Gearing 12%. Top 10 holdings: 56%. Top three holdings: BHP (LSE:BHP), Vale (NYSE:VALE), Rio Tinto (LSE:RIO). Financials – none.

Middlefield Canadian Income (LSE:MCT): Invests in quoted Canadian companies with a remit which allows up to 40% to be held in US-listed equities. Market cap £112 million. Managed by Dean Orrico since launch (July 2006). Dividend yield 4.9% paid quarterly. Five-year dividend growth 2%. Discount 9.9%. Gearing 6%. Top 10 holdings: 42%. Top three holdings: Parkland Fuel (TSE:PKI), JPMorgan Chase (NYSE:JPM), AT&T (NYSE:T). Financials 18% (this is actually an underweight – the Canadian index is 30% financials).

BlackRock Frontiers (LSE:BRFI): can invest in any country which is neither part of the MSCI World Index of developed markets nor one of the eight largest countries by market cap in the MSCI Emerging Markets Index. Managed by Sam Vecht since launch (2010) and Emily Fletcher. Dividend yield 4.5% paid half-yearly. Five-year dividend growth N/A. Discount 2.4%. Gearing – only used for short-term cash-flow management. Top 10 holdings: 29%. Top three holdings: Astra International, Charoen Food, Vincom Retail.

Ediston Property Investment Company (LSE:EPIC): invests in UK commercial property, for income, income growth and capital growth. Market cap £184 million. Managed by Calum Bruce since launch (October 2014). Dividend yield 6.5% paid monthly. Five-year dividend growth N/A. Discount 19.4%. Gearing 32.5%. Top ten holdings: >50%. This well-managed trust is currently interesting on account of its roughly 70% exposure to retail parks, which have been affected by the “death of physical retail” theme. The attraction of retail parks over shopping centres and the high street would appear to be ease of access, car parking, flexibility, and much lower rents. The sector may to some extent be underpinned by the fact that valuations are below rebuild cost, and the potential for change of use.

Tony Yarrow is co-manager of the Wise Multi-Asset Income fund.

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