Nine investment trusts for a £10,000 income in 2025

A year ago, I selected 10 investment trusts with the aim of achieving £10,000 of annual income in 2024.

Collectively, the hypothetical portfolio yielded 5.24%, meaning that a sum of £195,000 was required to attempt to hit the target.

While income is the priority, I’m also keen to try and strike the right balance from a total return perspective.

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The 2024 line-up fell slightly short of the target, with £9,921 of income generated. This was down to less income than expected from Balanced Commercial Property, which was delisted in mid-November after being taken over by US private assets firm Starwood. However, given BCPT’s strong share price performance, up 38.2% in 2024 until its delisting, some of those gains could have been used to make up for the shortfall.

In terms of overall total returns (including reinvested dividends), the portfolio returned 9.4% in 2024. 

Before revealing the line-up for the £10,000 income challenge in 2025, let’s look at how last year’s constituents fared.

How the 2024 portfolio fared

It’s been a tough couple of years for the investment trust sector, with the average discount standing at around -15%. The discount reflects the gap between an investment trust’s share price and the value of its underlying investments (the net asset value or NAV). When a trust’s share price is above the NAV, it trades on a premium, resulting in new investors paying more than the underlying assets are worth.

However, with the hypothetical income portfolio it’s pleasing to see only two funds in the red in 2024, Greencoat UK Wind (LSE:UKW) and Utilico Emerging Markets (LSE:UEM), with respective share price total return losses of -8.6% and -3.1%.

Greencoat UK Wind suffered after investor sentiment towards renewable energy infrastructure soured. This led the discount to increase, from around -13% at the start of 2024 to over -20% at the start of 2025.

Since interest rates started rising in late 2021, the renewable energy infrastructure sector was impacted and experienced less demand from investors. As interest rates rise, so do bond yields. As a result, income seekers have more options and can take less risk, as the safest types of bonds, UK and US government bonds, offer yields of around 4.5% compared to virtually nothing when interest rates were at rock-bottom levels. 

The hope is that falling interest rates will act as a catalyst for a change in fortunes for the sector, as well as other investment trust strategies that have been out of favour.  

Utilico Emerging Markets' performance was not helped by its discount moving from around -15% to around -20% (from the start of 2024 to the start of 2025). Investor sentiment towards emerging markets has been knocked by continued geopolitical tensions and the eruption of war in the Middle East.

After Balanced Commercial Property, the second-best performer was JPMorgan Global Growth & Income (LSE:JGGI), up 19.8%. Among the trust’s winners in 2024 were its top four holdings among the US technology giants capitalising on advancements in artificial intelligence (AI); Microsoft (NASDAQ:MSFT), Amazon.com Inc (NASDAQ:AMZN), Nvidia (NASDAQ:NVDA) and Facebook-owner Meta Platforms Inc Class A (NASDAQ:META).

Diverse Income Trust (LSE:DIVI) came second in terms of performance, up 15.9%. Gervais Williams, its fund manager, said the return was driven by smaller company shares starting to stage a recovery after a couple of tough years as interest rates rose. He picked out Galliford Try (LSE:GFRD) and Yu Group (LSE:YU) as two stocks that stood out in performance terms.  

In third place was TwentyFour Income (LSE:TFIF), up 12.9%. This specialist bond fund aims to generate attractive risk-adjusted returns principally through income distributions. This objective was certainly achieved in 2024. It invests in UK and European Asset-Backed Securities that have high yields and are floating rate (meaning they benefit from interest rises). Therefore, the higher interest rate environment has benefited this fund.

Elsewhere, City of London (LSE:CTY) delivered 10.6%, followed by UK equity income peers JPMorgan Claverhouse (LSE:JCH) and Merchants Trust (LSE:MRCH), with gains of 8.3% and 3.9%.

Finally, global equity income trust Henderson International Income (LSE:HINT) returned 5.1%.

Source: Morningstar. Total return figures are one year to 31 December 2024. 12-month yield as at 31 December, used to estimate income from initial value. Past performance is not a guide to future performance.

*Balanced Commercial Property figures obtained by the Association of Investment Companies. Figures from 1 January 2024 to 14 November 2024 when it delisted. 

Investment trusts have an income edge

Investment trusts can hold back up to 15% of the income generated from the underlying holdings each year. In leaner periods, such as during the global financial crisis and the Covid-19 pandemic, many investment trusts maintained or increased their dividends by dipping into income retained during better times.

In contrast, most funds cut dividends as they cannot hold back income and are required to pay investors all the income received each year. So, when there’s a shortage of dividend cheques during challenging times, funds have no get-out-of-jail card and dividend cuts are pretty much inevitable.

How the revenue reserve actually works

It’s easy to get the impression that the revenue reserve is somehow “ring-fenced”, but that’s not the case. In reality, it amounts to little more than an accounting tactic, an entry in the books to show retained revenue. That money is part of the trust’s NAV and is invested in the same way as the rest of the portfolio. If some of it is needed to top up dividend distributions, then the manager has to sell holdings or dip into the cash element and the NAV is affected. 

Of course, even for those investment trusts with healthy income reserves, there’s no guarantee that dividends will be maintained or increased.  

Purpose of the portfolio

The hypothetical portfolio has been created to show DIY investors how they can build their own diversified income portfolios. The funds are chosen on the basis that over the medium to long term they would be expected to grow both capital and income. However, there are no guarantees that this will be achieved.

Moreover, you must be mindful of the fact that overall total returns (capital and income combined) can decline, especially in the short term.

The line-up for the 2025 portfolio

As I’ve picked each investment trust for the medium to long term, I’m inclined to avoid making many changes each year. However, there are certain things I consider, including a fund manager change, short- and long-term performance, and whether I can simplify the portfolio.

There was a manager change in 2024 at JPMorgan Claverhouse. Its longstanding fund manager of 12 years, William Meadon, departed last summer. The baton has passed to Callum Abbott, who managed Claverhouse alongside Meadon for the past six years. Anthony Lynch and Katen Patel, who oversee the JPM UK Equity Income fund, have also joined Claverhouse as co-managers. The investment approach remains the same.

When a fund manager leaves to join a rival firm or retires, it’s important to see evidence of good succession planning so that the handover is smooth.

While Abbott has been working alongside Meadon for the past six years, the news of Meadon’s departure felt abrupt as it was a short notice period, with Meadon’s departure announced on 24 June 2024 and his exit taking place in August. Another way of doing it would have been to install the two new co-managers alongside Abbott before Meadon’s departure.  

Due to Meadon’s long tenure and the succession planning not being as smooth as it could have been, I’ve decided to remove JPMorgan Claverhouse from the £10,000 income challenge for 2025.

In its place, I’ve chosen Dunedin Income Growth (LSE:DIG), managed by Rebecca Maclean and Ben Ritchie. It’s a concentrated portfolio of best ideas, holding around 36 stocks, with a focus on both dividend growth and capital growth. It has a sustainable investment approach and can hold up to 25% in overseas stocks.

Dunedin Income Growth has either held or grown its dividend for the past 44 years. It would have been classed by the Association of Investment Companies (AIC) as a  “dividend hero” (defined as 20 years or more of consecutive dividend increases) if it had not held its dividends at the same level in 2010 and 2011. It is currently a “next-generation” dividend hero, with 13 years of consecutive increases.

There were a couple of other investment trusts I considered, including Murray Income Trust (LSE:MUT) and Law Debenture (LSE:LWDB), but what swung it for Dunedin Income Growth was the overseas exposure and sustainability focus. Both these elements bring something different to the £10,000 portfolio.

I also considered adding TR Property (LSE:TRY) to replace the property void created by the delisting of Balanced Commercial Property. However, I’m cautious on the outlook for the asset class due to the prospect of economic growth remaining sluggish and inflation potentially surprising on the upside. This could result in fewer interest rate cuts than expected this year, with the Bank of England indicating last month that four cuts were on the cards for 2025. I would sooner wait to see if those interest rate cuts materialise, and revisit property exposure next year.

Please note: following the publication of this article (on 4 February 2025) there was an announcement about a proposed merger between JPMorgan Global Growth & Income and Henderson International on 7 February. If given the green light by shareholders, Henderson International Income’s assets will be rolled into JPMorgan Global Growth & Income. The current fund managers and investment objective of JPMorgan Global Growth & Income will remain the same. If approved, the merger is expected to take effect by July 2025.

Portfolio weightings

The 2025 portfolio requires £190,000 for the £10,000 income challenge (a portfolio yield of 5.26%). All yield figures were sourced in late January, but bear in mind that yield figures are not static.

UK equity exposure comprises 45% of the portfolio. City of London has the highest weighting at 15%. Its longstanding fund manager, Job Curtis, has been at the helm since 1991. Curtis manages the portfolio in a conservative fashion, focusing on companies producing plenty of excess cash to pay dividends. Curtis mainly sticks to Britain’s biggest firms that are listed in the FTSE 100 index.

Over the long term, returns have been solid, but arguably a bigger attraction is that the trust is a consistent dividend payer, having raised payouts each year since 1966.

The other three trusts are allocated 10% each: Merchants Trust, Dunedin Income & Growth, and Diverse Income.

Merchants Trust aims to deliver an above-average level of income and income growth, as well long-term growth of capital, through investing mainly in higher-yielding large UK companies. It has lagged the averaged UK equity income trust over one and three years but is ahead over five years. Merchants has raised its dividend for 42 consecutive years.

Diverse Income invests across the UK equity market but has a bias towards UK smaller companies. Its fund manager, Gervais Williams, has said that he’s the most bullish he’s been about the prospects for the UK market in 30 years.

Williams explains that he seeks to “identify companies which generate more income growth than most of the market. If the income growth comes through, then that drags the share price up over time. Not every year, but over the longer term. It is the capital appreciation along with the good and growing income which ultimately delivers the return.”

For global/overseas income, 35% is allocated. JPMorgan Global Growth & Income has 20%. It aims to outperform the MSCI All Country World index over the long term. It’s “style neutral”, meaning that it doesn’t favour value or growth, for example. It holds 50 “best idea” stocks, and looks to trim its winners and recycle the money into underperformers it still has conviction in.  

Henderson International Income has a 10% weighting. This trust gives the portfolio a different source of income. Its investment approach involves favouring defensive and value stocks, with the US weighting of 34% notably less than global indices holding around 70%.

Of the “Magnificent Seven” technology stocks, it holds only Microsoft (NASDAQ:MSFT) in its top 10 holdings. Another difference compared to other global income strategies is that it doesn’t invest in the UK. Ben Lofthouse has managed HINT since launch in 2011.

Utilico Emerging Markets has been handed 5%. Its approach is very different from peers as it focuses on investing predominantly in infrastructure and utility companies across the emerging markets. Despite recent challenges, the same structural growth drivers remain across emerging economies, including growing middle-class populations driving consumption.

TwentyFour Income is a 10% weighting. When this bond trust was chosen two years ago, a key attraction was that most of the bonds it held were floating rate, meaning they benefited from interest-rate rises. The team expects interest rates to remain higher for longer. If this plays out, its strategy looks well placed to benefit.

It said: “In the UK, the extra borrowing unveiled in the new Labour government’s first Budget in October is expected to bring a short-term boost in growth that will limit the Bank of England’s capacity to cut rates. In the US, the tax cuts and tariffs proposed by Donald Trump on his way to winning the presidential election in November are widely considered to be inflationary, which has weighed on market expectations for US rate cuts.

“This shift in expectations for the next 12 months or so is naturally a positive for floating-rate assets such as Asset Backed Securities (ABS). Given ABS coupons generally move up and down in line with base rates, higher-for-longer rates would mean higher-for-longer income.”

And finally, Greencoat UK Wind gets a 10% weighting. It aims to provide investors with a yearly dividend that increases in line with RPI inflation. This has been successfully achieved each year since the trust launched in 2013.

Nine trusts for 2025’s income challenge