There are close to 40 investment trusts that are yielding more than the FTSE All Share after beating the index for total returns over the past year, Trustnet research shows. 
In a recent article, we looked at the Investment Association funds that currently have a higher yield than the UK stock market, with names such as Premier Income, Marlborough Multi Cap Income and Kames Diversified Monthly Income appearing on the list.
Here, Trustnet puts the investment trust universe under a similar spotlight. The biggest yield offered by an investment trust (outside of the IT Unclassified sector and the various VCT peer groups) comes from British & American: it was yielding 27.6 per cent at the end of January.
This is a small trust with total assets of just £9.1m, which invests in other trusts and individual stocks – with top holdings including Dunedin Income Growth, US biomedical stock Geron Corporation and Merchants Trust. But it also derives an income stream from a number of subsidiary companies of which it is the parent, such as British and American Films and BritAm Investments.
Chairman David Seligman explained in the trust’s latest interim results: “We generate a significant proportion of our income reserves from gains earned by our subsidiary companies and this allows us to pay dividends considerably in excess of overall portfolio yield.”
British & American paid out an interim dividend of 2.7p per share in December 2019, which was unchanged from the year before. However, Seligman added: “Unless the value of our largest investment, Geron Corporation, recovers further over the coming period towards the levels seen during 2018 we will not be able to maintain our dividend going forward at current levels.”
Source: FE Analytics
The table above shows all the investment trusts (aside from VCTs and the IT Unclassified sector) with a yield of more than 10 per cent, along with their total returns over the 12 months to the end of January.
The most obvious thing about the table is how many of these trusts have posted heavy losses over the past year, meaning their elevated yields may be down to a fall in capital values rather than paying out a high level of income. In addition, many of the portfolios are invested in more specialist areas of the market, such as aircraft leasing.
With this in mind, we re-ran the numbers to look for investment trusts with a higher yield than the FTSE All Share’s 4.24 per cent and a 12-month total return that was higher than the index’s 10.67 per cent gain. This left 37 trusts, which can be seen in the table below.
Source: FE Analytics
The list has several trusts that invest in debt, which clearly has the potential to generate high levels of income for investors, with Blackstone/GSO Loan Financing sitting at the very top. However, analysts at Winterflood Investment Trusts warn that this space can be difficult to evaluate.
“There is a considerable spread of yields and ratings, based on current share prices, with the debt sector. More than half of the sub-sector offers a historical yield in excess of 6 per cent. However, we continue to think it is often difficult to assess the risks that are being taken in order to achieve targeted returns, particularly where underlying investments are not publicly quoted,” Winterflood said.
“Approximately one-sixth of the sector has a historical yield in excess of 10 per cent. At the beginning of last year, we gave the view that this was unsustainable and that these funds with either cut their dividends or see their shares re-rated, with yields being compressed. In a number of cases, such as Fair Oaks Income and Blackstone/GSO Loan Financing, the funds have been re-rated and yields compressed, although they remain relatively high.”
While the above list has a lot of debt, property and infrastructure trusts on it, there are a number of equity income offerings as well.
The UK equity income strategy with the highest yield at present and one-year outperformance of the FTSE All Share is Merchants Trust. Managed by Allianz Global Investors’ Simon Gergel, the fund has been highlighted as one of the Association of Investment Companies’ ‘dividend heroes’ after growing its income payout for 37 years in a row.
In total, 12 of the 25 trusts in the IT UK Equity Income sector have a higher yield than the FTSE All Share although only seven of them have a higher yield as well as a higher 12-month total return.
City of London is the largest of these seven trusts, with a portfolio of £1.7bn. It is headed up by Janus Henderson’s Job Curtis and has grown its dividend in each of the past 52 years – a feat only matched by Bankers and Alliance Trust, according to the AIC.