UK investment trusts such as Merchants Trust, Chelverton Small Companies Dividend and Invesco Perpetual Select UK Equity have generated some of the highest income payouts over the past five years, research by FE Trustnet shows.
When reviewing the open-ended space in a recent article, we found that IA UK Equity Income funds such as Insight Equity Income Booster, MI Chelverton UK Equity Income and Majedie UK Income have paid out the most income to their investors over the five years to the end of 2017.
We now turn our attention to the Association of Investment Companies’ (AIC) UK Equity Income and UK All Companies sectors to reveal which UK investment trusts have posted the highest yields over the same period.
Source: FE Analytics
Starting with the IT UK Equity Income sector, the chart above shows the trust that has paid out the most over the five years in question. British & American IT’s income payments on an initial investment of £10,000 amounted to £5,333.33 – compared with an average of £2,609.05 for its peer group.
British & American invests predominantly in investment trusts and other leading UK quoted companies to achieve a balance of income and growth, but FE Analytics shows it is the sector’s bottom quartile for total returns over one, three and five years.
In an article last year, Informed Choice managing director Martin Bamford said investors should be wary of the trust after pointing to its high premium to net asset value (NAV) and yield. According to the AIC, its premium currently stands at 46.8 per cent while it is yielding 14 per cent; both are the highest in the IT UK Equity Income sector by a wide margin.
Bamford said: “When I see premiums and yields at these elevated levels, it gives me cause for concern as an investor and a higher level of due diligence should be applied to understand the reasons before investing.”
He also noted that more than one-fifth of the trust’s assets are in a single holding – Geron Corporation, which develops therapeutic cancer treatments – making it a high-risk investment.”
Chelverton Small Companies Dividend, which is in second place after paying out £4,247.57 on an initial £10,000 investment, has a much stronger track record than the previous trust. It has made the peer group’s highest total return over three and five years, rising by 150.64 per cent over the latter period compared with a 43.75 per cent gain from its average peer.
Managers David Taylor and David Horner, who have a strong track record on the open-ended MI Chelverton UK Equity Income fund – believe that the small-cap market is significantly under-researched but present significant opportunities for bottom-up stockpicking.
In a recent update, the managers noted that increased volatility was impacting small-caps but pointed out that dividend growth is expected to be strong in 2018. They added: “We continue to seek to retain a balanced sector approach within our portfolio construction process through what we believe will be a period of heightened share price volatility in the short term. This should also, however, bring a number of new opportunities into our investible universe as prices fall and dividend yields rise.”
Source: FE Analytics
The fund in third place – The Investment Company – is also run by small-cap specialists. Headed up by Miton’s Gervais Williams and FE Alpha Manager Martin Turner, the trust paid out £3,780 over five years on an investment of £10,000.
However, it must be noted that management of the trust will move from Miton to Fiske, a London-based stock broker with which the trust has historic associations.
Merchants Trust, in fourth place with a payout of £3,111.98, is a well-known member of the space. It is managed by Simon Gergel and has grown its dividend in each of the past 33 years.
In a recent update, the manager said: “We are still finding the most promising opportunities in recovery situations, where there may be an element of short-term uncertainty but greater long-term value. We also see interesting opportunities among the more domestically exposed companies, many of which are trading on unusually depressed valuations.”
When it comes to the IT UK All Companies sector, the average trust turned an initial investment of £10,000 into £1,686.89 of income payouts over the five years to the end of 2017. As would be expected, this is below the £2,609.05 average seen in the IT UK Equity Income sector.
At the top of the table here is Invesco Perpetual Select UK Equity, which is managed by James Goldstone. It has paid out total dividends of £2,6800 on an initial £10,000; in terms of total return, it is third quartile over three years and second quartile over five years.
The trust is part of the multi asset class Invesco Perpetual Select Trust, which has four parts: UK Equity, Global Equity Income, Balanced Risk and Managed Liquidity. Invesco Perpetual Select favours companies with strong balance sheets, high barriers to entry and the ability to expand market share as the manager believes these traits help underpin long-term capital and income growth.
Source: FE Analytics
JP Morgan Mid Cap IT, which appears in second place, is managed by Georgina Brittain and Katen Patel. It has made the sector’s highest total return over the past five years with a 133.11 per cent, compared with 50.21 per cent from its average peer. It’s also in the top quartile of the sector over one and three years.
Goldstone’s Keystone IT is in third place although the manager only took over from Invesco Perpetual head of UK equities Mark Barnett in April 2017. Goldstone uses a three-pronged investment approach that focuses on valuations, company fundamentals and the macroeconomic environment, which was the same approach used by his predecessor.