While looking at discounts and premiums can provide an insight for growth investors whether an investment trust is attractively valued or not, it isn’t particularly useful for telling income-focused investors how secure a trust’s dividend is.
Income has become increasingly difficult to find as interest rates – cut to record lows in the wake of the global financial crisis – remain at ultra-low levels more than a decade later.
Although some central banks such as the US Federal Reserve have moved towards a rate-hiking regime, many developed economies continue to maintain low rates.
As such, income investors have found it increasingly difficult to find value in the low rate environment where demand for bonds and so-called ‘bond proxy’ equities have pushed those assets out to expensive prices.
With the ability to retain some income for more challenging years, unlike their open-ended counterparts, investment trusts have become a more attractive proposition.
This has become easier in recent years as investment trusts have been able to retain some capital profits from disposals.
In light of this, FE Trustnet has taken a closer look at dividend coverage within the Association of Investment Companies (AIC) universe to find out which investment trusts can most comfortably make their payouts.
Some investment trusts have been able to build very big income reserves of capital, as the below table shows.
Top 10 trusts with the greatest revenue reserves
Source: AIC
Indeed, the trust with the largest revenue reserves is Tetragon Financial Group, which has more than £1bn to draw upon.
The $2.5bn alternative multi-asset strategy has a dividend yield of 5.7 per cent and its dividend cover stretches to 16.2 years.
For investors looking for traditional equity income trusts, dividend coverage will be of particular interest – although they have much smaller reserves that the very high figure posted by Tetragon.
Below FE Trustnet takes a closer look at trusts from the IT UK Equity Income and IT Global Equity Income sectors to find out which are best placed to weather any lean years.
In the IT UK Equity Income sector, the trust with the best dividend cover is Shires Income – the £77.2m trust managed by Aberdeen Standard Investments’ Iain Pyle – with revenue reserves of £6.8m covering the next 1.74 years. The trust has a yield of 4.8 per cent, the fifth-highest in the sector.
Shires Income targets a high payout for investors with the potential for some growth in income and capital by investing in a mix of UK equities, preference shares, convertible bonds and other fixed income securities. Indeed, its fixed income holdings represent 25.4 per cent of the portfolio.
It is currently trading at a discount to net asset value (NAV) of 7 per cent, is 20 per cent geared and has ongoing charges of 0.99 per cent.
Dividend coverage in IT UK Equity Income sector
Source: AIC
Another trust at the top of the table for dividend coverage is BlackRock Income and Growth, managed by Adam Avigdori and David Goldman. The £52m trust has revenue reserves of £2.6m and dividend cover of 1.64 years.
Highlighting recent changes to the macroeconomic backdrop and geopolitical developments the managers noted that “it is crucial to be selective and to focus on those companies that are strong operators, that provide a differentiated service or product and that boast a strong balance sheet”.
The trust has one of the lowest yields in the sector, however, at 3.22 per cent. It is currently trading at a discount of 4.6 per cent to NAV, has gearing of 2 per cent, and ongoing charges of 1.08 per cent.
Third on our list is FE Alpha Manager Mark Barnett’s Edinburgh Investment Trust, with revenue reserves of £80.8m and dividend coverage of 1.55 years.
The £1.4bn trust aims to deliver an increase in NAV per share in excess of the growth of the FTSE All Share and grow dividends faster than the rate of UK inflation.
It has a yield of 3.81 per cent, slightly higher than the peer group’s average of 3.63 per cent.
Barnett has overseen the trust since January 2014 – after replacing veteran equity income manager Neill Woodford – and has recently been joined by James Goldstone.
The trust is trading at a 9.9 per cent discount to NAV, is 11 per cent geared and has ongoing charges of 0.57 per cent.
Moving on to the IT Global Equity Income sector, which is significantly smaller than the UK-focused peer group, the trust with the best level of coverage is Blue Planet Investment Trust.
The £21m trust has revenue reserves of £3.6m, giving it dividend cover of 1.52 years. Its current yield is 11.29 per cent, the highest in the sector.
The trust, which targets a combination of capital growth and income, invests across a range of assets including equities, exchange-traded funds (ETFs) and bonds.
Blue Planet is trading at a discount of 16.7 per cent to NAV, is 32 per cent geared and has an ongoing charge of 3.62 per cent.
Dividend coverage in IT Global Equity Income sector
Source: AIC
Murray International – managed by Aberdeen Standard Investments’ Bruce Stout – also features at the top of the list with revenue reserves of £75.3m and dividend cover of 1.12 years. It has a yield of 4.5 per cent.
The trust, which targets a greater return than a composite benchmark consisting of 40 per cent FTSE World UK and 60 per cent FTSE World ex UK, also aims to increase the trust’s revenues to maintain an above average dividend yield.
It is currently trading at a discount to NAV of 3 per cent, is 12 per cent geared and has an ongoing charge of 0.64 per cent.