InvestmentsMar 12 2012

Unparalleled income options

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ByNyree Stewart

In an environment where interest rates are expected to stay lower for longer and a 10 year UK gilt is yielding roughly 2 per cent, it is not surprising income is a key focus for many investors. Amid this ongoing dash for income, investment trusts may present a possible alternative.

Over a five year period, companies in the AIC Global Growth & Income sector produced an average return of 16.83 per cent, with the £1.1bn Murray International Investment Trust producing a return of 80.33 per cent, according to Morningstar.

This was the best performance of all income-focused investment trusts for the timeframe, with the £564.2m Temple Bar investment trust, run by Alastair Mundy in the UK Growth & Income sector, coming in second with a return of 31.08 per cent.

This compares favourably with the returns from the IMA income sectors, the best of which, the newly established IMA Global Equity Income, produced a sector average of 16.35 per cent over five years to February 22 according to FE Analytics.

However, the best-performing fund in this sector, the £1.7bn Veritas Global Equity Income fund, returned just 48.4 per cent for the five years to February 10, almost half the return of the best performing income investment trust.

James de Sausmarez, head of investment trusts at Henderson Global Investors, points out that one of the attractions of using investment trusts for income investing is the fact they can smooth dividends much more efficiently, saving aside cash in reserves to boost dividends in lean years. As a result, some investment trusts have delivered very consistent payouts.

“You can see lots of evidence of that. The City of London investment trust has increased its dividends every year for the past 45 years, right back to the devaluation of sterling in the late 1960s, the three-day week in 1974, the ‘winter of discontent’ in 1979, the Falklands war in the early 1980s, the stockmarket crash of 1987 and so on,” he says.

“Through all those periods City of London consistently increased its dividend, and I think the investment trust structure does give you an advantage because you are able to have this revenue reserve to at least maintain but also increase your dividends on a regular basis.”

This record of continued dividend payments was highlighted by the AIC in March 2011. It published research showing 16 companies across all sectors had increased their dividends continuously for more than 20 years, including 28 per cent of the UK Growth & Income sector, with 67 per cent of the peer group increasing their dividends for the past decade.