Are you a fan of investment trusts, especially in this new post retail distribution review world where commission is persona non grata? Well you certainly should be, or at the very least you should be getting to grips with them as part of your continuing professional development.
I was drawn to two pieces of intriguing research in recent weeks which demonstrated why investment trusts are now more than a match for unit trusts or open-ended investment companies in the land of milk and honey that is post-RDR.
The first was from Capita Registrars – not my biggest friends in light of their culpability in the well-documented Arch Cru affair but let us push that to one side for another day. Capita produces a splendid quarterly review of the dividends paid by UK-listed companies. It is a report that has taken on a greater significance in light of the eager, and somewhat frantic, hunt for income among both financial advisers and private investors as quantitative easing and the Funding for Lending scheme help suppress savings rates.
The latest report, covering the first three months of the year, did not make for happy reading. It revealed that quarter one dividends totalled £14.1bn, a fall of nearly 25 per cent on the equivalent period last year. Worryingly, for income seekers, it predicted that dividend growth would be “hard to achieve” this year. It warned: “After the rapid dividend growth of recent years, it is inevitable that payouts will slow to come more into line with the growth in underlying profitability. Companies are cash generative, and still reluctant to invest aggressively, but dividends must eventually fall into line with profit growth.”
The second was from analyst Oriel Securities. It identified 14 investment trusts – all equity invested – which have a historic yield of at least 4 per cent. These it said could appeal to investors “hungry for yield” who were happy to take on board some equity risk.
The list was eclectic, comprising some surprises such as BlackRock Mining (mining and dividends do not normally go hand in hand), some unknowns such as Middlefield Canadian Income (investing in Canadian equities) and some long-standing investment trusts such as City of London (founded in 1891), Merchants (1889) and Scottish American (1873).
Interesting as the premium income these 14 trusts are delivering is, what is far more fascinating is the insight this research gives into the income-friendly world of investment trusts. These collectives have far more control than unit trusts over how they distribute their income to investors. Unlike unit trusts, they have the power to squirrel some of the income they receive from their company holdings into reserves rather than literally pay it all out as it comes in. This ability to reserve in the good times, and top up income payments in the more challenging times, means many equity income investment trusts have managed to build records going back more than 40 years of unbroken dividend growth to shareholders.
So, of Oriel’s 14 high yielders, City of London has 46 years of dividend growth. Other trusts among the 14 with long-standing annual dividend growth histories include Scottish American (33), Schroder Income and Growth (18) and Standard Life Equity Income (12).
This is merely the hors d’oeuvre of the equity income investment trust story. According to the consumer-focused Association of Investment Companies, 29 trusts have increased their dividends consecutively for the past 10 years. Most are either globally invested – the likes of Alliance, Bankers, Foreign & Colonial, Witan and Scottish Investment Trust. Or they are delivering income from the UK stock market – the likes of JP Morgan Claverhouse, Murray Income and Temple Bar.
As Annabel Brodie-Smith, the adroit communications director, of AIC, said: “It is encouraging to see that investment company investors are being rewarded for taking on the additional risk that comes with equity investment, with so many of Britain’s oldest, largest and well-known investment companies announcing dividend increases year after year.”
This process of so called ‘dividend smoothing’ is one reason among many why both private and professional investors, and forward-thinking financial planners, should start taking a closer look at investment trusts.
Other excuses to look at trusts include lower management charges, independent board directors that can, and do, get rid of underperforming fund managers, annual general meetings (where managers can be challenged) and detailed financial reports. And, of course, the ability of most trusts to deliver satisfactory long-term returns from investing astutely in stock markets.
My view is that in a post-RDR world where the focus is increasingly on transparency and value for money, you cannot afford to ignore investment trusts. You know I am right
In a post-RDR world where the focus is increasingly on transparency and value for money, you cannot afford to ignore investment trustsJeff Prestridge is personal finance editor of the Mail on Sunday.
You said
Belfast IFA on Tony Hazell’s column on annuities
Like any other aspect of financial services, annuities are commercial, not a charity. If a provider wants to make 20 per cent then that should not be an issue. Try looking at the difference in income for any annuity when commission (or adviser charge) of 3 per cent is applied to a fund of £50,000 for a 65 year old compared to zero. It is totally minimal. Everyone has to make money to stay in business and while they make 20 per cent on annuities. Try seeing what their profit is on pensions, Isas and unit trusts.
