For many savers, this has meant five years searching for any investment that could pay an income in excess of inflation.
That available pool became even smaller with the advent of policy measures such as quantitative easing, which drove down yields not just on the bonds that central banks were buying, but on all assets where coupons are based on a ‘spread’ above the so-called ‘risk-free’ return on a gilt or a Treasury stock.
So what do investment trusts have to offer against such a backdrop?
While on the face of it investment trusts may seem very similar to the much broader range of open ended investment companies, there are actually several factors specific to the closed-ended sector that could favour investors searching for an income.
For equity income investors, dividend growth can be just as important as dividend yield.
Whether a client reinvests their dividends for future growth, or relies on a stream of dividend cheques to help pay the bills, a dividend that rises each year will compound over time and help offset the rising cost of living.
The Association of Investment Companies publishes a list of ‘dividend heroes’ each year. These are the investment trusts that have increased the dividends they pay to their shareholders over multiple decades.
JPMorgan Claverhouse joined a list of those with 40 or more consecutive years of dividend increases (correct to March 2013) for the first time in 2013, and to mark this occasion we ran some figures to calculate the effect on the returns from long-term dividend reinvestment.
The results were startling: an investment of £1,000 made in JPMorgan Claverhouse in 1972 would have grown to £22,999 over 40 years if the investor had taken all their dividends when paid. But if the investor had reinvested their dividends throughout, that £1000 would have grown to £140,210 after 40 years (figures supplied by Winterflood Securities).
So how have investment trusts achieved this impressive long-term record? As any investor in BP or many of the UK banks over the past few years will know, companies can and do cut their dividends.
When these dividend cuts happen, their full effect is felt by investors in open-ended funds, as these funds are required to pay out all the net income they earn in a given year.
Investment trusts, by contrast, are only required to pay out 85 per cent per cent of income received, and they can hold the rest in reserve. They can then dip into this reserve if needed in future years when income at the portfolio level is lower, thus maintaining their own record of year-on-year dividend growth.
One of the features of investment trusts is their closed-ended structure. Instead of issuing and cancelling units or shares in an open-ended fund in response to changing investor demand, they have a fixed pool of capital, which means they can take a longer-term approach to portfolio management.