Kepler identifies annuity-like trust picks

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Kepler identifies annuity-like trust picks

The investment trust research arm of boutique Kepler Partners has identified five trusts that could effectively replace an annuity when combined into a single portfolio.

The autumn edition of Kepler’s quarterly Investment Trust Intelligence report identified the £432m BlackRock Income Strategies, £141m Henderson Diversified Income, £314m Starwood European Real Estate Finance, £483m Greencoat UK Wind and £333m Empiric Student Property trusts for their income prospects.

Kepler founding partner William Heathcoat Amory said the trusts, which span themes including specialist lending and property, could suit annuity-style investors who seek an income but also want capital preservation.

He said: “Our aim has been to highlight a group of trusts that can deliver a high income for a couple who have retired, at an age between 57 and 75 years of age, ideally rising with inflation.

“The result of our research is a group of trusts that, for a £100,000 investment, should pay a rising income of £5,700 per year, with a decent chance of at least nominal preservation of capital.”

The BlackRock Income Strategies trust, formerly known as British Assets, has been chosen because of its focus on uncorrelated, income-producing assets, and the 5.2 per cent yield that manager Adam Ryan is mandated to grow with inflation, backed up by revenue reserves.

The vehicle has undergone dramatic changes – including a significant reduction in its equity exposure – since Mr Ryan took it over and introduced a new strategy in February.

Meanwhile, Kepler chose the Henderson trust, run by Jenna Barnard and John Pattullo, for investing across the credit spectrum. It said this “gives it the flexibility we think is required to avoid the risks associated with a focus on one specific area of the credit market”, and added that the Starwood trust’s dividend should be “relatively resilient”.

The Greencoat trust has been included in the list because of the “highly stable, government-backed cashflows” associated with renewables and infrastructure, while the Empiric trust and other student property investors have been earmarked for their high dividend yields and supportive fundamentals.

The research comes after brokerage and investment banking firm Stifel also sought to tap into investors’ desire for income last month by identifying 18 equity trusts with a dividend yield of more than 4 per cent.

Stifel analysts said: “For investors prepared to take equity [risk], these [18 trusts] may be attractive for income investors at a time of exceptionally low interest rates.

“In addition, the property, infrastructure, renewable energy and debt fund sectors continue to offer attractive yields.”

But the analysts raised concerns over the sustainability of some yields.

They said: “BlackRock World Mining tops the list of the highest yielders – at 8.8 per cent. However, there is risk of a future dividend cut, given the issues in the mining sector.

“There must also be a question mark over the sustainability of dividends at BlackRock Latin American, which has a large exposure to Brazil, and JPMorgan Russian [Securities], which has an historical yield of 4.1 per cent.”

Investment trustDividend yield (source: Stifel)
BlackRock World Mining8.8%
BlackRock Latin American6.8%
Henderson Far East Income6.4%
Merchants Trust5.5%
Murray International5.4%