Investment Trusts  

Capital growth 'icing on the cake'

It is difficult to provide long-term performance figures for this blend of portfolio because many multi-asset income funds have track records of no more than five years – but what we can focus on is the benefits that investments trusts have in the income space.

Ten years of income

It is now 10 years since the great financial crisis, when the banking system almost broke the capitalist system that we all know, but investment trusts have not only survived this crisis but also many others over the past 50 years.

My example focuses on what would be considered as a higher-risk investor, investing £100,000 on March 27 2008 into a portfolio to produce income.

I must emphasise this is a client who has other capital to access but only requires income from this investment.

I have chosen a portfolio of four of the largest investment trusts. Three of these are considered dividend heroes, having increased their dividends for at least 20 consecutive years: these are City of London Investment Trust (with 52 years of dividend increases), Bankers Investment Trust (51 years) and Scottish American Investment Company (38 years).

The other, Murray International Trust, now has a progressive dividend policy and a track record of 13 years of successive increases.

An investment of £25,000 into each of these funds would have provided a starting yield of 3.64 per cent in 2008, when the Bank of England base rate was 5 per cent and you could receive 7 per cent from some of the most competitive building societies.

I would guess that a year later the investor would have been kicking himself, to see the value of his investment fall to a low of £71,600, although the yield based on that valuation had jumped to 5.44 per cent.

In hindsight, that was a better time to invest.

The key thing to remember is that in adverse conditions everything falls due to market sentiment. Just evaluate your holdings and if you are happy, be patient and wait for confidence to return.

Looking back

Looking back over the history of many crashes, the recovery from this crisis was relatively short and providing that income was still being paid the investor could sit back and spend it.

In fact, in 2009, the collective dividend income from the portfolio of four investment trusts increased by 7.1 per cent to £3,906.27 and in 2010 by a further 7 per cent to £4,180.43, at a time when the client saw his portfolio return back to its original value and the BoE base rate was cut to 0.5 per cent.

To date we have seen markets continue to climb with a few wobbles along the way; most recently between May 2015 and February 2016, when the portfolio dropped by 19 per cent.

Looking back over the past 10 years, the original objective of the client was to receive a growing income.