The investment trust sector "rose to the challenge” of 2020, its trade body has claimed, as the sector’s dividend advantages and suitability for illiquid assets came to the fore amid the crisis.
Annabel Brodie-Smith, communications director at the Association of Investment Companies, said: “No one will forget 2020 in a hurry — the pandemic ruled last year and sadly, has been devastating for many people.
“It was a tough year but the investment company industry has risen to the challenge.
“The average investment company returned 8 per cent in 2020 to the end of November, the industry’s assets reached an all-time-high of £209bn in September and the average discount is narrow at 3 per cent.”
The hunt for income
Investment trusts were a stable source of income in 2020 at a time when hundreds of firms culled or slashed their payouts to shareholders.
According to Janus Henderson, global dividends fell between 17.5 per cent, to £900bn, and 20 per cent to £870bn last year. Alongside this, bond yields have fallen to historic lows.
But some 92 per cent of trusts investing in equities held or increased their dividends this year, with only 8 per cent reducing payments.
Ms Brodie-Smith said: “A unique advantage when it comes to delivering consistent income, the revenue reserve enables investment companies to hold back up to 15 per cent of the income they receive each year.
“Managers can save it for difficult times when these reserves can be used to boost or sustain dividends.”
At the same time, there were familiar challenges for the sector, with mainstream equity trusts either failing to launch or announcing plans to merge or wind up in the face of low asset bases.
Equally, problems for other investment structures have worked to trusts' advantage. Issues surrounding illiquid assets in open-ended funds were highlighted once more this year when property funds suspended amid the market uncertainty.
Ms Brodie-Smith said: “The suitability of investment companies for illiquid assets was again demonstrated this year.
“The share prices of property investment companies investing in office and retail were adversely affected but investors could continue to buy and sell them.”
The regulator has proposed enforcing a 90- or 180-day notice period for such portfolios in a bid to solve this “liquidity mismatch”.
But the AIC has argued that this is not long enough, instead pitching for a 12-month notice period to “protect consumers and the economy from the risks arising from open-ended property funds”.
Fighting for fair fees
Another positive for investment trusts last year was regarding the impact their independent boards had on fees.
Throughout 2020, 45 investment companies negotiated lower fees for shareholders, over a tenth of the entire investment company universe.
Ms Brodie-Smith said: “In what was a demanding year, investment companies’ independent boards of directors have worked hard to protect shareholders’ interests.
“We have also seen boards replacing the managers of investment companies and a merger of Perpetual Income & Growth with Murray Income, with another proposed between Invesco Income Growth and Invesco Perpetual Select UK Equity Trust.”