Trusts have notable advantages when it comes to consistent income growth and have historically been good dividend payers. This makes them good investments in times of rising inflation and low savings rates, according to Hargreaves Lansdown.
Below, senior investment analyst Joseph Hill explores the reasons why investment trusts are a valuable solution in difficult periods and highlights three to consider.
“Trusts have greater flexibility to ease some of the shocks of the stock market and to maintain a rising and sustainable income through periods of volatility,” he said.
“They can hold back up to 15% of their income when times are good and dip into the reserve to make up any shortfall when the day is rainy. Also, they aren’t limited to paying out a dividend just from the income they receive from their underlying investments, but can also use the profits they make from buying and selling investments.”
With gearing, or the ability to borrow money, they can invest in more dividend-paying shares than they could otherwise, which has the potential to boost both income and growth.
Over the long term, this can be an effective way to grow capital, but there’s another side to the coin, warned Hill.
Frequently dipping into reserves to increase the income pay-out is unlikely to be sustainable in the long term and using up investment profits could erode a trust's potential for growth in the future.
Gearing is also a double-edged sword, as the extra return may not cover the cost of leverage and could increase losses when share prices fall, explained the analyst.
“But any income paid out can help to mitigate rises in the cost of living, and if it isn’t required now, investors always have the option of using the proceeds to buy extra shares in the trust.”
City of London
The first pick is the City of London investment trust, which invests up to 20% of its assets overseas.
Trust performance vs sector over 10yrs
Source: FE Analytics
Janus Henderson manager Job Curtis invests in good quality, well-managed companies that can be bought at reasonable share prices. He also wants them to be sufficiently robust to weather economic storms and still pay dividends.
“In the trust’s last financial year to the end of June 2021, it used revenue reserves built up in previous years to contribute to the dividend, which rose 0.5%. This helped to extend the trust’s record as the investment company that has consistently increased its dividend for the longest period – now standing at 56 years,” noted Hill.
City of London trades on a 1.99% premium to net asset value (NAV) and yields 4.71%.
Merchants
The Merchants Trust is another good choice, according to Hill, as it increased its dividend by 0.4% in the year to the end of January 2022 – the 40th consecutive year and the 12th longest record of any investment trust.
Trust performance vs sector and index over 10yrs
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Source: FE Analytics
Manager Simon Gergel, chief investment officer for UK equities at Allianz Global Investors, invests mainly in larger companies listed in the UK with the aim of providing a high level of income and a growing income and capital return over the long term.
“Gergel’s investment process focuses on three key areas,” explained Hill. “He aims to understand the fundamentals of a company, including its competitive position and financial strength. He assesses valuations compared with both the company’s own history and its peers, and finally considers industrial and consumer themes along with the economic outlook.”
Merchants is trading on a 0.40% premium to NAV and yields 4.90%.
Murray International
Lastly, the Murray International trust invests more in higher risk emerging markets compared with some peers, with Asia Pacific ex Japan representing the trust’s biggest regional exposure.
Trust performance vs sector and index over 10yrs-3.png)
Source: FE Analytics
Abrdn’s Bruce Stout aims to grow income and capital over the long term by investing in company shares from around the globe, with an emphasis on resilient business models, a unique set of advantages over the competition and experienced management teams, while also holding some bonds.
“The trust increased its dividend by 0.9% in the year to the end of December 2021, again using reserves accumulated during the good times to boost the income paid to investors. This is the 17th consecutive year that the trust has increased the dividends it paid to investors,” Hill said.
Murray International is currently trading on a 2% discount to NAV and yields 4.34%.