The search for income continues to be a major theme among investors and equity income funds have become the mainstay of many portfolios.
Within the investment trust space, the IT UK Equity Income sector is one of the most closely watched peer groups while the IT Global Equity Income is seen as a good hunting ground to diversify UK-heavy allocations.
In this series, we have been reviewing the long-term performance of investment trusts. To do this, we looked at quartile rankings in 54 rolling 10-year periods (calculated on a quarterly basis) going back to 1995; the first period spans 1 April 1995 to 31 March 2005 then we move forward in three-month increments until we reach the period covering 1 July 2008 to 30 June 2018.
We now turn our attention to the IT UK Equity Income and IT Global Equity Income sectors, highlighting investment trusts from each that have spent the most time of their track records towards the upper end of the peer group.
Rolling 10-year total return of trust vs sector & index
Source: FE Analytics
As suggested by the above chart, Perpetual Income and Growth Investment Trust sits at the top of the IT UK Equity Income sector in this research. The trust has 50 rolling 10-year periods for us to examine and it has been in the top quartile for 47 of them, or 94 per cent; two of the remaining periods were in the second quartile and the final one was in the third.
The £863.2m trust has been headed up by FE Alpha Manager Mark Barnett since August 1999, with Martin Walker joining as deputy in July 2016. The approach behind the portfolio is high-conviction in nature and unconstrained by the benchmark, with the managers able to buy small and unquoted companies – although there is a focus on larger businesses.
In this trust’s annual report to 31 March 2018, Barnett said: “The UK stock market is not expensively valued on an historical basis as demonstrated by a price earnings multiple of circa 14x for the current year. This represents a discount to other major stock markets and is clearly indicative of the Brexit discount applied indiscriminately to UK quoted companies. The most significant area of opportunity is within the sectors that offer direct exposure to the UK economy, notably financials, consumer cyclicals and real estate.”
Perpetual Income and Growth Investment Trust has ongoing charges of 0.70 per cent, is trading on a 12.7 per cent discount to net asset value (NAV) and yields 3.9 per cent, according to Association of Investment Companies (AIC) figures. It is 12 per cent geared.
In second place in this research is Lowland Investment Company, which is managed by James Henderson and Laura Foll. It was in the peer group’s top quartile for 83 per cent of the 54 rolling decade-long periods reviewed (or 45 periods); the remaining 17 per cent of the time it was in the second quartile.
The managers are bottom-up stock pickers who tend to balance the portfolio between small- and mid-caps that offer strong long-term growth and higher-yielding large-caps that contribute lower but more consistent returns.
Analysts at FundCalibre said: “James and Laura have built up an impressive track record over a long period, offering proof that their investment process is repeatable. This trust does tend to be more volatile than the UK stock market, as measured by the FTSE 100, but this additional volatility is adequately compensated for by the performance. This is a suitable trust for any investor seeking a reasonable level of income now, as well as long-term growth in income and capital.”
Lowland Investment Company has ongoing charges of 0.57 per cent, but this rises to 0.67 per cent when the most recent performance fee is included. It is trading on a 7.2 per cent discount, yields 3.6 per cent and is 13 per cent geared.
Rolling 10-year total return of trusts vs sector and index
Source: FE Analytics
Coming in third place is Alastair Mundy’s £858.6m Temple Bar Investment Trust, which achieved top-quartile returns in 76 per cent of the rolling periods we looked at. It was in the IT UK Equity Income sector’s second quartile for the remaining 17 per cent of 10-year periods.
Mundy runs a large-cap portfolio for this trust, using a distinctive value/contrarian approach. He aims to buy stocks that have fallen at least 50 per cent from their five-year peak and is willing to let cash build up if there is a lack of compelling investment opportunities; at the moment, the trust is holding 7.4 per cent in cash.
Kepler Trust Intelligence analysts highlighted the manager’s long-term track record, saying: “Though there have been prolonged periods during his tenure when the trust’s returns have deviated significantly from the index, Alastair has a proven track record of long-term outperformance while the trust has an unbroken dividend growth record of more than 30 years.”
Temple Bar Investment Trust has ongoing charges of 0.49 per cent, trades on a 6.7 per cent discount to NAV and is yielding 3.4 per cent. It is 5 per cent geared.
Only one other trust from the sector has been in the first quartile for more than half of its track record: Finsbury Growth & Income Trust was top-quartile in 63 per cent of rolling 10-year time frames. Edinburgh Investment Trust and Chelverton UK Dividend Trust come next, both being top-quartile 46 per cent of the time.
Moving over to the IT Global Equity Income sector, we find that there is a clear winner in this peer group. Bruce Stout’s Murray International Trust has been in the top quartile for 96 per cent of the rolling 10-years examined in this research; aside from this, it spent one period in the second quartile and one period in the bottom quartile.
With assets under management of £1.5bn, Murray International is one of the largest trusts in the UK market on the back of its strong long-term returns. However, it has underperformed over shorter time frames owing to the very cautious positioning of the portfolio.
Stout has a pessimistic view of the vast quantitative easing programmes that were unleashed after the financial crisis, labelling them “economic vandalism”. In a recent update, the manager added that the “torrid” equity market volatility that marked the opening months of 2018, plus the following return to calm, should act as a warning to investors.
Rolling 10-year total return of trust vs sector and index
Source: FE Analytics
“An eerie uneasiness descended over global financial markets in the wake of the most recent convulse to complacency,” he said. “The subsequent market rebound, whilst welcome relief, should provide a wake-up call to those over extended into high risk assets at historically high valuations. We remain extremely cautious and maintain a widely diversified portfolio and investment strategy.”
Murray International has ongoing charges of 0.64 per cent, is trading on a 2.2 per cent discount and is yielding 4.5 per cent. It is 12 per cent geared.
No other members of the IT Global Equity Income sector came close to Murray International’s results in this research.
Invesco Perpetual Select Global Equity comes in second place after spending 29 per cent of the rolling 10-year periods in the top quartile while JP Morgan Global Growth & Income scored 24.4 per cent. Both of these trusts spent more than 70 per cent of their track record in the second quartile, however.