With interest rates low, and likely to remain so, investment trusts have proved a popular source of income in investors’ portfolios.
This has left many trusts sitting on chunky premiums to net asset value and investors have to be selective. Some undoubtedly justify the premium paid, while others do not look as steady.
Almost all mainstream trusts paying a high income now sit on a premium to net asset value. Infrastructure funds have the highest premiums, then commercial property, then international equity income and then UK equity income. The question is therefore about shades of grey. Some premiums are far higher than others and it does not necessarily follow that the trusts on the highest premiums are the top performers or pay the highest income.
Among the international equity income trusts, Murray International currently stands out with a 9.5 per cent premium, but has delivered 154.8 per cent over five years, roughly 30 per cent ahead of the wider AIC Global Growth & Income sector.
The majority of the other internationally focused equity income trusts – Aberdeen Asian Income, JP Morgan North American Income, Henderson International Income – are trading on premiums of between 2 per cent and 4 per cent. Some have delivered exceptional performance – the Schroder Oriental income is up 338.9 per cent in five years, for example – but investors may reason that the higher volatility merits a lower rating.
Among UK equity income trusts, premiums look more reasonable and in some cases, performance has been exceptional. The Henderson High Income fund, for example, is up 157.4 per cent in five years and sits on a premium of ‘just’ 5.5 per cent. The Small Companies Dividend trust, run by Chelverton Asset Management, is up 257 per cent in the past five years and is one of the few income funds trading on a discount (10.3 per cent). Temple Bar also stands out, up 182.7 per cent in five years and trading at a relatively small 1.6 per cent premium.
Among infrastructure trusts, all are sitting on premiums, but the level of premium does not necessarily reflect performance. For example, the HICL Infrastructure trust is on a 13.6 per cent premium and has delivered 68.8 per cent in the five years to 29 October. The 3i Infrastructure trust is on an 11 per cent premium, but is up 98.3 per cent in the same period. The income on the HICL trust is higher – 5.27 per cent versus 4.79 per cent – but not enough to make the difference in overall performance.
The income trusts that have been the worst performers have been all those with a commodity focus. The BlackRock World Mining trust has been a notable laggard, down 22.5 per cent, but paying an income of 4.36 per cent. Investors may reason that they are the bargain of the income investment trust sector, but – for the time being at least – it would take a brave contrarian to reinvest.
Cherry Reynard is a freelance journalist
