The Association of Investment Companies’ H1 2023 review, covered by Portfolio Adviser last week, majored on ‘challenging’ fundraising conditions for the closed-end funds sector so far this year. But behind the headline-grabbing 76% year-on-year fall in new money raised, there are nonetheless some interesting success stories.
UK Equity Income investment trusts raised £147m of new money in the first half of the year, in all cases through secondary or ‘tap’ issuance. This is a stark contrast to £582m of net retail outflows so far this year from open-ended UK Equity Income funds, which featured consistently among the biggest net redemptions in the Investment Association’s monthly sales figures – and with June’s numbers not yet released, the full picture for the half year could be even worse.
It is no secret that UK equities have been hugely out of favour in recent years (contrast the IA sector outflows with £670m of net inflows to open-ended Global Equity Income funds from January to May), as explored in June’s PA cover story. So what makes these investment trusts stand out?
Closed-end funds have long been popular with income investors. This is partly because their structure – although obliging them to pay out 85% of net income each year in the form of dividends – allows them to keep some of their income in reserve, which can be paid out in future years if income receipts drop. This ‘smoothing’ effect means income-focused trusts can offer consistent dividend growth – or at worst, avoid dividend cuts in lean years. It is no accident that all but one of the funds in the table below feature on the AIC’s list of ‘dividend heroes’ (trusts with a least a 20-year record of year-on-year dividend growth) or ‘next generation dividend heroes’ (those that have raised their dividend for more than 10 but less than 20 consecutive years).
The exception here is JPMorgan Global Growth & Income, which has a policy of paying a dividend equal to 4% of its year-end NAV, so while the payout ratio is consistent, the actual dividend will vary from year to year depending on whether the NAV has gone up or down. Some of these trusts also offer eye-catching yields, with City of London on 5.3%, Merchants Trust on 5.2%, and Henderson Far East Income yielding a whopping 10%.
Investment trust investors – particularly the self-directed ones – tend to be a loyal bunch, and may invest regularly through platforms. According to Boring Money, City of London appears among the top-selling investment trusts for June 2023 on all of the ‘big four’ retail investor platforms – AJ Bell, Fidelity, Hargreaves Lansdown and Interactive Investor – with JPMorgan Global Growth & Income, Merchants Trust and Henderson Far East Income also appearing in the bestseller lists.
Such consistent demand means the shares seldom trade at an appreciable discount to NAV (by contrast, the average investment trust discount was 14.0% at the end of June, up from 12.3% at the start of the year, according to the AIC). Indeed, it is the fact that the shares have been trading at a premium to NAV that has allowed these six trusts to raise an aggregate £238m – or 25% of all new money raised in the investment company sector – so far in 2023.
Equity income investment trusts may not be at the top of advisers’ shopping lists – none of the income sectors featured in the top four by sales on adviser platforms in 2022 (Flexible Investment was first, followed by UK Smaller Companies, Global, and Renewable Energy Infrastructure).
However, with discounts to NAV often proving the biggest sticking point for professional investors deciding between comparable open- and closed-ended funds, these six names arguably showcase the benefits of the closed-end structure while avoiding some of the downsides.