Alternatives-focused investment trusts have driven record dividend payouts across the closed-ended sector, as cuts from global companies put traditional equity vehicles on the backfoot.
Investment trust dividends rose 15.4% to £5.5bn in the year to March 2022, according to the latest Investment Trust Dividend Monitor from Link Group.
But, unlike previous years, the sharp uptick was driven by investment trusts that invest in alternative assets, which collectively saw payouts jump 25.1% to £3.65bn.
This was double that generated by ‘traditional’ vehicles investing in equity markets, which were flat for the year at £1.85bn.
Alternatives categories of investment trusts contributed two-thirds of the dividends paid by the sector overall in 2021, nine times larger than in 2010.
“Ten years ago, alternatives were a much smaller segment of the investment trust market, but they have rapidly expanded as new investment opportunities have opened up in response to investor demand,” Ian Stokes, managing director of corporate markets UK and Europe at Link Group, said.
“Given that many of the assets in alternatives trusts are relatively illiquid, they are very well suited to the closed-ended structure.”
VCTs and renewable energy infrastructure payouts surge
Within the alternatives space, Venture Capital Trusts (VCTs) saw the biggest increase during the period, with payouts climbing 65.7% to £556m, followed by renewable energy infrastructure funds, which divvied out £583m to shareholders.
Stokes said VCTs have surged in popularity as a reduction in the lifetime allowance on pension funds meant more savers are being hit with a punitive tax on their pension pots.
Demand for renewable energy infrastructure funds has also ramped up, as investors look for ways to tap into green trends and protect against soaring inflation.
In 2021, the Renewable Energy Infrastructure sector raised £3.4bn, over one fifth of the record £15.1bn of new money raised for UK closed-ended vehicles, according to the Association of Investment Companies.
It also led the way in terms of IPOs, with six worth £874m getting off the ground last year, as other high-profile equity-vehicles fell short of their fundraising targets.
Dividend growth from equity investment trusts will remain sluggish
Although equity-focused investment trusts had a difficult time last year, recent data points to an improving picture.
In Q1 2022, dividends of equity investment trusts reached £437m, 4% higher than the same period last year when they reached their nadir.
However, Link said over the next 12 months it expects dividend growth to remain sluggish, with payouts rising 4% to £1.92bn.
“This is slower than either expected dividend growth in the UK or globally but reflects the fact that investment trust payouts were shielded from wider dividend cuts in 2020/21 and trusts are now rebuilding reserves,” the report said.