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Thirst for income distorts investment trust prices, says Urquhart

The price of higher-yielding investment trusts has been distorted by investors' need for income, says Edinburgh Worldwide investment trust manager Mark Urquhart.

Thirst for income distorts investment trust prices, says Urquhart

Investors’ insatiable appetite for income is distorting the prices of higher-yielding investment trusts, according to Citywire A-rated Edinburgh Worldwide investment trust manager Mark Urquhart.

The average trust in the Association of Investment Companies (AIC) UK high income sector is trading on a premium to net asset value (NAV) of 0.3% compared with an average 12.1% discount in the UK growth sector.

Following a similar pattern, albeit less starkly, the AIC global high income sector is trading on an average 5.4% discount compared with 9.1% for global growth trusts.

The 'income' premium

‘I think it has certainly had an influence,’ Urquhart says. ‘You only have to look at our own sector, the investment trust sector. You look at the discounts in some trusts and the narrow discounts and near premiums of some of those with income in the title.

‘It’s obviously all tied into very low interest rates and low bond yields.’

Urquhart does not believe this trend is translating over to other companies, however. ‘Some of the great companies out there, with very strong share prices in the last three or four years, haven’t paid any dividend back at all,’ he says.

‘If you have the right business and you can transcend the current economic circumstances for secular growth I think you will be rewarded in share price terms.’

Highlighting this theme of firms being able to defy the macro backdrop and deliver growth, Urquhart has recently added the first Japanese stocks for ‘some while’ to the trust.

He has bought Gree, an online social gaming platform and Sanrio, which owns the Hello Kitty brand. ‘This is a global brand that they have franchised out, and I think have shown quite a lot of innovation with,’ he says.

Aspirational products

Strength of brand is a key theme within the portfolio, with Urquhart citing competitive advantage, high barriers to entry and products that customers aspire to own as being highly attractive investment criteria.

In this vein, he is also backing Apple, Hermes, L’Oréal and Inditex, which owns the fashion chain Zara. He says all are benefiting from continued strong demand from Asia, the Middle East and to a lesser extent Africa.

‘I think it is a very positive thing that you are not overly reliant on the US or European consumer, so for us the crises of the last two or three years have really accelerated some of those changes and some of the shifts in the global economy,’ he says.

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