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A big rip off? The expensive world of income investment trusts
by Robert St George on Oct 17, 2013 at 11:36
The higher valuations attached to investment trusts with an income bias are potentially unwarranted given their performance relative to growth funds, according to a sector analyst.
‘Emphasising the use of income within a fund’s branding or investment approach has proved highly attractive in terms of raising valuations in recent years, with a whole host of sectors amplifying their - often new found - income dynamics,’ noted Paul Locke, an analyst at Westhouse Securities.
‘With interest rates low and set to remain so for the foreseeable future, this is understandable,’ he acknowledged. ‘Yet there are cases where broader variables may be being overlooked when it comes to pricing, such as the level of yield - both absolute and relative to inflation - and the broader total return dynamics that may be offered by a specific fund.’
As an example, Locke highlighted UK equity trusts. Those in the UK Growth category offer an average yield of 2.2% and trade on an average discount of 8.1%, data from the Association of Investment Companies show. The typical UK Growth & Income constituent, in contrast, yields 4.1% and has a 1.2% discount.
However, over the past year the average UK Growth trust has returned 30.2% compared with 28.5% from the average UK Growth & Income fund.
Locke also noted similar differences between the JPMorgan Global Emerging Markets Income and Utilico Emerging Markets trusts. The former yields 4% and trades on a 1.4% premium to its net asset value, while the equivalent figures for the latter are 3.4% and a 7.3% discount. Yet the Utilico vehicle has returned 15.2% over the past year, compared with JPMorgan’s 13%.
The same pattern was evident even in niche spaces, Locke found. Polar Capital Global Healthcare had attracted a 1.7% premium with a 2.3% yield, for instance. But Worldwide Healthcare , which has generated almost double Polar’s return over the past year, sat on a 6.1% discount while also yielding 1.5%.
‘This is immaterial looking forward and any signs of renewed economic uncertainty could provide grounds for investors to return to the safety of higher-yielding products,’ recognised Locke. ‘However, if the equity bulls are right regarding the durability of the current economic recovery, questions could eventually arise over the value being applied to income.’
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