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IT Insider: trusts looking beyond the obvious for equity income
by James Carthew on Jul 27, 2011 at 09:42
The UK Growth and Income sector has had a fairly good year so far. It is up by 9.1% on average in net asset value (NAV) terms and about the same in price terms against a 6.7% increase in the FTSE High Yield Index, which in turn has outperformed the FTSE All-Share (up by 4.4%).
The winners in the sector are James Henderson’s Lowland , which has had a phenomenal run since markets turned after the credit crisis, and, perhaps more surprisingly, Edinburgh – once the dysfunctional dinosaur of the investment trust industry but now managed by Neil Woodford and much revived.
Investors’ seemingly desperate need for income has had the sector trading on a premium for some time, with quite a few funds issuing new shares. We have even seen the launch of a new fund, the Diversified Income trust, managed by Gervais Williams.
A cursory glance at the top 10 positions of funds in the sector reveals many common holdings. Royal Dutch Shell, BP, BAT, AstraZeneca, Glaxo, HSBC and Vodafone form the core of most portfolios and probably would have been there for some time. Coincidentally or not, these seven stocks account for over half the dividend income generated by the UK market (BP is in there even after its dividend cut).
The positions are maybe more concentrated than they would have been in the past thanks to the litany of companies that have disappointed in recent years, notably banks.
Managing income flows in the face of upsets like these is difficult but most trusts had revenue reserves to fall back on, and dividend growth in the rest of their portfolios has been quite healthy.
Hard to differentiate
Given the commonality of holdings in many of these funds, differentiating between them is not easy but a few stand out from their peers.
Highest yielding of the bunch is RCM’s Merchants Trust . It has been increasing dividends each year for some time, albeit in recent years below the rate of inflation. It has fallen back on revenue reserves to achieve this in five of the past 10 years however.
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Look up the shares
- Royal Dutch Shell Plc
- BP PLC
- British American Tobacco PLC
- AstraZeneca PLC
- GlaxoSmithKline PLC
- Vodafone Group PLC
- Cable and Wireless Communications PLC
Look up the investment trusts
- Lowland (Ordinary Share)
- Edinburgh Investment (Ordinary Share)
- Merchants Trust (Ordinary Share)
- Finsbury Growth & Income (Ordinary Share)
Look up the fund managers
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