The UK Growth & Income investment trust sector offers attractive yields for income-seeking clients, the prospect of capital growth and access to some of the most established managers in the business. But trading on an average premium of 2%, is the sector now looking too expensive?
James Maltin of Rathbones believes the sector is starting to look richly priced. ‘We have made money on a number of these trusts and we are not selling out, but I would caution people not to buy at these levels,’ he said.
He still views UK income-oriented investment trusts as attractive in comparison to their open-ended counterparts and is happy to remain in holdings, but is in no rush to increase exposure. He highlights Temple Bar, which is yielding 3.7% and trading on a premium of 2.2%, alongside Troy Income & Growth, trading on a 1.6% premium with a 3.6% yield, as top picks.
John Newlands (pictured), head of investment company research at Brewin Dolphin, is more sanguine, saying that even though discounts are now looking tighter and a number of trusts are trading at a premium, he is ‘staggered at the range of quality in the sector’.
‘In today’s investment climate, it is very hard to get a useful return on fixed income markets, gilts don’t look rewarding, so I still see a place for [income investment trusts],’ he explained.
He currently views Neil Woodford’s Edinburgh Investment trust as ‘far too expensive’. It has an attractive 4.3% yield, but trades on a 2.7% premium. However, Newlands says the manager has delivered even though the trust has an awkward capital structure.
Mark Barnett’s Perpetual Income & Growth remains his ‘absolute favourite’ in the sector, yielding 3.8% and sitting on a slightly smaller 1.2% premium, while he is also positive on Finsbury Growth & Income and Standard Life Equity Income.
Mick Gilligan, head of research at Killik & Co, views Nick McLeod-Clarke’s BlackRock Income & Growth as a potential buy, on a 6.2% discount and a 3.7% yield, pointing to his track record of achieving dividend growth.
‘Since the start of the year the performance in the sector has been up 17%, and they are up 13%, but I think they have done a reasonable job over time, so on a 6% discount it looks attractive to me,’ Gilligan said.
He also views Standard Life Equity Income on a 4% discount as potentially attractive, and is backing Perpetual Income & Growth over Edinburgh.
Similarly, Charles Stanley analyst Stephen Peters highlights the Standard Life Equity Income trust.
He expects the UK growth & income trust sector, particularly trusts with gearing, to benefit from rising dividend payouts at the company level, boosting its attractiveness and raising the potential for dividend growth in comparison to their open-ended equivalents.
‘Being geared into companies that are paying higher than expected dividends is good for trusts that may have had to dip into their revenue reserves over the last few years, as it will allow them to top up,’ he said.
He says it is important to distinguish which trusts have had to spend cash reserves over the past few years, while selection in the sector will be driven by underlying expectations for markets.
For those with a more bearish view on markets, the lower yielding quality names of Temple Bar and Finsbury are more likely to appeal, he said, whereas the higher beta Lowland and Schroder Income Growth trusts might appeal to the more optimistic.