Interactive Investor

10 investment trusts for a £10,000 annual income in 2024

The 2023 portfolio delivered its annual income target. Kyle Caldwell details how each investment trust performed and shares his picks for the £10,000 income challenge in 2024.

6th February 2024 09:40

by Kyle Caldwell from interactive investor

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Investment trusts have bells and whistles that set them apart from funds.

A key difference is that investment trusts can hold back up to 15% of the income generated from the underlying holdings each year. In leaner periods, such as during the global financial crisis and the Covid-19 pandemic, many investment trusts maintained or increased their dividends by dipping into income retained during better times.

In contrast, most funds cut dividends as they cannot hold back income and are required to pay investors all the income received each year. So, when there’s a shortage of dividend cheques during challenging times, funds have no get-out-of-jail card and dividend cuts are pretty much inevitable.

Of course, even for those investment trusts with healthy income reserves, there is no guarantee that dividends will be maintained or increased.  

However, while the investment trust structure is something that private investors can take advantage of, it is important to be aware that trusts tend to be more volatile than funds over shorter periods. This is because investment trusts have two values, a share price and a net asset value (NAV), with the latter reflecting the value of the underlying investments in the portfolio. When investors are cautious and stock markets are rocky, the gap between an investment trust’s share price and NAV tends to widen, leading to a larger “discount”.

At the start of 2023, the average investment trust discount stood at 11.7% and increased throughout the year until it hit 16.9% at the end of October, which marked its highest level since the global financial crisis. During the final two months of the year, a broad market recovery took place, which saw the average discount end the year at 9.0%. The rally was fuelled by expectations of interest rate cuts in 2024, which would boost various strategies and make investors less cautious.

In 2023, the investment trust £10,000 income challenge did not do as well as the fund £10,000 income challenge in total return terms. The investment trust choices delivered 4.8% versus 6.9% for funds. However, in terms of income generated, investment trusts came out on top, bringing in £11,178 versus £10,139 for funds.

Below is a run-through of how constituents fared, and the portfolio line-up for the 2024 income challenge.

How the investment trust income choices fared in 2023

Overall, in total return terms, eight trusts made money while four posted losses. This shows how having a diversified portfolio can help to both protect and grow capital, with the better performers in 2023 doing the heavy lifting and making up for those that lagged behind.

Two of the trusts in the red sit in the alternatives section of the portfolio with individual weightings of 5%. Balanced Commercial Property (LSE:BCPT) and BlackRock World Mining Trust (LSE:BRWM) declined in 2023 by -12.5% and -10.4%.

For the former trust, higher interest rates were a headwind, with investors drawn to safer areas, such as gilts and money market funds, where they could pick up yields of around 5%. As the NAV was essentially flat over the year, it was the widening discount that resulted in the share price decline.

BlackRock World Mining also suffered from rate rises, as well as China’s economy not delivering the rebound that many expected following the reversal of its Covid-19 restrictions. Both were headwinds for commodity demand.  

One of four UK income choices, Diverse Income Trust (LSE:DIVI), was the third-worst performer, down -5.7%. This investment trust, managed by Gervais Williams, has a bias to UK smaller companies, which suffered in the rising interest rate environment. Mid- and small-cap parts of the market are more economically sensitive due to containing more domestic businesses that make most of their money in the UK. In contrast, the FTSE 100 index has more of an international footprint, meaning it is less reliant on the health of the UK economy and less vulnerable to consumers tightening their belts.  

Also in the red was Henderson International Income (LSE:HINT), down -3.8%. Its investment approach involves favouring defensive and value stocks, with the US weighting of 37% being notably less than global indices holding around two-thirds. Just one US tech giant, Microsoft (NASDAQ:MSFT), is in its top 10 stock positions, which meant the trust did not benefit as much as others from the artificial intelligence-fuelled stock market rally in 2023.

Moving on to the rest of the portfolio, the biggest contributor to returns, up 22.6%, was JPMorgan Global Growth & Income (LSE:JGGI). The trust, which had a 10% weighting, adopts a total return approach in aiming to outperform the MSCI All Country World Index over the long term. 

The third global income pick, Murray International (LSE:MYI), returned 1.1%. It holds substantially less in the US than global indices (around 25%), with no exposure to big US tech. In contrast to other global funds, it focuses more on opportunities in Asia Pacific, emerging markets and Latin America, which account for around 35% of assets.

Taking second place overall is TwentyFour Income (LSE:TFIF), up 17.9%. When this bond trust was chosen last year, a key attraction was that most of the bonds it held were floating rate, meaning they benefited from interest rate rises.

Taking the bronze medal is Utilico Emerging Markets (LSE:UEM), gaining 14% in 2023. Its approach is very different from peers as it focuses on investing predominantly in infrastructure and utility companies across the emerging markets.

In fourth place was Greencoat UK Wind (LSE:UKW), up 5.4%. It aims to provide investors with a yearly dividend that increases in line with RPI inflation. This has been successfully achieved each year since the trust launched in 2013.

And finally, the three other UK equity income choices, City of London (LSE:CTY)Merchants Trust (LSE:MRCH) and JPMorgan Claverhouse (LSE:JCH), delivered steady total returns of 4.8%, 4.7% and 2.9%. The average UK equity income trust returned 2.9%, while the FTSE 100 index increased in value by 7.9% in total return terms.

Group/InvestmentStarting value (£) Market Return (GBP)
01/01/2023 to 31/12/2023
Value at End (£)12-month yield (31/12/2023)Estimated Income (£)
UK Equity Income
City of London £32,2504.8233,803.085.061,633.25
Diverse Income Trust £10,750-5.6810,139.594.71506.26
JPMorgan Claverhouse £21,5002.8622,115.714.941,063.04
Merchants Trust £21,5004.7022,510.175.311,140.83
Global Equity Income
Henderson International Income £21,500-3.7920,685.494.20902.53
JPMorgan Global Growth & Income £21,50022.6126,361.173.62779.12
Murray International £21,5001.0721,731.054.28921.26
Commodities & Natural Resources
BlackRock World Mining Trust £10,750-10.399,633.436.76727.10
Property - UK Commercial
Balanced Commercial Property £10,750-12.549,402.164.33465.99
Global Emerging Markets
Utilico Emerging Markets £10,75013.9512,250.113.24348.70
Debt - Structured Finance
TwentyFour Income £21,50017.9025,349.559.872,122.07
Renewable Energy Infrastructure
Greencoat UK Wind£10,7505.4211,332.675.29568.32

The line-up for the £10,000 income challenge in 2024

The purpose of the hypothetical portfolio is to show how DIY investors can go about building their own diversified income portfolios. The investment trusts are chosen on the basis that over the medium to long term they would be expected to grow both capital and income. However, there are no guarantees that this will be achieved. Moreover, you must be mindful that overall total returns (capital and income combined) can decline, especially in the short term.

As the investment trusts chosen are selected for the medium to long term, I intend to make changes only when necessary, or if I spot a potential new opportunity to generate sustainable income or diversify further.

With that in mind, there are only two changes to the portfolio for 2024, and they are both removals. Overall, the portfolio yields just over 5.2%, meaning £195,000 is required to attempt the £10,000 income challenge this year.

When investing in trusts, key things to watch out for include whether the same manager is running the fund, whether the manager is sticking to his or her knitting in terms of the investment objective and style, and whether performance has soured on the back of too many poor stock-selection decisions.

In addition, when it comes to investment trusts it is also important to keep an eye on the discount and premium. High premiums tend to be unsustainable in the long term. When conditions change – such as when investors become more cautious – premiums can fall and turn into a discount. As a rule of thumb, investors should be wary when an investment trust is trading on a premium of more than 5%. 

I also wanted to ensure that all or most of the funds selected appear in either interactive investor’s Super 60 or ACE 40 lists of investment ideas. The lists are made up of funds endorsed by interactive investor, with the day care of the list handled by Morningstar’s Manager Selection Services Group.

In the recent annual review of the Super 60 list, the decision was taken to remove Murray International following the announcement of the retirement of lead fund manager Bruce Stout. Stout, who has managed the trust since 2004, will pass the baton to co-managers Martin Connaghan and Samantha Fitzpatrick when he retires in June.

Murray International's removal from the Super 60 has also led to its departure from this hypothetical portfolio. However, finding a direct replacement proved tricky. Murray International has a higher yield than most global equity income trusts and holds notably more in emerging markets, Asia Pacific and Latin America. There’s also a lack of options with only seven global equity income trusts.

More choice is available in the global trust sector, housing 13 trusts in total. But most have much more of a growth focus. Bankers (LSE:BNKR), a new entrant to the Super 60, was considered, but the 2.5% yield was deemed too low.

Unlike for the £10,000 fund portfolio, where I included a low-yielding option in Fidelity Global Dividend to strike a better balance between growth and income, my view here is that my two other global equity income choices provide enough balance. 

JPMorgan Global Growth & Income is a solid performer, aiming to deliver both capital growth and income. Its policy allows some dividends to be paid from capital, which helps it generate capital growth. A 15% weighting has been allocated. 

Henderson International has one of the highest yields among global equity income trusts. As mentioned earlier, it is positioned very differently from global indices, and offers greater overseas exposure as it does not invest in the UK. It has a 10% weighting. 

The other overseas pick is Utilico Emerging Markets. Last year, 5% was allocated, which has now been upped to 10% to make up for the emerging market exposure that exited the portfolio with Murray International.

For UK equity income, I’ve allocated 40%, spread equally across four trusts. Three have proven to be consistent dividend payers for decades, City of London, JPMorgan Claverhouse and Merchants Trust, which have respectively increased payouts for 57, 51 and 41 years. All are in a good position – due to the income being generated from their underlying investments and by having income reserves – to keep income rises going.

The fourth pick is Diverse Income. Last year’s 5% allocation has been upped to 10% in an attempt to try to capitalise on a potential recovery for UK smaller company shares in 2024.

For the remaining 25% of the portfolio, 10% is handed to TwentyFour Income. Prospects for bonds look promising, given that bond yields are at their highest level in over a decade. Moreover, interest rate cuts in 2024 could be great news for bond prices.

In the specialist section, BlackRock World Mining Trust has been removed. While this is a respected option for direct commodity exposure, I am concerned about the sustainability of its 7.4% dividend yield, particularly as its dividend policy is not progressive. If that yield is not achieved, the £10,000 income challenge will be harder to fulfil. In the six-month period to the end of June 2023, the trust noted that there had been dividend reductions from many mining companies.

In its most recent update (31 December 2023), it said: “Mining companies have low levels of debt, continue to return capital to shareholders, but appear to be entering a higher capital expenditure phase.” The last bit of that sentence indicates to me that the mining dividend boom of the past couple of years has run its course. I would sooner focus my attention on areas where income is more predictable and reliable.

Mining company dividends fluctuate depending on the performance of the iron ore price. In addition, some firms have strict dividend payout ratios. As a result, if they make less money, dividends decline.   

Two specialists remain, with 10% allocated to Greencoat UK Wind. It recently increased its target dividend for 2024 to 10 pence per share, above the Retail Prices Index for December 2023. In a video interview with interactive investor last summer, manager Stephen Lilley explained that the dividend aim is sustainable in the coming years due to the secure and predictable nature of the income being generated.

The final specialist, Balanced Commercial Property, is allocated 5%. While it could be facing another challenging economic backdrop, with some commentators predicting recession, a 10% monthly dividend increase from October 2023 shows the income outlook has improved.

Investment trust Yield (%)Weighting (%)Investment (£)Estimated Income How often dividend paid 
UK equity income
City of London 5.110£19,500£995Quarterly 
Merchants Trust 5.210£19,500£1,014Quarterly 
JPMorgan Claverhouse 5.210£19,500£1,014Quarterly 
Diverse Income 510£19,500£975Quarterly 
Global/overseas income
JPMorgan Global Growth & Income 3.715£29,250£1,082Quarterly 
Henderson International Income 4.710£19,500£917Quarterly 
Utilico Emerging Markets 3.710£19,500£722Quarterly 
TwentyFour Income 7.610£19,500£1,482Quarterly 
Balanced Commercial Property 6.65£9,750£644Monthly 
Greencoat UK Wind 710£19,500£1,365Quarterly 

Sources: interactive investor and Morningstar. Yield date for all funds sourced on 24 January 2024. 

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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