Ian Cowie: some home-grown income winners

Good news from the Office for National Statistics (ONS) today (Thursday 15 October) and the International Monetary Fund (IMF) yesterday, showing the UK’s economy growing faster than expected, might mean it’s time for investors to “buy British”.  

Better still, the biggest investment trust in the Association of Investment Companies (AIC)’ UK Equity Income sector has set a new record by increasing  shareholders’ pay for an eye-stretching 60 years without fail. 

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But cautious souls will note that the IMF bullish statement that Britain’s gross domestic product (GDP), a measure of economic output, will be the second-biggest in the G7 group of major economies this year is only a forecast; not a fact.  

Similarly, the ONS says Britain’s GDP grew by 0.1% in August, beating expectations that it would shrink by the same sum, but prompting faint praise from a former Bank of England governor, who said we are “winning the slow bicycle race” among sluggish developed economies. 

Never mind the macroeconomics, the £3 billion giant City of London Ord (LSE:CTY) Investment Trust deserves full-throated praise for six decades of uninterrupted dividend growth.  

No other British pooled fund - including unit trusts and exchange-traded funds (ETFs) - has increased shareholders’ annual pay for such a long time. 

Job Curtis, City’s fund manager since 1991, said: “By reaching this milestone we celebrate not only 60 years of consecutive annual dividend increases, but also the resilience of the UK market and indeed the benefits afforded to us by the investment trust structure. 

“Our investment approach prioritises patience, valuation discipline and long-term thinking, all of which has allowed us to navigate the varied market conditions of the past six decades. 

“Most importantly, we focus on creating a portfolio of brilliant, dividend-paying businesses, of which there are many in the UK.” 

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City of London currently yields 3.9% income that has risen by an annual average of 3% over the last five years.  

This rising yield is based on a portfolio led by big banks - with HSBC Holdings (LSE:HSBA), NatWest Group (LSE:NWG) and Lloyds Banking Group (LSE:LLOY) in its top 10 assets - plus the oil giant Shell (LSE:SHEL) and the defence group BAE Systems (LSE:BA.). 

Less happily, from this former smoker’s point of view, City’s top 10 also includes British American Tobacco (LSE:BATS). Call me squeamish if you like, but I draw the line at investing in companies which kill their customers. I mention this awkward fact whenever I meet Job, who is unfailingly courteous and positive. 

Against all that, it could be argued that the trust’s rising income over six decades has been slightly offset by some reduction in total returns, because this fund is not its sector leader over any of the usual periods. City of London produced total returns of 17%, 88% and 123% over the last year, five years and 10-year periods. 

By contrast, Law Debenture Corporation Ord (LSE:LWDB) is the long-term leader of the UK Equity Income sector with total returns of 17%, 93% and 242% over the same three periods.  

Over the medium term, the sector leader is Temple Bar Ord (LSE:TMPL) with returns of 18%, 137% and 176%. Over the last year, the leader is Lowland Ord (LSE:LWI)(which has the same investment team as Law Debenture) with 27%, 80% and 121%. 

For balance, it is only fair to add that even in the “steady Eddie” UK equity income sector there is a wide dispersal of returns.  

For example, the worst performer among 16 comparable funds over the last year is Finsbury Growth & Income Ord (LSE:FGT), which shrunk shareholders’ money by 2.4% over one year, following a feeble but positive return of 3.2% over five years and 54% over the decade. 

It seems even Finsbury’s boss, Nick Train, is not immune to the curse of the “star fund manager” tag, which has presaged problems elsewhere before.  

But he remained upbeat about the fund’s third-quarter numbers today, when he said: “In September, the NAV was minus 7.9% on a total return basis and the share price was minus 7.8%, while the index was minus 1.9%.  

“Despite a challenging month, the company’s NAV and share price outperformed the index over Q3, up 3.7% and 4.2% respectively, compared to the FTSE All-Share’s 2.4%.” 

Perhaps shareholders should be grateful for small mercies.  

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On a purely personal level, I have no UK Equity Income investment trusts because of longstanding direct shareholdings in British businesses ranging from BAE Systems (LSE:BA.) and Fevertree Drinks (LSE:FEVR) to Greencoat UK Wind (LSE:UKW) and Unilever (LSE:ULVR). 

It’s also a London-listed fund, Seraphim Space Investment Trust Ord (LSE:SSIT), that is currently shooting the lights out.  

Seraphim has two-thirds of its NAV invested in Europe, including the UK, and leads the AIC Growth Capital sector over the last year and five years with total returns of 134% and 70% respectively.  

So, it pays prospective investors to look beyond sectors and consider where revenues and profits are being derived. 

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in BAE (BA.), Fevertree Drinks (FEVR), Greencoat UK Wind (UKW), Seraphim Space Investment Trust (SSIT) and Unilever (ULVR) as part of a globally diversified portfolio of investment trusts and other shares. You can see more at iancowie.co.uk