Interactive Investor

Most UK equity income trusts are on a discount, which is the best value?

15th October 2021 09:02

Faith Glasgow from interactive investor

Loading

Share on

A research firm has ranked the sector, which contains 22 trusts, on six metrics. Faith Glasgow reveals the results.

The UK equity income investment trust sector proved a wise choice for income investors during the pandemic. At a time when businesses were struggling and dividends were being cut or suspended, trusts could draw on the revenue reserves built up over the years to continue payouts to investors.

In contrast, their open-ended equity income peers, with no rainy-day cash cushion to fall back on, in many cases had no option but to cut dividend payments to investors.

So, as a recent (24 September) research note from QuotedData points out, it is somewhat surprising that only three of the 22 trusts in the closed-ended sector are trading on premiums to net asset value - and even those are all under 2%. Discount figures have changed only marginally since the research was published.

QuotedData highlights the fact that Finsbury Growth & Income (LSE:FGT) and City of London (LSE:CTY) trust, one of the three on a premium, are not only the largest trusts in the sector but the ones pulling in new business: CTY issued more than £106 million of new shares in the 12 months to end June 2021.

Yet CTY’s long-term figures lag most trusts at just 3.9% per year over the past five years. Only two trusts, Temple Bar (LSE:TMPL) and Edinburgh (LSE:EDIN), returned less, and TMPL’s performance has picked up markedly since a managerial change last year. In contrast, FGT has returned more than 9% a year over that five-year time frame.

It begs the question of why investors persistently return to CTY. James Carthew of QuotedData points to its status as an Association of Investment Companies' (AIC) dividend hero with 55 years of unbroken dividend growth. “CTY gets a lot of attention for leading the dividend hero table,” he explains. “Additionally, manager Job Curtis has a great reputation. It’s also large, and I think theres a tendency for people to associate size with success and solidity.”

Nonetheless, the data suggests there may be stronger candidates for anyone looking at the sector’s capacity to deliver steady total returns and reliable income streams through difficult times, and keen to capitalise on these surprisingly sticky discounts of up to 9%. “Why not pick up a bargain if you can?” Carthew asks.

QuotedData ranked the UK equity income trusts from 1 to 22 (where 1 is highest) on each of six measures: yield, five-year NAV total returns, five-year dividend growth, discount, size and number of years’ consecutive dividend growth. A simple overall ranking was calculated by simply adding the six numbers together for each trust, so the one with the smallest total tops the table.

Please scroll to the left to see the full table

      Rankings             Data          
Ranked score Total score   Yield 5-year returns (NAV) 5-year dividend growth per annum Discount Size Consecutive annual dividend increases   Yield (%) 5-year returns (NAV) 5-year dividend growth per annum (Discount) or premium Size (£m) Consecutive annual dividend increases
1 45 Law Debenture (LSE:LWDB) 16 1 1 14 5 8   3.7 10.2 11.2 (1.7) 945 11
2 48 Murray Income (LSE:MUT) 14 5 18 6 3 2   3.8 8.4 1.4 (6.6) 1,065 48
3 49 Merchants (LSE:MRCH) 4 4 14 16 7 4   5.1 8.5 2.5 (1.3) 671 39
4 50 JPMorgan Claverhouse (LSE:JCH) 10 10 4 15 9 2   4.1 7.3 6.5 (1.6) 447 48
5 51 Aberdeen Standard Equity Income (LSE:ASEI) 2 20 3 4 15 7   6.0 2.2 7.0 (8.4) 168 20
5 51 Finsbury Growth & Income (LSE:FGT) 22 2 4 9 1 13   1.9 9.4 6.5 (4.3) 2,011 0
5 51 Lowland (LSE:LWI) 8 14 2 3 11 13   4.6 4.8 7.9 (9.2) 357 0
8 56 City of London (LSE:CTY) 5 18 10 20 2 1   4.9 3.9 3.7 0.7 1,737 55
9 66 BMO UK High Income Units (LSE:BHIU) 3 16 12 5 17 13   5.5 4.6 2.9 (6.7) 124 0
9 66 Chelverton UK Dividend (LSE:SDV) 7 6 7 18 20 8   4.7 8.2 5.9 (0.5) 49 11
11 68 BMO Capital & Income (LSE:BCI) 18 8 13 12 12 5   3.6 7.6 2.6 (2.6) 352 27
11 68 JPMorgan Elect Managed Income (LSE:JPEI) 9 13 9 10 19 8   4.5 5.3 4.0 (3.6) 80 11
13 70 Edinburgh (LSE:EDIN) 12 21 19 1 4 13   3.9 1.9 (0.3) (9.7) 1,052 0
13 70 Schroder Income Growth (LSE:SCF) 11 12 8 19 14 6   4.1 5.7 4.1 0.1 215 25
15 72 Dunedin Income Growth (LSE:DIG) 13 7 15 17 8 12   3.9 8.2 2.3 (1.0) 486 10
16 73 Diverse Income (LSE:DIVI) 20 3 6 21 10 13   3.1 8.7 6.0 1.5 432 0
17 74 Shires Income (LSE:SHRS) 6 9 17 11 18 13   4.9 7.5 1.5 (3.0) 87 0
18 77 Temple Bar (LSE:TMPL) 17 19 20 2 6 13   3.7 2.8 (0.6) (9.5) 697 0
19 78 Invesco Select UK Equity (LSE:IVPU) 19 11 16 8 16 8   3.5 6.5 1.6 (5.0) 150 11
20 82 BlackRock Income and Growth (LSE:BRIG) 15 15 11 7 21 13   3.7 4.6 3.7 (5.1) 41 0
21 98 Troy Income & Growth (LSE:TIGT) 21 17 21 13 13 13   2.5 4.2 (4.2) (1.7) 251 0
22 102 British & American (LSE:BAF) 1 22 22 22 22 13   8.6 0.0 (19.9) 48.8 8 0

Source: QuotedData. Data to 24 September 2021. 

On this basis, Law Debenture (LSE:LWDB) ranks first, bolstered by impressive NAV returns and dividend growth, while Murray Income Trust (LSE:MUT) is second. Both boast strength in terms of size and consistent dividend growth. CTY comes in eighth, buoyed by high scores on size, yield and outstanding dividend hero status.

How significant is investment style - growth versus value – in this whole equation, and in the ranking produced by QuotedData? Carthew explains that during the decade or more when value-focused investors lost out to those seeking growth potential, the trusts with the lowest-yielding portfolios had a better chance of providing the best total returns.

He says: “That favoured trusts like Law Debenture (with its trustee business) that could supplement their income and invest in lower-yielding stocks, and those like Finsbury Growth & Income that never tried to pay as high a dividend as the other trusts.”

When value started to come back into fashion last November as coronavirus vaccines emerged, the investment landscape shifted. Trusts such as MRCH and Lowland (LSE:LWI) have had a terrific year, as did the newly revived TMPL.

All three have seen NAV gains of more than 40% over 12 months to 12 October, according to Winterflood data, despite the subsequent pause in that run. “TMPL’s managers think that there is more to go for and the stocks that they hold are still cheap,” adds Carthew.

More generally, there are clearly trade-offs between the factors to be weighed up for every trust, and investors’ priorities are bound to differ. For instance, those already heavily reliant on investment income may attach greater importance to, say, a substantial and growing dividend, while those who don’t yet need to draw an income are likely to be more interested in the long-term total return performance.

However, Carthew suggests there are some basic principles worth bearing in mind when assessing UK equity income options. For a start: “Go for a trust over an open-ended fund – the ability to build up and use revenue reserves is a key advantage for trusts.”

Second, he suggests resisting the temptation to be too greedy for a high yield, “as that can come at the expense of lower overall returns”.

He also warns against favouring trusts that invest in a narrow group of large-cap income stocks: “Diversification is important.” That’s particularly the case for income investors when dividends are potentially under threat.

And finally, with inflation becoming an increasingly significant consideration for income investors, he suggests thinking beyond simple dividend hero status. “The ability to grow dividends ahead of inflation over the medium term is perhaps more important than a record of edging a dividend up every year,” concludes Carthew.

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.

Get more news and expert articles direct to your inbox

Sign up for a free research account to get the latest news and discussion, and create your own virtual portfolio.

Free Sign Up