Investors have been hunting for high income strategies ahead of tax year end.
February was a month that saw the FTSE 100 index surpass 8,000 points for the first time, and the consensus view is that UK shares remain good value versus history.
For contrarian investors, bargain opportunities are particularly prevalent among the mid and small-cap parts of the market, which have notably sold-off due to stagnant economic growth, high inflation and interest rate rises. Some fund managers argue share price falls over the past year or so for more domestically facing UK businesses have been overdone, and already priced in the prospect of a shallow recession.
However, investors are on the whole shying away from their home market, although there are a couple of exceptions, which is reflected in our top 10 most-bought investment trusts in February. Three UK equity trusts feature: City of London (LSE:CTY), Greencoat UK Wind (LSE:UKW), and Merchants Trust (LSE:MRCH).
City of London, which has been managed by Job Curtis since 1991, predominately invests in dividend-paying FTSE 100 firms. Curtis adopts a conservative approach in focusing on companies with good cash generation. It has raised its dividends for 56 years in a row – a high level of consistency.
Greencoat UK Wind, the renewable infrastructure investment trust, aims to provide investors with a yearly dividend that increases in line with RPI inflation. This aim has been successfully achieved each year since the trust launched in 2013. In its recently published annual results, the trust said it was confident that its RPI target would be achieved once again in 2023.
It said: “With our continuing strong cash flow and dividend cover we can confidently target a dividend of 8.76 pence per share with respect to 2023, increased in line with December's RPI of 13.4%.”
Greencoat UK Wind has a yield of 5.6%, and took fourth spot in our table in February.
In 10th place is Merchants Trust. It has as a higher yield than peers, at 4.6%. It aims to deliver an above-average level of income and income growth, as well as long-term growth of capital, through investing mainly in higher-yielding large UK companies.
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Elsewhere, one of the two new entrants in February has around half its assets in the UK – Renewables Infrastructure Group (LSE:TRIG). It last appeared in the top 10 most-bought list in October.
As well as investors looking to ensure that their money is invested in businesses ‘doing good’ in some form or other, the high yields on offer among renewable energy investment trusts is a key attraction, particularly at time when inflation is at its highest level in decades and investors are hungry for income. The Renewables Infrastructure Group has a yield of 5.7%.
Alliance Trust (LSE:ATST), which dropped out of our top 10 table last month, swiftly returned in February. The multi-manager trust is externally managed by Willis Towers Watson. It selects managers with a balance of investment styles, which means Alliance Trust effectively takes style risk off the table.
One of its main multi-manager rivals, F&C Investment Trust (LSE:FCIT), also climbed up the table in February, moving from third to second place. The trust’s manager, Paul Niven of BMO Global Asset Management, oversees the strategic and tactical asset allocation. He selects managers to run various strategies, which are predominantly within BMO. The trust has exposure to unlisted and private equity, which differentiates it from peers.
Both F&C and Alliance Trust offer a one-stop-shop solution due to being highly diversified, which makes them a potential good fit for beginner investors.
Of the remaining four trusts that have kept their place in the top 10, it is Scottish Mortgage (LSE:SMT) that once again takes pole position. The trust, which invests in disruptive businesses making clever use of technological innovations, has seen its performance struggle over the past 18 months. This is due to rising interest rates, which have downgraded the valuations of growth stocks that promise future profits.
Scottish Mortgage is an adventurous investment, and it asks investors to judge performance over five years. Therefore, this is the minimum holding period that investors should adopt. Over five years, it has returned 59.2% versus 47.3% for the average global trust, according to Morningstar via the Association of Investment Companies (AIC).
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In sixth place is Murray International (LSE:MYI), which invests in globally. It been a beneficiary of the change in macroeconomic conditions, which has resulted in sentiment shifting away from high-growth strategies. It has a value focus, and a bias towards Asia and emerging markets.
Next, in seventh place, is BlackRock World Mining Trust (LSE:BRWM). Natural resources stocks are beneficiaries of inflation. This is because as commodity prices rise, mining and oil stocks make more money. These higher profits are being returned to investors through share buybacks and higher dividend payments. This has resulted in BlackRock World Mining offering a dividend yield of 6.2%.
In ninth place is RIT Capital Partners (LSE:RCP). The ‘wealth preservation’ strategy gave its shareholders a loss of over 20% last year. This is not the sort of drawdown to be expected from such a strategy. The losses stemmed from its private company allocation. Investment trust analysts are divided, with Investec recently downgrading RIT Capital Partners from a buy to a hold, but Numis thinks its discount - currently 19.5% - now offers “significant value”.
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Top 10 most-popular investment trusts in February 2023
|Investment Trust||Change from January||One-year performance to 1 March 2023 (%)||Three-year performance to 1 March 2023 (%)|
|Scottish Mortgage||No change||-26.7||28.6|
|F&C Investment Trust||Up one||15.6||46.3|
|City of London||Down one||12.7||30.1|
|Greencoat UK Wind||Up two||9.9||29.3|
|The Renewables Infrastructure Group||New entry||-0.6||8.9|
|Murray International||Up two||19.1||45.7|
|BlackRock World Mining||Down two||0.5||160.7|
|Alliance Trust||New entry||8.3||41.8|
|RIT Capital Partners||Down five||-18.4||9.5|
|Merchants Trust||No change||13.6||50.3|
Source: interactive investor. Performance figures: FE fundinfo. Note: the top 10 is based on the number of “buys” during the month of February.
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.