BMO's Peter Hewitt reveals his favourite trusts in his Income portfolio.
When choosing an investment trust for income generation, investors have plenty of options – a wide selection of trusts are positioned to deliver reliable income streams, and many now offer a dividend yield over 4%.
The first three trusts in my top five are related to the large and fast-growing healthcare sector. Ageing populations, the rise of chronic diseases and technological advancement all ensure that this market will continue to expand for some time yet.
One trust benefiting from growth in this sector is Assura, the UK’s leading healthcare REIT with a market share of about 6-7% (or 554 properties). It is FTSE 250-listed and currently paying a dividend yield of 4-4.5% and growing 7-9% per annum. The company designs, invests in, manages and develops healthcare buildings – specifically GP surgeries and community healthcare buildings – with an aim to help the NHS bring care closer to patients’ homes by providing fit-for-purpose buildings in suitable locations. Investing in primary care real estate may provide a reliable income stream: occupier covenants are secure, there is minimal development risk, restricted supply and leases are long and backed by the NHS, to name a few reasons.
BB Healthcare Trust is the biggest holding in my portfolio – a high conviction, long-only trust that sets its dividend at 3.5% of the previous financial year’s net asset value. Run by Paul Major at Bellevue Asset Management, the trust invests in a maximum of 35 listed or quoted global healthcare equities – think biotech, diagnostics, medical technology and managed care companies, while being bearish on the outlook for big pharmaceutical companies.
About 90% of the portfolio’s exposure is allocated to the US, in smaller and medium-sized companies with exciting growth prospects. An example is Teladoc, one of the largest holdings in the portfolio, and offers a range of services such as reducing the number of GP visits by providing online video calls for patients, which curbs unnecessary expenses. Any potential holdings undergo a rigorous assessment process that considers the risks and opportunities in the context of the wider market, and are chosen based on their quality rather than their index or benchmark weighting.
Secure Income REIT also has exposure to the healthcare sector, comprising high-quality, long-term, inflation-protected real estate investments. Advised by Prestbury Investments LLP, it currently offers a 4% dividend yield, which is growing at high single digits. The portfolio holds 11 private hospitals across England, which are rented by Ramsay Healthcare Limited, a leading private healthcare company listed in Australia. However, its high-quality holdings go beyond healthcare: also found within the portfolio are well-known theme parks Alton Towers and Thorpe Park, plus two hotels, let to Merlin Entertainments Plc – one of the world’s largest visitor attraction businesses, second only to Disney. Other notable names include Manchester Arena (let to SMG, the world’s largest venue management group) and 129 Travelodge hotels throughout the UK. Importantly, the portfolio has a weighted average unexpired lease term of around 21 years, demonstrating the security of these assets.
I am also keen on Law Debenture. Its current dividend yield of 3.5% is not the highest in this selection but, importantly, it’s growing strongly. Law Debenture has a rather unique status as an investment trust supported by a professional services business. The conventional equity portfolio is run by James Henderson at Janus Henderson Investors, and typically holds around 140 stocks, about 75% of which are UK-focused, with the remainder largely held in Europe and the US. James and the team take an active but patient approach to investing, keen on getting to know the companies within the portfolio and conducting extensive analysis of their businesses to find undervalued holdings with significant growth potential.
However, it is the second element of Law Debenture that makes it unique: the Independent Professional Services business offers a raft of niche governance and transaction services that are not directly investment related, whether that be supporting employees in reporting ethical breaches in the work place, or helping a business facilitate a major deal. And this element of the company is profitable too: in 2018, more than a third of the total dividend was funded from it.
Rooted in Glasgow’s industrial and shipbuilding heritage and today managed by Bruce Stout of Standard Life Aberdeen, Murray International currently offers investors a healthy 4.5% dividend yield. The trust invests in global equities, and to a lesser extent fixed income. Bruce and the team focus heavily on research and analysis to identify companies they believe the market has overlooked. The equity holdings are geographically diverse with a huge overseas exposure, particularly emerging markets in Asia Pacific ex Japan and Latin America, driven by the strong long-term growth prospects there. Taiwan Semiconductor is among the top holdings in the portfolio, but developed market stocks can be found too, such as Auckland International Airport, which has expansion plans (including an additional runway) in the pipeline.
Peter Hewitt manages the BMO Managed Portfolio Trust – a trust that invests in other trusts within its Growth and Income portfolio.
The value of investments can go down as well as up and investors may not get back the original amount invested.
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