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10 December 2011
Income trusts dominate 2011 launches
Jemma Jackson, PR Manager, AIC, takes a closer look at this year's new launches.
It’s been a tough year for new launches, as might be expected given the current global economic backdrop. In the Chancellor’s Autumn Statement, George Osborne admitted that the economy was in an even more precarious position than even he had previously imagined. And with interest rates still at historic lows, Europe on tenterhooks, and with stock markets up and down like a yo yo, there’s few places for investors to turn for respite.
Whilst new launches have been thin on the ground this year (6 investment companies collectively raised £691m, compared to 15 investment companies raising £1.7bn in 2010), it is new launches with an income theme that have tended to succeed in coming to market. Indeed Cazenove highlighted recently that, with equity market volatility returning to crisis levels, “uncorrelated – or alternative – income appears an attractive proposition.” New, alternative income funds have increasingly joined an existing universe of UK equity income and global equity income. Cazenove argue that “in our opinion, fundraising for income – especially alternative income focused investment companies - is likely to continue to dominate new issuance in the near-term.”
The launch data for 2011 certainly does bear this out. In what Cazenove would no doubt describe as ‘alternative income’, Duet Real Estate Finance, in the Sector Specialist: Debt sector, was the first launch of 2011, raising £50m in March. The company’s objective is to provide shareholders, through investment in its Master fund, with regular dividends and an attractive total return while limiting downside risk to capital, through exposure to European commercial real estate debt. And anyone thinking that anything with ‘Europe’ in the remit might not be in vogue must think again: the fund was on a premium of 1% at 5 December 2011 and has a current dividend yield of 4.1%. In fact all but one of this year’s launches were trading close to par on 5 December 2011, between a 2% premium and a 2% discount compared to an industry average discount of 10% at the end of November 2011.
NB Global Floating Rate Income, another Sector Specialist: Debt investment company, has been by far the largest launch in 2011, raising £309m back in April. It was on a discount of just -0.4% on 5 December. In the Forestry and Timber sector, Forest Company raised £166m in June and has been the only launch this year that has not had an income theme. On 5 December it was trading close to par, at 0.2%.
Two more conventional launches this year still had an income theme. Diverse Income Trust (UK Growth & Income) and Henderson International Income (Global Growth & Income) were launched in April raising £50m and £42m respectively. At 5 December 2011, Diverse Income Trust was on a discount of 1.8%, whilst Henderson International Income was on a discount of 1.7%. Another launch in the Global Growth sector, Damille Investments II (SFM) raised £74m.
Of course whilst new issues are an interesting measure of investor sentiment, the wider investment company sector has a long and enviable reputation when it comes to dividend records. AIC research recently suggested that one third (33%) of conventional investment companies are yielding more than the FTSE 100 average annual yield of 3.2% (80 investment companies out of a universe of 244 conventional AIC members). Two thirds of these (66%) were trading at a discount to net asset value (55 out of a total of 80 companies). Investment trusts have the ability to sustain their dividends, by building up their revenue reserves in good years, allowing them to pay dividends in difficult years. They do this by squirreling away up to 15% of the income they receive each year and transferring this to their revenue reserves. Known as ‘smoothing’ dividends, this is one of the defining characteristics of the sector and has helped some investment trusts to raise their dividends each year for shareholders over many years. This can be a great comfort to investors, particularly in difficult times.
As 2011 draws to a close, the economic outlook is perhaps less certain than ever. But whilst launches have been muted this year, the launches do illustrate that companies with a mandate that resonates with investors can still be brought to market. And with so many investment companies with an income focus trading at narrow discounts, if not premiums, it may seem that the income story has further to travel yet. Only time will tell.
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