David Prosser looks at why the investment company sector is important to investors trying to generate yield.
Two rankings of investment companies published last week measured very different things but featured many of the same closed-ended funds. For financial advisers with clients in need of investment income, the two lists make interesting reading.
First up came the Association of Investment Companies’ list of the most viewed funds on its web site over the third quarter of the year; then investment company analyst Stifel published its ranking of the 20 highest-yielding funds with exposure to equities.
The overlap was considerable: both lists featured Murray International, BlackRock World Mining, Henderson Far East Income, Merchants, European Assets, Murray Income and City of London. And what this tells you is that investors looking for details of investment companies online are very often seeking out high yielders.
The close correlation between these two rankings underlines just how important the investment company sector is becoming in providing a source of attractive income to investors trying to generate yield. In a continuing environment of low interest rates – and rates will remain low even once the Bank of England begins raising them – investors may have to accept additional risk if they want higher yields; but if they are prepared to take that risk, investment companies are a natural fit. There are good reasons for this. Investment companies have an inbuilt advantage: unlike open-ended funds, they are permitted to retain some income in good years in order to cushion dividend payments to investors in more difficult times. They can also, with the permission of shareholders, use capital profits to finance income payments.
This is why so many investment companies have such a long term track record of raising dividend payments every year – even during periods when markets are struggling. Some of the funds in Stifel’s rankings of high yielders are there because their valuations have slipped back in recent times – there are examples in the commodity and emerging markets sectors, for example – but they have managed to maintain or even increase pay-outs to shareholders. Others are offering good yields from holdings in blue chip UK companies.
“We calculate there are 18 trusts with market capitalisations in excess of £80m investing in equities which have a yield of 4 per cent or higher, which is a similar number to a year ago,” says Stifel’s Iain Scouller. “In addition, the property, infrastructure, renewable energy and debt fund sectors also continue to offer attractive yields.”
The forthcoming dividend tax changes may increase the attractiveness of the investment trust sector even further for income seekers. From next April, everyone will be entitled to receive dividends worth up to £5,000 a year without paying tax on them – even if they’re held outside an individual savings account (Isa). Above this level, there will be higher tax charges to pay on dividends, but for those below the limit, this offers an opportunity to effectively increase returns. The advantage will be larger for investors in funds on the highest yields.