Life begins at 50

Welcome to the club. Two more investment companies have just joined the elite ranks of closed-ended funds to have increased their dividends in each and every year for the past 50 years. Both Bankers Investment Trust and Caledonia Investments paid their dividends in May and both rewarded investors more generously than in 2016; they join City of London Investment Trust and Alliance Trust in the 50-year club.

This select group is set to grow in the years ahead, with a further six investment companies able to point to dividend-raising track records that go back more than 40 years, and another 10 with at least 20 years of increases under their belts.

For many years, it went unnoticed that so many investment companies were routinely increasing distributions to shareholders, year-in, year-out. More recently, however, advisers and investors have begun to take note.

The higher profile of investment companies since the retail distribution review of four years ago has certainly helped, with the intermediary sector stepping up its engagement with closed-ended fund managers since then. But it is the difficult environment for income seekers that has really focused attention on investment companies – the sector has been one of the few bright spots in an otherwise dismal time for yield over the past six or seven years.

Advisers increasingly recognise that investment companies offer them a structural advantage in the context of income. The fact that closed-ended funds can build up reserve funds, holding back some income in better years in order to fund pay-outs in leaner times, is what underpins their ability to go on increasing dividends no matter what is happening in the broader market environment.

What’s really going on here is a smoothing process. There may be years in which investment companies do not make distributions that are as generous as those coming from other vehicles. This is what enables them to carry on with higher payments when the income coming into the fund might not appear to allow that.

For investors dependent on their portfolios for income – not least, the very rapidly increasing numbers of people opting for income drawdown in retirement under the pension freedom reforms – this is a hugely valuable financial planning tool. What those investors need is not so much the highest possible yield at any given time, but a reliable stream of income over an extended period. They can’t afford to stumble from feast to famine.

The increasing number of investment companies seeking permission from shareholders to make income distributions from capital is an important part of this picture. Martin Currie Asia Unconstrained is the latest fund to move in this direction – it will ask shareholders to vote in July on proposals to allow it to distribute up to 2 per cent of its assets via dividends each year.

Such a move might once have been poorly regarded, since taking income out of capital will inevitably reduce long-term capital returns. But the freedom of investment companies to explore this option, with the consent of investors, is another example of how the flexibility of the closed-ended sector can prove so valuable.