Special Report on Investment Trusts (5): Careful selection can pay dividends: As interest rates fall, cash deposits earn less. Rupert Bruce looks at the high income trusts
Wednesday 20 January 1993
Most of the trusts launched in recent times have had a stated objective of high income. But during the recession they have, almost by definition, had poor capital performance. That is because many of the high income shares they have bought have been those that were likely to cut their dividends. And, when a dividend is cut, the share price tends to fall.
Now Jerry Evans, UK equity strategist at NatWest Securities, thinks the prospects for the best of the high income investment trusts may be about to improve. 'If you have a good fund manager I think the high yield investment trusts can be some of the best performers in 1993,' said Mr Evans.
His faith in these high income investment trusts goes hand in hand with expectations of a sustained economic recovery. If this is the case, many of the high income shares should do well because, with the exception of utilities, they tend to be the most sensitive to economic conditions.
He expects a further boost to performance because some shares have higher income yields than those earned by putting cash on deposit. That should encourage investors to buy these shares and push up their capital value.
'The main proviso I would make is that the fund managers have to be selective and make sure they buy the shares that will definitely not cut their dividend,' he said.
The poor performance of Merchants Trust, managed by Kleinwort Benson, is representative of many high income trusts during 1992, according to Robin Angus, a senior investment trust analyst at NatWest Securities. It has an income yield of just over 6 per cent, but its capital value climbed by only 11 per cent in 1992. Meanwhile the FTA All-Share broad stock market index rose by 14.8 per cent. The trust's annual report and accounts published in January 1992 revealed that its largest holding was British Petroleum. A few months later the oil giant cut its dividend and the share price fell sharply.
But, while some of the straightforward high income investment trusts may be about to perform well, problems are far from over for many recently launched split capital investment trusts. Like the normal high income trusts, they need to invest in shares with a high income. Unlike them, however, any poor capital performance is exaggerated by the capital structure of these trusts.
The simplest of these trusts have two classes of capital. The zero dividend preference share should steadily appreciate in capital value each year until it reaches a predetermined level on a predetermined date. The so-called ordinary income share gets all the income from the trust's portfolio, but only has rights to capital once the zero has been paid off in full. A few years of disappointing dividends and poor capital performance have created, in the very worst cases, doubt over whether the zeros can be paid fully. In many more cases, however, surprised income share investors are sitting on hefty capital losses.
Michael Woodward, investment director at Ivory & Sime, believes that if straightforward high income trusts do have a period of outperformance, it will be short term. He said: 'At the end of the day we firmly believe that it is dividend growth that drives investment performance in the long term. And dividend growth does not come from high yielding stocks . . .
'I would think that the investment trust industry will think again before going on such a binge in these things.'
Hooray, you're going to live longer! But what should you do to celebrate?
Debt in Britain: Numbers seeking help on how to cope with mounting bills goes up by more than half in three years
Bargain Hunter: BT improves its mobile reception with 'incredibly competitive' deals
Questions of Cash: Why was my case ignored by My Civil Service Pension?
Offset your mortgage and save thousands
- 1 Finland schools: Subjects scrapped and replaced with 'topics' as country reforms its education system
- 2 The West has it totally wrong on Lee Kuan Yew
- 3 Watch: Man takes selfie every mile of 2,600 mile hike, creates amazing timelapse video
- 4 The day I starred in Only Fools and Horses
- 5 Scientists have discovered a simple way to cook rice that dramatically cuts the calories
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
JK Rowling responds to fan tweeting she 'can't see' Dumbledore being gay
Jeremy Clarkson sacked live: Alan Yentob 'wouldn't rule out' ex Top Gear host's BBC return
Revealed: Putin's army of pro-Kremlin bloggers
The West has it totally wrong on Lee Kuan Yew
David Cameron calls Labour 'hopeless, sneering socialists' while announcing 7-day NHS plans
iJobs Money & Business
Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...
Negotiable: Recruitment Genius: You will be the first point of contact for all...
£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...
£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...
Day In a Page
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station