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.'
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Pension mortgages: 'The advice I was given was wrong and now I face losing my home'
You'll need £220,000 for a minimum wage in your retirement
Money Insider: Supermarkets: the real challenger banks
Questions of Cash: I checked in with Air France in time and still missed the plane
Minister's pension promise to firefighters challenged
- 1 Planes go hybrid-electric in important step to greener flight
- 2 Christmas comes early to Hong Kong, as millions of bank notes spill out onto busy street
- 3 Antonio Martin shooting: Police and protesters clash over teenager's death just five miles from Ferguson, Missouri
- 4 Northern Lights above Britain: Stunning Aurora Borealis illuminates Northumberland sky on Christmas Eve
- 5 British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Rozanne Duncan: Ukip expels councillor for 'jaw-dropping' comments made in BBC TV interview
Germany anti-Islam protests: 17,000 march on Dresden against 'Islamification of the West'
Ukip member gets into Christmas spirit with Union Flag plea to Santa 'for our country back'
Panic Saturday: 13 million Britons spend £1.2bn – while 13 million others across the country live in poverty unable to afford food
iJobs Money & Business
Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...
£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...
£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...
£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
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
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
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
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens