Are these income trusts strong buys in the current choppy market?
If recent market turbulence has taught us one thing, it is that we should respect the power of the dividend. Like a Duracell battery-powered toy, the income keeps banging away after those whizzy growth stocks have run down.
As I recently discovered, it is easy to go overboard on equity income. And that's what I'm about to do. I want to dive into some nicely diversified equity income funds with low charges and hefty yields, preferably between 4% and 6%.
And then I want to invest for growth, year after year. At least 20 years, in fact. And possibly beyond.
Give it some stick
I already hold two equity income funds. Inevitably, one of them is Invesco-Perpetual Income, run by you-know-who (Neil Woodford, in case you don't). The other is Rathbone Income, managed by Carl Stick.
They're both good funds, returning 53% and 57% respectively over the past three years. The trouble is, they're both unit trusts, with pricey total expense ratios (TERs) of 1.68% and 1.56%.
Those charges take a hefty bite out of the funds' annual yields of 3.8% and 4.13% (as an aside, it's interesting how Rathbone wins on growth, TER and yield).
One alternative is to simply top up my portfolio of dividend-yielding stocks such as GlaxoSmithKline (LSE: GSK), Royal Dutch Shell (LSE: RDSB) and Vodafone (LSE: VOD).
But this time, I'm looking to see if an investment trust (or three) can do the job instead.
Income, at a premium
One drawback with dividend-paying investment trusts is that they tend to trade at a premium. Good examples are City of London Investment Trust (LSE: CTY), which has increased its dividend for 44 consecutive years, and Neil Woodford's Edinburgh Investment Trust (LSE: EDIN). Both trade at a premium of around 2% to 3% to net asset value.
That shows how highly investors prize them, but I don't like buying trusts at a premium, especially since it knocks the yield. I want a discount, please.
So what did I find?
From little acorns…
I started my search in the UK High Income investment trust sector and stumbled across an investment trust I had never heard of before, called Acorn Income Fund (LSE: AIF), from Premier Asset Management.
This fund has already grown into a mighty oak, returning 198% over the past three years. It also yields 4.52% a year. Despite that, it is trading at a discount of more than -15%.
John McClure's fund is 75% invested in smaller companies, and is clearly making some big calls, with its largest holding RPC Group (LSE: RPC) making up nearly 9% of the fund, and Fool favourite James Halstead (LSE: JHD) totalling 8%.
In fact, its top 10 holdings make up 50% of the fund. Diversified, it ain't.
That explains its sharp outperformance (its benchmark UK high income sector delivered 88%) and also its high TER of 2.41%.
Small Companies Dividend Trust (LSE: SDV) from Chelverton Asset Management has returned 162% over three years, yields 6.4% and trades at a -3% discount. Again, the TER is the blow, at 2.46%.
Both funds look impressive, if you think now is the right time to invest in small companies. And if you can stomach those charges.
Next stop, UK Growth & Income, home of solid blue-chip funds such as the top-performing Troy Income & Growth Trust, which returned 112% over three years and yields 3.6%, but trades at a 4% premium. Curses!
Lowland Investment Company (LSE: LWI) returned 109% over three years. It trades at a narrow -3% discount and yields 3.1%, with a low TER of 0.74%. I fancied a wider discount and bigger yield, but this looks like a contender.
Shires Income (LSE: SHRS), from Aberdeen Asset Management, boasts a spiffing 6.5% yield and has returned 98% over three years, but also trades at a small premium. Am I getting too hung up on this premium thing? It rules out another brace of income goodies, Edinburgh Investment Trust and Murray Trust, both from Aberdeen.
A -6% discount, a 6% yield and a 0.66% TER? That has a devilish symmetry to it, which is why I might go shopping for Merchants Trust (LSE: MRCH), which invests in a portfolio of FTSE 100 faves, including BP (LSE: BP), HSBC (LSE: HSBA), British American Tobacco (LSE: BAT), BAE Systems (LSE: BAE), SSE (LSE: SSE), BT (LSE: BT-A) and National Grid (LSE: NG).
Performance has been mid-table rather than market beating, matching the sector average by returning 60% (another six!) in three years. But its solid blend of stocks are highly appealing to me.
Finally, to the International Growth & Income sector. Scottish American Investment Company (LSE: SCAM), from Baillie Gifford, is a stand-out here, returning 85% over three years and yielding just over 4%. It is trading at a small discount, with a 1.08 TER.
Murray International (LSE: MYI), from Asia specialists Aberdeen Asset Management yields 4.1% but is trading at a whopping 5.9% premium. TERs tend to be higher in the international sector, and Murray charges 1.23%.
Bankers Trust (LSE: BNKR), from Henderson Global Investors, is an international fund with large UK exposure and a relatively humble three-year return of 43%, which explains the -11 discount. The yield is a bit soppy at just over 3%. Its TER is a very lowly 0.42%, but low charges aren't everything. No, really.
My favourite here is the British Assets Trust (LSE: BSET), two-thirds invested in UK shares. It is up 58% over three years and yields a juicy 4.9%. It trades at a small -2% discount, has an acceptable TER of 0.74% and a track record that stretches back to 1898.
In trusts we trust
There is no single fund out there that meets my criteria. The best performers inevitably trade at a premium. Right now, I'm leaning towards Merchant's Trust, British Assets and Acorn Income.
Or do you have a better idea?
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> Harvey Jones owns shares in BP, GlaxoSmithKline, Shell and Vodafone.