People often tell me they’re not confident enough to buy their own shares, but they don’t trust fund managers who they see as only out to line their own pockets. While that latter sentiment is not necessarily accurate, it is common, and it’s perhaps understandable.
My solution, as always, is to go for either an index tracker or look towards investment trusts. With an investment trust, we investors actually own the company, making the pockets that the company is trying to line our own. Today I’m looking at two trusts with different but complementary approaches.
Small is beautiful?
Strategic Equity Capital (LSE: SEC) is one of the smaller trusts with a market cap of £140m, and its aim is net asset value (NAV) appreciation.
Wednesday’s full-year results showed a 2.2% rise in NAV, against an 8.6% fall for the FTSE Small Cap ex Investment Trusts Total Return Index. In a tough year, I see that as a commendable performance.
Pointing out fears that the Trump-China trade war might escalate, and the UK’s Brexit effects linger, chairman Richard Hills makes what I think is an apt comment: “The whole UK stock market, on a global basis, is now generally considered to be cheap while simultaneously ‘uninvestable’ given the uncertain backdrop.”
While the trust has its focus on capital appreciation, rules that prohibit investment trusts from retaining any more than 15% of their income in any financial year mean a dividend has to be paid. At 1.5p per share, it amounts to a yield of only around 0.7%, but it’s of no real importance.
Investment trust shares typically trade at a discount to NAV, and for Strategic Equity Capital that’s averaged 15.2% over the past 12 months, which hints at undervaluation to me. The board thinks so too, and has invested £6.9m in buying back its own shares at an average discount of 15.9%.
I reckon we have a well-managed investment trust here, and I think the shares are a buy.
Big is better?
My second pick today is at the other end of the scale, in terms of size and strategy. A FTSE 250 company valued at £1.63bn, City of London Investment Trust (LSE: CTY) is a veritable dividend champion.
In March this year, the Association of Investment Companies named City of London as its top dividend hero. Heading a list of 20 trusts that had lifted their dividends for at least 20 years in a row, City of London had achieved that feat for 52 consecutive years.
And it went one further for the year ending June 2019, with a 5% hike in its annual payments to 18.6p per share. At the time, that provided a 4.4% yield. So we’re looking at inflation-beating rises, a very long track record of increases, and a strong yield. On its own, that looks like a good reason to invest, but from where is the trust generating the cash?
The company goes for dividend-paying UK equities, which I think is the perfect strategy for someone seeking dependable retirement income. Its portfolio holds some of our dividend giants, including Shell, HSBC, BP, Diageo, Unilever.
If you think a UK-centric approach is risky right now, every one of those companies is a big global player and has little real dependence on the UK economy. City of London is also on my investment shortlist.