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How important is yield when it comes to investment trusts?

A master key to making sense of trusts — or is it just one consideration among many others?

Last week, Oriel Securities published its list of the top 20 equity investment trusts with a dividend yield in excess of 4 per cent but how important is yield when examining investment trusts?

At the top of the list is the European Assets trust with a yield of 6.6 per cent at a 4 per cent discount. This is followed by the BlackRock Commodities Income trust, which is yielding 6.1 per cent at a 4 per cent premium.

CF Miton Worldwide Opportunities manager Nick Greenwood has picked out the European Assets, Middlefield Canadian and JPM Global Emerging Markets Income trusts as his favourites from the list, with each offering different advantages.

“European Assets is slightly unusual in that its Dutch history has allowed it to distribute dividends from capital for many years,” he says. “This allows the manager Sam Cosh to manage the portfolio with less of an eye on generating income. Higher-yielding equities are more expensive because of yield starvation in the same way that high-income trusts are highly priced. This strategy avoids the risk of the share price being undermined at two levels when the market environment moves on.

“Middlefield Canadian started life investing in local royalty trusts but now has a more diversified portfolio. Its investments tend to be natural high yielders and therefore less vulnerable when the tide turns.

“I like JPM Emerging Markets Income because in the longer term emerging market companies should produce more dividend growth than in more mature developed economies. I have concerns to say the least about the Russian and Brazilian exposures but at least we can say that some of these country’s problems are already reflected in today’s market prices.”

Out of the 20 investment trusts listed by Oriel, 12 are currently running at a premium following good performance, with the Murray International trust currently highest at 11 per cent.

The trust is currently paying a dividend yield of 4.1 per cent.

Chelsea Financial Services managing director Darius McDermott says yield is just one consideration to look at when assessing investment trusts.

“Like any investment vehicle, investors must look under the bonnet and understand what these trusts are holding. For example, a number of the highest-yielding trusts are solely exposed to Russia, which obviously carries higher risk in the current climate. Simply investing in the highest yields is not a strategy I would advocate. 

“Having said this, in the current low-yielding environment there are clearly a number of diversified trusts offering compelling prospects for income. Many trusts also trade at a discount to net asset value, which is additionally attractive.”

Norwest Consultants principal Harry Katz says he is wary of trusts that offer higher yields as often this can impact on investors’ capital. “There is no such thing as a free lunch. What I look for in anything is what are the prospects, is the manager reliable and I am more interested in total return. You do not want a higher yield if it is damaging capital. I prefer to look at global trusts as you can look at holding assets inaccessible elsewhere. I do not like borrowing in any circumstance because you are subordinate to somebody else.”

Charles Stanley Direct head of investment research Ben Yearsley says trusts and their investment objectives should be looked at on a case-by-case basis.

“When you look at things such as the BlackRock Worldwide Mining trust you have to consider what the current climate is in respective sectors.,” he says. “You would have thought the London Mining fiasco would or will have an impact so that is something to consider. Yield is obviously one aspect but also there are a number of trusts here that are running at a premium.”

Hargreaves Lansdown head of investment research Mark Dampier says where investment trusts are running at a premium, prices are looking too expensive.

“I wouldn’t buy something on a premium. Trusts have had a fantastically good press for the last few years. The performance of trusts has been good because they are geared into a bull market and discounts have closed in. The buying has come in many instances through DFMs.”

Dampier adds that because of their limited size and closed-ended structure they will never be mass-market instruments.

“There is clearly a capacity issue because they cannot be mass-market instruments if they are not open-ended. Investment trusts are niche operators and cannot be mass market because of their limited size. At the moment a lot of trusts are trading at NAV or premium and so are looking expensive.”



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