Considering Investment Trust investment
Nocto
Posts: 177 Forumite
I am an income investor with a portfolio of Unit Trusts (& OEIC’s), and over the next few weeks will be moving some of my investments into an ISA, due to the recent tax changes.
Rather than buying back units in the same funds (Invesco Perpetual Income Inc & IP High Income Inc), I am considering purchasing shares in a UK Equity Income investment trust. The intention being to split two roughly equal investments into three.
I will be staying in the UK Equity Income sector - this is not a whole portfolio rebalance.
I am looking at The City of London Investment Trust plc*. As an income investor its 50 year history of dividend increases is pretty compelling (though of course past performance is not a guide to the future, etc. etc…). It looks to be well and conservatively managed, with good long term growth. Views would be appreciated.
Also, I have never purchased shares in an investment trust before. I understand and am completely comfortable with the way unit trusts work, but have always been a little wary of investment trust discounts / premiums and gearing. Which is why I have never invested in one before. Again, views would be appreciated.
Finally, Trustnet lists five share classes. Common sense tells me that “The City of London Investment Trust Ord” (price 418.5p today) is the correct share to purchase (CTY.L), but what are the others?
* All funds in the IT UK Equity Income sector are under consideration - This one looks to be the most suitable for me. But I am open to other suggestions.
Can I politely request that this thread doesn’t deteriorate into a Unit Trusts vs Investment Trusts (and possibly ETF’s) argument… Thank you!
Rather than buying back units in the same funds (Invesco Perpetual Income Inc & IP High Income Inc), I am considering purchasing shares in a UK Equity Income investment trust. The intention being to split two roughly equal investments into three.
I will be staying in the UK Equity Income sector - this is not a whole portfolio rebalance.
I am looking at The City of London Investment Trust plc*. As an income investor its 50 year history of dividend increases is pretty compelling (though of course past performance is not a guide to the future, etc. etc…). It looks to be well and conservatively managed, with good long term growth. Views would be appreciated.
Also, I have never purchased shares in an investment trust before. I understand and am completely comfortable with the way unit trusts work, but have always been a little wary of investment trust discounts / premiums and gearing. Which is why I have never invested in one before. Again, views would be appreciated.
Finally, Trustnet lists five share classes. Common sense tells me that “The City of London Investment Trust Ord” (price 418.5p today) is the correct share to purchase (CTY.L), but what are the others?
* All funds in the IT UK Equity Income sector are under consideration - This one looks to be the most suitable for me. But I am open to other suggestions.
Can I politely request that this thread doesn’t deteriorate into a Unit Trusts vs Investment Trusts (and possibly ETF’s) argument… Thank you!
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Comments
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The discounts/premium is pretty modest at the moment. They do have a program of issuing or buying back shares to stop the market price getting too far out of hand with respect to the NAV. You can plot the share price total return compared to NAV total return over time to see how this has varied. Gearing in the last annual report last summer was 8%, not too outrageous. Per last monthly factsheet 7%.Also, I have never purchased shares in an investment trust before. I understand and am completely comfortable with the way unit trusts work, but have always been a little wary of investment trust discounts / premiums and gearing. Which is why I have never invested in one before. Again, views would be appreciated.
As you noted, they use gearing. One way of doing that would be to get this from bank loans or overdrafts. But for the longer term as a permanent source of debt finance, they can issue other financial instruments for a price that delivers a fixed return maturing in year x (say 2021) and invest the proceeds of that fundraising to make returns for their equity investors. And when the debt matures, issue new instruments to help them pay it off rather than have to sell the underlying portfolio holdings.Finally, Trustnet lists five share classes. Common sense tells me that “The City of London Investment Trust Ord” (price 418.5p today) is the correct share to purchase (CTY.L), but what are the others?
It is just like borrowing money via mortgage to buy a house (except as mentioned the borrowing is pretty modest at under 10%). If it all went titsup the mortgage lender would get their money out before you the equity owner were left with the leftovers.
As an investor, you could probably invest in the debt instead of the equity. But if you want access to the unlimited upside of the income and gains from the portfolio's investments, rather than the relatively safe but unexciting fixed coupon, you would want to play the role of 'house buyer' not 'mortgage company' and therefore buy the ordinary shares rather than any other instruments which might be in issue from time to time.
I don't hold any ITs in the UK equity income sector so am not best placed to comment on relative attractiveness of this one compared to the competition. You should get the annual report from last summer and the shorter but more recent interim report and see what you think about the strategy, performance and their commentary on it.0 -
CTY is a good IT for income and has a very low OCF. If you like Mark Barnett as it looks like you do, then Edinburgh IT could be a cheaper way of accessing him than your IPI and IPHI0
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Thanks Bowlhead - very useful reply.0
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In my UK income section I have both CTY and EDIN. You might also look at Finsbury Growth & Income, not quite as much yield but a good record. Troy income and Growth might be a defensive alternative as well as any of the above, "might" not lose quite as much in a downturn.0
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CTY is a good IT for income and has a very low OCF. If you like Mark Barnett as it looks like you do, then Edinburgh IT could be a cheaper way of accessing him than your IPI and IPHI
Thanks, you're quite correct that i like Mark Barnett and I am also considering Edinburgh IT, which is currently trading at a discount. But I wonder if two investments managed by the same person is enough...
My investments in IPI & IPHI have grown by 50% each in six years and currently rather dominate my UK Equity income exposure. I'm beginning to feel that a little manager diversification may be in order.
On the other hand perhaps I should stick with a winner.0 -
There's a lot to be said for diversification and even CTY and EDIN have a lot in common. Just to throw another idea out there you might check out Henderson High Income (HHI). It has a high yield (4.61) from a mixture of equities and bonds, currently about 11%. It's conservatively run though may have less scope for growth which might or might not be a good thing for you. Note the high OCF though0
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There's a lot to be said for diversification and even CTY and EDIN have a lot in common. Just to throw another idea out there you might check out Henderson High Income (HHI). It has a high yield (4.61) from a mixture of equities and bonds, currently about 11%. It's conservatively run though may have less scope for growth which might or might not be a good thing for you. Note the high OCF though
Hmm... interesting. The charges are high, and the gearing is 24%, yet it trades at a premium...
I'm probably still thinking too much like a UT investor - but that gearing puts me off. Surely that makes it a riskier investment?
I Like the yield though, but I suspect that there's less scope for growing the dividend.0 -
True but at face value that's like saying, I could buy this asset which pays £50 a year dividends or that asset which pays £60 a year dividends, but the one that pays £60 already might not be able to grow to much more than £60 so would stay static, while the one that pays £50 might be able to increase in the future, perhaps to some high figure, like eventually, erm, £60.I Like the yield though, but I suspect that there's less scope for growing the dividend.
I'd better get the one that pays £50 so I can see it increase next time towards £60, rather than the on that pays £60 already....
It is a bit more nuanced than that because in theory something that pays lower divs might have greater capital growth prospects, or just be generally lower risk involving lower falls in capital which would hamper future income projections of the currently-higher-yielding fund.
But the future is uncertain. You can't have your cake and eat it, so all things being equal you would expect two managers to produce broadly similar long term returns if they are taking broadly similar risks and charging broadly similar fees. Change one variable, or have one manager with greater skill or research resources or luck, and the relative outcomes would be different.0 -
If you are looking for just one IT in the UK equity income sector as a core holding then CTY would fit the bill IMHO. However if you are looking for more than one or diversification in equity income then an additional IT to consider would be the Diverse Income Trust (DIVI) which I hold. This is heavily invested in small comanies, including AIM, so is quite diffferent to the typical IT s in the sector. It has a lot of holdings with the largest only 2.2%. Despite the holdings it has been less volatile than the sector according to the 2016 annual report. The charge is 1.18% but they are totally open and even state the additional costs of dealing/stamp duty (+0.10% extra). Yield is a little lower at 3.1% (info from Jan 2017 Factsheet).0
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On the subject of dividend growth, just in case you haven't seen it, the AIC website is useful for that and more:
https://www.theaic.co.uk/aic/find-compare-investment-companies
You can filter the investment trusts by sector and the results include 5 year dividend growth.0
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