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  • FIRST POST
    • Nocto
    • By Nocto 11th Mar 17, 6:12 PM
    • 171Posts
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    Nocto
    Considering Investment Trust investment
    • #1
    • 11th Mar 17, 6:12 PM
    Considering Investment Trust investment 11th Mar 17 at 6:12 PM
    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!
Page 1
    • bowlhead99
    • By bowlhead99 11th Mar 17, 6:45 PM
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    bowlhead99
    • #2
    • 11th Mar 17, 6:45 PM
    • #2
    • 11th Mar 17, 6:45 PM
    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.
    Originally posted by Nocto
    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%.

    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?
    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.

    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.
    • ColdIron
    • By ColdIron 11th Mar 17, 6:45 PM
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    ColdIron
    • #3
    • 11th Mar 17, 6:45 PM
    • #3
    • 11th Mar 17, 6:45 PM
    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
    • Nocto
    • By Nocto 11th Mar 17, 7:07 PM
    • 171 Posts
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    Nocto
    • #4
    • 11th Mar 17, 7:07 PM
    • #4
    • 11th Mar 17, 7:07 PM
    Thanks Bowlhead - very useful reply.
    • talexuser
    • By talexuser 11th Mar 17, 7:17 PM
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    talexuser
    • #5
    • 11th Mar 17, 7:17 PM
    • #5
    • 11th Mar 17, 7:17 PM
    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.
    • Nocto
    • By Nocto 11th Mar 17, 7:22 PM
    • 171 Posts
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    Nocto
    • #6
    • 11th Mar 17, 7:22 PM
    • #6
    • 11th Mar 17, 7:22 PM
    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
    Originally posted by ColdIron
    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.
    • ColdIron
    • By ColdIron 11th Mar 17, 7:48 PM
    • 3,159 Posts
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    ColdIron
    • #7
    • 11th Mar 17, 7:48 PM
    • #7
    • 11th Mar 17, 7:48 PM
    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
    • Nocto
    • By Nocto 11th Mar 17, 8:17 PM
    • 171 Posts
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    Nocto
    • #8
    • 11th Mar 17, 8:17 PM
    • #8
    • 11th Mar 17, 8:17 PM
    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
    Originally posted by ColdIron
    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.
    • bowlhead99
    • By bowlhead99 11th Mar 17, 8:34 PM
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    bowlhead99
    • #9
    • 11th Mar 17, 8:34 PM
    • #9
    • 11th Mar 17, 8:34 PM
    I Like the yield though, but I suspect that there's less scope for growing the dividend.
    Originally posted by Nocto
    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'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.
    • Morphoton
    • By Morphoton 11th Mar 17, 8:38 PM
    • 39 Posts
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    Morphoton
    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).
    • TCA
    • By TCA 11th Mar 17, 8:39 PM
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    TCA
    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.
    • TCA
    • By TCA 11th Mar 17, 10:25 PM
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    TCA
    On the subject of CTY, it's continually rated a top trust by Morningstar. Their latest analyst research from November last year is below:

    The City of London Investment Trust Plc

    City of London remains a highly compelling option for investors.

    There are several reasons we have such conviction in the fund. Job Curtis has been at the helm for 25 years, a length of tenure that’s rare to see. His involvement with the fund dates to his time at Touche Remnant, which was acquired by Henderson in 1992, although he officially took charge of the fund in July 1991.

    Not only has the management been consistent but the process used by Curtis is also little changed over that time. “Conservative” is a moniker that permeates through the management of the trust, and Curtis is naturally a cautious investor. This caution has served shareholders well over the years. He doesn’t ignore the macro picture, but the bulk of his analysis is done from the bottom up. A company’s cash generation and physical assets are important in his analysis, but the primary driver for a stock to enter the portfolio is dividend yield, and this focus on income as a measure of a company’s value has been paramount in the fund’s success.

    The prudent and measured approach to portfolio management here has resulted in outperformance over most time frames. Indeed, over Curtis’ tenure since 1991, the fund has returned an annualised 9.3%, some 80 basis points more than the FTSE All-Share and around 190 basis points ahead of the peer group over this period. The fund has quite a low active share score and historical tracking error, suggesting outperformance has been generated through relatively small incremental positions, rather than by aggressive sector and stock positioning. The focus on well-managed companies with a commitment to their dividends had also enabled the fund to increase its dividend in each of the 50 years, which is a real feather in the cap for the fund manager and board.

    Another plus is the board’s approach to discount and premium management. While there is no firm rule in place, the board will issue shares when the fund trades at a premium to its net asset value, as we have seen for some time now, but they will also buy back shares when the fund trades at a sustained and material discount. We take comfort in the fact the board has demonstrated its approach clearly and thus kept discount volatility muted, and we think shareholders should be reassured by this.

    Finally, and most crucially, investors benefit from the very low costs associated with this fund. With ongoing charges for financial year-end 2016 of 0.42%, the board has made good with its avowed intent to have amongst the lowest fees available for any investment trust.

    In summary, we believe the combination of experienced and stable management, consistent process, exceptionally low fees, and focus on dividend generation contribute to make this one of the most compelling options of its kind.

    We are pleased to reiterate the Morningstar Analyst Rating of Gold.

    Role in Portfolio
    The fund provides investors with core UK equity exposure. It offers the prospect of longer-term growth in capital and income, the dividend here has been raised for 50 consecutive years. The manager’s cautious approach and focus on limiting downside risk makes it especially suitable for those investors with less tolerance for risk, although they should still broadly expect equity volatility here.

    Executive Summary
    Process: Curtis’ process favours caution, and income is of paramount importance in his decision-making. This leads to a portfolio biased toward large caps but not to the exclusion of smaller names or overseas opportunities, which are limited to 20%.

    NAV Performance: The fund has performed well over the short, medium, and long term under Curtis’ stewardship, beating both its peers and the FTSE All-Share. He has achieved this without taking excess levels of risk.

    People: Job Curtis is a long-standing veteran of Henderson. He has managed investment trusts since 1987 and this trust since July 1991. He is supported by a stable team with some exceptional depth of experience within it.

    Parent: An acquisition-led period for Henderson has given it a platform for its rising retail ambitions.

    Board: The board under the chairmanship of Philip Remnant comprises a good range of skills and experiences. All directors own shares in the fund, which we like to see as we feel it aligns their interests with those of the investor.

    Fees: The fund is highly competitively priced with one of the lowest ongoing charges of any investment trust (2016: 0.42%). Our analysis identifies this as one of the most important drivers for long-term investor returns.
    • xylophone
    • By xylophone 11th Mar 17, 11:32 PM
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    xylophone
    Have you seen today's Your Money in The Daily Telegraph?

    There's an article on the back page concerning ITs which may be of interest.
    • Nocto
    • By Nocto 12th Mar 17, 12:28 AM
    • 171 Posts
    • 145 Thanks
    Nocto
    Thanks TCA!

    I think that The City of London Investment Trust looks like the right investment for me. No one’s come back with a compelling reason to avoid this IT (or IT’s in general - yet!). I didn’t think they would, but you never know if you’re missing something, especially when I’m considering an investment which is very slightly different from what I’m used to.

    Thanks for the other suggestions guys. I’ll certainly be reading a lot of factsheets & reports with an open mind before I commit. So far City of London IT seems to tick all the right boxes, with Edinburgh IT a close second. Others will be taken into consideration (I can of course always buy more than one - but as I already have ten UT investments I’m trying to keep things simple).
    • Nocto
    • By Nocto 12th Mar 17, 12:29 AM
    • 171 Posts
    • 145 Thanks
    Nocto
    Have you seen today's Your Money in The Daily Telegraph?

    There's an article on the back page concerning ITs which may be of interest.
    Originally posted by xylophone
    I haven't - is the article online?
    • xylophone
    • By xylophone 12th Mar 17, 12:47 AM
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    xylophone
    I haven't - is the article online?
    It doesn't appear to be unfortunately.

    It does mention Mark Barnett's Edinburgh Investment Trust and Invesco Perpetual Investment and Growth Investment Trust.
    • ColdIron
    • By ColdIron 12th Mar 17, 8:40 AM
    • 3,159 Posts
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    ColdIron
    If you have a MyWaitrose card you could spend an hour reading your free Sunday Telegraph with your free coffee

    FWIW I don't think you'll regret choosing City of London IT, I haven't, and as you say it will give you a bit of manager diversification
    • Freecall
    • By Freecall 12th Mar 17, 10:03 AM
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    Freecall
    If you have a MyWaitrose card you could spend an hour reading your free Sunday Telegraph with your free coffee
    Originally posted by ColdIron
    There speaks a true MSE'er.

    • badger09
    • By badger09 12th Mar 17, 10:52 AM
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    badger09
    If you have a MyWaitrose card you could spend an hour reading your free Sunday Telegraph with your free coffee
    Originally posted by ColdIron
    There speaks a true MSE'er.

    Originally posted by Freecall
    Surely a true MSEer would shop at Aldi rather than Waitrose, then walk home and make his own coffee
    • Freecall
    • By Freecall 12th Mar 17, 10:58 AM
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    Freecall
    Surely a true MSEer would shop at Aldi rather than Waitrose, then walk home and make his own coffee
    Originally posted by badger09
    I don't think ColdIron said anything about shopping.
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