Due to the economic impact of the coronavirus outbreak, many UK companies cut, curtailed or suspended dividends last year, including historically trusted payers. However, some UK companies haven’t stopped generating and growing payouts, and some are showing signs of recovery. A great way to get exposure to these opportunities is, among other things, active funds run by experienced investment teams that can assess how sustainable these opportunities are going forward.
Investment trusts, on the other hand, have the advantage of curbing dividend income in good years, allowing them to accumulate reserves that can sustain or increase dividends in stockpiling years.
Finsbury Growth and Income Trust (FGT)
Finsbury Growth & Income Trust has been run since 2000 by respected manager Nick Train. He runs a focused portfolio of companies with strong brands and/or strong market franchises. These trusts typically don’t hold more than 30 shares, only 25 at the end of June. At the end of June, consumer goods companies tend to have a significant share of their assets.
As of the end of July, the largest trusts were alcoholic beverage company Diageo (DGE) and information and analytics provider RELX (REL), accounting for 11.4% and 10.6% of assets, respectively.
Train aims to buy and hold stocks over the long term, with the hope that their value will double or even better over time, regardless of short-term volatility. He no longer thinks they are a quality company, or sells only if they account for too large a percentage of trust assets due to an increase in value. This investment approach reduces trust returns by lowering turnover and lowering transaction costs.
Finsbury Growth & Income Trust has an excellent long-term performance record compared to the FTSE All-Share Index and other UK Equity Income Investment Trusts and has proven to be a defensive choice, including volatility over the past few years. However, this means that they can underperform even when they are performing well, as they don’t hold value and recovery stocks. For example, in the first seven months of the year, Finsbury Growth & Income Trust achieved a NAV return of 9.9% versus 11.7% for the FTSE All-Share Index.
These trusts also typically have low yields of around 1.8% as of mid-August. However, the Board of Directors aims to increase or maintain the total dividend each year and has kept the dividend at 16.6p despite extensive cuts by UK companies for the fiscal year ended 30 September 2020. According to the Association of Investment Companies (AIC), it was partially financed using an earnings reserve of $45.44 million at the end of the last fiscal year, equivalent to 1.22 years of dividends for the current fiscal year.
Finsbury Growth & Income Trust increased its dividend every 7 years prior to 2020.
Diversified Income Trust (DIVI)
Diverse Income Trust can invest in companies of all sizes, including those listed on Aim, and is generally biased towards small businesses. This sets it apart from many other UK equity income funds that generally focus on large caps. At the end of June, the Diverse Income Trust held 35.3% of its assets in Aim, 22% in FTSE 100, 19.6% in FTSE 250 and 15.2% in FTSE Small Cap listed companies.
As of the end of July, the largest trusts were online trading firm CMC Markets (CMCX) and business service provider K3 Capital (K3C), accounting for 3.4% and 2.4% of assets, respectively.
The main goal of a diversified income trust is to pay good dividends. The trust paid 3.75p per share for the fiscal year ended May 31, 2021, an increase of 1.4% over the previous year’s 3.7p. It was partially financed by the withdrawal of an earnings reserve worth 15.2 million at the end of the last fiscal year on May 31, 2021, for which it distributed a dividend worth of 14.8 million.
Since its launch in 2011, it has increased its dividend almost every year. Trust managers seek to maximize dividend growth potential because they believe that the companies that generate the greatest long-term dividend growth are often the ones that provide the best return on capital.
The trust’s yield was around 3% in mid-August.
Diverse Income Trusts also have good total returns. Between the April 2011 launch and the end of May 2021, the NAV and the stock’s total return were 239.7% and 227.1%, respectively. This contrasts with the FTSE All Share, FTSE SmallCap excluding investment trusts and FTSE Aim All-Share indexes of 83%, 202.2% and 52.9%, respectively, total returns. Despite Diverse Income Trust’s exposure to smaller companies and Aim, it was defensive. For example, in 2020, the trust made NAV and stock price total returns of 7.57% and 8.6%, respectively, during which time the FTSE All-Share Index fell 9.82%.
Diverse Income Trust has been running since its inception in 2011 by highly experienced UK small business manager Gervais Williams with Martin Turner.
In addition to investing in stocks, managers sometimes use the FTSE 100 put option contract, which gives the buyer the opportunity to sell a specified amount of a security at a predetermined price within a specified period of time. For example, in March 2020, Williams and Turner sold their FTSE 100 put options for profit, providing capital to invest in additional income stocks when prices were weak. They recently bought another FTSE 100 put option that can be sold between now and December 2022.
Legal Bond Corporation (LWDB)
Law Debenture Corporation sets itself apart from other UK equity income funds by investing in publicly traded stocks as well as owning a professional services business. This accounts for about 16% of the NAV, and the additional revenue helps the trust pay off the proper income. For the 10-year period through December 31, 2020, 36% of the trust’s dividend was financed by professional services businesses, and the dividend has been maintained or increased annually for 42 years. The trust paid a total dividend of 27.5p per share in 2020 and the board plans to pay a higher level in 2021.
The trust investment portfolio is run by an experienced manager, James Henderson, who, along with Laura Foll, has achieved very high returns with the funds he manages. They aim for real capital growth in the long run and a steadily increasing income through an opposing investment style. They seek unfavorable stocks that trade at a discount to their long-term historical averages and prefer blue-chip companies with strong competitive advantages.
Income from the professional services business means there is no need to invest in a high-dividend sector that Henderson and Foll believe has no potential to deliver attractive total returns. This has helped the trust achieve superior total returns compared to the FTSE All-Share Index and other UK equity income investment trusts.
As of the end of July, the companies with the most holdings were GlaxoSmithKline (GSK) and Royal Mail (RMG), which each accounted for 2.5% and 1.6% of assets. Royal Mail, with a dividend yield of only about 2%, suffered the biggest drop in trust earnings during July, but Henderson and Foll argue there is a structural shift in e-commerce adoption compared to pre-pandemic levels that will continue to benefit the company. .
However, their opposing style of value investing means that trust returns can be volatile from year to year and suffer from underperforming periods.
Trojan Trojan Ethical Income (GB00BKTW4V58)
Troy Troy Ethical Income Total returns generally have a defensive profile depending on Troy Asset Management’s investment approach. It prioritizes avoiding permanent capital losses through conservative asset allocation. For example, Trojan Ethical Income fell below 6% when the FTSE All-Share Index fell nearly 10% last year and the British Investment Association’s average return on equity income was -10.73%.
Long-term cumulative total returns also outperform these benchmarks, but their defensive profile means that the market and more aggressively positioned funds could lag behind as they advance from 12 months to 13 August.
The fund excludes investments in sectors including armaments, tobacco, fossil fuels, and high-interest loans. It is still exposed to a variety of sectors, particularly consumer goods companies, which accounted for 31% of assets at the end of July, and the financial and industrial sectors, which accounted for 18% and 16%, respectively. As of the end of July, the two largest stakes were RELX and Unilever (ULVR).
The Fund paid a total dividend of 2.4961p per share for the fiscal year ended January 31, 2021, which is 28% lower than the 3.4471p paid in the previous fiscal year. Its manager Hugo Ure said this was due to cuts, delays and delays in the UK company’s dividend. However, he expects improvement as some fund holdings are starting to recover. And he thinks other holdings have the potential for dividend growth backed by free cash flow, so we can move forward.
Cumulative Total Return Fund/Benchmark 1-year (%) 3-year (%) 5-year (%) 10-year (%) Finsbury Gross & Income Trust stock price 11.0314.1152.81253.60 DiVenture Corporation stock price 55.7249.8797.28230.841.958 divers Income Trust5 Trojan Ethical Income*10.6419.6534.92 IA UK Equity Income Sector Average 31.2610.6327.14118.35FTSE Total Equity index26.9511.3733.29110.23FTSE Small Cap ex ICs index71.4542.42 Source: August 26.9511.3733.29110.23FTSE
*The history of this unit/equity class has been extended at the discretion of FE Fundinfo to show the longer performance of the fund as a whole.
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