Cheap UK Equity Income Trusts Trading on Discount

The UK equity income sector was trading at an average of 5% discount at the end of March, we highlight the biggest yielding and the highest rated income trusts

Karen Kwok 27 April, 2016 | 4:45PM
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UK equity income investment trusts are going cheap, signalling a buying opportunity to closed end funds investors. Trusts in this sector are currently trading at an attractive discount, driven by selling towards the end of the 2015/16 tax year and a weak stock market year to date.

The UK equity income sector was trading at an average of 5% discount at the end of March from a 1% discount at the start of 2016, according to a report issued by Stifel.

What is a Discount?

Investment trusts trade at either a premium or discount to the value of their underlying assets, based on “the forces of supply and demand prevailing in the market for the trusts’ shares”, Chris Traulsen, head of research for Morningstar EMEA says. If demand for an investment trust is low, the shares will trade at a discount to their net asset value (NAV). If demand is high, shares in a particular trust will trade at a premium to their NAV.

Investors took profits on funds which had performed well at the end of the tax year, and by selling resulted in a rise in supply.

A volatile start to equity markets in 2016, means it is “understandable” for some investors reducing exposure to equity investments overall, says Stifel.

“We saw a similar pattern in the first three months of 2015 and the funds in the sector subsequently positively re-rated to trade on a 1% average premium by August 2015,” Stifel added.

There are already signs of some discounts narrowing: the UK equity income sector is trading at a 4% discount up from 5% at the end of March, indicating that investors need to act now if they want to avoid missing out a buying opportunity.

Which UK Income Trusts Offer the Highest Yield?

The UK equity income sector is trading on around a 4% dividend yield at the moment, offering a “relatively attractive” return compared with bank deposit rates, Stifel says. 

This includes Dunedin Income Growth (DIG) that is trading a 9% discount, according to Morningstar Direct. Its dividend yield is 5.1%. It’s a Bronze Rated trust by Morningstar analysts. Murray Income (MUT), another Bronze Rated trust, trades at a 8% discount with a 4.8% yield.

The Cheapest Gold Rated Trusts

There are three closed-end UK equity income funds rated Gold by Morningstar analysts according to Morningstar Direct, and Temple Bar Investment Trust (TMPL) offers the largest discount at 7.4%. It is also one of the cheapest trusts with an ongoing charge of 0.49% a year. It currently has a dividend yield of 3.8%. The trust has an experienced manager Alastair Mundy who has managed it since June 2000.

Mundy avoids sector specialists as he likes his analysts not to be narrow in their thinking, helping them avoid becoming overly negative on, or biased against, particular stocks, according to Morningstar analysts. The trust has lost 8% in 2015, however, it generates a positive long-term gain with a 6.5% five years annualising return.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk