Closed-end Fund Investors Seek UK Equities Exposure despite Brexit Risk

Investment trusts with high weightings in UK remain popular with Morningstar.co.uk readers – but there is also renewed interest in commodity-based trusts

Karen Kwok 22 June, 2016 | 12:10AM
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UK closed-end fund investors retained their interest in developed market equities last month - despite fears of a possible Brexit, according to Morningstar.co.uk’s ‘hit list’ of the most popular investment trusts.

Fears of a possible Brexit have caused short-term turbulence in the financial markets –however investment trusts with the largest exposure to UK stocks continued to top the most popular list in May.

This hasn’t just been limited to trusts in the UK large-cap category: investment trusts in the global large-cap sector with a high exposure to UK stocks also proved popular. 

Global Equity Trust with High Exposure to UK Equities

Witan (WTAN) – in the global large cap blended equity sector - has up to 40% exposure to UK equities. It came second in Morningstar’s list of 10 most popular investment trusts. It is Rated Silver by Morningstar analysts and is currently trading at a 5.8% discount.

Despite of its recent 2.7% loss to date, the trust has delivered a positive long-term return over the past four years. In 2013, it gained 36.7% and it has 10.8% three years annualised return and 10.5% five years annualised return.

Morningstar analyst David Holder retains confidence in Witan, which is reflected in the trust’s competitive price and solid result.

“Since the fund manager Andrew Bell took over, the results at Witan have been very solid. The board has maintained its excellent track record at paying a rising dividend each year for four decades, and in 2013 it moved to a quarterly dividend payment cycle,” Holder said.

Positive Returns from Investment Trusts under the UK Large-Cap Category

The outcome of the European Union Referendum remain too close to call – causing volatility in both UK currency and stock markets in recent months. However, investment trusts having more than 80% exposure to UK equities are performing positively. Not surprisingly, they remain popular with Morningstar.co.uk. readers.

This includes Gold Rated investment trust, Temple Bar (TMPL), which has generated a 1.9% return so far this year. It has 82% exposure to UK equities as it is under the UK large-cap value equity category. It is now trading at 8% discount and it has delivered a 6% annualised return over the past five years.

Morningstar analysts believe the trust is managed by experienced Alastair Mundy with a proven process that has delivered excellent returns, at a very reasonable price. The board is committed to paying a rising dividend year on year, and has met this commitment for the last 30 years. So this fund has particular appeal for investors who want regular and dependable income.

Another trust that has up to 80% exposure to UK equities, Finsbury Growth & Income (FGT), also delivers 2.4% positive returns year to date. It came third on the most popular hit list. The trust has generated positive returns for the past seven consecutive years.  It has 11.6% three year annualised return and a 14.3% five years annualised return. It is Gold Rated by Morningstar analysts and is currently trading at a 0.34% premium.  The trust has an experienced manager in Nick Train, a tried-and-tested process that has delivered excellent returns, and a competitive fee structure.

Another Gold Rated closed-end fund, is City of London (CTY). This has generated a 0.6% return this year. But its longer term results are more impressive: with an annualised return over five years of 10%. It has 88% exposure to UK equities and it is trading at a 1.9% premium. The trust has an outstanding 49-year record of annual dividend increases, Holder said. The company targets a yield of between 10% and 30% greater than the FTSE All Share. Currently the trust yields 3.9%, compared with the FTSE All Share yield of 3.7% due to the structural bias of yield distribution in UK market.

This trust is one of the most compelling options of its kind with amongst the lowest cost of any investment trust, according to Holder.

“We believe the strong management, consistent process, and exceptional low fees have contributed to the excellent long-term performance. The ongoing charges in 2015 of 0.42% are amongst the lowest of any investment trust,” Holder said.

Natural Resources Regain Confidence among Investors

As the commodity sector start to look “fairly positive” - thanks to a rising oil prices and a slightly weaker US dollar, - sentiment across this sector have improved. This has been reflected in the investment trust sector, with the Silver Rated, BlackRock World Mining Trust (BRMW), appearing on the top 10 most popular investment trust hit list for the first time since December 2014. This trust is trading at a 12.7% discount.

This fund is one of the best resourced in the sector, underpinned by its experience and knowledge, according to Morningstar analyst Fatima Khizou. It currently delivers 9.4% dividend yield. The trust underperformed in the past five years, but it has generated a 47.3% return year to date.

The trust’s final dividend to December 2015 of 14p was maintained with a total dividend of 21p for the year, which has been held since 2012. However, the chairman advised investors to expect a dividend cut in 2016, with key holdings such as BHP Billiton and Rio Tinto, cutting their dividends by 75% and 50% respectively.

Holder thinks looking at the position of commodities there is some hope that the dividend, whilst reduced, will still be “material feature” for investors here in the future. However, Stifel warned that if the total dividend falls by 25%, the prospective 2016 yield on the fund declines to 7%.

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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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BlackRock World Mining Trust Ord655.00 GBX-2.82Rating
City of London Ord404.50 GBX-1.58Rating
Finsbury Growth & Income Ord886.00 GBX-0.34Rating
Temple Bar Ord1,216.00 GBX-1.78Rating
Witan Ord241.00 GBX-1.43Rating

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk