Investment Trusts for Income

VIDEO: A look at which specific investment trusts could be suitable for income seekers

Holly Cook 19 July, 2012 | 11:28AM
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Investment Trusts Mentioned in the Video:
Murray International (MYI)
JPMorgan Global Emerging Markets (JEMI)
Dunedin Income Growth (DIG)
Schroder Income Growth (SCF

Holly Cook: It's “Seeking Income Week” on and I'm joined by Jackie Beard, Director of Closed-End Fund Research at Morningstar. Jackie, thanks for joining me.

Jackie Beard: Hi, Holly.

Cook: So whenever we talk about income, quite often investment trusts pop up. What is it about investment trusts that make them suitable for income seekers?

Beard: Well, the structure is very efficient, and a part of that efficiency is because of the revenue reserve. So to explain briefly how that works, it means that the company can keep back 15% of its dividend income every year. So it's a bit like a company keeping back its profits. And when you look at the open-end funds, they can't do that. They have to pay out their income every year. So it means that the [investment trust] board can make quite strategic decisions on how they want to smooth the income payments. For an investor, it means there's predictability of income. So in low return worlds, even if you're not a desperate income seeker, I think it's a very nice way of getting some stability of returns.

Cook: So is it fair then to say that if you're investing in investment trust, you can almost count on a slightly more reliable payout ratio?

Beard: Absolutely, yeah, it's very reliable. And quite a few of the trusts have, what's called a “progressive dividend” policy, which means that every year they've committed to increasing that dividend in absolute sense year-on-year. Some of these funds have 30-year records of doing this, and the boards are really very protective of maintaining that, because it really sets them apart from open-end funds.

Cook: Which is exactly what an income seeker wants to hear.

Beard: Precisely.

Cook: So, what are some of the funds that we rate highly?

Beard: Oh gosh. What are some of the funds we like? Things like Murray International, very nice global growth fund. And JPMorgan Global Emerging Markets, because it's not just about the UK and it's not just about global, there are some quite specialist funds in the investment trust sector.

One caveat on that is these are all starting to trade at a premium. I think, that's a recognition of the fact that people realise there is this predictability of income. We've seen that discount move into a premium for over half the income sector in the investment trust world. That’s quite staggering.

Cook: So, that’s essentially the same as saying ‘we like these funds, but they're a bit pricey at the moment’.

Beard: That's right. So I think, if there are some opportunities out there, then there's a handful of funds where there’s been some changes recently. So they might not be ‘top of pops’ in terms of our ratings, but something like Dunedin Income Growth, it's the same team at Aberdeen running all their equity funds and exactly the same process. So that's quite an interesting one. Something like Schroder Income; again, they've had a change of manager, but they've got track records. All these funds have had changes of manager, but they all have very proven track records. It's not a graduate running these funds, it's people with long experience in the sector. I think that makes them quite exciting at the moment.

Cook: And from the investor's point of view, when they are looking at the investment trust world and they're trying to pick their investments, what sort of criteria would they look at? The dividend payments obviously would be something that you want to look at, but what else is important for your research?

Beard: I would look at the discount. I would look at how it's traded over time, and to see if there is a trend, because even the funds that are trading on a premium at the moment will dip down into discounts. It's really just about having the core proposition, looking at our analyst research, and looking at what makes sense to fit your risk profile.

Cook: Well, thanks, Jackie. Some very good tips there.

Beard: Thanks.

Cook: From Morningstar, I'm Holly Cook. Thanks for watching.

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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Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites