Investment trusts can be the key to long-term income generation, so here are five ideas for your investment account.
Five investment trusts for your ISA
As the financial year nears its end, ISA allocations are on many investors’ minds. Whether it’s making the most of your allowance, or reconsidering your investment goals, changes will be underway in portfolios across the nation.
For a large number of ISA investors, income generation over the long term is their primary goal. For this, investment trusts, and especially equity income trusts, can be the ideal vehicle.
For example, the ability of trusts to trade below the value of their underlying assets – called a discount – means that it is possible to buy assets at bargain prices. It is worth noting that not all discounts are built the same. Some trusts trade perpetually on a discount, and so the discount effectively becomes the investment trust’s ‘true’ value. But, trusts trading below their average discounts can offer strong potential returns for investors.
Aberdeen Smaller Companies Income Trust (ASCI) is currently trading on a discount of -11.6%. This is despite its management having being taken over in September by Abby Glennie, one of the two managers on the Standard Life small-cap team responsible for the highly-successful (and much less undervalued) Standard Life UK Smaller Companies Trust (SLS). This could prove an opportunity to get hold of a proven income-generating investment process, on a trust which is already yielding 2.9%, at a relatively cheap price.
A different characteristic of investment trusts that also propels them into income generation is their ability to retain up to 15% of annual revenues in a reserve – which boards use to top up dividends where the income from underlying investments has fallen short. This offers a degree of smoothness to dividends in equity income trusts that is not available to open-ended equivalents, a fact felt by investors following BP’s Deepwater Horizon disaster in 2010, when the company suspended its dividend.
City of London (CTY) is a classic example of this, which sailed through the aftermath of the crisis using reserves and continued its progressive increase of dividends. This year marks the 52nd year of consecutive increases, 27 of them with Job Curtis at the helm. He emphasises the security of underlying companies, in terms of strong balance sheets, well-valued shared and sustainable cash generation to support both dividends and re-investment.
Finally, investment trusts are able to pay dividends from capital, offering a diversified income stream for investors that do not want to be solely exposed to income-focused investment strategies. This is particularly pertinent in the tax neutral ISA wrapper, given it is indifferent as to whether income or capital is paid as a dividend. Both Baring Emerging Europe (BEE) and International Biotechnology Trust (IBT) pay a high yield of 4.8% (at the end of January 2019), from sectors that investors rarely associate with income.
Several aspects of the investment trust structure lend themselves to income-hungry investors – even if these are not immediately apparent. It is therefore worth taking a closer look at investment trusts as the final weeks of ‘ISA season’ roll on.
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These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.