Opportunities in income investment trusts: the best options from among investment trusts that invest for income

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2 Opportunities in income investment trusts: the best options from among investment trusts that invest for income Moira O Neill Personal Finance Editor Investors Chronicle

3 Investor policy statement Name: Age: Financial goals: Purpose of portfolio: Risk and return expectations: My investment philosophy: Time horizon: Target asset allocation: Diversification policy: Rebalancing and review: Investment universe:

4 How long will you live? Projected cohort expectations of life (years) at age 65, Males and Females England and Wales (Source: Government Actuary s Department/Office for National Statistics) Year Male cohort life expectancy at age years (to age 86.7) years (to age 87.8) years (to age 88.7) years (to age 89.6) Female cohort life expectancy at age years (to age 89.2) 25.3 years (to age 90.3) 26.2 years (to age 91.2) 27.1 years (to age 92.1)

5 APCIMS Private Investor Indices Asset class Stock Market Conservativ e Index (%) Income Portfolio (%) Growth Portfolio (%) UK shares International shares Bonds Cash Commercial property Hedge funds Total Balanced Portfolio (%) The Association of Private Client Investment Managers and Stockbrokers (APCIMS) is a trade association that represents the investment community. Its 176 full and associate members either directly manage over 509 billion of the country s wealth or provide supporting services to the industry.

6 Where to find income Markets that global investors would consider investing in for income (Source: Legg Mason) Market US 81% China 68% Emerging markets 63% Europe ex UK 61% Brazil 55% Japan 52% India 46% Russia 40% Percentage of investors

7 Fixed income issues APCIMS indices 35 per cent of the income index is made up of bonds. Bruce Stout, fund manager, Murray International investment trust - stark warning about bond bubble What to do? Buy funds that offer exposure to shorter duration bonds Alternative income sources: Neuberger Berman Global Floating Rate Income (NBLS)

8 High yield trusts Trust Dividend Yield % Merchants Trust 5.4 Henderson High Income 5.3 BlackRock Commodities Inc 5.2 Shires Income 5.2 European Assets 5.0 British Assets 4.7 Henderson Far East Income 4.6 Middlefield Canadian Income 4.4 Dunedin Income & Growth 4.2 Table shows investment trusts primarily investing in equities with a dividend yield above 4.0% Source: Oriel Securities, 16 April 2013 Standard Life Equity Income 4.1 City of London 4.1 BlackRock World Mining 4.1 Scottish American 4.1 Schroder Income & Growth 4.0 FTSE FTSE

9 Revenue reserves in the UK Income Growth Peer Group Name Reven ue Dividen reserve d s m m Revenu e Reserve s / Dividen d ratio Latest accounts City of % 30/06/2012 BlackRock Income & Growth % 31/10/2012 Income Growth % 31/01/2013 Edinburgh Investment Trust % 31/03/2012 F&C Capital & Income % 30/09/2012 Finsbury Growth & Income % 30/09/2012 Invesco Income Growth % 31/03/2012 JPM Claverhouse % 31/12/2012 JPM Elect - Managed Inc % 31/08/2012 Lowland % 30/09/2012 Merchants % 31/01/2012 Income % 30/06/2012 Perpetual Income & Gwth % 31/03/2012 Schroder Income Gwth % 31/08/2012 Standard Life Equity Income % 30/09/2012 Temple Bar % 31/12/2012 Income & Growth % 30/09/2012 Source: Winterflood Securities, The Companies 24-Apr-13 Note: Based on latest full year accounts

10 Income portfolio with a difference (March 2013) Bob is 65, retired, and has been investing in shares for about 15 years. UK Income portfolio with an emphasis on fixed securities and high-yielding stocks He says: "With such poor interest rates at banks and building societies the only way to provide good income is with preference shares, permanent interest bearing shares (Pibs) and high-yielding stocks. Portfolio: Pibs and preference shares (32%), Main market shares (40%), AIM shares (16%) and investment trusts (12%). Investment trusts: Edinburgh Investment Trust, F&C Commercial Property, New City High Yield Fund

11 2012. Boring portfolio needs no apology (June 2012) John's portfolio Name of share or fund Value United Utilities (UU) 9,490 Aberdeen Asian Income Fund (AAIF) 6,195 Aviva (AV) 4,751 WM Morrison Supermarkets (MRW) 4,921 National Grid (NG.) 5,589 Utilico Emerging Markets (UEM) 5,453 Standard Life (SL) 3,033 JP Morgan Emerging Markets Income Trust (JEMI) 2,769 Murray International Trust (MYI) 2,488 Temple Bar Investment Trust (TMPL) 1,938 Henderson Far East Income (HFEL) 1,245 Schroder Oriental Income Fund (SOI) 1,029 Scottish Mortgage Investment Trust (SMT) 1,033 5-year index linked saving certificare 9,000 Cash ISA 45,000 4 KWP Solar Panel Installation 16,000 Total 122,188

12 Cheap UK dividends Standard Life Equity Income Trust (SLET) Experienced new manager (Thomas Moore) Improved performance over one year Attractive yield (4.5%) Good revenue reserves Discount: -3.2% 12 month average discount: -5.64% Ongoing charge: 0.99% Top 20 holdings % HSBC 6.2 BP 3.6 Vodafone 3.6 BT 3.2 British American Tobacco 2.9 DS Smith 2.9 Royal Dutch Shell 2.8 easyjet 2.6 GlaxoSmithKline 2.6 Legal & General 2.3 Standard Chartered Bank 2.2 Close Bros 2.1 Barclays Bank 2.1 GKN 2.1 Rolls Royce 2 Inmarsat 2 Howden Joinery 1.7 Rio Tinto 1.7 Bodycote 1.7 International Personal Finance 1.7

13 High yield from strong economy Middlefield Canadian Income (MCT) Strong economy Strong returns Dividend yield: 4.53 % Premium: 2.36 % 12 month average discount/premium: 1.90% Ongoing charge: 1.00%

14 High yield from emerging markets J P Morgan Global Emerging Markets Income Trust (JEMI) Dividend yield: 4.11 % Premium: 2.42 % 12 month average premium: 1.51% AIC ongoing charge: 1.27% AIC ongoing charge plus performance fee: 2.96% Geographical breakdown (31 March 2013) South Africa 13.9% Brazil 13.2% Taiwan 11.2% China 8.5% Hong Kong 8.1% Russia 6.5 % Turkey 5.8% South Korea 4.5% Indonesia 4.4% Poland 3.9% Thailand 3.3% India 2.9% Singapore 2.5% Other 11.3%

15 Geographic breakdown data (as at as 31/03/2013) at: Property and Europe in one package TR Property Investment Trust (TRY) Dividend yield: 3.5% Discount: 13.6% 12 month average discount: 15.6% AIC Ongoing charge: 1.04% Country % of portfolio UK 44 France 22 Germany 11 Sweden 7 Netherlands 5 Switzerland 5 Austria 1 Belgium 1 Cash/Cash Equiv. 1 Finland 1 Italy 1 Norway 1

16 Quality Asian team Aberdeen Asian Income Fund (AAIF) Dividend yield: 3.44% Premium: 4.53 % 12 month average premium: 4.65% AIC Ongoing charge: 1.29 % Cumulative performance (%) As at 31/03/13 1 year (%) 3 years (%) 5 years (%) Share price Diluted NAV* MSCI AC Asia Pacific ex Japan *Excluding current year revenue

17 Check list Have your piece of paper outlining your strategy Diversify away from the UK equities with at least 15 per cent of your portfolio Double check that a trust is a true diversifier Check where the income is coming from capital or dividends, revenue reserves Rebalance to cope with the high premium on income

18 Income opportunities in investment trusts Moira O Neill Personal Finance Editor Investors Chronicle moira.oneill@ft.com

19 Panel and Q&A John Hughman, Editor, Investors Chronicle Annabel Brodie-Smith, Communications Director, Association of Investment Companies Moira O Neill, Personal Finance Editor, Investors Chronicle Peter Hewitt, Fund Manager, F&C Managed Portfolio Trust

20 Networking, canapés and drinks reception