UK Equity Income from Invesco at a discount

Last week we tipped another equity income fund run by Invesco Perpetual, The Edinburgh Investment Trust (EDIN), which is managed by Mark Barnett. Both funds are benchmarked against the FTSE All-Share index, and Winterflood research shows they have about 60 per cent of the same stocks. They are both good funds, but there are several important differences between them and their managers.

The Edinburgh Trust is positioned more conservatively, as Mr Barnett is more likely to stick to benchmark weights. On the other hand, Ciaran Mallon, manager of the Invesco Income Equity Growth Trust, is prepared to take a more active approach to his sector weightings. For example, the trust has no investment in mining companies, because it sees them as too risky. He also has zero exposure to foreign markets, so the trust would suit an investor looking for pure UK exposure. The Invesco Equity Income Growth Trust is also relatively small with a market cap of £160m, dwarfed by the £1,194m Edinburgh Trust.

Crucially, the trust's discount has widened over the past year and, at 6 per cent, it is one of the cheaper funds in Morningstar's UK Equity Income sector. For example, Edinburgh Investment Trust's shares are only trading at a 0.3 per cent discount.

Mr Mallon is experienced and has been running the trust for more than nine years. He also manages an open ended fund, Invesco Perpetual Income & Growth, which has a similar portfolio to the trust. Following Neil Woodford's departure from Invesco earlier this year, Mr Mallon took responsibility for the UK equity components of a range of other funds, including the Invesco Perpetual Monthly Income Plus Fund, and the Invesco Perpetual Distribution Fund.

The Invesco Equity Income Growth Trust pays a quarterly dividend and has a healthy yield of 3.6 per cent. Its earnings during 2010, 2011 and 2013, didn't cover dividend payments, so it used revenue reserves to ensure investors still received their dividends. However, according to investment trust analysts at Winterflood, its revenue reserves are now much healthier at around £2.6m, equivalent to 46 per cent of a full year's dividend payment.

Its consistent record of outperformance is the result of gearing (7.5 per cent) and deliberately low weightings to the mining and banking sectors. Mr Mallon believes that "utility banks" are not attractive businesses given their low rates of return on capital. Therefore, the only banking exposure in the portfolio is HSBC (HSBA).

Instead, he has a heavy weighting to the tobacco and healthcare sectors, with holdings including Smith & Nephew (SN), AstraZeneca (AZN) and GlaxoSmithKline (GSK). The trust also has a low portfolio turnover of 8 per cent in its last financial year, reflecting Mr Mallon's long-term investing style and his emphasis on investing in quality businesses.

Simon Elliott, a research analyst at Winterflood, said: "Invesco Income Growth Trust has been in the shadow of its larger stable mates, Edinburgh Investment Trust and Perpetual Income & Growth Investment Trust, for a number of years, mainly because of its smaller size.

"However, Ciaran Mallon has done a good job for shareholders, delivering consistent performance through a more mainstream portfolio. Supporting dividends with the fund's reserves was the right decision and the hope now will be that the fund sees continued growth in its revenues, allowing it to replenish these reserves."

With an ongoing charge of 0.56 per cent it looks very reasonable for an actively managed investment trust. Rival Edinburgh Investment Trust has a slightly higher charge of 0.68 per cent. For pure UK income and growth exposure on a discount, this investment trust is a good bet. Buy.

INVESCO PERPETUAL INCOME GROWTH TRUST (IVI) KEY FACTS