Switch out of Scottish American while premium is high

With this in mind, consider Scottish American Investment Company (SCAM). It has underperformed its benchmark, FTSE All World Index, and the Association of Investment Companies (AIC) Global Equity Income sector average in share price terms over three, five and 10 years. In terms of its net asset value (NAV) returns, it underperformed its benchmark over these time periods and one year.

However, Scottish American has moved to a premium to NAV of more than 7 per cent, a level where it has been for a few months, against a 12-month average of around par. Earlier this year it was trading at a discount, at times in excess of 6 per cent, and it has rarely been at such a high premium over the last few years.

The trust also has relatively high gearing (debt) of 27 per cent, and this is via an £80m debenture paying 8 per cent interest, which is due for repayment in April 2022.

"The fund has underperformed global equity indices over most medium-term time periods on a NAV basis, and with the shares having moved to a notable premium over the last few months, and given the size and expensive cost of the debt facility, we would prefer alternatives," argues Mick Gilligan, head of research at broker Killik & Co.

With a number of investment trusts offering attractive yields on premiums, a better option might be to switch into an open-ended fund. Overseas equity income funds in the IC Top 100 Funds include Artemis Global Income (GB00B5ZX1M70) which offers a yield of about 4.2 per cent. It has beaten MSCI AC World Index over one, three and five years, and is the top performing fund in the Investment Association Global Equity Income sector over three and five.

Over one year and six months Scottish American's share price outperformed its index and sector average. In early 2014 deputy manager Dominic Neary became lead manager, so this could be the beginning of a turnaround under a new manager. Mr Neary has repositioned the portfolio with the aim of increasing the level and dependability of the income stream, while also improving the capital return.

The trust also offers an attractive yield of 4.28 per cent and has grown its dividend every year for the last 35. The dividend is fully covered by earnings and it has revenue reserves of 10.2p a share which could help maintain or raise the dividend in future years, if earnings are not enough. And it pays quarterly dividends.

Scottish American's manager, Baillie Gifford argues that "Scottish American looks expensive but you need to take into account the debt. The trust's board are aware of the seemingly large premium but can only really issue shares at a level that does not dilute investors' holdings. They have issued shares in a small way relatively recently."

But there is no guarantee this trust can continue to do well and it may fall back to a discount to NAV, as its equity portfolio is considerably different to its benchmark and there will be times when its performance differs.

If Scottish American continues to perform well and falls back to a discount, this could be a better time to invest or reinvest. But for now SELL.

Source: Morningstar, *Baillie Gifford

Performance

Morningstar as at 18 September 2015

TOP 10 HOLDINGS as at 31 August 2015 (%)

Geographic breakdown (%)