Over the last 20 years the average UK Equity Income investment trust has more than doubled in value while delivering 4.6 per cent annual dividend growth for investors, reports the Association of Investment Companies (AIC).
According to the AIC's figures, a £100,000 investment made on 31 December 1995 in the average UK equity income investment trust would have generated an average annual income of £3,826 by 31 December 1996, and this would have grown to an average annual income of £8,993 by 31 December 2015.
Over 20 years, an average investor would have received a total of £124,548 dividend payments on their initial £100,000 and their capital would have grown to £215,874 - an increase of 116 per cent.
Annabel Brodie-Smith, communications director at the AIC, said the data shows how investment companies and trusts can be useful to people looking to grow their capital and receive a retirement income.
"These figures make a compelling reason for investors to consider investment companies as part of a well-balanced retirement portfolio whether that's in a self-invested personal pension (Sipp) or an individual savings account (Isa)," she said.
"The investment company sector has some unique advantages over other forms of collective investment when it comes to income. Investment companies not only have the freedom to pay income out of capital, they also have the flexibility to hold some of the income they receive each year and save it for tougher times."
Winterflood research analyst Innes Urquhart said investment trusts' ability to use gearing and their historically lower fees helps to explain why they have outperformed open-ended funds over the past two decades. "We would also argue that not having to worry about the investment flows associated with an open-ended fund generally leads to better investment decision-making and also allows the managers to take advantage of less liquid investment opportunities, often in mid- and small-cap companies," he said.
But he also cautioned that performance has been supported by the fact that many trusts have tended to be underweight in banks and basic materials such as mining, which are areas that have significantly underperformed.
"Were these sectors to see an improvement in relative performance, this may well have a negative impact on the performance of the UK Equity Income sector relative to the wider market," he explained.
Charles Cade, head of investment companies research at Numis Securities, said investors need to be aware that the general risks of investing in equities apply to investment trusts.
"Ultimately, you are investing in UK equities and these would be vulnerable to a market correction and/or disappointing earnings growth," he said. "In particular, equity income investment companies are vulnerable if they have a concentrated portfolio and major holdings suffer dividend cuts."
However, he added, that in contrast to open-ended funds, most investment companies have considerable revenue reserves that can help them through a period of earnings weakness, smoothing out dividends to investors.
Another issue investors need to be aware of is whether or not an investment trust is trading at a premium or discount to its net asset value (NAV).
Recent risk aversion and uncertainty around Brexit has led to widening discounts with the sector trading on an average discount of around 4.5 per cent, according to Ewan Lovett-Turner, director of investment companies research at Numis Securities. He said: "At the moment there is the potential to buy UK Equity Income investment companies trading on reasonable discounts."
AIC UK Equity Income sector growth
Date | Capital return (£) | Income received (£) |
31 Dec 96 | 102,836 | 3,826 |
31 Dec 97 | 128,175 | 4,062 |
31 Dec 98 | 138,229 | 4,232 |
31 Dec 99 | 153,248 | 4,516 |
31 Dec 00 | 153,730 | 4,631 |
31 Dec 01 | 136,305 | 4,820 |
31 Dec 02 | 99,275 | 4,992 |
31 Dec 03 | 114,264 | 5,211 |
31 Dec 04 | 128,174 | 5,248 |
31 Dec 05 | 151,669 | 5,548 |
31 Dec 06 | 178,214 | 6,057 |
31 Dec 07 | 164,404 | 6,858 |
31 Dec 08 | 113,809 | 7,441 |
31 Dec 09 | 135,462 | 7,546 |
31 Dec 10 | 162,044 | 7,635 |
31 Dec 11 | 157,874 | 7,870 |
31 Dec 12 | 175,113 | 8,138 |
31 Dec 13 | 215,581 | 8,400 |
31 Dec 14 | 215,548 | 8,525 |
31 Dec 15 | 215,874 | 8,993 |
Source: AIC using Morningstar data
Compound average annual growth rate: 4.6 per cent