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Get yield at a discount with Standard Life Equity Income

A new fund manager at Standard Life Equity Income has resulted in improved performance over the last year, along with an attractive yield. The trust still trades at a discount but that may change
November 27, 2012

Finding an investment trust with a good yield that doesn't trade at a premium to its net asset value (NAV) is becoming increasingly difficult as yield-starved investors pile into any they can find, pushing their share prices to premiums. When higher-yielding trusts aren't on a premium it's normally for a good reason, such as poor performance. But Standard Life Equity Income Trust (SLET) may now present an opportunity for yield and decent performance.

IC TIP: Buy at 306p
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points
  • Experienced new manager
  • Improved performance over one year
  • Attractive yield
  • Trades at a discount
Bear points
  • New manager may not continue to do well

This trust, which aims to generate income and growth from a portfolio of UK equities, failed to beat its peer group average over three and five years. However, last year, Thomas Moore was appointed as a co-manager on the fund, and earlier this year he took over as lead manager.

Mr Moore has also run the open-ended fund, Standard Life Investments UK Equity Income Unconstrained (ISIN: GB00B1LBSR16) since 2009. This has gradually improved its performance since then so that over one year it is the eighth best out of nearly 100 funds, in contrast to being 52nd out of nearly 80 over five years.

Mr Moore is an experienced investor, having worked at Standard Life Investments since 2002 initially as an investment analyst, and then as a portfolio manager. Before this he worked for four years at Schroders as an assistant manager in UK equities.

Over the year that Mr Moore has been involved with the running of Standard Life Equity Income investment trust its performance has beaten the sector average and thrown off an attractive yield of more than 4 per cent. But it still trades at a discount of 4.8 per cent.

 

IC TIP RATING
Tip style:INCOME
Risk rating:HIGH
Timescale:LONG TERM

 

If the performance continues to improve then the discount is likely to tighten further, so now may be a good time to buy the shares. It has already started to tighten as its 12-month average discount is 7.6 per cent. Peter Walls, who runs the Unicorn Mastertrust fund of investment trusts, thinks it is unlikely that the discount will widen further and suggests Standard Life Equity Income as an option for income-seeking investors (read his full comment).

Mr Moore has made a number of changes to the portfolio in the last year. "The sharp improvement in relative performance compared with 2011 coincides with the selective changes that have been made to the investment portfolio over the course of the year," said Standard Life in the trust's recent annual report. "The portfolio has been shifted gradually to introduce a number of mid-cap holdings where the investment manager has a high conviction whilst at the same time reducing the concentration risk of the top 10 income contributors."

At the end of September this year 35.8 per cent of assets were in mid caps in contrast to 23.9 per cent a year earlier.

The trust has also continued to perform well in terms of income generation, with a 14.3 per cent increase in investment income over the year to 30 September. A half-year dividend of 3.75p was paid on 22 June 2012, an increase of 5.6 per cent on the previous year's interim, and the trust's board is recommending a 1.7 per cent increase in the final dividend to 9p. This would bring total dividends to 12.75p.

From next March, the trust will pay quarterly dividends.

Standard Life Equity Income Trust, meanwhile, has a very reasonable ongoing charge of 0.96 per cent.

Investors will have to watch out for overlap with any existing UK share portfolio. However, with improving performance and a tightening discount, now could be a good time to get in. Buy.

STANDARD LIFE EQUITY INCOME (GB0006039597)

PRICE:306pGEARING:108%
AIC SECTOR:UK Growth & IncomeNAV:318.7p
FUND TYPE:Investment trustPRICE DISCOUNT TO NAV:4.81%
MARKET CAP:£115.97mONGOING CHARGE:0.96%
SET UP DATE:15 November 1991MORE DETAILS:uk.standardlifeinvestments.com
YIELD:4.17% 

Source: Morningstar as at 23 November 2012

Performance (%)

1 year6 months3 months
Standard Life Equity Income share price22.6214.389.11
FTSE All-Share17.119.931.52

Source: Morningstar as at 22 November 2012

Top 10 holdings as at 30 September 2012

HSBC5.5
Royal Dutch Shell5.0
Vodafone4.7
BP4.3
GlaxoSmithKline3.9
British American Tobacco3.1
BT Group3.1
DS Smith2.8
Petrofac2.0
Inmarsat2.0

Sector Breakdown

Finance-general 27.0
Basic industries17.2
Oil & gas13.4
Consumer services12.5
Telecommunications11.6
Consumer goods7.5
Healthcare6.7
Materials4.4
Net current assets4.0
Utilities3.4