Don't pay for income with poor performance

Because following a set of poor results from the trust, we are recommending you sell its shares if you hold them in your portfolio. There are several reasons for our decision and they come despite its seemingly remarkable yield.

In a disappointing run over the year to date (to 26 November 2013), its net asset value (NAV) total return of 15.2 per cent has lagged its benchmark (80 per cent FTSE All-Share/20 per cent FTSE World ex UK), which produced a total return of 19 per cent over the same period.

And looking to the longer term the picture is bleak, too. Over the past 10 years, the UK portfolio has only made a meaningful contribution to the relative performance in one year, while the manager's 60-stock open-ended UK equity income fund is ranked bottom quartile over three years and bottom decile over one and five years.

"This is one of the worst performing investment trusts investors can buy," said Alan Brierley, head of closed ended funds at Canaccord Genuity. "And even with this in mind, these are terrible results for the trust."

The company is around 80 per cent invested in UK equities, but sits in the AIC global growth and income sector, which puts it in a tough position. It's doesn't hold enough in UK equities to be a UK fund, but holds too many UK stocks to have the flexibility that normally comes with a global fund.

As a result of its failings, the board has decided to reduce the total number of holdings, although the portfolio will continue to be invested mainly in UK-listed equities.

These will be streamlined into one portfolio, rather than as several sub-portfolios, as has been the arrangement in the past.

A statement from the trust said: "All holdings will be selected on the basis of fundamental research, utilising the wider skills within the managers' investment teams. This represents a change in approach for most of our international equity holdings which have been selected on a systematic (or quantitative) basis since December 2008.

"We believe that this change will result in improved long-term performance for our shareholders, while recognising that there may be higher levels of volatility in short-term returns. The managers have already started to implement the initial changes to the portfolio."

But despite the change in strategy, Mr Brierley remains unconvinced, pinning most of the fund's failings on "indifferent stock selection". He also says the fund's (already poor) track record has been propped up by gearing and buy-backs.

If you're selling your shares in British Assets Trust, you might be looking for another investment trust to fill the hole in your portfolio. You could look to Murray International (MYI), an IC Top 100 Fund, as its premium to NAV has narrowed from 14 per cent to 5 per cent. Also worth checking out is Invesco Perpetual Select Global Equity Income (IVPG) trust, which has performed well this year.

So, on the basis that steady income isn't worth paying for with woeful growth, and that 80 per cent UK equity exposure in a global fund is too limiting, we believe it's time to say goodbye to British Assets. Sell.

Source: Morningstar as at 26 November 2013. *Performance data as at 31 October 2013.

TOP TEN HOLDINGS as at 31 October 2013

ASSET ALLOCATION as at 31 October 2013