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IC investment trust income portfolios – 12 months on

Dave Baxter checks how our investment trust portfolios for income have been performing
November 14, 2019

The extremes of equity investing have been clear to see over the past year. The final three months of 2018, a period marked by heightened concerns about central bank policy and an escalating US/China trade spat, saw the MSCI World index lose 11.5 per cent in sterling terms

But investors with steady nerves are likely to have fared well over the 12 months to 30 September 2019. Equities have mostly rallied strongly so far this year and bonds, which provided some defence for portfolios in the final quarter of 2018, have also delivered big returns this year. But while many investors have made good total returns, rising prices have meant a fall in yields, making income even more difficult to find.

Our two investment trust income portfolios have not been immune to last year’s volatility, with the performance of both suffering in the final three months of 2018. They also lagged the subsequent rally in equity and bond markets, although they still made positive returns over the 12 months to the end of September. And, importantly, they have maintained a good level of yield.

The portfolios are constructed by David Liddell, chief executive of online investment service IpsoFacto Investor, and Simon Moore, the director of consultancy Trust Research, who also carries out work for investment manager EQ Investors.

Over our assessment period between 1 October 2018 and 30 September 2019, Mr Liddell’s portfolio made a share price total return of 1.8 per cent. £100,000 invested in it would have delivered a total income of £4,920 or a yield of 4.9 per cent. Mr Moore’s portfolio managed a total share price return of 6.4 per cent, and £100,000 invested in it would have produced an income of £6,097 or a yield of nearly 6.1 per cent.

We have looked at how holdings in the portfolios contributed to returns by accounting for both share price total returns and the weighting given to each trust. And we have looked at the income produced, accounting for position sizes.

 

How David Liddell’s portfolio performed

Mr Liddell’s portfolio is heavily focused on mainstream investments, with 65 per cent of assets allocated to equity income trusts, most of which focus on the UK. The balance of the portfolio is in bond, commodity, multi-asset and infrastructure trusts.

Although the portfolio made a small positive total return over the assessment period, it significantly lagged the 7.6 per cent sterling rise in MSCI World index. However, it holds up well in terms of yield.

Mr Liddell says the drag on total returns is due to the uncertainty that has continued to haunt UK equities, the value bias of some of the portfolio constituents and – in the case of one trust – Woodford-related fallout.

Three of the four UK equity income holdings in the portfolio – BMO UK High Income Trust (BHI),  Edinburgh Investment Trust (EDIN) and iShares UK Dividend UCITS ETF (IUKD) – made losses in terms of their share price total return. They each had a 12.5 per cent weighting in the portfolio.

The biggest drag on the portfolio's total returns was Edinburgh Investment Trust, which is managed by Neil Woodford protégé Mark Barnett, and may have taken an additional hit amid the scandal that surrounded his former mentor. But Mr Liddell is sticking with these positions, citing good yields, attractive share prices and the hope of a resurgence for UK assets once a Brexit outcome has emerged.

“UK equities have not been flavour of the month,” he explains. “But there is a lot of value there, with the caveat that there are still political issues.”

Other equity holdings, all of which have a degree of value exposure, have fared better despite this investment style lagging growth strategies for much of the assessment period.

Temple Bar Investment Trust (TMPL), a UK equity income fund, delivered a 3.7 per cent share price total return. Mr Liddell adds that with a conservative management style and a yield expected to grow above inflation, this is a good core holding.

Temple Bar, Murray International Trust (MYI) and Aberdeen Asian Income Fund (AAIF) made good share price total returns despite having a value investment style. If value investments return to form, as they did briefly in September, they could see further gains.

“You would expect to see some of these more value-oriented funds put in some decent performance,” says Mr Liddell.

The non-equity holdings' share price total returns have also had mixed fortunes.

JLEN Environmental Assets Group (JLEN), which accounts for 10 per cent of Mr Liddell's portfolio, made the best share price total return over the assessment period, and the greatest contribution to the overall portfolio return. Mr Liddell rates this holding for its yield and diversification qualities even though its shares trade at a hefty premium to the value of its underlying assets.

“This trust should be reasonably uncorrelated with equities and provide diversification,” he explains. “It has a good yield. It has a high premium, but so do many other infrastructure trusts.”

NB Global Floating Rate Income Fund (NBLS) has also performed well, delivering a 6.5 per cent yield and a share price total return of 8.7 per cent. This trust is also in Mr Moore's portfolio, but both he and Mr Liddell have become concerned about how floating rate notes, which pay variable yields linked to interest rates, could fare at a time when many central banks have been cutting rates.

However, Mr Liddell will continue to include the trust in his portfolio as a diversifier to equity markets, although it is his only fixed-income holding. 

“I’m pretty nervous about this one,” he says. “We are in an odd position where the US economy is doing well but we are seeing interest rate cuts. That’s not particularly helpful for a floating rate fund. But I can’t see anything that looks much better in the [investment trust] bond space.”

Mr Liddell's other alternative asset trusts have had more of a difficult time. Aberdeen Diversified Income and Growth Trust (ADIG) has struggled, in part because one of its holdings, CATCo Reinsurance Opportunities Fund (CAT), performed poorly following a high number of natural disasters. BlackRock Energy and Resources Income Trust (BERI), which changed its name from BlackRock Commodities Income Investment Trust in May, also didn't make a good share price total return.

But all the constituents in Mr Liddell's portfolio pay out a decent level of income – the yields on these funds ranged between 3.8 per cent and 6.5 per cent. This, and the belief that a contrarian strategy could come good over time, has persuaded Mr Liddell to leave the vast majority of his portfolio unchanged.

 

Table 1
David Liddell's portfolio: 1-year performance 1/10/18 to 30/09/19
HoldingAsset classAllocation (%)Share price total return Contribution to portfolio return (%)Income paid (£)Contribution to income (%)Yield (%)Average yield over five yearsCapital value as at 30/09/19 (£)
Murray International Trust (MYI)Global equity12.510.71.3375573.1911.649540274.585524.5213,837.5
BMO UK High Income Trust (BHI)UK equity12.5-2.55-0.31875476.259.6793271933.814.112,181.25
Edinburgh Investment Trust (EDIN)UK equity12.5-8.54-1.0675515.4610.476233064.123684.2611,432.5
iShares UK Dividend UCITS ETF (IUKD)UK equity12.5-4.81-0.60125770.7915.665571886.166325.6111,898.75
Aberdeen Diversified Income and Growth Trust (ADIG)Multi-asset10-9.02-0.902427.258.6834489094.27254.599,098
Temple Bar Investment Trust (TMPL)UK equity103.710.371404.588.2227027734.04583.610,371
JLEN Environmental Assets Group (JLEN)Infrastructure1019.421.942626.612.73504766.2666.2811,942
NB Global Floating Rate Income Fund (NBLS)Bonds108.650.865649.4513.199452066.49456.510,865
Aberdeen Asian Income Fund (AAIF)Asian equity59.460.473224.824.5692521564.49644.465,473
Blackrock Energy and Resources Income Trust (BERI)Commodities5-5.74-0.287251.895.1194240985.03784.434,713
Overall portfolio  21.281.8124920.28 4.920284.835101,812
Source: FE Analytics

 

Table 5
David Liddell's portfolio's performance
Holding6-month share price total return (%)1-year share price total return (%)3-year share price cumulative total return (%)5-year share price cumulative total return (%)10-year share price cumulative total return (%)
Murray International Trust (MYI)4.5810.720.4437.23144.24
BMO UK High Income Trust (BHI)2.38-2.557.5525.9987.96
Edinburgh Investment Trust (EDIN)-5.86-8.54-8.0817.61155.3
iShares UK Dividend UCITS ETF (IUKD)1.17-4.810.214.5585.83
Aberdeen Diversified Income and Growth Trust (ADIG)-4.57-9.0212.493.4162.06
Temple Bar Investment Trust (TMPL)-1.943.7126.4424.67149.97
JLEN Environmental Assets Group (JLEN)9.8519.4236.6754.42 
NB Global Floating Rate Income Fund (NBLS)9.228.6513.0751.26 
Aberdeen Asian Income Fund (AAIF)3.559.4622.2133.24151.97
Blackrock Energy and Resources Income Trust (BERI)-3.71-5.7410.27-6.397.64
Source: FE Analytics as at 30 September 2019
Table 2
David Liddell's updated portfolio 
HoldingAllocationChange from 2018 (%)Contribution to portfolio return (%)Income paid (£)
Murray International Trust (MYI)12.501.3573.19
BMO UK High Income Trust (BHI)12.50-0.3476.25
Edinburgh Investment Trust (EDIN)12.50-1.1515.46
iShares UK Dividend UCITS ETF (IUKD)12.50-0.6770.79
Aberdeen Diversified Income and Growth Trust (ADIG)100-0.9427.25
Temple Bar Investment Trust (TMPL)1000.4404.58
JLEN Environmental Assets Group (JLEN)1001.9626.6
NB Global Floating Rate Income Fund (NBLS)1000.9649.45
Aberdeen Asian Income Fund (AAIF)500.4224.82
BlackRock World Mining Trust (BRWM)*550.2274.73
Overall portfolio  2.24,943.12
*new addition    

Source: FE Analytics. Performance between 1/10/18 and 30/09/19

 

Table 6
David Liddell's new addition's performance
Holding6-month share price total return (%)1-year share price total return (%)3-year share price cumulative total return (%)5-year share price cumulative total return (%)10-year share price cumulative total return (%)
BlackRock World Mining Trust (BRWM)-0.183.4936.1911.8910.39
Source: FE Analytics as at 30/09/19

 

How Simon Moore’s portfolio performed

Mr Moore’s portfolio differs significantly from Mr Liddell’s portfolio, which is heavily weighted to equity funds. This asset class represents just a quarter of Mr Moore’s portfolio, which is instead focused on high-yielding alternative assets. Trusts with a focus on infrastructure or property account for 45 per cent of his portfolio, and bonds and more esoteric forms of debt account for 30 per cent.

These allocations stem partly from a desire to tap into assets that are unavailable via open-ended funds or, arguably, better accessed via a closed-end structure. Mr Moore has diversified across these areas with different forms of exposure, but also favours investments backed by assets that offset the uncertainty facing markets and the global economy.

“If there’s an overarching theme to the portfolio it would be asset-backing,” he says. “If there’s a recession, you have the comfort that what you are investing in is asset-backed.”

The biggest contributor to Mr Moore's portfolio's return over the 12 months to 30 September, LXI REIT (LXI), is one of the portfolio’s largest positions and made a share price total return of 18.6 per cent, which equates to a 2.8 per cent portfolio contribution. It also yielded nearly 4 per cent – despite the strong performance – although is still one of the lower-yielding holdings in Mr Moore's portfolio.

He also highlights that the trust has successfully disposed of some of its assets.

“They have proved their ability to buy buildings and also shown that they are adept at selling buildings as they have been selling at a profit," he explains. “Many other funds, both open and closed-ended, buy a building and [still have] it in five years’ time. How do you know what the value is if you don’t sell some of it? LXI REIT's managers have proved that their net asset value is real.”

International Public Partnerships (INPP) and GCP Infrastructure Investments (GCP) have also made decent contributions to returns. Although some of the trusts in Mr Moore's portfolio operate in the same broad areas as each other, Mr Moore aims to diversify within them. So, for example, International Public Partnerships has a global remit and focuses on private finance initiative (PFI) projects, which have a form of government backing, while GCP Infrastructure Investments makes loans to infrastructure projects. 

Some of the constituents of Mr Moore's portfolio focus on niche forms of debt. Fair Oaks Income (FAIR), which accounts for 10 per cent of the portfolio, invests in collaterised loan obligations (CLOs) and made the greatest contribution to the overall portfolio's income over the 12 months to 30 September. Fair Oaks Income trust yielded nearly 16 per cent, and if you had £100,000 invested in Mr Moore's portfolio this trust would have generated £1,585.

Although bonds could come under pressure if there is volatility, Mr Moore believes that CLOs should hold up well. “CLOs are geared plays on loans, but are not listed loans,” he explains. “If people get worried they might take money out of corporate bonds [and the funds that invest in them]. But CLOs tend to invest in unlisted bank loans so should be more resilient.”

As with the infrastructure plays, the portfolio’s debt exposure has a level of diversification. TwentyFour Income Fund (TFIF), which accounts for 10 per cent of Mr Moore's portfolio, invests in asset-backed securities or debt secured against assets in the UK and continental Europe. Its holdings include CLOs and other types of debt not held by Fair Oaks Income.

However, Fair Oaks Income and TwentyFour Income Fund, along with BlackRock Frontiers Investment Trust (BRFI) and Tritax EuroBox (EBOX) were a drag on overall portfolio returns. But the latter trust only launched in July last year, so it is still in the early stages of investing. It also had a low yield over the 12 months to 30 September, but Mr Moore says that this is also because the trust had not yet put all of its money to work.

Mr Moore's equity exposure is all overseas and one of these holdings, JPMorgan Global Emerging Markets Income Trust (JEMI), was among the top contributors to performance over the 12 months to 30 September. This trust, BlackRock Frontiers Investment Trust and Henderson Far East Income (HFEL) each yielded between 4 and 6 per cent.

 

Table 3
Simon Moore's portfolio: 1-year performance 1/10/18 to 30/09/19
HoldingAsset classAllocation (%)Share price total return (%)Contribution to portfolio return (%)Income paid (£)Contribution to income (%)Yield (%)Average yield over five years (%)Capital value as at 30/09/19 (£)
LXI REIT (LXI)Property1518.622.793594.299.745862083.961933333na17,793
International Public Partnerships (INPP)Infrastructure156.330.9495696.9211.428908784.6461333334.9715,949.5
JPMorgan Global Emerging Markets Income Trust (JEMI)Emerging market equity1011.11.11420.626.8978184194.20624.2111,110
Henderson Far East Income (HFEL)Asian equity107.170.717598.389.812934685.98386.510,717
Fair Oaks Income (FAIR)Debt10-0.18-0.0181,585.1825.9956345415.8518189,982
NB Global Floating Rate Income Fund (NBLS)Bonds108.650.865649.4510.650440246.49456.510,865
TwentyFour Income Fund (TFIF)Debt10-4.36-0.436528.698.6700766015.28695.329,564
GCP Infrastructure Investments (GCP)Infrastructure108.020.8026089.9706946856.086.4610,802
BlackRock Frontiers Investment Trust (BRFI)Frontier market equity5-0.84-0.042302.164.9551728726.04325.474,958
Tritax EuroBox (EBOX)Property5-7.69-0.3845114.181.8724571042.2836na4,615.5
Overall portfolio  46.826.3566,097.87 6.097877.17875106,356

Source: FE Analytics

 

Table 7
Simon Moore's portfolio's performance
Holding6-month share price total return (%)1-year share price total return (%)3-year share price cumulative total return (%)5-year share price cumulative total return (%)
LXI REIT (LXI)9.3318.62  
International Public Partnerships (INPP)5.086.3314.6442.74
JPMorgan Global Emerging Markets Income Trust (JEMI)5.9211.124.9737.42
Henderson Far East Income (HFEL)8.057.1728.553.72
Fair Oaks Income (FAIR)-0.88-0.1821.3273.66
NB Global Floating Rate Income Fund (NBLS)9.228.6513.0751.26
TwentyFour Income Fund (TFIF)-2.75-4.3615.4812.29
GCP Infrastructure Investments (GCP)3.338.0215.3846.31
BlackRock Frontiers Investment Trust (BRFI)1.04-0.8415.1423.61
Tritax EuroBox (EBOX)-0.34-7.69  
Source: FE Analytics as at 30/09/2019

 

Simon Moore’s portfolio changes [Box out]

As investor concerns about slowing economic growth are most likely to hit traditional assets, Mr Moore’s main changes are to his equity and bond positions.

He has removed the 10 per cent position in NB Global Floating Rate Income Fund because he is concerned about the performance of floating rate notes in a lower interest rate environment. “We are not in a rising rate environment,” he says. “I think that, if anything, rates will go down, so it’s not the [right] time for that [holding].”

Mr Moore also fears that if investors become cautious and take their money out of equities, emerging markets might be harder hit than other areas. So he has reduced the allocation to JPMorgan Global Emerging Markets Income Trust from 10 per cent to 5 per cent. He has maintained the allocation to BlackRock Frontiers Investment Trust at 5 per cent, and remains content with a 10 per cent allocation to Henderson Far East Income because he thinks that sentiment towards Asian equities will be more resilient.

Mr Moore increased the allocation to Tritax EuroBox from 5 to 10 per cent because he is “less worried about the risks” now that it is fully invested.

Mr Moore has introduced two new positions that each account for 5 per cent of his portfolio. US Solar Fund (USF) is part of his focus on alternative assets and Aberdeen Standard Equity Income Trust (ASEI) is a cautious play on UK equities.

“Aberdeen Standard Equity Income is a split between large, mid and small-caps, and gets income from each of these areas,” he explains.

 

Table 4
Simon Moore's updated portfolio 
HoldingAsset classAllocation (%)Share price total return (%)Contribution to portfolio return (%)Income paid (£)Contribution to income (%)Yield (%)Average yield over five years (%)
LXI REIT (LXI)Property1518.622.793594.2910.678796943.961933na
International Public Partnerships (INPP)Infrastructure156.330.9495696.9212.52295544.6461334.97
Henderson Far East Income (HFEL)Asian equity107.170.717598.3810.752290155.98386.5
Fair Oaks Income (FAIR)Debt10-0.18-0.0181,585.1828.4840992315.851817.97
TwentyFour Income Fund (TFIF)Debt10-4.36-0.436528.699.5000305475.28695.32
GCP Infrastructure Investments (GCP)Infrastructure108.020.80260810.925151936.086.46
Tritax EuroBox (EBOX)Property10-7.69-0.769228.354.1032211232.2835na
JPMorgan Global Emerging Markets Income (JEMI)Emerging market equity511.10.555210.313.7790603654.20624.21
BlackRock Frontiers Investment Trust (BRFI)Frontier market equity5-0.84-0.042302.165.4295130046.04325.47
US Solar Fund (USF)*Infrastructure51.290.0645000na
Aberdeen Standard Equity Income Trust (ASEI) *UK equity5-8.79-0.4395212.863.8248813154.25724.37
Overall portfolio  30.674.17655,565.141005.565146.90875
*new additions
Source: FE Analytics. Performance between 1/10/18 and 30/09/19

 

Table 8
Simon Moore's new addition's performance
Holding6-month share price total return (%)1-year share price total return (%)3-year share price cumulative total return (%)5-year share price cumulative total return (%)10-year share price cumulative total return (%)
Aberdeen Standard Equity Income Trust (ASEI)-6.61-15.155.3418.09128.69
Source: FE Analytics as at 30/09/2019. US Solar only listed in April 2019 so does not yet have a performance record

 

For all the features in our Investment Trust special, click below:

Go global for income

Trusting in fast-growing unlisteds

IC investment trust income portfolios: 12 months on

Investment trusts: professional picks 2019

Around the world in 8 investment trusts

 

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