IC investment trust income portfolios: 12 months on

The last year has been a trying time for most investors, with many asset classes falling deep into the red as monetary policy gets tighter and tighter. However, income-generating assets have continued to do the job at hand, with some even holding up well when it comes to total returns, too.

That much can be seen from the behaviour of our two investment trust income portfolios. The hypothetical £100,000 portfolios, put together by David Liddell, IpsoFacto Investor chief executive, and Simon Moore, director of the Trust Research consultancy, both generated good levels of yield between 1 October 2021 and 30 September 2022 while staying relatively flat on a total return basis. That feels like a good result in a period dominated by market volatility.

As in our previous updates, we look at the holdings Liddell and Moore picked last year, the performance of the portfolios and how each specialist has reset their selection.

How David Liddell’s portfolio performed

Liddell’s equity-heavy portfolio has done a good job in a turbulent period, making a small positive share price total return and generating its target income yield of 4.5 per cent. All but two of the holdings generated a yield of at least 4 per cent, although the picture has been pretty mixed when it comes to total returns.

BlackRock Energy Resources and Income (BERI) returned more than 30 per cent, Murray International (MYI) registered a 13.6 per cent gain and both the value-oriented US fund North American Income (NAIT) and Renewables Infrastructure Group (TRIG) made gains in the high single digits.

But a few others suffered somewhat, from Murray Income (MUT) to JPMorgan European Growth & Income (JEGI). Some of the trusts have been vulnerable to external headwinds, whether Europe’s geopolitical challenges dealing a blow to the JPMorgan fund, the depreciation of the yen hurting CC Japan Income & Growth (CCJI) or trusts such as M&G Credit Income (MGCI) and multi-asset trust Aberdeen Diversified Income & Growth (ADIG) seeing their debt exposures suffer in the recent fixed income sell-off. Liddell struggled to explain the poor total returns of Murray Income, although the trust's managers partially pinned the blame in the first half of the year on a relative lack of exposure to oil and gas stocks. In any case, while some trusts in the portfolio have posted disappointing total returns, they have all done their job on the income front.

Portfolio changes

Liddell dialled back the portfolio’s equity exposure from 82.5 to 67.5 per cent last year because of a worry that investors were facing multiple uncertainties following a strong run for stock markets. This time round he continues that trend, cutting the equity allocation further to 52.5 per cent and moving to bond-like instruments.

“The central outcome we’re looking at is a situation where inflation falls back somewhat and we are in some kind of recessionary conditions,” he explains. “All things being equal we favour moving a bit towards fixed income.” However, Liddell is favouring exposure to infrastructure and property over dedicated bond funds. The portfolio’s target yield rises from 4.5 to 5 per cent to reflect the higher levels of income available after a sell-off in both bond and equity markets this year.

When it comes to his most prominent holdings, Liddell has decided to slightly increase the exposure to Abdrn Diversified Income & Growth from 12.5 to 15 per cent, on the basis that the valuation of its underlying holdings and its share price yield look appealing after recent performance woes.

Murray International, Murray Income and the Renewable Infrastructure Group all maintain weightings of 12.5 per cent: Liddell hopes that Murray International’s strong run of form can continue, while also believing that Murray Income’s portfolio of UK blue chips could demonstrate strong pricing power and retaining a liking for TRIG’s yield. He introduces another infrastructure stalwart to the portfolio in the form of HICL Infrastructure (HICL).

Abrdn Asian Income (AAIF) and CC Japan Income & Growth are kept at last year’s weightings, while Liddell takes some profit on BlackRock Energy and Resources Income. He entirely exits his position in JPMorgan European Growth & Income, whose underlying market is currently “under a cloud”, and North American Income.

Liddell slightly ups his exposure to M&G Credit Income on the basis that price falls for its asset class should produce some attractive yields, and adds one other new holding in the form of TR Property (TRY). The trust’s shares recently traded on just a modest discount to portfolio net asset value (NAV), but Liddell believes the property shares TR Property tends to hold are currently trading on very low valuations. He favours this fund to those that directly hold physical property assets in the belief that valuations on property company shares are “more current and realistic”, while also offering better liquidity.

How Simon Moore’s portfolio performed

If Liddell’s portfolio is often heavily exposed to equities, Moore has tended to make much greater use of alternative assets. The portfolio he put together last year had an allocation of just 30 per cent to equities, with 30 per cent in infrastructure, 20 per cent in property, 10 per cent in debt and 10 per cent in private equity.

This approach has worked extremely well when it comes to income generation, with the portfolio achieving a yield of 7 per cent between 1 October 2021 and 30 September 2022. Seven of the holdings generated a yield of more than 6 per cent, although as we saw last year the enormous payout from debt specialist Fair Oaks Income (FAIR) does slightly skew the figures. Removing this fund from the table would bring the average yield down to a still attractive 5.9 per cent.

Once again there are some big highs and lows to be found on the share price total return front. Fair Oaks Income and NextEnergy Solar (NESF) have totted up big gains, with BlackRock Frontiers (BRFI) also performing strongly. However, Princess Private Equity (PEY) has suffered especially badly in a rough period for its sector, with property funds Home Reit (HOME) and LXI Reit (LXI) also struggling.

In line with difficulties for its market cap segment of choice, UK smaller companies vehicle Athelney Trust (ATY) is also down by a double-digit amount over the period. It should be noted that Moore sits on the board of both Athelney and Home Reit.

Portfolio changes

Moore, in contrast to our other specialist, has stuck with roughly the same asset allocation from last year, while also opting for nine trusts on a 10 per cent weighting and two on a 5 per cent weighting, partly for the sake of simplicity.

Eight of these trusts stay in the portfolio and stay on last year’s weighting, for various reasons. To give a few examples, Moore likes holding Henderson Far East Income (HFEL) to demonstrate that a good level of equity income can be found outside the UK, while also noting that its share price dividend yield recently came to 9 per cent.

Turning closer to home he likes that Abrdn Equity Income (ASEI) takes a multi-cap approach, rather than taking a route employed by many of its rivals and relying on a few UK blue chips for its income. He continues to like the “stable income” offered by the infrastructure trusts, while also still seeing the appeal of areas such as renewable energy. When it comes to the latter Moore partly likes the fact that the NextEnergy trust uses a variety of different suppliers for parts in its projects, making it less reliant on a small handful of companies than its peers might be. A recent sell-off in the alternatives space has also resulted in some attractive yields, with the NextEnergy fund’s shares recently offering a dividend yield of 7 per cent.

While Moore is happy with his asset allocation and most of the holdings, three holdings exit the portfolio.

To start with the smallest change, Moore has decided to sell out of BlackRock Frontiers. The fund, which was kept as a smaller position due to its risky nature, has performed well both by total return and income generation over the last 12-month period. But Moore worries it will be hardest hit if the economy goes into recession.

Rather than picking another equity fund, Moore has reallocated the 5 per cent weighting to Target Healthcare Reit (THRL), which invests in purpose-built care homes in the UK. Moore views the trust, whose shares recently traded on a dividend yield of nearly 8 per cent and at a 22.5 per cent discount to NAV, as a play on the UK’s ageing demographics.

Moore also sells out of LXI Reit (LXI). He has tended to favour this fund as a source of property exposure, in part because its managers have a high rate of portfolio turnover and can therefore “prove” the portfolio valuations via realisations. “They have a really good history of buys and sells," he notes. However, LXI has absorbed the Secure Income Reit, which held the likes of theme parks, since our last update. Moore notes that the merger has turned LXI into “a very different beast” and wants to exit for the time being.

He replaces LXI with another property trust, opting for AEW UK Reit (AEWU). Moore views this as a “more traditional” property fund, with around half of its assets in industrial assets at the end of June and a fifth of the portfolio invested in offices. Like other property trusts it has looked cheap by certain metrics recently, with the shares trading at a 26 per cent discount to NAV in early November and offering a yield of nearly 9 per cent.

Moore is wary of the fact that the property trusts will soon have to refinance loans and borrow from banks at higher rates than before. AEW UK Reit appears to have avoided this problem for now, having secured a new £60mn loan facility with a five-year term back in May at an interest rate of around 3 per cent. The board described it as “prudent to fix the loan now, rather than run the risk of further rising rates”.

As with LXI Moore also likes the fact that this trust has managed some realisations by selling three big holdings earlier this year – and the fact that the investment team has around 10 per cent in cash, something that could prove useful if an economic downturn creates a buyer’s market. Moore adds that the trust avoided cutting its dividend in the lockdown era of 2020.

Not all investment trusts have demonstrated such consistency with dividends, and that explains why Moore is dropping Princess Private Equity (PEY) from the portfolio. The Princess board announced earlier this month that it would suspend the second interim dividend for the 2022 financial year, noting: “This suspension has been deemed necessary in light principally of the significant reduction in the company’s liquidity due to the strengthening of the US dollar against the euro, which led to outflows of more than €60mn (£52mn) year to date to settle currency hedging contracts. In addition, challenging debt markets are currently limiting the facilitation of asset sales across the industry.” The board said it would “continue to monitor the company’s liquidity and ability to pay dividends in the future” and keep shareholders informed in a timely manner.

Moore expressed frustration both with the decision to freeze the dividend and the lack of clarity on when and whether such payments might be reinstated. But he is sticking with a private equity allocation, shifting his 10 per cent allocation from Princess into Global Apax Alpha (APAX), one of the other names in its sector to pay a dividend, again using capital. Like its peers the fund has had a difficult year, presenting some opportunities for brave investors. The trust’s shares recently traded at a 33.2 per cent discount to NAV and came with a 7.3 per cent yield.

Find below all the features in our special issue celebrating the investment trust. 

Spotting the true discount bargains - Val Cipriani highlights investment trusts trading at a discount

Where the money has been flowing in a year of turmoil - Dave Baxter looks at how investment trusts have fared in raising funds this year

IC Income Portfolios - one year on - Dave Baxter reveals how our experts' pick of income trusts has performed and what changes are being made

Around the world in eight investment trusts - Alex Newman runs our global investment trust stock screen to produce the best investment ideas for regional diversification

Gearing up and down - Val Cipriani reports on the big gearing movements in the investment trust world over the past year

The professional picks 2022 - Our panel of experts pick their preferred investment trusts for the year ahead

Investment trusts hold up as refinancing risk looms - The sector has largely timed refinancing right

Capital preservation with a personal touch - Personal Assets Trust provides an asset allocation case study for a tough bear market

How cheap is Scottish Mortgage? - Looking beyond the growth trust's price tag

Investment trusts' unlisted headache - Exposures to private companies have brought their share of problems

When discounts signal a new buying opportunity - Our investment trusts system bottomed early in 2009, will history repeat?

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