I want an investment trust with an income. What are your favourite investment trusts?
19 July 2021
Question by Fran
Are you able to comment on The Investment Company? I wanted an investment trust with an income, so I put £10,000 in there. It does deliver a reliable quarterly dividend but the capital value has dropped by 10% since I invested 2 years ago. Can you comment on its performance? I was considering selling it and moving the money to another fund with a similar return but a better performance. If you could tell me your favourite investment trusts at the moment that would be great.
Answered by Boring Money
The Investment Company is a tiny trust at £17m. At this size I find it hard to believe it can be a going concern.
The original fund manager was a small cap specialist and a good one at that - so I am unclear why he was sacked. The management has gone to a London based broker, Friske, who I don’t know.
UK income funds have generally struggled over the last 2 years, and the market has been in love with tech type stocks. They've tended to shun traditional income funds who look for companies with a market type yield (around 3.8%), which will grow over the years. I have no idea whether Friske have any expertise in running funds.
Looking for alternative bigger, more established names - I would look at Edinburgh Trust, which is currently on a near 10% discount*.
It’s had a difficult time recently, but the fund manager has an excellent long term record. (I have bought some myself).
I would also add Standard Life Equity Income which has performed better and is therefore only on a 1% discount. (I have bought this too!)
I think the two funds complement each other. Edinburgh pays quarterly dividends while Standard Life is twice a year.
“If you have a collection of funds or investment trusts, you need to set up an account somewhere to buy them. Most people use an investment platform. Our Best Buys tables will show you which ones we like, and let you filter your search according to what you want.”
Some companies (and shares) generate spare and excess cash which they choose to ‘divvy up’ and pay out to shareholders. As dividends.
This means that some investments can generate an annual income as well as hopefully going up in value. For example, if a £100 investment pays out £3 a year, it is said to have a yield of 3%.
Investment trusts are slightly weird creatures – they are companies themselves and their business is buying and selling shares. So let’s say I set up Holly Trust PLC. I buy Apple, British Airways and HSBC. Their shares are £100 each. So the trust has £300 in it. 300 people buy shares at £1 each. Now imagine a month later the shares haven’t moved in price. All of the shares I have are still £100 each. A few people are fed up because they think Holly Trust PLC is rubbish. So they sell out. This pushes the shares in Holly Trust PLC down to 90p. So you have this weird situation where the total value of the shares in Holly PLC is actually less than the value of the shares that Holly PLC owns. This is trading at a discount. The opposite is when everyone loves it and the investment trust is worth more than all its underlying holdings – then this is trading at a ‘premium’.