James Pigott, managing director of Pigotts Investments, agrees: “Income is an important part of any portfolio, either simply to pay fees or better still for reinvestment. Investment trusts can provide a good income flow. Nothing is guaranteed but with many trusts producing an increased dividend each year for more than 40 years, the case is clear.”
He adds: “This is crucial for income seekers as it means that there is a good chance your income could grow with, or ahead of, inflation.”
More recently, some trusts have sought shareholder approval to dip into capital to cover dividends. While this feature is yet to be utilised fully by the investment trust sector, it is worth noting that this can be done.
Mr Pigott adds that although these types of investment vehicles do not expect to have to use this feature, it does act as an additional “safety net”.
Illiquid options
The UK Equity Income sector is not the only investment trust sector to have delivered a growing income over the years.
As Ms Jackson points out: “Some of the highest yielding investment companies are in the alternative assets space, such as Sector Specialist: Infrastructure, Sector Specialist: Debt and the property sectors. Such areas have been a real growth area in recent years, responding to the huge demand for yield.”
She notes that investment trusts are well placed to invest in illiquid assets because managers do not have to sell stock to meet redemptions.
“The flip side, however, is that such is the demand for many of these specialist investment companies that many are trading on premiums, with some regularly issuing shares in an effort to help keep up with demand,” she cautions.
“So valuations are worth watching carefully, although an adviser I spoke with recently was sanguine about the premium on one of the infrastructure companies because he said there was ‘no other fund like it’,” Ms Jackson recalls.
“Of course, advisers will have their own views on premiums and whether they are willing to buy companies at a premium and it has to be taken very much on a case-by-case basis.”
Long-term value
Over the years, investment trusts have proved they are a reliable source of income, so should investors be considering these vehicles as part of their long-term portfolio?
“They certainly should do,” says Mr Pigott. “With the changes to the tax on passing on a pension to dependants, pensions have the potential to be used to minimise inheritance tax (IHT). This now contradicts the initial thought people had of busting their pensions.
“So assuming we are now looking at more being ploughed into pensions, they suit long-term investment very well and should be able to outperform, especially with a little gearing.”
