Purposeful Portfolio: Regular Income - Income investment trusts deliver cash cow yields

Income trusts deliver cash cow yields

In the few months since we last looked at our closed-ended Regular Income portfolio, we have had a general election, the establishment of a hung parliament, terrorist attacks and a rise in tensions between the US and North Korea. ‘If you had told me back in April, with so many challenges on the horizon, that we would produce this performance, I would have thought you were mad,’ says James Brumwell, who manages the portfolio.

In fact, with so much geopolitical and economic uncertainty, investors have been loyally sticking to their steady, income-focused investments and that has been a major boon to this portfolio. Buoyed by his success so far, Brumwell too is sticking with his choices and there are no changes to this portfolio at its first review. It is currently yielding 4.13 per cent, marginally down from 4.2 per cent at inception due to the strength of capital growth over recent months.

Just one of the 15 investment trust constituents is in the red after five months, and other holdings have produced some stellar returns over the short period. Chief among those is Scottish Mortgage, which has returned an incredible 17.9 per cent since the portfolio’s inception. While the trust doesn’t produce much in the way of yield (currently 1.7 per cent), it was included in the portfolio for its long-term proven track record of delivering reliable returns whatever the weather.

In recent months, the fact that 42 per cent of the trust’s assets are in popular US companies such as internet retailer Amazon and electric car maker Tesla has helped to drive forward returns. Its second-largest weighting is to China, which has rallied recently as fears of an economic slowdown and rising debt have eased off.

Brumwell says: ‘Scottish Mortgage is just a very good investment, I’ve owned it for donkey’s years, but it probably won’t do this every quarter. Perhaps if it keeps rising at this rate we might take some profits, but I don’t like to do that for small amounts because the cost of trading negates the profit you’ve made.’

Preference shares up

Among the other top performers are Standard Life Equity Income, which has returned just shy of 13 per cent, and the two sets of preference shares, from General Accident and National Westminster, which are up 11.3 per cent and 10.7 per cent respectively. Brumwell says these latter two have benefited as the UK looks less likely to raise interest rates this year. Fixed interest investments could find themselves under pressure if rates rise, as their returns become less appealing, but with a rate hike looking less probable, they are retaining their allure.

FIXED INTEREST PREFERENCE SHARES HELPED BY HOLD ON RATES
Name Sector Month divi paid Purc-hase price (p) Quan-
tity bought
Net value at inception (£) Current value (£) Change since inception (%) Curr
-ent yield (%)
Income received (£)
Invesco Perpetual Enhanced
Income
Equity & Bond Income JAJO 79 9,000 7,110.00 7,222.50 4.6 6.3 225.00
CQS New City High Yield Fund Equity & Bond Income FMAN 62 11,500 7,158.75 7,158.75 3.8 7.0 279.45
HICL
Infrastructure
Infra-
structure
MJSD 169 4,250 7,182.50 6,906.25 -2.9 4.6 81.60
Foreign
& Colonial Commercial Property
Property - Globe monthly 145 5,000 7,225.00 7,512.50 5.6 4.2 125.00
General Accident 8.875%
Cumulative
Preference (Insurance) JJ 152 4,750 7,196.25 7,849.38 11.3 5.8 210.78
Nat West 9% Series A Non Cum Preference (Bank) AO 140 5,150 7,210.00 8,034.00 10.7 6.4 0.00
JPMorgan
Global Growth & Income
International Equity Income JAJO 292 2,400 7,008.00 7,656.00 9.3 3.3 52.80
Murray International IT International Equity Income FMAN 1,215 575 6,986.25 7,457.75 8.3 4.0 155.25
Scottish American IT International Equity Income MJSD 334 2,100 7,014.00 7,707.00 10.0 3.2 57.23
City of London UK Equity Income FMAN 417 1,700 7,080.50 7,276.00 4.2 4.0 146.20
Merchants UK Equity Income FMAN 472 1,500 7,072.50 7,320.00 5.4 5.1 183.00
Standard
Life Equity Income
UK Equity Income MJSD 411 1,700 6,987.00 7,879.50 13.0 4.0 64.60
Finsbury Growth &
Income
UK Equity Income MN 694 700 4,858.00 5,285.00 9.0 2.0 47.60
Scottish Mortgage Global Capital Growth JD 366 1,300 4,758.00 4,867.50 4.0 1.7 40.00
RIT Capital Partners Flexible Strategy AO 1,875 250 4,687.50 5,630.30 17.9 0.8 20.93
99,534.25 105,762.43 6.3 4.1 1,689.44
Notes: Inception date of portfolio 1 April 2017. Net value includes £10 broker fee plus 0.5% stamp duty where appropriate. IPE, NCYF, HICL and FCPT do not incur stamp duty. Source: James Brumwell, as at 1 Sept 2017.

While the General Accident shares, which yield 5.8 per cent, have already earned the portfolio £210.78 in income, investors will have to wait until October for their first payout from the NatWest holding. This yields a meaty 6.4 per cent and is the only constituent of the portfolio yet to pay out.

Meanwhile, the UK-focused Standard Life fund has been boosted by its investments in companies with overseas earnings, such as Rio Tinto and Imperial Brands, which have been given a lift by the weak pound.

What Brumwell calls the one ‘fly in the ointment’ is HICL Infrastructure, which has fallen back slightly after funding rounds over the summer. He says: ‘This is just the business model of that trust – it bids for things, wins and then raises the money to pay for them. But I’m not worried as the last couple of rounds have been oversubscribed, so the demand is there.’

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In July HICL acquired a 35 per cent stake in the High Speed 1 rail project, so there is every likelihood it could return to shareholders for another round of funding in the near future too, which could further dent its performance. But Brumwell is not concerned about that while the trust is still yielding an attractive 4.55 per cent.

Highest yielder

The highest yielder in the portfolio is the CQS New City High Yield trust at just over 7 per cent. It’s a complicated vehicle, investing in a mix of preference shares, loan stocks and corporate bonds, but has already brought in £279.45 in income.

Meanwhile, our international equity investments have all delivered strong total returns. With investments spanning the US, Australia, China and Brazil, the Scottish American trust is up 10 per cent since portfolio launch and producing a respectable 3.2 per cent yield. Murray International, whose largest country weightings include Mexico, Taiwan and Indonesia, yields slightly more at 4 per cent and is up slightly less at 8.3 per cent.

Overall, it’s been an auspicious start for the Regular Income portfolio, which has already bagged £1,689 in income. Brumwell says: ‘Investors who had stuck to the old investment adage that you should sell in May would have missed a decent rally this year. It is slightly surprising the whole portfolio is up, especially over the summer which usually tends to be more placid.’

Like many other investors at the moment, Brumwell is concerned that global stock markets are in bubble territory. Investors seem complacent and any market corrections are quickly reversed. But, he argues, it makes sense to be in the market and to enjoy the gains while they are still there to be made, rather than move to cash out of fear and potentially miss out.

Over the coming months Brumwell will be keeping an eye on exchange rates and the likelihood of interest rate raises, to determine whether our next review will bring any changes. He says: ‘While there are reasons that performance has been so strong, such as the weakness of the pound, it’s certainly a nice problem to have. I guess the only issue is that you could argue that if all of the holdings can go up together, they can fall together too.’ 

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