Top investment trust picks for income-seekers hit by Covid-19.
UK equity investors have felt the sting of billions of pounds worth of dividend cuts already during the coronavirus crisis, including three of the top dividend-payers - HSBC, Shell and BT - cutting or suspending payouts.
In total, more than £28 billion worth of dividends from 289 UK companies have been axed or deferred as companies try to conserve cash.
Against this backdrop, investors may be searching further afield for yield. The Association of Investment Companies (AIC) asked investment analysts for their top investment trust picks for income-seekers hit by Covid-19.
Anthony Stern, analyst at Stifel, notes that Asia was “the first region into the Covid-19 crisis and the first region out”.
He adds that the dividends on offer from Asia Pacific income funds are attractive because they tend to be fully covered by revenue income. “All of the funds [in the sector] have substantial revenue reserves which should allow them to maintain their dividends through their lean times,” he explains.
Aberdeen Asian Income and Schroder Oriental Income are his picks in the sector, with dividend yields of 5%-plus. He describes Aberdeen Asian Income as the sector’s value play, trading on a 13% discount and paying a 5.5% dividend yield. Schroder Oriental Income, managed by veteran fund manager Matthew Dobbs, yields 5.3% and has one of the best total return track records in the sector, Stern adds.
Winterflood’s head of investment research, Simon Elliott, selects JPMorgan Asia Growth & Income as his Asia Pacific pick. It pays an enhanced dividend, meaning an element is paid from realised profits or capital.
Its dividend is reset every quarter, with 1% of net assets paid to shareholders, so the payout will vary, but this is justified by its exposure to high growth internet companies such as Tencent and Alibaba that do not pay dividends, Elliott says.
The Japanese equity income story is a newer phenomenon, underpinned by strong company balance sheets, net cash positions, and more of a focus on return on equity, says Anthony Leatham, head of investment trust research at Peel Hunt.
“In the case of Japan, the dividend culture has been quick to take hold and has shown resilience. However, active management has been key to navigating away from higher-risk sectors.”
He picks out CC Japan Income & Growth Trust, run by Richard Aston since launch in 2015. The trust has been given a boost from the sharper focus on shareholder returns from Abenomics, says Leatham. It offers a yield of 3.8% and an “unconventional” sector mix compared to other developed market equity income strategies, he adds.
Global emerging markets
In the global emerging markets sector, Winterflood’s Elliott highlights JPMorgan Global Emerging Markets Income, a trust which seeks to pay a covered dividend and has significant exposure to financials. It has revenue reserves equivalent to 1.3 times the previous year’s dividend, and could offer an attractive option for income-seekers, he suggests.
Leatham also favours the healthcare sector, noting that large-cap pharma in particular has been a historically valuable source of equity income for investors. “But the global opportunity set has evolved and the exciting growth stories are unlikely to be the dividend-paying stocks,” he says.
“BB Healthcare pays its dividend out of capital and currently offers a yield of 3%. The benefit of this approach is that it allows the managers to adopt an unconstrained and high-conviction approach, without being tied to the high-yielding, often ex-growth stocks in their universe.”
Biotech and other growth themes
In growth-focused sectors too, investments trusts’ ability to pay enhanced dividends means those portfolios with a capital growth focus can still appeal to income investors. “With shareholder permission, investment companies are now allowed to pay income out of capital in the form of realised profits,” says Elliott.
“This means that the portfolio could in theory be invested for capital growth, while the structure of the listed closed-ended fund generates the income. This has meant asset classes that were not historically noted for generating income can now offer investment companies with high yields.”
This includes Biotechnology & Healthcare, where he likes International Biotechnology; Private Equity, especially BMO Private Equity and Standard Life Private Equity; and Japanese Smaller Companies, where he highlights JPMorgan Japan Smaller Companies.
“This practice is not uncontroversial and some have objected to the tax inefficiencies of converting capital into income. However, the rationale is that investment companies offering income appeal to a wider investor base and could see discount levels narrow in time as a result of a pick-up in demand,” he adds.