Covid-19 contagion is threatening to wreck the global economy and pile pressure on crucial dividends.
This update, the latest for our income-focused investment trust portfolio, covers the period from the end of November to 28 February, so it has not been affected by the huge market falls in early March.
Even so, there was plenty of movement in markets over the period, particularly during the last week of February, when coronavirus fears caused the portfolio to fall by 5.2% from its November high. James Brumwell, manager of the portfolio, says: “It was all sailing along quite nicely. Then the impact of the virus came very fast. There were big drops in the market in the final week of February.”
However, he has not joined in with the selling. He explains: “If you were wise enough to know when the market would fall, you could have taken a lot of immediate action in advance.” Otherwise, it makes sense to wait for the dust to settle before taking any action.
According to Brumwell, the primary factor that would prompt him to consider selling or trimming would be looming dividend cuts. The portfolio’s purpose, after all, is to produce income. For now, however, most of the portfolio appears safe in this respect.
RIT Capital Partners, a defensive trust, suffered a loss of more than 13%, the worst performance in the whole portfolio over the three-month period we are looking at.
Brumwell says: “[This is] a bit ironic. It is one holding you usually rely on to help you when markets go pear-shaped. For something supposed to be safe [to be hit this hard] is a bit of a shocker.”
He explains that the trust’s holdings are quite balanced. As a result, it usually outperforms when markets take a plunge. The latest falls, however, are different. He says: “What you’ve got is not a straightforward bear market; it’s a car crash. People are throwing everything out.” As in the 2008 market falls, the usual correlations between asset classes don’t hold as panicked investors engage in a general sell-off.
However, he stresses that this is where comparisons end with the 2008 meltdown. He says: “Some of the price movements are eye-watering, but the financial system is still working, it seems, although that could be a sign that we are being complacent – I don’t know.”
Next on the list of worst performers is Murray International trust, which endured a loss of 12.15%. However, Brumwell does not plan to sell. “This has a cracking yield, but every now again, it just falls out of bed,” he says. Crucially, though, “it doesn’t generally cut dividends, so it still looks attractive”.
City of London is another trust that has seen notably poor performance over the quarter. Again, Brumwell is not concerned about the security of the dividend or the need to consider selling.
He says: “This is the king of the dividend heroes list, having increased its dividend for more than 50 years. It will guard that record jealously.”
In general, Brumwell is reasonably confident that most trusts in the portfolio will manage to hold their dividends steady, as they have reserves that can be used if necessary.
However, while Brumwell has no plans to sell anything yet, he notes that several trusts face at least the prospect of dividend cuts and are worth keeping a close eye on. JPMorgan Global Growth & Income, which saw its share price fall by 10.9% over the period, is one trust that could well cut its payout, as it has a policy of basing its dividend on its net asset value (NAV). The trust’s NAV has taken a dive in the coronavirus-sparked sell-off, so a dividend cut looks as though it could be on the cards. Brumwell has no plans to sell just yet, however.
He notes that high-yielding investment trusts may also be forced to cut their dividends. Of his holding in the CQS New City High Yield Fund, he says: “It has some bonds that are pretty close to junky. Some things in there are risky, so the trust might have to cut its dividend.” But he adds that even if the dividend were trimmed by a third, it would still be a respectable payout, as the trust is currently yielding 7%.
That said, it is hard to say what is likely to happen because its holdings are opaque. Brumwell explains: “With this trust, you need to rely on research done by the managers, and ride on their coattails. You are basing your decision to buy on the fund manager’s track record and the yield.” For now, Brumwell does not plan to sell. TwentyFour Select Monthly Income was swap from its slightly underperforming sibling, TwentyFour Income, last year. The new fund, he notes, has had quite a good run since last autumn, although that has now come off a bit. However, he says: “Again, my preference is to let the dust settle a bit. If it cuts its dividend, I might have to think seriously about cutting it out.”
The problem with Brumwell selling any trusts is that he will have to find ready replacements. As the portfolio’s purpose is to produce income, he cannot just sit in cash, which produces no income, so he needs to know before he sells a trust what he will replace it with. He says he has been scouring for new short-duration bond exposure, but has not yet found any obvious targets.
The best performer during the three months under review was Scottish Mortgage, which returned 6.1%. This trust has also been the best performer since the portfolio’s inception almost three years ago. Brumwell says: “This has always been an investor favourite, and people pile in more than they normally do when it has done well.”
The trust has substantial exposures to large-cap US growth stocks such as Tesla and Amazon. The former, for its own idiosyncratic reasons, delivered particularly strong performance in the first six weeks of the year.
However, the trust has not been immune to the recent market sell-off and has been at a rare discount. “This is probably one I should be mulling over buying more of,” says Brumwell. However, the problem with an income-seeking portfolio such as this one is that the yield is just over half a percentage point. “For income, it is inconsequential: you would need a lot of money in it to generate meaningful income.”
HiCL Infrastructure, while not shooting the lights out over the past three months, did provide a marginally positive return. However, Brumwell expects this trust’s performance to pick up on the back of the large commitment to public spending on infrastructure made by the government in the recent Budget. He adds that he may also consider adding more dividend-paying infrastructure funds.
Ultimately, Brumwell says, he is “quite happy to leave stuff on the table”, but he will be looking to make some changes before the next quarter begins, “assuming we have seen some kind of a bottom in markets by then”.
He stresses that he is not rushing to buy, partly because the portfolio has no spare cash. He says: “We always run this portfolio on the assumption that income is being drawn down for investors rather than being reinvested. On that basis, before I buy, I need to sell.”
Brumwell is hoping that by the time of the next portfolio update markets will be in a more optimistic mood. Until then, he will be watching closely for signs that any holding may be about to cut its dividend.
Income portfolio faltered as market nervousness began to rise in February
|Fund||Quantity||Cost price||Value at inception (£)||Current value (£)||Gain/Loss (£)||Change (%)||Income (£)||Yield (%)||Total return since inception (£)||Total return (%)|
|Invesco Perpetual Enhanced Income||9000||79.00||7,120.00||6,516.00||-346.50||5.1||450.00||6.32||746.00||10.5|
|CQS New City High Yield Fund||11500||62.25||7,168.75||6,647.00||-23.00||-0.3||511.75||7.13||1,007.75||14.1|
|Twenty Four Select Monthly Income Fund||6500||93.60||6,094.00||6,175.00||130.00||2.2||412.30||6.76||330.80||5.4|
|iShares Global High Yield Bond (£ Hedged)||47||9855.00||4,641.85||4,558.53||-22.09||-0.4||233.41||5.02||39.94||0.9|
|Balfour Beatty 10.75% Conv 01/07/20||6500||111.12||7,268.91||6,695.00||0.00||0.0||154.38||2.12||474.23||6.5|
|National Westminster 9% Series A Non Cum||5150||140.00||7,256.05||8,008.25||-180.25||-2.2||463.50||6.38||1,910.95||26.3|
|JPMorgan Global Growth & Income||2400||292.00||7,053.04||7,248.00||-888.00||-10.9||309.84||4.39||996.56||14.1|
|City of London||1700||416.50||7,125.90||6,494.00||-748.00||-10.3||323.00||4.53||292.90||4.1|
|Finsbury Growth & Income||850||705.21||6,044.22||6,757.50||-841.50||-11.1||141.10||2.33||1,083.83||17.9|
Notes: Includes income from previous holdings. Portfolio inception was 1 April 2017. Source: FE Analytics, as at 28 February 2020