How is our investment trust-focused portfolio performing?
Last year, central banks around the world were supposed to be gradually tightening interest rates. After a decade at historic lows, investors were expecting a “normalisation” of monetary policy, led by the US Federal Reserve.
That did not happen. As James Brumwell, manager of our regular income investment trust-focused portfolio, notes: “A year ago we were looking towards higher interest rates and Brexit being sorted. But that’s not happened. The US/China trade war escalated and now there’s a race to the bottom on interest rates.”
He continues: “No one knows what will happen, of course, but if the US is going to cut interest rates, we in the UK will presumably have to cut rates as well. And Europe is already in negative rates territory.”
This shapes what he chooses to hold in the portfolio. Brumwell says: “Basically, if you’d set up a similar portfolio 20 years ago, you’d have gilts (UK government bonds) and more fixed income in general.” But now, with yields so low on fixed income, equities dominate the portfolio. He continues: “If you’re trying to get any sort of income at all, you have got to go where there is some yield.”
Brumwell says that it seems as though equities are practically now the only game in town for sensible yields, with investment trusts his favoured way to gain access. “We have a bit of balance, with some corporate fixed income, one infrastructure fund and a mixture of international and UK trusts,” he says.
Over the four months (between end April and end August) since our last portfolio review, two of the best performers have been the JP Morgan Global Growth& Income (JPGI) and Scottish American (SCAM) investment trusts, both with returns of 4.6%.
Brumwell says of JP Morgan Global Growth & Income: “This trust has quite an interesting system, where they base the dividend on the net asset value.” Last year, he notes, the trust was paying 3.1p per share; now it is paying 3.3p, an increase of 4.2%.
On Scottish American, he notes that the trust also puts its dividend up regularly and “hasn’t cut its dividend in donkeys’ years, at least not in recent memory”.
The growth component
However, the best performer over the period was Finsbury Growth & Income (FGT) trust, returning 6.4%. That continues Finsbury Growth & Income’s reign as the best performer in the portfolio. In total it has returned 36.3% since the portfolio’s inception.
Finsbury Growth & Income, despite the ‘income’ in its name, is part of what Brumwell considers his selection of capital growth holdings. Much of the trust’s total return has come from capital appreciation.
Brumwell notes that three of his holdings are equity trusts focused primarily on capital growth. While the trusts are currently paying out acceptable dividends, their yields are below the optimal 3% found in the rest of the portfolio. But, he says, they are needed to maintain capital and hopefully provide some growth.
Brumwell’s two other capital growth holdings are Scottish Mortgage (SMT) and RIT Capital Partners (RCP). Scottish Mortgage has a yield since purchase of 0.8%, while its total return is 32.5%. RIT Capital Partners has a total return of 15.4% and is yielding 1.8% based on purchase price.
Not all winners
Of course, not all of the portfolio’s holdings have been winners. Aberdeen Standard Equity Income continued its trend of poor performance, losing 10.2% over the four-month period. Brumwell notes that the trust performed quite well at inception; however, during the previous update it performed disappointingly, and as a result was placed under review. That continued into the latest four-month period. “It rolled over at the end of May, resulting in a new low, so we cut it,” says Brumwell.
Because of the yield the trust offered, he did not want to rush out and sell. However, he notes: “I decided there was only so much we can afford to lose on capital. It had a good run.” He says the trust will stay on the firm’s radar: “If Europe, UK, oil, financials all come back into vogue, I’ll be straight back in to buy.”
Poor recent performance does not always necessitate a sell. Merchants (MRCH), for example, has produced a disappointing four-month return of -5.8%, though Brumwell adds: “It’s been OK for the whole period (since inception).” He also points out that the trust has a good yield. Since 1 April 2017 Merchants has provided a return of 11.1% and is on a yield of 5.5%.
However, Brumwell says, if the share price continues to fall and dips below the 430p low it reached last year, it may be time to place the trust under review. Brumwell explains the recent poor performance as the result of the trust’s heavy weighting towards the UK.
Similarly, City of London (CTY) has not had a strong four months. Brumwell, however, has no intention of selling in this case: “This is one of those perennial favourites,” he comments. Like Merchants, this trust also has a heavy UK focus, and he suggests that “it will probably be a flier if Brexit is solved comfortably.”
For now, he says, it has a respectable 3.5% yield, while its dividend can be expected to continue to nudge up year after year. City of London has the longest unbroken track record for increasing its dividend, leading the AIC’s Dividend Heroes list. “Unless they cut the dividend, I can’t see why I would sell,” says Brumwell. “It’s got a good track record, and were I to sell it I would have to replace it with something that could match the yield and was no more risky.” That would be no easy task.
With the capital from the sale of Aberdeen Standard Equity Income on 24 June, Brumwell added iShares Global High Yield Bond (£ Hedged). “This was a replacement for Aberdeen. It has a high yield and has done well of late, although not much since June.” However, he continues: “I’m not sure if I will hold for a long time. It might be worth getting out after Brexit.”
His most recent sell has been a swap between two very similar funds. On 8 August he sold Twenty Four Income Fund (TFIF) and bought Twenty Four Select Monthly Income Fund (SMIF). “When we originally bought TFIF, it was a toss-up between that and SMIF.” That call, however, seems to have been the wrong one, he says. “TFIF has been disappointing while SMIF been pretty steady” – hence August’s fund switch.
There are other upsides to swapping, adds Brumwell. He points out that TFIF invests heavily in asset-backed securities, which are fairly opaque unless you have some “good digging tools”. Instead, you have to rely on track record. “SMIF, while having some asset-backed holdings, has more straightforward bonds that you can value more easily,” he says. “It should provide a little capital growth with a slightly rising income stream.”
In October last year, Brumwell re-added HICL Infrastructure (HICL). Since then the trust has returned 12.7%. Over the past four months it has returned 1.8%. “It pays a nice dividend,” he says.
Infrastructure has become popular in an era of ultra-low or negative rates, offering investors a place to earn a positive income. However, this ability to pay strong dividends has seen income-hungry investors bid up prices.
Brumwell notes that HICL is trading on a premium of 6%. However, relative to the rest of the sector, he does not view that as excessive, pointing out that other well-known infrastructure trusts have premiums in the double digits. “If something goes wrong, that, in theory, is a big potential downside,” he warns.
Quality buy-and-hold trusts make capital growth contribution
|Quantity||Cost price (p)||Value at inception (£)||Current value (£)||Gain/loss (£)||Change (%)||Income (£)||Yield||Total return since inception (£)||Total return (%)|
|Invesco Enhanced Income||9,000||79||7,120||6,660||-460||-6.5||450||6.3||665||9.3|
|CQS New City High Yield Fund||11,500||62.2||7,169||6,871||-297.5||-4.2||512||7.1||1,002||14|
|Twenty Four Select Monthly Income Fund||6,500||93.6||6,094||6,071||-23||-0.4||426||7.0||10||0.2|
|iShares Global High Yield Bond (£ Hedged)||47||9855||4,642||4,671||29.01||0.6||227||4.9||29||0.6|
|Balfour Beatty 10.75% Conv 01/07/20||6,500||111.1||7,269||6,858||-411.41||-5.7||341||4.7||287||3.9|
|National Westminster 9% Series A Non Cum||5,150||140||7,256||8,008||752.2||10.4||464||6.4||1,679||23.1|
|JPMorgan Global Growth & Income||2,400||292||7,053||8,208||1154.96||16.4||304||4.3||1,800||25.5|
|City of London||1,700||416.5||7,126||6,953||-172.9||-2.4||316||4.4||590||8.3|
|Finsbury Growth & Income||850||705.2||6,044||7,939||1894.78||31.4||137||2.3||2,192||36.3|
Notes: Includes income from previous holdings. Portfolio inception date was 1 April 2017. Source: FE Analytics, as at 30 August 2019.
mr brumwell's income portfolio
I would be inclined to include Fleming Claverhouse and some trusts like Far east asian income, and some utilities trusts (Ecofin, Utilico).
Also Property trust which generate income (Regional reit)
Its not strictly an investment trust portfolio as its included am ishares ETF.
what is the target income?