A quarterly update for our regular income-focused investment trust portfolio reveals how the prospect of a Conservative general election win pacified markets.
Note: this portfolio update focuses on the past quarter and was written before the 12 December election result.
"The past quarter was pretty smooth,” says James Brumwell, manager of our regular income portfolio. “Dividend growth continued nudging up, which was pleasing. At the same time, the portfolio held up on the capital front, which is really what the target is.”
Over the course of the three months, capital growth in our regular income-focused investment trust portfolio edged up by 0.8%. However, when dividends received over the period are added in, the three-month return for the portfolio increases to 2.1%.
Driving much of this performance was an uptick among trusts that have up until now not been the strongest contributors to the portfolio.
Brumwell notes that there is increasing optimism about UK equity markets, thanks to the calling of a general election in the UK, which at the time of writing was going the way markets would prefer it to. This can be seen in the performance of the Merchants Trust and the City of London Investment Trust, the two best performers over the three months from the end of August to the end of November.
Merchants, which invests in high-yielding UK companies, benefited from a strong rally in the value of its underlying assets and its share price shot up by 10.9%. Meanwhile, the share price of City of London, which could be described as a defensive trust with consistent dividends, rose by 4.2%.
According to Brumwell: “Both have underperformed in the recent past but suddenly seem to have got their mojo back.”
He notes that at the end of August, Merchants’ share price was around 460p and it had been as low as 440p prior to that, but since August it has been on an upward trend and is now sitting at 471p. However, he says: “That is only back to where it was in April.”
He adds: “It’s a similar story if you look at a chart of City of London’s share price. It was down at 390p in early August. It is now at 416p, but it was up to 430p in June and July. All the trust has done over the late summer is recover.”
Brumwell puts the performance of the two trusts down to the outcome expected in the 12 December election. Both trusts are UK-focused and include many domestic-facing stocks. He says: “Whatever your politics, a Conservative majority is the best option on the table for the market.” At the time of writing (in early December) polling suggest this is the most likely outcome.
Brumwell adds: “It is the option favoured by markets. A win for the Labour Party, even if it could square the numbers for its promised spending plans, would still likely lead to chaos in markets.”
At the time of writing, a Labour majority appears highly unlikely, but Brumwell remains cautious. A Conservative majority looks to be the most likely outcome, but he fears markets could be getting ahead of themselves. He says: “It’s possible that Prime Minister Boris Johnson won’t get a majority. But in the past week or two, we’ve seen sterling firming. Usually that would hurt the FTSE 100, but it hasn’t.”
He continues: “I think the fact that the FTSE 100 hasn’t fallen out of bed due to currency appreciation indicates that markets believe the Tories will get in and that there will be an orderly Brexit, and that everyone can look forward to life after that.”
Brumwell admits, though, that this assessment may be too optimistic. He says: “After the election outcome in 2017, this seems a dangerous view. The market is getting ahead of itself, and we are just riding on the back of it.”
Murray International Trust also saw strong performance over the past three months. However, over a longer timescale, the trust has underperformed.
Brumwell says: “The share price rose to £12.50 at the beginning of November, but it has come off its peaks.” (It now stands at around £12.15.) The trust has produced a total return of just 9.8% since the portfolio’s inception in April 2017.
Another strong recent performer has been the Invesco Perpetual Enhanced Income investment trust, which produced a three-month return of 3%. Brumwell says: “Again, that has been quite lacklustre since we bought it. It’s shares got down to about 70p about a year ago but have been steadily recovering from there.” They now stand at 79p.
He adds that the trust is sensitive to interest rate expectations. “It has been paying the same 1.25 pence per quarter for ages.” So when rates are seen to be rising, as many expected them to about a year ago, the value of the trust’s shares will tend to fall. When rates are thought to be heading lower, as is the case now, their value will tend to rise.
One of the worst performers over the quarter was the Finsbury Growth and Income Trust, which produced a negative return of 4.3%. “It has drifted. It has not been stellar,” says Brumwell. He points out that the trust peaked in September, when it was trading on a high premium for about 950p a share. “It has now drifted back and is on a tiny discount,” he says.
However, he emphasises that the trust has had a good run and is up more than 30% since the portfolio’s inception. Even when dividends are excluded, the trust has returned 26%.
Brumwell points out that despite it being deemed a growth and income trust, its yield is relatively small, at less than 2%. In contrast, Merchants yields 5% and City of London 4.5%.He says: “The trust is really in there to add capital gains as we go along. On this count, it has been reasonably successful since inception.”
Another poor performer over the quarter in capital terms was the CQS New City High Yield Fund, which was down by 2.9%. “It hasn’t really gone anywhere,” says Brumwell. “It traded at highs in July and lows at the beginning of November – it’s one where you trust the managers, as some of what they invest in is obscure.”
However, the trust has a strong yield of 7.5%. “That’s the sort of yield you can’t turn your back on. How will we replace it?” Since inception it has provided a total return of 12.8%.
Portfolio’s capital growth has edged up over the quarter
since inception (£)
|Invesco Enhanced Income||9,000||79.0||7,120||6,863||-257.5||-3.6||450||6.3||980||13.76|
|CQS New City High Yield Fund||11,500||62.3||7,169||6,670||-498.75||-7.0||511.75||7.1||916||12.77|
|Twenty Four Select Monthly Income Fund||6,500||93.6||6,094||6,045||-49||-0.8||425.75||7.0||103||2|
|iShares Global High Yield Bond (£ Hedged)||47||9855.0||4,642||4,581||-61.23||-1.3||233.41||5.0||62||1|
|Balfour Beatty 10.75% Conv 01/07/20||6,500||111.1||7,269||6,695||-573.91||-7.9||154.38||3.6||125||2|
|National Westminster 9% Series A Non Cum||5,150||140.0||7,256||8,189||932.45||12.9||463.5||6.4||2,091||29|
|JPMorgan Global Growth & Income||2,400||292.0||7,053||8,136||1082.96||15.4||306.72||4.4||1,806||26|
|City of London||1,700||416.5||7,126||7,242||116.1||1.6||319.6||4.5||960||13|
|Finsbury Growth & Income||850||705.2||6,044||7,599||1554.78||25.7||141.1||2.3||1,925||32|
Notes: Includes income from previous holdings. Portfolio inception was 1 April 2017. Source: FE Analytics, as at 30 November 2019.
There have been no buys, sales or rebalances for the portfolio in this quarter. “We have been really riding a fairly favourable market,” says Brumwell. “As a result, we haven’t felt much pressure to tweak anything.”
He notes that there are plenty of risks out there – from trade war to Brexit – but he is not too worried. He says: “Will we have a nasty shock to the system? I think probably not.” But even if there were to be one – an unexpected election outcome, for example – “we would just have to wait for the dust to settle”.
Brumwell says the portfolio now has an annual dividend growth rate of 11.8%. Partly this is the result of tweaking. But it’s also because 2019 was a very good year for investment trusts raising dividends.
He doubts whether that growth rate will persist. But he adds: “We have a healthy yield. We have achieved our target with the portfolio so far.”
James Brumwell is a private investor and investment trust specialist.