Closed ended trusts have dividend reserve advantage says Oriel Securities

Research into higher yielding closed ended funds in the UK market has shown that investors looking for yield could benefit from these structures where they have reserves that can be tapped for maintaining dividend payouts.

So-called revenue reserves can ensure dividends are maintained or even increased at times when they might not be covered by annual revenues.

“We see the ability to use revenue reserves as an advantage that investment trusts have over some other investment products,” said Oriel Securities analyst Iain Scouller in a note.

The research covers funds with market capitalisation values above £30m, which are investing predominantly in listed equity. Funds with yields of 4% and more were identified and compared against the yield of the FTSE 100 (3.2%) and FTSE All Share (3.1%).

Some 15 funds – investment trusts – were identified, ranging from a yield of 4% for the Standard Life Equity Income to the 6.2% yield of the Shires Income.

Fund Yield (%)
Shires Income6.2
Henderson High Income 6.2
Merchants Trust5.5
European Assets5.3
Henderson Far East Income4.7
Dunedin Income Growth4.7
British Assets4.6
City of London IT4.5
INVESCO Income Growth4.5
Schroder Income Growth4.5
Edinburgh Investment Trust 4.4
Murray Income4.3
Securities of Scotland4.1
Value and Income4.1
Standard Life Equity Income4.0


Source: Oriel Securities

One indication of the popularity of yield is in the premiums noted – which illustrates that investors are prepared to pay more per share than the underlying net asset value per share. For example, Oriel Securities found that Merchants Trust was on a 7% premium and the Edinburgh IT on an 8% premium.

Income producing assets were not limited to the UK. The European Assets, Henderson Far East Income and, despite the name, British Assets funds all did well. The Henderson fund invests in Asian and Australian equities. The British Assets portfolio has 24% of its assets in international equity.

In addition to these equity funds, property assets are also noted for their ability to pay an income. The HICL and 3i infrastructure funds were identified in the research as paying yields typically of 5%-6%, and trading on premiums to NAV values.

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