TEN investment trusts that offer a stream of income in volatile market

INVESTING in stock markets is not without risk. We saw it in the run-up to the first lockdown in 2020 as shares slid; endured it as Liz Truss’s Government committed hara-kiri late last year; and are experiencing it again as a mix of governments and central banks attempt to prevent a full-scale banking crisis.

For investors in some of the country’s most high profile investment funds, these are challenging times. For example, Scottish Mortgage, our largest investment trust with a market value of £9.4billion, has lost its billing as the private investor’s favourite money maker.

The FTSE100 listed fund, managed by Edinburgh-based investment house Baillie Gifford, has gone into a tailspin since late 2021 as its technology-bent has fallen out of favour in response to higher interest rates, soaring inflation and economic malaise.

Sixteen months ago, the trust’s shares were trading above £15. Today, they are a tad above £6.50 and the future looks uncertain as the managers grapple with a portfolio heavily invested in unquoted companies – many of which are cash-guzzling and ripe for a write-down in value. Boardroom resignations have added to the swirl of uncertainty.

Volatile stock markets have even impacted on investment funds that market themselves as conservatively managed. Investment trust RIT Capital Partners, a £2.9 billion fund, states that preservation of investors’ capital is a priority, yet its share price has come tumbling down 27 per cent over the past year.

The trust’s poor performance – together with the risky nature of some of its underlying assets – has prompted Investec Bank to advise investors to sell their shares.

Alan Brierley, investment trust analyst at the bank, describes the trust’s management approach as having moved from ‘fly-fishing to fishing with dynamite’.

He told The Mail on Sunday: ‘For more than two decades, we viewed RIT Capital as a classic low risk, safe harbour investment and core holding in a diversified portfolio.

‘However, this has changed. The risk profile has been radically transformed in recent years. Given an objective of preserving shareholders’ capital, last year was deeply disappointing.’

Like Scottish Mortgage which never hid its high-risk, highreward investment strategy, RIT Capital Partners has a big slug of assets in unquoted businesses – or as Brierley says, ‘higher-risk late-stage venture capital’. The value of these assets could well be written down.

ARE THERE ANY RAYS OF INVESTMENT SUNSHINE?

SO, all rather gloomy – short term especially. But are there any comfort blankets for investors to cling on to while stock markets remain volatile? The biggest by far is the income that many investment funds are still dishing up for investors. Although Thursday’s hike in interest rates to 4.25 per cent now makes cash increasingly attractive, there are still a number of investment trusts that can better this – and in addition provide the opportunity for both long-term income and capital growth.

Using data from Morningstar, The Mail on Sunday has identified ten income-friendly investment trusts (see table). All pay dividends quarterly – which can either be taken as regular income (to boost income in retirement) or reinvested to buy more shares (a great strategy when building long-term wealth).

All bar one (Murray International) are primarily invested in the UK stock market.

All ten pass two big income tests which should reassure both existing shareholders and those looking to invest.

First, their shares are currently providing an annual income equivalent to in excess of 4.25 per cent – some quite a lot more. Second, and more importantly given the difficult economic backdrop, their ability to sustain growth in dividend payments is enhanced by the ‘rainy day’ income they have tucked away.

These income reserves, built up during periods when companies were making profits and paying big dividends, are employed when needed to top-up dividend payments to investors.

All ten trusts have at least half a year’s income in reserve ready to be used when times get tough.

REASSURINGLY, eight of the ten have provided shareholders with a growing income going back at least ten years – ranging from Dunedin Income Growth (11 years) to JPMorgan Claverhouse (50).

Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC), says a cocktail of geopolitical tensions, rising prices and the banking crisis are providing a challenging backdrop for equity investors.

She adds: ‘In these difficult times, dividends are a priority for many investors who rely on the income to help them meet rising bills and living costs.

‘Even investors who don’t need income now can benefit from reinvesting their dividends.

‘By doing this they are buying more shares which boosts their performance over the long term.’

The AIC website (www.theaic.co. uk) provides plenty of useful information on income investing.