Coronavirus has wiped around a third off the value of UK shares and is leading to economic fears across the world. The impact from this point in time is hard to assess right now, with many companies still to update on the effect the virus will have on their profits and with no cure yet available. At the moment it seems still very risky to invest in individual shares, especially for income. Income investors are being hit by an in companies suspending their dividends because of the impact of COVID-19.
However, for brave investors willing to invest in this turbulent market, investment trusts offering dividend yields of above say 3-4% might be a good way to take advantage of falling share prices. Many investment trusts which at the beginning of 2020 had a premium, now trade at significant discounts. These will likely narrow when the picture becomes clearer and uncertainty in the market lessens; the bear market won’t go on forever.
Another advantage of investment trusts is that they are allowed to store away 15% of their income every year, meaning they have greater scope to maintain dividends when markets become tougher. In many ways then higher-yielding investment trusts, which are now considerably cheaper, make sense as a starting point for investing in this market. Individual shares are likely still too risky.
3 investment trusts for income investors
The Scottish Investment Trust (SCIN)
This is a global investment trust, listed on the FTSE 250. The dividend yield is around 3.7% and the shares now have a massive discount to the net asset value. The discount has grown to -27%. For reference over the last 12 months, the discount has trended to be towards 9%.
Top holdings as of the end of February 2020 were 3 mining companies, Newmont, Barrick Gold and Newcrest Mining. The rest are better-known companies such as Tesco, Japan Tobacco, Pfizer, Roche, BT, United Utilities, PepsiCo and GlaxoSmithKline. It’s interesting to note that the trust has 0% invested in information technology – an area that has done well for other trusts in recent years. Instead, its biggest sectors are materials (usually miners), consumer staples, communication services and healthcare.
The trust’s biggest region is the United States which accounts for about 30% of the portfolio’s assets. The UK accounts for 21% and Europe (exc UK) for just under 15%.
Murray Income (MUT)
The growth in the gap between net asset value and the discount has been less severe for Murray Income in the last month. Although this discount on offer is still better than it has been for much of the last year. It’s currently -7.2% versus an average of -4.77% and the dividend yield of the trust is 5.3% making it better for income investors., from a yield perspective.
Top holdings of the trust also at the end of Feb 2020 were GlaxoSmithKline, Diageo, Countryside Properties, RELX, AstraZeneca, AVEVA, Unilever, National Grid, Roche and Close Brothers. The top 20 holdings accounted for just over half of the total assets of the trust. In total the trust has 61 investments. Clearly, this is a much more UK focused investment trust.
In terms of sectors, just under 19% is in financials, 17% in consumer goods, 13% in healthcare, 13% in industrials and 11% in consumer services.
Invesco Income Growth (IVI)
This is another UK focused trust, 74% of the assets are invested in the FTSE 100 with a further 15% invested in the FTSE 250. This is the highest yielding of the three shortlisted trusts with a yield of 5.8%. The discount is around -14.65% which is broadly around the same as it has been previously, which is hard to explain, given the market declines. Perhaps it’s because that is already quite a significant discount.
The trust is also very focused, with its top 10 holdings accounting for 40% of its assets. The top holdings are: GlaxoSmithKline, Experian, Ferguson, Pennon, RELX, British American Tobacco, Young & Co’s Brewery, Legal & General, Informa and National Grid.
In terms of sectors, the trust is overweight on consumer services which account for a tad over a quarter of its investments. This sector is followed by industrials, financials and utilities which are all around 15% of assets each.
Investing in a bear market
This is a difficult time to invest, especially for those experiencing their first bear market. So let’s stick together and if you need reassurance that there are others in the same boat, please read my blog about investing in my first bear market.
I’d add now to what I said then, that if I was going to invest in shares at this time, I might start by adding investment trusts with decent dividend yields. Hopefully, these investment trusts highlighted are helpful as a starting point for thinking about which ones could do well over the next twelve months. This is quite a basic overview and the factsheets on the investment trust’s websites are helpful sources of information.
Of course, the economic conditions will play a role in how they perform, but with reserves and diversified portfolios and usually cheaper charges than funds, investment trusts should perform better than most share-based assets in the foreseeable future.