Investment trusts are often used to access hard-to-reach markets or niche themes, but are sometimes overlooked by income investors.
Morningstar covers a handful of income-focused trusts for your portfolio, so let's look in detail at three with Analyst Ratings of Neutral and above.
Morningstar ratings work in two ways. Star-based performance ratings are given out to funds or investment trusts based on a retrospective assessment of returns. Funds and trusts can, however, also earn coveted Gold, Silver, Bronze, or Neutral Ratings based on our analysts’ assessment of their overall long-term viability as strategies.
Three trusts earn ratings in the latter category: Aberdeen Standard Equity Income Trust (ASEI) is rated Neutral, while Finsbury Income & Growth (FGT) and Troy Income & Growth (TIGT) hold Silver status.
Aberdeen Standard Equity Income Trust (ASEI)
Performance on this UK equities-focused £207.7m trust has been relatively strong, with total returns of 24% over one year in the share price. That said, Morningstar analyst Teodor Dilov says investors must be willing stomach more volatility than they might otherwise expect if they back the proposition.
These days, where oil is makes up part of the picture, volatility is rarely far away. Oil majors make up significant segments of ASEI's portfolio, including Royal Dutch Shell (RDS.A), which is the trust’s top holding at 4.1% of its assets, and BP (BP) at 4%.
“ASEI’s experienced manager, employs a well-defined approach, but investors would need to tolerate periods of relatively high volatility,” Dilov says.
“Delivering excess risk-adjusted returns over a cycle poses a challenge for this intrepid approach, resulting in the trust being been downgraded from a Morningstar Analyst Rating of Bronze to Neutral.”
The trust yields nearly 6%.
Finsbury Growth & Income Trust (FGT)
With a market capitalisation of £2 billion, you could justifiably be asked if you had been living under a rock if you had not taken notice of this Nick Train-led investment phenomenon.
In the post-Woodford era, commentators are rightly reluctant to attach “star” status to any kind of investment vehicle. For retrospective performance alone, however, this trust earns a Morningstar 5-star rating, and a Silver Analyst Rating overall. Performance is way above its FTSE 100 benchmark, despite a more pedestrian performance in the 10 months to the end of October this year of 8.2%.
Holdings include all the big names Train has so vigorously (and in his in trademark charismatic style) defended over the years, including Diageo (11.5% of the portfolio), and smaller holding Fever-Tree, whose performance of more than 5% in August helped keep the trust’s overall performance stable.
“An important aspect to our investment case for Fever-Tree is the extent and scale of the company’s relationships with the leading global Spirits companies for co-promotions and activations, and we received more detail on this than usual,” the trust notes in its most recent September fact sheet.
“Whatever the spirit, Fever-Tree has the mixer to match it, and as the only premium mixer brand with global recognition and scale it remains a partner of choice for these demanding, prestige-conscious companies. The big, premium spirits companies want Fever-Tree to be a success.”
This trust yields just under 2%.
Troy Income & Growth (TIGT)
Also rated Silver by Morningstar analysts, the £248.6 million Troy Income & Growth trust enjoyed a better January-November period for performance, clocking up 10% returns in that time, and a share price return of 75% since its launch in July 1993. Troy took over management of the trust in July 2009.
Like Train’s FGT, Troy Income & Growth holds drinks giant Diageo, though at 6.2% of the portfolio, the position is nowhere near as significant, despite it being its biggest holding.
If you fear change at the top, however, you will be pleased to note the assessment of Morningstar analyst Robert Starkey, who says the trust is managing an expected change of leadership at the end of 2021 well.
In December, manager Francis Brooke will step back from portfolio management to assume a role as Troy’s executive vice-chairman.
“While his experience has been a crucial component here, his successor, Blake Hutchins, joined in October 2019 from Ninety One, where he steered a similarly-styled UK Equity Income mandate to good outcomes,” Starkey says.
“The approximate two-year handover period is well-managed and ensures that the sound process employed here continues.”
Unike the Finsbury trust, however, Troy yields 2.5%.
