The Results Round-Up – The Week’s Investment Trust Results

Which investment trust has joined the £1 billion club? And what has Odyssean IT been able to do that a large number of investment companies haven’t been able to this past year?

Frank Buhagiar•14 Jun, 2024•

TR Property (TRY) looking for stability

TRY posted a +21.1% NAV total return for the year, outpacing the benchmark’s +15.4%. As Chair, Kate Bolsover, explains, most of the year’s gains were made in the second half as H1’s NAV Total Return came in at just +3.3%. Bolsover puts the strong H2 down to the underlying companies making ‘great strides to improve their balance sheets and debt books over the last two years. This was always going to be a key building block in the sector’s recovery.’ Heightened M&A activity also helped. Looking ahead, Bolsover points out that ‘What is being looked for is stability in the monetary environment with lenders returning and margins normalising.’

JPMorgan: ‘TRY has outperformed, building on a good long-term track record, driven by security selection overall, we remain comfortable with our Overweight recommendation.’

Numis: ‘TR Property’s pan-European mandate focused on listed Property companies is unique in the ICs sector. TRY shares are currently trading at a c.9% discount, which we continue to view as undemanding.’

Fidelity China Special Situations (FCSS) and the importance of being a £1bn fund

FCSS may have posted a -16.3% NAV Total Return for the year, but at least this was better than the MSCI China Index’s -18.8% total return (sterling). According to Chairman, Mike Balfour, China’s tough year was down to global uncertainties and geopolitical concerns remaining heightened, as well as a softer-than-expected economy recovery in the wake of COVID restrictions being lifted. The fund’s latest full-year performance means FCSS’ NAV has now outperformed the index over one, five and 10 years. Over the last ten years, total shareholder returns stand at 125.7%, compared to the index’s 49.3% return.

That long-term record goes some way towards explaining why 99.9% of abrdn China shareholders supported the proposed tie-up with FCSS. The transaction resulted in a £126 million asset infusion for FCSS, taking the asset base to over £1 billion. Not just a nice round number. As Portfolio Manager, Dale Nicholls, explains ‘the increased scale and liquidity should help to bring Fidelity China Special Situations PLC to the attention of more professional fund buyers’.

Numis: ‘we believe that Fidelity China is an attractive way to access the market, should investors be comfortable with the risk profile of a leveraged fund with a focus on mid/small caps in a single Emerging Market.’

JPMorgan: ‘We think FCSS deserves a narrower rating due to its larger size and better liquidity and it has also had a favourable NAV TR performance over the past 1 year, 3 year and 5-year periods.’

Odyssean (OIT), an outlier

OIT’s concentrated UK small-cap portfolio didn’t benefit from any takeovers during the latest financial year – one of the reasons given by Chair, Linda Wilding, for why NAV per share came in at -3.7%, compared to 3% for the broader market. While the wider market benefited from M&A activity, this largely escaped industrial stocks, an area OIT has significant exposure to.

A strong long-term performance record helped keep the share price at around NAV during the year, allowing the fund to grow by issuing equity. Makes OIT something of an outlier in the broader investment company space.

Numis: ‘Performance since launch has been exceptional, with OIT producing NAV total returns of 75% (9.6% pa), compared to 32% (4.6% pa) for the DNSCI inc. AIM ex ICs index. We believe that the stockpicking record speaks for itself and that Odyssean represents an attractive and differentiated addition to a portfolio.’

Lindsell Train (LTI) standing out from the crowd

LTI posted a total NAV return of +2.1% for the year, some way off the MSCI World Index’s +22.5% (sterling). According to Chairman, Roger Lambert, the underperformance is due to a combination of factors including a drop-off in annualised NAV total returns to +6.4% per annum from +14.4% between 31 March 2001 and 31 March 2020; fund outflows from investment manager LTL in which LTI has a 24% stake; and a general widening of discounts in the investment trust sector.

Despite the disappointing year, the fund has kept true to its investment disciplines – it rarely changes its portfolio of a small number of stocks so that compounding can work its magic on earnings and value. As Lambert says ‘It is a differentiated approach that stands out against the crowd’.

Numis: ‘We believe that Lindsell Train IT is an interesting vehicle that benefits from both an experienced management team and a unique approach. The fund’s long-term performance is impressive, helped by strong returns from the management group.’

Winterflood: ‘The Board believes that, to maintain or grow dividend going forward, ‘material improvement’ in LTL performance is required, and this will need to be evidenced before the Board is willing to utilise additional revenue reserves, which ‘will be asking a lot over the next year’.’

abrdn New India (ANII) focusing on quality

ANII may not have matched the +34.4% return of what Chairman, Michael Hughes, describes is the riskier MSCI India Index, but the fund’s NAV total return still soared +27.8% in sterling terms during the year ended 31 March 2024. And since period end to 10 June 2024, the fund’s NAV total return of +14.7% trounced the index’s +6%. As Hughes points out there’s a lot to like about India: fast-growing economy; large, youthful population; growing middle class; corporations holding their own on the international stage; supportive policies; infrastructure spending boom; and relative geopolitical stability.

There’s a but, though. ‘Investing in India, however, means accepting market volatility, particularly as high growth rates in corporate earnings come with high valuations’. That’s especially true in the small and mid-cap space. As a result, ‘these do not form the core of our portfolio although they are included in it to ensure that shareholders benefit over the medium-to-longer term.’ Instead, the focus is on “high-quality, resilient companies that possess strong balance sheets and can profit from pricing power at each stage of the economic cycle.’

Winterflood: ‘The strongest sector returns came from holdings in Property, Infrastructure and government spending beneficiaries in Utilities and Industrials sectors, while Consumer, Financials and Energy stocks lagged market returns.’

Baillie Gifford UK Growth Trust (BGUK), not in the business of second-guessing markets

BGUK’s NAV total return came in at +0.6% for the year, some way off the FTSE All-Share’s +7.5%. Similar story over the five years to 30 April 2024: +3% NAV total return compared to the All Share’s +30.1%. Chair, Carolan Dobson, puts this down to the macroeconomic backdrop of sluggish economic growth, rising interest rates and a spike in inflation. An environment ‘not conducive to Baillie Gifford’s growth investment style’. The index is jam-packed with resource and financial stocks ‘whose profits tend to be cyclical with limited long-term sustainable growth and as such are not areas that meet the Managers’ long term growth requirements.’

The Investment Managers have asked themselves what they could have done differently. They could have taken positions in index heavyweights such as the resources and financials. But this would have meant ditching their long-term active investment approach for a short-term one based around ‘trying to second guess, and trade around, short term swings in style in stock markets. Attempting to do so in our view could make things far worse for shareholders.’ The Board sounds happy with that – it is recommending shareholders vote for the continuation of the fund at the upcoming AGM.

Numis: ‘After a difficult period for performance since Baillie Gifford took over the trust in June 2018, the Board has committed to allow shareholders to realise up to 100% of their assets via a performance-related conditional tender should the fund not match or exceed the FTSE All Share in the five years to 30 April 2029. This is conditional on the continuation vote in September 2024 passing.’

JPMorgan Emerging Markets (JEMA) feeling optimistic

JEMAposted a +6.9% NAV total return for the half year, a little off the benchmark’s +9.1%. The difference is partly down to the fund’s Russian assets which do not form part of the index. The Russian holdings continue to be subject to strict sanctions. Looking ahead, the investment managers sound as if they are ready for anything, ‘whatever 2024 may hold, we remain optimistic about the longer-term prospects of emerging markets in Europe, the Middle East and Africa.’

Winterflood: ‘As at 30 April, portfolio comprised 100 stocks, of which 26 were Russian securities. The latter account for 8% of portfolio (written down to account for sanctions).’

The great stock market recovery is under way. Provided by The Motley Fool

by Zaven Boyrazian, MSc

The stock market’s been rampaging over the last eight months. With inflation steadily falling, investor sentiment’s improved drastically compared to early 2022. And, subsequently, UK shares across the board have been marching upward.

Since October 2023, the FTSE 250‘s surged more than 25%, including dividends! That puts it firmly back in bull market territory. Similarly, the flagship FTSE 100‘s also up by double-digits, with the FTSE All-Share tagging along for the ride.

Yet despite this stellar surge of growth, many UK shares are still trading well below their pre-inflation prices. So supposing the recent stock market momentum continues, it may not be long before these cheap shares start delivering fantastic results.

Capitalising on slashed prices

2022 was the first time in over a decade investors had to endure a prolonged slide in valuations. That’s because such events are actually pretty rare. There are always buying opportunities to take advantage of. But having such a wide range of options available all at the same time is exceptional.

However, not all of these ‘cheap’ stocks are actually bargains. Some may never recover to their former highs. Therefore, simply snapping up sold-off stocks could likely end up destroying wealth rather than creating it.

Instead, investors still need to exercise discipline and diligence when selecting companies for a portfolio. This is especially true when examining smaller enterprises.

A downturn in the market may only be a temporary headwind, but it could still be a permanent threat if a business doesn’t have the financial resources to see it through the storm. Similarly, a company that hasn’t been able to protect itself with a competitive moat could see its performance wither as other firms steal market share.

With that in mind, investors need to look beyond the stock market climate when determining why a stock has taken a tumble. That way, it becomes far easier to identify traps.

A bargain stock to buy today?

It’s important to highlight that 2023 saw a lot of non-repeating sources of profit for this enterprise. As a result, the P/E ratio’s currently biased downward. Therefore, using the forward P/E ratio is more appropriate and this increases the metric to 7.0. That’s still looking relatively cheap, but it’s clear this business isn’t the stellar bargain suggested.

In the short term, things are looking up for this enterprise. And it seems the majority of analysts following the stock are recommending to buy with an average 12-month price target of 170p – about 27% higher than today’s price. But in the long run, there may be some greater uncertainty.

How to create a ton of passive income within an ISA in 3 easy steps

Story by Edward Sheldon, CFA

The Motley Fool

Passive income’s often said to be the ‘holy grail’ of personal finance. With this form of income, investors get paid without having to actively work for the money.

Here, I’m going to explain how UK investors can potentially build up a ton of passive income within an ISA in just a few simple steps. Let’s get into it.

Thanks to higher interest rates, it’s possible to generate passive income within a Cash ISA. At present, some of these accounts are offering interest rates of over 5%.

However, if an investor wants to generate a really high-level income, Stocks and Shares ISAs are a better bet, in my view. That’s because these products offer access to high-yielding investments such as dividend stocks and income funds.
So if I was looking to create a powerful passive income stream, I’d start by opening this type of ISA.

Look for attractive dividend stocks
Once I have an account open, my next move would be to identify some attractive high-yielding dividend stocks.

Now, this part of the process can be a little tricky. This is due to the fact that high-yielding stocks don’t always turn out to be good investments.

Sometimes, a high yield’s actually a signal that the underlying company has fundamental problems. So it’s important to look beyond a company’s yield and think about its long-term prospects.

One dividend stock I like the look of today is FTSE 250 company the Renewables Infrastructure Group (LSE: TRIG). It’s an investment company that owns a portfolio of clean energy assets (wind and solar farms etc).

Looking ahead, the transition away from fossil fuels towards renewable energy is likely to be a huge theme. So the backdrop for this company should be quite favourable.

Currently, the yield here is around 7.75%. This means that a £3k investment could potentially generate annual income of about £233 (dividends are never guaranteed though).

Over the last two years, this company’s share price has taken a hit due to higher interest rates. After this fall, I reckon now’s a good time to consider building a position in it.

That said, there’s always the chance that the share price could dip further. Falling energy prices are one risk to consider with this company.

Given that every company has its own risks, the last step in my passive income plan is spreading capital out over a number of different stocks.

This move – which is known as ‘diversifying’ a portfolio – can help to reduce stock-specific risk. This, in turn, can improve the chances of generating strong overall returns.

For example, if you only own three stocks and one of them tanks, your overall returns could be ugly. However, if you own 20 stocks and one falls heavily, it’s probably not going to be so bad.

The Motley Fool

Billionaire Warren Buffett owns this stock with a 60% dividend yield.

Story by Charlie Keough

Investors seeking inspiration in the stock market, they should look no further than Warren Buffett.

He’s arguably one of the best stock pickers of all time. His company Berkshire Hathaway has long produced returns that have comfortably trumped the market.

Alongside seeking out stocks that can bag him incredible returns, Buffett loves to make passive income. And today his investment in Coca-Cola (NYSE: KO.) yields a staggering 59.7%.

A whopping payout

Readers may wonder how that’s possible. Well, let me explain.

Buffett first snapped up its shares back in 1988. Over the next few decades, he slowly built up his position. Today, he owns over 400m shares worth over $24.7bn.

This year, he’s set to receive $776m in dividends from his investment. For us mere mortals, the Coca-Cola yield stands at 3.1%. For Buffett, that means he’s in line to receive back just shy of 60% of his $1.3bn investment through dividends. Incredible.

Lessons to learn

But what does this tell us?

Well, first it shows that playing the long game is effective. For starters, the value of Buffett’s investment has risen massively in 36 years. During that time, the Coca-Cola share price has gone through numerous peaks and troughs. But those are ironed out over a longer timeframe. His average buy price is $32.90. Today, a share costs $63.90.

It also shows that targeting shares that pay a dividend is an incredible way to start generating a second income. The ‘Oracle of Omaha’ owns plenty of other stocks that also have bulky yields, such as Citi Group, Chevron, and Kraft Heinz.

It’s something I’ve tried to do with my own portfolio. That’s why around 75% of the stocks I own pay a dividend.

In Q1 this year, Coca-Cola delivered revenue growth of 3% to $11.3bn while earnings per share also grew 3% to $0.74. This shows that demand for its products has remained steady despite economic uncertainty. It’s no surprise given that over 1.9bn servings of its drinks are consumed in over 200 countries every day.

There’s also its dividend track record. Its yield is by no means the highest out there. However, it has increased its payout for 62 years on the trot. Dividends are never guaranteed, so a record like that is worth its weight in gold. It’s for such reasons that I suspect Buffett is such a big fan of the stock.

Invesco Bond Income

Bond funds are sold as they are a ‘safe’ investment but as u can see from the chart the reality is entirely different.

Same chart but incudes earned dividends. If u were in De-accumulation u would spend the dividends but in Accumulation it would be better to re-invest the dividends into a higher yielder to grow your Snowball.

Current yield 6.7% and trading at a small premium.

The dividend has been very reliable, useful if u want to pay your utility bills.

But as always it’s your hard earned and only u can decide where to invest it.

Case study: Invesco Bond Income Plus (BIPS)

Company: Invesco Fund Managers Limited

Launched: Formed in 2021 through the merger of Invesco Enhanced Income and City Merchants High Yield Limited

Manager: Rhys Davies and Edward Craven

Ongoing charges: 0.86% including annual management fee (as at 31/01/2023, Source: Invesco factsheet)

Dividend policy: Target annual dividend of 11.5p per share. This is a target and there is no guarantee the dividend will be paid

Benchmark: The company does not have a benchmark

One investment company that aims to provide income to investors is Invesco Bond Income Plus (BIPS). BIPS invests primarily in high-yielding fixed-interest securities, with the goal of providing a mix of capital growth and income to shareholders.

The company was formed through the merger of the Invesco Enhanced Income and City Merchants High Yield Limited in 2021. BIPS continued to pay a dividend during the pandemic and, once the merger was complete, the company’s management team confirmed it would target an 11p per share annual dividend for the following three years. In the third quarter of 2022 the board decided to increase this target to 11.5p per share per year, paid quarterly.

The BIPS portfolio is made up of typically higher-yielding corporate bonds and financial debt instruments. BIPS also holds a small number of bonds that have come under price pressure but where the portfolio managers believe the companies are capable of turning around their businesses.

Risk is obviously a major consideration in the high yield bond market and BIPS portfolio managers Rhys Davies and Edward Craven try to mitigate this using their skill, experience, and judgement to diversify the portfolio. It’s not uncommon for the portfolio to hold over 100 companies, meaning a single bond issuer defaulting will not by itself lead to a large loss of NAV.

High yield bonds of the sort held by BIPS are typically harder for retail investors to evaluate and invest in by themselves. Anyone looking to gain some exposure to the corporate bond market may want to consider doing so via an investment company like BIPS as a result.

1. What is the company’s goal?

Invesco Bond Income Plus aims to produce capital gains and income for investors by investing in a diverse portfolio of high yield bonds and other fixed interest securities.

2. What kind of bonds do the managers like?

Portfolio managers Rhys Davies and Edward Craven, supported by their team, typically invest in a diversified portfolio of bonds issued by large and medium-sized businesses across the sectors of the economy, both corporates and financials. They are also happy, to a limited degree, to invest in bonds which have experienced substantial price pressure but only if they believe there is a strong enough case for a turnaround.

3. Are investment decisions driven by a particular investment style?

Fixed income brings with it credit risk and the possibility that issuers will default, more so in high yield bonds. Reducing the likelihood this will happen is a big part of the decision-making process at BIPS as a result. The company aims to hold bonds issued by companies the team know well, where they have confidence in their ability to service their debt. It also means holding a diversified portfolio of bonds, to potentially reduce any downside risk.

4. How many bonds does the company typically hold?

In line with those efforts to offer sufficient diversification, the company typically holds a diversified portfolio of around 200 individual fixed income securities. This number is not fixed and can change.

5. What is the company’s dividend policy?

After BIPS was formed from the merger of Invesco Enhanced Income and City Merchants High Yield Limited , management said it would target an 11p per share dividend for the following three years. In the third quarter of 2022, the board decided to increase the target dividend to 11.5p per share per year. Assuming it meets that target, the dividend will be paid out via four 2.875p per share dividends, issued on a quarterly basis. The company typically pays dividends from income it receives but may use capital and revenue reserves to pay shareholders if it experiences a shortfall. Please note as dividend policies and future dividend payments are determined by the board, they are not guaranteed.

6. What are the company’s ongoing charges?

The company’s ongoing charges are 0.86% at the time of publication, with an annual management fee of 0.65%. Note that this can change over time.

7. Does the company have performance fees?

The company does not have performance fees. The portfolio managers are invested in the company, so their interests are aligned to shareholders.

8. How much attention do the portfolio managers pay to their benchmark, and to what extent are absolute returns important?

Unlike most investment trusts, BIPS does not run against a benchmark, nor do the positions it takes reflect one. The portfolio managers do look at the BofA Merrill Lynch European Currency High Yield Index as a way of gauging their performance but the index is also not reflective of the positions BIPS takes. Rather than obsessing over their performance relative to a benchmark, the BIPS team are focused on achieving the company’s stated goals – delivering a high level of income and capital growth to shareholders.

9. Does the company use gearing and if so is it structural or opportunity led?

The company uses gearing, when appropriate, to potentially enhance the income it generates. Levels of gearing tend to fluctuate as a result. The company uses gearing by means of repo financing.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When making an investment in an investment trust/company you are buying shares in a company that is listed on a stock exchange. The price of the shares will be determined by supply and demand. Consequently, the share price of an investment trust/company may be higher or lower than the underlying net asset value of the investments in its portfolio and there can be no certainty that there will be liquidity in the shares.

Invesco Bond Income Plus has a significant proportion of high-yielding bonds, which are of lower credit quality and may result in large fluctuations in the NAV of the product.

The product uses derivatives for efficient portfolio management which may result in increased volatility in the NAV.

The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall.

The product may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events.

How investment trusts can support your income goals…

Kepler Trust Intelligence

Updated 21 Apr 2023

Generating a reliable income has always been one of the foremost goals of investors. Younger investors tend to invest for capital growth but that starts to change as they get older.

Instead of wanting to generate large capital gains, they’re much more likely to want their investments to pay out so they can have cash to use during retirement.

Although generating income from your investments is a straightforward goal, there are lots of ways that investors go about trying to achieve it.

It might mean they focus their efforts on bonds, stocks, or alternative investments, like real estate or private debt. There’s also nothing to stop people from mixing things up and having holdings in a range of assets that they believe will generate income.

Investing in bonds for income

In the past, the bond market was typically seen as the go-to for income investors. As bonds are usually structured to pay out a fixed sum of cash at regular intervals and over a set period of time, they’re often regarded as offering a mix of reliability and, if they are issued by a reliable counterparty, low risk to income investors.

Bond investors have had a strange time since the financial crisis in the late 2000s. Many central banks set their interest rates close to zero in the wake of the crisis. This meant government bonds from countries like the US and UK, the traditional go-to for many investors, offered anaemic yields.

However, this started to change in late 2021. Central banks came under pressure to raise interest rates to try and stem the wave of inflation, which emerged in the wake of the Covid-19 pandemic. As a result, lower risk bonds, such as treasuries and gilts, are now offering more attractive yields than they have in over a decade.

This may mean we will see a shift back into these assets, after a long period in which they did not offer much to make them appealing for investors.

It’s also worth remembering that the bond market is much broader than those issued by a few governments in developed markets. Companies and governments across the world issue bonds and many of these yield comparatively high returns.

The problem is they do tend to carry more risk with them. Investors should take note of these risks prior to investing, given that the likelihood of default – and investment losses – are commensurately higher.

Investing in stocks for income

One consequence of the low yields in government bonds that we saw after the financial crisis was a move towards equity markets.

Equities have always been a source of income for investors, so that’s not to say this was new territory for them. But it did mean income investors had more exposure to stocks than they might have in the past.

Typically income investors put their cash into larger, blue-chip stocks. In the UK, that has usually meant firms like Unilever, HSBC, or Shell.

The reason for this is fairly straightforward. Large, established companies don’t tend to have ambitious, capital-intensive growth plans, meaning they’re less likely to reinvest their earnings and can pay dividends instead.

For those investors looking for the level of reliability that government bonds provided in the past, larger businesses are also perceived as offering a measure of stability. Rightly or wrongly, investors tend to believe these companies will be around for a while, earning stable revenues and paying out predictable dividends.

This is, of course, just a rule of thumb and there are still large companies that don’t pay dividends and smaller ones that do. But income investors do usually like stability and predictability, something that we tend to see as a feature of larger firms.

Income investing using alternative investments

Alternative investments is a broad term that could refer to anything from fine art collections to a hedge fund.

For private investors it usually means investing in things like real estate, debt products, or commodities.

Obviously not all of these are easily accessible, nor do they all provide a source of income – a gold bar remains a gold bar, no matter how long you hold it for, so you aren’t going to get any dividends from it.

Probably the most popular alternative investment option for regular investors is real estate. A house or flat can generate rental income that’s reasonably reliable and predictable. It’s also more readily accessible to a regular investor compared to a large-scale private equity investment.

Still, buying a home for investment purposes is likely to be out of reach for many people. That’s why regular investors, looking for income, may invest in a fund that holds alternative assets instead.

Doing so is cheaper and simpler than attempting to go it alone. For instance, if you want to invest in commercial real estate you’ll need a huge amount of money. Investing in a fund that pools together a large amount of money and then invests in commercial real estate is a much more realistic option for most people.

Using investment trusts for income

This is one reason that investment trusts appeal to income investors. Income-producing alternative assets are much more easily accessible through a trust than they would be if an investor wanted to do it alone.

And the various trusts listed in the UK offer a broad range of alternative assets to investors. For instance, TwentyFour Income (TFIF) tries to generate income by investing in asset-backed debt securities. Alternatively, Greencoat Capital operates two investment trusts that attempt to generate income from investments in renewable energy infrastructure.

Beyond these more niche investments, trusts can also generate income from investing in traditional asset classes, like bonds and equities.

Some investors may choose trusts that invest in these because they’re focused on markets that are hard to access for retail investors. For instance, regular investors may find it almost impossible to purchase shares in some East Asian countries themselves. Similarly, buying certain corporate or government bonds can be difficult to do alone.

But this obviously isn’t true across the board. UK stocks are, for instance, pretty easy for regular investors to access themselves, so why bother with a trust?

One reason is they offer access to professional portfolio managers. Stock picking isn’t a simple task and many people find it more convenient to hand the reins over to someone else.

This is particularly the case if you have a specific goal in mind, like generating income, and don’t want to take on the risk of managing it yourself. Anyone considering this should keep in mind that trust’s that have a particular style or purpose often have a lot of overlap, in terms of the assets they hold, so it’s worth checking that you’re not doubling up by buying shares in several trusts.

Trusts also tend to have diversified portfolios and thus offer investors the ability to access a mix of assets through one investment. This may be particularly appealing if an investor has a specific goal in mind, as the trust can act as something of a ‘one stop shop’ for them. Rather than having to pick a whole basket of assets themselves to meet that goal, they can just buy one share in the trust.

How investment trusts can help income investors

Aside from the actual investment process, trusts have unique structural benefits which make them particularly suitable for income focused investors.

Trusts are legally required to pay out 85% of the dividends they receive. For real estate investment trusts the figure is 90%.

The remaining 15% or 10% can be kept in reserve and used to smooth out payments during rough patches in the market. Open-ended investment companies must pay out all of their income, meaning they don’t have this benefit.

The benefit of being able to keep income in reserve was on display during the Covid-19 pandemic in 2020. Whereas many firms were forced to slash dividends or cut them entirely, close to 90% of investment trusts maintained or increased their payouts.

That was possible in large part because of the reserves that many trusts have built up over the years. For income investors, many of whom are partial to that mix of stability and predictability, this ability to retain dividends is thus a very attractive feature.

Income from capital

Another benefit that trusts have for income investors, which complements the above, is the ability to pay dividends from their capital reserves. In simpler terms, this means they can pay a dividend to their shareholders by converting some of the capital growth generated by their investments into an income.

Generally income paid from capital reserves is undertaken in line with a specific dividend policy. This will usually be an agreement by the trust to pay out dividends as a percentage of the trust’s net asset value (NAV).

This may be done once a year or more frequently. For example, Invesco Perpetual UK Smaller Companies (IPU) has a policy of paying out a dividend that’s equal to 4% of its NAV at the year end. JPMorgan Japan Small Cap Growth & Income (JSGI) takes a different approach by paying out 1% of NAV at the end of each quarter. And International Biotechnology (IBT) pays a dividend equal to 4% of NAV at the end of its financial year, but in two instalments, one in January and the other in August.

Trusts can mix and match in meeting these commitments. For instance, half the payout may come from dividends generated by the trust’s holdings, whereas the other half may come from capital reserves.

It’s worth keeping in mind that paying out of capital reserves carries some risk with it. Selling off assets to meet dividend requirements can depress a trust’s NAV, something that can make a bad situation worse if a trust has had a period of poor performance.

That may not please income investors but then they’ve still got plenty of options open to them. And in the long-run, they’d likely be better off choosing an income-focused trust, rather than one that’s decided to adopt a dividend policy which may not be best-suited to its investment strategy.

Why a closed pool of capital helps investment trusts

The investment trust structure is also key to their being able to invest in more niche areas of the market that can produce income.

A closed pool of capital means the buying and selling of trust shares doesn’t impact a trust’s underlying portfolio. This means that trusts are freer than open-ended funds, which must contend with redemptions, to invest in more illiquid assets.

As discussed above, this might include areas like renewable energy infrastructure or commercial property. But there are more specialized areas too.

Accessing these sorts of funds outside of the investment trust market is tricky and trusts’ structure is a key reason for that.

Bundles of Twenty Pound Notes

The Telegraph

What are bonds?
Bonds, sometimes known as fixed income or fixed income securities, are a form of IOU. You lend money to a company or government, and it pays you a fixed return – sometimes called a coupon – for doing so.

At the end of the bond’s term, when it matures, you get back the original amount you paid for the bond. The duration – as it’s known – can be from three months to as much as 50 years.

Interest rates influence the way bonds are priced. When interest rates increase, bond prices generally tend to go down. When interest rates fall, bond prices rise.

Benefits of investing in bonds
A key reason for investing in bonds is to receive an income. All types of bonds provide investors with a pre-determined interest rate, which for income-seekers, particularly those in retirement, is a tempting offer.
Diversification is another key benefit. Bonds can provide a safer alternative during times of market uncertainty as they traditionally behave differently to stock markets. Held alongside equities they can help to reduce the volatility of the portfolio as a whole, as bond prices typically fluctuate less.

Since returns are already fixed – unlike the capital returns and dividends issued to shareholders, which can change – they are popular with more cautious investors who don’t like the idea of the value of their money rising and falling.

Types of bonds
There are a whole host of different types of bonds offering different levels of return – and risk.

Government bonds
Bonds issued by the UK Government are also known as gilts. The name refers to a time when they were issued in the form of paper certificates with gilded edges.

There are tax benefits when it comes to holding gilts. Any profit made from a gilt when you sell or redeem it is free from capital gains tax, unlike many other investments, such as shares, funds or investment trusts held outside an Isa.

It’s particularly advantageous for higher and additional rate taxpayers who would otherwise pay capital gains tax at 20pc.

Governments in other developed countries issue bonds too, such as the US.

Emerging market bonds are issued by countries or companies in the developing world. Emerging market debt carries more risk as there’s a greater chance of defaulting and it can be volatile owing to currency movements – but there are clear opportunities.

The liquidity and the financial strength of bond issuers, as well as political stability, need to be considered when assessing these government bonds.

The coupons on emerging market debt can be very attractive, often in double figures.

Corporate bonds
Corporate bonds allow you to invest in big companies in a less risky way than buying shares in them. Corporations will often issue bonds to allow them to fund growing their business, perhaps by buying property and equipment, or hiring more staff.

Corporate bonds come in many guises within this sector. Those from companies with high credit ratings (which are an indication of a financial strength) are known as investment-grade bonds. Companies with a higher level of risk associated with them are known as high yield or sometimes as junk bonds.

Investment-grade corporate bonds are issued by companies which ordinary investors are likely to have heard of, such as Apple and Tesco.

Should a business run into financial trouble, these bonds rank higher in the pecking order than shareholders, so you can take comfort from that when it comes to weighing up risk.

High-yield or “junk” bonds are issued by companies with lower credit ratings. To compensate for the greater risk taken by investors that they might default on a payment or not be able to repay bondholders in full, these bonds pay higher returns. High-yield issuers are often smaller companies in more niche, specialist areas.

Inflation-linked bonds
A specialist sector of inflation-linked bonds – also known as index-linked or “linkers” – pay interest that rises with inflation. Such bonds aim to offer protection when stock markets fall, as well as providing a shield against inflation.

Bond returns
A bond’s yield is expressed as a percentage. It’s the return an investor can expect to receive as income over the next 12 months, which is based on the amount originally invested.

When it comes to prospects for returns ahead, there’s no crystal ball to tell investors what to expect.

Hal Cook, a senior investment analyst at Hargreaves Lansdown, believes that interest rates are likely to be at their peak for this cycle, with the broad expectation being that rates will come down from here.

He said: “This is good for bonds, because falling yields means increasing prices. Current market pricing is suggesting that interest rates in the UK will be around 3.25pc to 3.5pc in five years’ time. This figure is around 3.6pc for US interest rates and 2pc to 2.25pc for Europe. If this turns out to be correct, that will mean interest rate cuts from three of the most influential central banks globally in the coming months and years.

“When inflation falls and the central banks cut rates, bonds appeal more to investors. This increases demand and pushes the price up – so investors who are holding bonds will see the value of their holding increase.

“In the event of a market shock, it is possible that bonds will increase in value again. This is particularly true for government bonds such as gilts, that could benefit from a safe haven trade in a market-shock environment.

“The potential for bonds to increase in value in this scenario increases their diversification benefit within an investment portfolio.”

Risks of buying bonds
One major risk to fixed income is that posed by inflation. Bonds are less attractive in periods of rising inflation because as prices rise, the value of the income in real terms is reduced.

While inflation is today rising at a much slower pace than in previous years, it’s still high.

The lower volatility of bonds also tends to make them popular with cautious investors or those who want to reduce overall risk in a portfolio, but there are no guarantees as bonds can experience rough times too.

Credit risk is another issue for bonds. This is the risk of a company or government defaulting by not paying the coupon or repaying your capital.

Liquidity is a risk because if you want to sell and can’t find a buyer you cannot cash in your investment.

For global bonds, where bonds are paid and priced in local currencies, there is currency risk because the value of that currency could fall, impacting the value of your investment.

Bonds with a shorter lifespan of five years or fewer can be considered less risky as there is not as much time for things to change in terms of the economic environment. That’s why a lower level of income is typically offered with short-duration bonds. Those with a longer duration usually pay a higher level of income to compensate for the greater levels of risk involved.

You can buy government bonds directly through the Government’s debt issuer – the Debt Management Office (DMO) – where they are issued in units of £100.

It provides a trading service, meaning that you can buy and sell gilts that are already in the market. However, to be eligible to use the service you must first sign up as a member of a DMO “approved group of investors”, which is only available to UK residents.

You don’t need to be a member of the approved group to sell gilts via the service, however. For buying or selling, you’ll pay fees of 0.7pc of the value of the gilts you’re trading.

Alternatively you can use a stockbroker or investment platform, such as Hargreaves Lansdown or Interactive Investor. Each gilt is priced differently and will be constantly changing, and will have varying coupon and maturity dates, which means that there are several choices to make before investing.

The maturity date and the coupon appear in the name of the gilt, so they are easily found.

You can also buy corporate bonds via an investment platform.

Emerging market bonds are not so readily available. You can get exposure by investing in a global bond fund which would usually hold emerging market debt.

In fact you can buy all types of bonds in an investment fund where you’ll pool your money with other investors to hold a portfolio of bonds. These funds are either run by a fund manager or invested via a tracker fund or an exchange-traded fund (ETF) which will mimic an index of bonds.

Some fixed interest funds allow ordinary investors access to all types of bonds in one fund. Strategic bond funds are run by a manager who is permitted to move between the different types, according to where they see the greatest value.

Bond funds are available to buy on investment platforms and can be held in tax-efficient investments such as an Isa or self-invested personal pension.