Kepler navel gazing

Not Naval gazing, that’s a different topic altogether.

2025 Income rating winners

08 Jan 2025

There are four trusts winning an Income rating this year, all of which have an enhanced yield, paying a fixed amount of NAV out as a dividend. Our ratings require trusts to have delivered on average 3% dividend growth over the past five years. The potential drawback with enhanced dividends is that if the NAV falls year-on-year, the dividend may fall too. Our ratings suggest that over the medium term, this doesn’t have to get in the way of providing attractive dividend growth. We note that one other rating winner,  Montanaro UK Smaller Companies (MTU), has also switched to an enhanced dividend policy, starting in 2025.

It is notable to see Aberforth Smaller Companies (ASL) win a rating this year. ASL is one of the few unabashedly ‘value’ equity strategies left in the investment trust sector, and has performed extremely well post-pandemic. Its strong performance on dividend growth and very high revenue reserves qualify it for an Income rating. It joins a number of UK small-cap trusts on the list this year. We think this reflects the deep value in the sector, with a historically successful growth market providing all sorts of companies with a handsome yield – and increasingly buybacks too.

We think it is interesting to note the average Quality score of the Income rating winners is higher than the Growth rating winners (at 6.2 to 5.4). There are a couple of reasons this might be the case. First, it may reflect the fact that high quality earnings and dividend growth performance are intrinsically linked. Secondly, it is also true that our ratings value good downside performance, as we think that investors value this highly and it more reflects their understanding of risk than volatility. It is by design that a trust that delivered a return of X% annualised and dividend growth of Y% would score higher if the path of returns were steadier and saw more modest drawdowns, and a trust that had a much more volatile path to the same result would have a lower score. Finally, we would note that our style scores are all relative to the funds’ peers. As such, a Quality score over 5 means a score above average for the relevant investment trusts, not in relation to the underlying equity market. We believe the average quality score of the investment trust sector would be above that of the market, with quality being an important factor for many managers.

2025 INCOME RATED FUNDS

Source: Morningstar, Kepler calculations
Past performance is not a reliable indicator of future results

2025 Alternative Income rating winners

For the first time, the number of Alternative Income rated funds has fallen, reflecting the impact of an interest rate shock on the valuations of unlisted portfolios, financing costs and net cash yields. For this rating, we look across the relevant sectors for those trusts that have managed to deliver a flat or stable NAV along with dividend growth over the past five years. Only nine made the cut this time, down from 14 last year. The two battery storage funds that qualified in 2024 are among those dropping off. All our calculations are on NAV, not share price, and wide discounts on some of these trusts suggests investors may be wary of these NAVs too. On the other hand, stalwarts and early movers Greencoat UK Wind (UKW), Renewables Infrastructure Group (TRIG) and BBGI Global Infrastructure (BBGI) have navigated through the turmoil to retain their ratings in 2025. As can be seen in the table below, the solar funds are on particularly wide discounts, which is reflected in the very high yields on offer in the table below.

2025 ALTERNATIVE INCOME RATED FUNDS

Source: Morningstar
Past performance is not a reliable indicator of future results

We don’t apply a minimum yield requirement for these ratings, but they are formulated to focus on those portfolios designed to deliver a high income. Notably there is still a substantial yield pickup over gilts available from most of the trusts on our list, which reflects in part discounts. In fact, we tend to think it is this that is driving the discounts, rather than wariness of the NAVs, which interpretation may increase the attractiveness of the cheap share prices.