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Investment trusts vs funds – UK Equity Income

We compare investment trusts and funds investing in UK companies which focus on growth and increasing dividends.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

For several years the UK has been investors’ most unloved market. That’s largely down to Brexit worries. Although it’s natural for investors to be cautious about uncertain events, and it’s sensible to diversify your investments across lots of countries, we think the UK still has plenty to offer.

There’s one area in particular where we think the UK stands head and shoulders above most other major markets – equity income. Our shores are home to lots of companies that combine long-term growth prospects and steadily rising dividends. That means investors could potentially benefit from both capital growth and a healthy income. It’s the best of both worlds.

You can find our favourite UK equity income fund managers on the Wealth 50. You’ll also find plenty of top-rate investment trust managers in the sector. And they have a potentially useful trick up their sleeve to help deliver long-term income growth.

This article isn’t personal advice. If you’re unsure of the suitability of an investment for you, please seek advice. All investments and their income fall in value as well as rise so you could get back less than you invest.

Income icons

Investment trust managers can hold back up to 15% of the portfolio’s income each year. That can then be used to top-up income paid to investors in leaner times. Some trusts have used this income ‘smoothing’ so well they’ve increased dividends 20 years or more in a row – the so-called ‘dividend heroes’. A few even have over half a century of rising dividends under their belts.

It’s not just income where investments trusts have often done well. Their average long-term performance has also been better than funds’. Over the ten years to 31 December 2019, the AIC Investment Trust UK Equity Income sector grew 174.3%*. The IA (funds) UK Equity Income sector rose 119.9% over the same period. Remember past performance isn’t a guide to future returns.

UK Equity Income – investment trusts vs funds

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2019

Are investment trusts best for UK Equity Income?

Not necessarily. Although on average investments trusts have done better than funds, that doesn’t guarantee they will in the future. Not only that, many excellent UK Equity Income managers only run funds. So if you just stick to investment trusts, you’ll be missing out on some of the best managers in the sector.

We think the choice of investment vehicle should play second fiddle to the manager running it. After all, it’s the manager who generates the performance. Find the ones you think have the best potential to deliver strong long-term income and growth, whether they run a fund or trust.

Some managers do run both though. In that case you’ll need to compare things like the portfolios, the charges, the trust’s discount or premium, the different risks and level of gearing (borrowing to invest). Let’s look at some UK Equity Income managers who run both a fund and a trust.

Francis Brooke and Hugo Ure – it can pay to be cautious

Francis Brooke and Hugo Ure run both Troy Income & Growth Trust and the Trojan Income Fund. Blake Hutchins also recently joined the team to assist in managing the fund. There’s not much difference between the two portfolios. The managers have a more conservative approach than many other UK equity income managers, so they’ve normally done relatively well during troubled markets, but missed out when markets have risen rapidly.

The managers invest in a small number of holdings in both vehicles. That means each investment could have a big impact on returns, both positively and negatively. They can also use derivatives to help them invest, which adds risk if used.

Over the long term their approach has delivered strong performance, with some of the lowest volatility in the sector. Since July 2009, when Brooke has run both the trust and the fund, the trust has delivered 242.5%* gains, and the fund 200.1%. The IA UK Equity Income index grew 155.7% over the same period. These returns don’t indicate future performance.

The fund has the higher yield at 4.1%, compared with the trust’s 3.3%. Both yields are lower than the FTSE All-Share’s though, as the managers avoid income opportunities if they think it’ll hold back overall returns. Yields vary and aren’t a reliable guide to future income.

We rate the managers highly, so the Troy Trojan Income fund is on the Wealth 50 list of our favourite funds.

Please note in both the fund and trust charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.

Annual percentage growth
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Dec 16 -
Dec 17
Dec 17 -
Dec 18
Dec 18 -
Dec 19
Trojan Income Fund 11.0% 10.5% 6.5% -6.9% 20.8%
Troy Income & Growth Trust 10.8% 9.0% 7.9% -5.6% 21.9%
FTSE All-Share 1.0% 16.8% 13.1% -9.5% 19.2%

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2019

Find out more about Trojan Income Fund including charges

Trojan Income Fund Key Investor Information

Find out more about Troy Income & Growth Trust including charges

Troy Income & Growth Trust Key Investor Information

Simon Gergel – likes the unloved

Merchants Trust celebrated its 130th anniversary last year. Its manager, Simon Gergel, has run the trust since April 2006, as well the Allianz UK Equity Income Fund since May of the same year. He’s continued Merchants Trust’s unbroken record of increasing annual dividends paid to investors since 1982, making it a ‘dividend hero’, although that doesn’t guarantee future income increases.

Gergel runs both the trust and the fund with the same philosophy – investing in companies he thinks are financially sound but whose share price, in his view, doesn’t reflect their long-term potential. That means he invests in many unloved sectors such as oil & gas, banks and tobacco. There are some different investments in each portfolio though.

Both the fund and the trust invest in a relatively small number of companies, so each can make a meaningful difference to returns, but it’s a higher-risk approach. The trust can also use gearing and derivatives to try to boost performance, which increases risk.

The trust has been the slightly better performer since May 2006, returning 135.7%* compared with the fund’s 121% gains. Remember past performance isn’t a guide to future returns. Merchants’ yield is currently a fraction lower at 4.6% compared with the fund’s 4.8% yield, but both are higher than the FTSE All-Share average, although yields are variable and not a guide to future income.

Please note in both the fund and trust charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.

Annual percentage growth
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Dec 16 -
Dec 17
Dec 17 -
Dec 18
Dec 18 -
Dec 19
Allianz UK Equity Income 3.3% 8.0% 15.1% -9.6% 29.0%
Merchants Trust PLC -2.7% 11.1% 15.7% -7.8% 21.6%
FTSE All-Share 1.0% 16.8% 13.1% -9.5% 19.2%

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2019

Find out more about Allianz UK Equity Income including charges

Allianz UK Equity Income Key Investor Information

Find out more about Merchants Trust PLC including charges

Merchants Trust PLC Key Investor Information

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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