While a number of high-profile UK-listed global companies have announced cuts to their dividends since the onset of the coronavirus pandemic, there are still options available to investors willing to look elsewhere.
“Many income-seeking investors know the mainstream UK and global sectors, but they might not have considered the income possibilities of sectors like Japan, Biotechnology & Healthcare and Asia Pacific Income,” said Annabel Brodie-Smith, communications director of the Association of Investment Companies.
“With the dividends of so many household names under pressure at home, this could be a good time to look further afield.”
Below, investment trust analysts from Stifel, Peel Hunt and Winterflood highlight several income-paying trusts worth considering in the current environment.
For Stifel analyst Anthony Stern, the Asia Pacific Income sector is a strong candidate for investors looking for alternatives to the traditional global and UK equity income sectors, noting that the swift handling of the coronavirus.
“Asia was the region first into the COVID-19 crisis and the first out,” he said.
In addition, the Asian trusts picked by Stern offer dividend yields of 5 per cent or more that are fully covered by revenue income, “unlike some trusts in the investment company world”.
His first pick is Aberdeen Asian Income and “clearly the value play in the sector” trading at a 11.8 per cent discount to net asset value (NAV) as at 20 May, the widest of the four-strong sector.
Overseen by the Aberdeen Asian equity team, the £383.6m trust targets companies with an above-average yield and focuses on “balance sheet strength and cash flow generation as key measures of both quality and ability to pay dividends”. It has a yield of 5.4 per cent, is 10 per cent geared and has ongoing charges of 1.11 per cent, according to the Association of Investment Companies (AIC).
Stern’s other choice was the £653.3m Schroder Oriental Income trust, managed by Matthew Dobbs since launch in 2005.
Dobbs considers the longer-term fundamentals underpinning future dividend streams of companies he invests in, the appropriateness of the current dividend policy against the current market environment, and the regular shareholder return policy.
Schroder Oriental Income has a dividend yield of 5 per cent, is 8 per cent geared, ongoing charges of 0.86 per cent and is trading at a discount of 5.5 per cent, according to AIC data.
Over three years, the Aberdeen Asian Income trust has made a loss of 5.26 per cent in total return terms compared with a fall of 0.41 per cent for the Schroders strategy, to end-April.
Performance of funds over 3yrs
Source: FE Analytics
Simon Elliott, head of investment research at Winterflood Securities, also chose an Asian income strategy for investors, albeit with a slightly different strategy.
“The prospect of both capital and income growth is a compelling combination and we have a bias towards the Asian market,” he said, highlighting the JPMorgan Asia Growth & Income trust as one of this two choices.
The JPMorgan Asia Growth & Income is overseen by veteran emerging markets investor Richard Titherington with colleagues Ayaz Ebrahim and Robert Lloyd.
The managers invest in a diversified portfolio of around 50 to 80 companies and pay an enhanced dividend, paid from realised profits or capital
“Its dividend is reset every quarter, with 1 per cent of net assets paid to shareholders,” said Elliott. “As a result, its dividend will vary in absolute terms, but we believe that it is justified by the fact that the strategy allows exposure to high growth internet companies such as Tencent and Alibaba that do not pay dividends.”
The £365.6m trust has made a total return of 31.86 per cent over the past three years compared with a 12.91 per cent rise in the MSCI AC Asia ex Japan benchmark. It has a yield of 4.2 per cent, is 2 per cent geared, is trading at a 2.4 per cent discount and has charges of 0.74 per cent.
Another strategy worthy of note, according to the Winterflood analyst, is a sister fund to the above: JPMorgan Global Emerging Markets Income.
This £375.6m fund is managed by Omar Neygal, Amit Mehta and Jeffrey Roskell and focuses on finding sustainable businesses with good dividend growth prospects. The managers aim to provide a lower risk way to access emerging markets by investing in stable companies with regular income and good governance structures.
“The fund seeks to pay a covered dividend and has a significant exposure to financials,” said Elliott. “In addition, it has revenue reserves equivalent to 1.3x the previous year’s dividend.”
JPMorgan Global Emerging Markets Income has a yield of 4.9 per cent, is 8 per cent geared, has ongoing charges of 1.26 per cent, and is trading at an 8.9 per cent discount. Over three years it has made a loss of 3.01 per cent against a 4.32 per cent rise for the MSCI Emerging Markets benchmark.
Elsewhere, Anthony Leatham – Peel Hunt’s head of investment trust research – has highlighted Japan as a potentially interesting sector for income investors, and the CC Japan Income & Growth Trust, in particular.
Managed by Coupland Cardiff’s Richard Aston since launch in 2015, this £213.8m fund has benefited from the economic reforms enacted under prime minister Shinzo Abe – so-called ‘Abenomics’.
“The Japanese equity income story is a more recent phenomenon, underpinned by strong company balance sheets and net cash positions as well as the increased focus on return on equity as the key performance metric,” Leatham explained.
Over the past three years, CC Japan Income & Growth has made a total return of 5.78 per cent compared with an 8.51 per cent gain for the Topix benchmark. It has a yield of 3.7 per cent, is 15 per cent geared, has ongoing charges of 1.06 per cent and is trading at a discount of 9.6 per cent.
Leatham also singled out healthcare, which historically has been a very valuable source of equity income for investors albeit at the expense of capital growth.
In this area, he highlighted BB Healthcare Trust, managed by Paul Major and Brett Darke, which pays its dividend out of capital and has a yield of 3 per cent.
The £757.6mtrust aims to beat both the total return of the MSCI World Healthcare index on a rolling three-year period and generate a double-digit total shareholder return per annum over a rolling three-year period by investing in a concentrated portfolio of a maximum of 35 stocks.
“This approach allows the managers to adopt an unconstrained and high conviction approach, without being tied to the high yielding, often ex growth stocks in their universe,” Leatham explained.
Performance of fund vs benchmark over 3yrs
Source: FE Analytics
BB Healthcare has made a total return of 39.3 per cent over the past three years, just ahead of a gain of 38.82 per cent for the MSCI World/Health benchmark. It is 5 per cent geared, has ongoing charges of 1.16 per cent and is trading at a premium to NAV of 1.8 per cent.