Investing in the stock market is not without risk. We saw it as the first lockdown approached in 2020 as stocks slid; endured it when Liz Truss’ government committed hara-kiri late last year; and know it again as a mix of governments and central banks try to prevent a full-scale banking crisis.
For investors in some of the country’s most prestigious investment funds, times are tough. For example, Scottish Mortgage, our largest investment fund with a market value of £9.4 billion, has lost its reputation as a preferred source of income for private investors.
The FTSE 100-listed fund, managed by Edinburgh-based investment house Baillie Gifford, has been in freefall since the end of 2021 as its penchant for technology fell out of favor in response to rising interest rates , soaring inflation and economic malaise.
Sixteen months ago shares in the trust were trading above £15. Today they are just above £6.50 and the future looks uncertain as managers grapple with a portfolio heavily invested in unlisted companies – many of which are cash-hungry and ripe for a depreciation in value. Board resignations have added to the whirlwind of uncertainty.
Volatile stock markets have even had an impact on investment funds that claim to be conservatively managed. Investment trust RIT Capital Partners, a £2.9bn fund, says preserving investors’ capital is a priority, but its share price has fallen 27% in the past year .
The trust’s poor performance – along with the risky nature of some of its underlying assets – prompted Investec Bank to advise investors to sell their shares.
Alan Brierley, investment trust analyst at the bank, describes the trust’s management approach as having gone from “fishing with a fly to fishing with dynamite”.
He told the Mail on Sunday: ‘For more than two decades we have viewed RIT Capital as a classic, low-risk, safe investment and core holding in a diversified portfolio.
‘However, that has changed. The risk profile has changed radically in recent years. Given an objective of preserving shareholders’ capital, the past year was deeply disappointing.
Like Scottish Mortgage, which has never made a secret of its high-risk, high-return investment strategy, RIT Capital Partners has a large pool of assets in unlisted companies – or, as Brierley puts it, “high-risk, late-stage venture capital.” The value of these assets could well be depreciated.
ARE THERE INVESTMENT SUNBEAMS?
So, everything rather bleak – especially in the short term. But are there any comfort blankets investors can cling to as stock markets remain volatile? By far the most important is the income that many investment funds continue to provide investors. Although Thursday’s interest rate hike to 4.25% now makes cash increasingly attractive, there are still a number of investment trusts that can improve this – and additionally provide the opportunity to both long-term income and capital growth.
Using data from Morningstar, The Mail on Sunday has identified ten income-friendly investment trusts (see table). All pay quarterly dividends – which can either be taken as regular income (to boost retirement income) or reinvested to buy more shares (a great strategy for building long-term wealth).
All but one (Murray International) are primarily invested in the UK stock market.
All ten pass two big income tests that should reassure both existing shareholders and those looking to invest.
First, their shares currently provide an annual income equivalent to more than 4.25%, if not much more.
Second, and especially given the tough economic environment, their ability to sustain growth in dividend payouts is bolstered by the “bad day” earnings they have set aside.
These revenue reserves, built up during periods when companies were making profits and paying large dividends, are used when needed to supplement dividend payments to investors.
All ten trusts have at least six months’ income in reserve ready to be used when times get tough.
Reassuringly, eight of the ten have provided shareholders with growing income going back at least ten years – ranging from Dunedin Income Growth (11 years) to JP Morgan Claverhouse (50 years).
Annabel Brodie-Smith, director of communications for the Association of Investment Firms (AIC), said a cocktail of geopolitical tensions, rising prices and a banking crisis provide a difficult backdrop for equity investors.
She adds: “During these difficult times, dividends are a priority for many investors who rely on income to help them cope with rising bills and rising costs of living.
“Even investors who don’t need income now can benefit from reinvesting their dividends.
“By doing so, they buy more shares, which improves their long-term performance.”
The AIC website (www.theaic.co.uk) provides lots of useful information on income investing.
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