Three investment trusts that help deal with inflation

With inflation rising and savings rates still low, investment trusts with a history of income growth can play a useful role in a portfolio. We look at the benefits that investment trusts can offer income-seeking investors and three that can help tackle inflation:

  • City of London Investment Trust
  • Merchants Trust
  • Murray International Trust

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Joseph Hill, Senior Investment Analyst, Hargreaves Lansdown:

“Investment trusts have more flexibility to cushion some of the stock market shocks and maintain a growing and sustainable income during periods of volatility.”

They can keep up to 15% of their earnings when times are good, effectively creating a rainy day pot known as a “revenue reserve.” If dividends paid by the trust’s investments fall in a year, the manager can tap into the reserve to make up for any shortfall. So the trust can top up dividends in bad years and smooth out the dividends their investors receive over time. It is worth noting, however, that frequent dipping into reserves to increase income payouts is unlikely to be sustainable in the long term.

Trusts are not limited to paying dividends only from the income they receive from their underlying investments. They have the flexibility to use the profits they make from buying and selling investments. However, this could undermine the trust’s potential for growth in the future.

Trusts may also use gearing. This essentially means that they can borrow money to invest in more dividend-paying stocks than they otherwise could. It has the potential to increase both income and growth. However, the additional returns may not cover the drive costs and may also increase losses when stock prices fall, so this is a higher risk approach.

Any income paid can help cushion the rise in the cost of living. If the income paid out is not required now, investors always have the option of using the proceeds to purchase additional shares in the trust. In the long run, this can be an effective way to increase capital, although there are no guarantees.

City of London Investment Trust

“Long-time manager (since 1991) Job Curtis invests in quality, well-managed companies that can be purchased at reasonable share prices. He likes larger, more stable companies that often have multinational operations that are stable enough to weather economic storms and still pay dividends. Curtis also took advantage of the trust’s ability to invest up to 20% of its assets overseas.

Curtis is part of a large and experienced team of income investors at Janus Henderson and is focused on delivering long-term income and capital growth.

In the trust’s last financial year to the end of June 2021, it used reserves from income built up in previous years to contribute to the dividend, which rose by 0.5%. This helped extend the trust’s record as the investment company that has consistently increased its dividend for the longest period – now 56 years.

At the time of writing, the trust is trading at a 1.99% premium to NAV and a yield of 4.71%. Income is not guaranteed and income is not a reliable indicator of future income.”

Merchants Trust

“Manager Simon Gergel invests primarily in larger UK listed companies with the objective of providing a high level of income and growing income and capital return over the long term.”

Gergel’s investment process focuses on three key areas. It aims to understand the fundamentals of a company, including its competitive position and financial strength. It evaluates valuations against both the company’s own history and its peers, and finally looks at industry and consumer themes along with the economic outlook.

The trust increased its dividend by 0.4% in the year to the end of January 2022, once again using reserves built up during the good times to boost the income paid out to investors. This is the 40th consecutive year that the trust has increased the dividends it pays out to investors – the 12th longest record of any investment trust.

At the time of writing, the trust is trading at a 0.40% premium to NAV and a yield of 4.90%. Income is not guaranteed and income is not a reliable indicator of future income.”

Murray International Trust

“Bruce Stout of Abrdn has been the trust’s lead manager since 2004. Stout aims to grow income and capital over the long term by investing in stocks of companies around the world, as well as holding some bonds. The trust invests more in higher-risk emerging markets than some peers, with Asia Pacific ex Japan representing the trust’s largest regional exposure.

Stout and his team invest in high-quality, financially sound companies that have the potential to grow earnings and dividends over the long term. It has an emphasis on sustainable business models, a unique set of competitive advantages and experienced management teams.

The trust increased its dividend by 0.9% in the year to the end of December 2021, once again using reserves built up during the good times to boost the income paid out to investors. This is the 17th year in a row that the trust has increased dividends paid to investors.

At the time of writing, the trust trades at a 2% discount to NAV and yields 4.34%. Income is not guaranteed and income is not a reliable indicator of future income.”


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