UK investment trusts have recorded their best ever year for dividends, boosted by venture capital and infrastructure, but payouts from equity trusts are expected to lag behind as managers rebuild cash reserves denuded by the pandemic.
Investment trusts, a type of investment vehicle that is structured as a listed company, paid out £5.5bn in dividends in the year to the end of March, an increase of 15 per cent from the same period the year before, according to a report from fund administration group Link. The total payments were the highest since it started tracking investment trusts in 2010.
The boost to payouts came primarily from trusts that invest in so-called “alternatives” including venture capital, infrastructure and property vehicles. Dividends from alternative trusts have increased ninefold over the past decade, as the investment trust structure has become more popular for managers of these assets, Link said.
However, shareholder payments from investment trusts that invest in a portfolio of company stocks have flatlined, and are expected to grow more slowly than the market average in the coming year. Equity trusts, historically the core of the London-listed trust sector, proved resilient during the Covid-19 downturn but must now rebuild the cash buffers they tapped to keep up payments to shareholders during the pandemic.
Despite the lower payments, investment trust managers say the experience of the pandemic has reinforced a key selling point of the sector for income investors.
“What this shows is the whole point of investing in an investment trust rather than trying to select individual company shares,” said David Horner, managing director of Chelverton Asset Management, which runs two UK investment trusts.
According to Horner, one merit of investment trusts is that they are allowed to build cash reserves which they can access to “smooth dividend payments” during hard times.
Like other trusts, Horner said his trusts had built their cash piles before the pandemic, which they then dipped into to keep up shareholder payments when companies in their portfolio trimmed their dividends to conserve cash.
Link said a similar strategy was followed across the market as “investment trust payouts were shielded from wider dividend cuts in 2020-21 and trusts are now rebuilding reserves”.
Investors will now have to make do with lagging payments. Equity investment trusts paid out £1.85bn in the year to March, the same amount as the year before, and their payouts are expected to grow by just 4 per cent in the next 12 months, according to Link projections — lower than the pace of growth in corporate dividends.
Instead, growth in trust payouts has been powered by alternatives, which are an increasingly powerful force in the London-listed trust universe. “Ten years ago, alternatives were a much smaller segment of the investment trust market, but they have rapidly expanded as new investment opportunities have opened up in response to investor demand,” said Ian Stokes, Link managing director of corporate markets for the UK and Europe.
Dividends from alternative investment trusts increased 25 per cent to £3.65bn, according to Link. Property, renewable energy and venture capital trusts made up four-fifths of the increase.
“The investment trust structure has also lent itself well to investing in alternative income generating assets,” said David Smith, manager of Henderson High Income Trust. “These are typically private and illiquid assets that aren’t readily available on public markets but through investment trusts, investors can diversify their income in assets that are usually non-correlated to equity markets.”