While closed-ended investment trusts are often overlooked compared to their more familiar open-ended cousins, they are in many cases a superior choice, especially when it comes to investing for retirement income.
Their closed-ended structure means an investment trust’s performance is unaffected by asset flows, enabling it to invest in some illiquid asset classes and emboldening management to take a longer-term view. As such, investment trusts have often performed better compared to unit trusts and other collective, or pooled, investments.
And when it comes to finding reliable, steadily growing streams of income, the investment trust sector has a long and proud history of dividend growth. This is helped by the fact that investment trusts can hold back some of the dividend income they earn, allowing them to supplement dividend payments to shareholders in leaner years — something unit trusts and other open-ended funds cannot do. As a result, there are now more than 20 funds that have increased their dividends for 20 or more consecutive years, according to data from the AIC.
UK equity income
JPMorgan Claverhouse Investment Trust (LSE: JCH) is one such fund, with 44 years of consecutive dividend increases under its belt. It aims to provide a combination of capital and income growth from a portfolio consisting mostly of UK stocks.
The company aims to hold between 60 and 80 individual equities in which the fund manager has high conviction, with the flexibility to invest across the breadth of the UK equity market. Large-caps such as Royal Dutch Shell (7.5%), HSBC (6.6%) and British American Tobacco (5.3%) dominate its top 10 holdings, but its portfolio is noticeably overweight on mid-caps Electrocomponents (2%), Synthomer (1.9%) and Fevertree Drinks (1.7%).
Sector-wise, the trust has the largest exposure to financials (28.5%), consumer goods (17.6%) and industrials (13.3%).
Dividends are paid quarterly, with the total paid last year amounting to 24.5p, giving its shares a healthy yield of 3.4%. Fees are reasonable too, with ongoing charges estimated to total 0.76% over the past year.
Global diversification
Another investment trust worth a closer look is The Scottish American Investment Company (LSE: SCAM). With 37 years of consecutive annual increase in shareholder payouts, this fund has a slightly shorter track record of income growth; however I reckon this is made up for by its superior recent performance and its more diversified investment strategy.
Although the focus of its portfolio is on global equities, the company also owns fixed-interest and direct property investments, which represent 5.8% and 13.8% of its portfolio value, respectively. European equities represent its single biggest weighting, accounting for 35.3% of its portfolio, and this is followed by North American stocks, which account for a further 23.6%.
Historic performance figures for the past three years are encouraging as shares in the fund delivered a total return of 64%, significantly beating Claverhouse’s performance of just 32%.
On the downside, shares in The Scottish American Investment Company trade at a slight premium to its net asset value of 7%, against Claverhouse’s current discount of 3%.
Shares in the company currently yield 3%, with ongoing charges of 0.87%.