An excellent investment trust

The Lowland Investment Company (LSE: LWI), should fit the bill as a share poised to benefit from the appetite for value-focused investments as inflation persists. Top holdings include big UK shares such as Shell, GlaxoSmithKline, Phoenix Group, HSBC and BP.

Shell’s share price has risen by 18% this year, and commodities could continue to do well in an inflationary environment. The flipside of this is that the trust is very UK-focused so if investors continue to avoid the UK, as many institutional big-hitters do, then that may impact the trust’s performance. Its big exposure to financials such as banks and to oil & gas could be an issue too, as both of these industries are cyclical.

Coupled with net gearing of 15%, which could amplify losses if the trust invests in the wrong companies, this one isn’t without risks.

However, the shares trade on a discount of around 6% (although the discount has been larger in recent times). As well as that, shares in the trust yield 4.46%, which I think has appeal from an income perspective. Charges of 0.59% also compare favourably to other trusts, so I’m thinking of buying shares in it to get diversified exposure to UK value shares. 

Better than SMT?

The Schroder Income Growth Fund (LSE: SCF) is another higher-yielding UK-focused pick. The yield is about 4.1%, so that’s good versus most other stock market investments and compared to interest rates as they currently stand. The trust’s top holdings are AstraZeneca, GlaxoSmithKline, Anglo American and Shell.

The immediately obvious downside to this one is that it trades on a premium of about 1% to its net asset value. On top of that, it’s slightly more expensive with a charge of 0.79%. Its consistent record of dividend growth potentially makes that a price worth paying, especially if its underlying holdings do well and push up the net asset value of the trust.

The bottom line is these trusts are quite similar in many ways so I wouldn’t buy both – even though the two of them could well outperform Scottish Mortgage Investment Trust this year and maybe also over the longer term also. It’s a close call between them but Lowland looks to have the slight edge for me based on its lower charges and the fact it trades on a discount.

To recap I think inflation will drive the share prices of these value-focused investments. That’s why I’m keen to add a value investment trust to my portfolio. 

Investment trusts usually own portfolios of stocks managed by professional investment managers. Not only does this approach provide diversification, but it’s also a good approach for income investors. 

Trusts have to distribute most of their income to investors with dividends every year. However, they can hold back 25%. Managers can then use this reserve to cover distributions if the income from their investment portfolio falls.

This was particularly useful last year. As companies across the market slashed their payouts, investment trusts dug into reserves to maintain dividends. 

Considering these qualities, there are two income trusts I’d buy for my portfolio today. 

Investment trusts for income

The first company on my list is the Schroder Income Growth Fund (LSE: SCF). With a dividend yield of 4.1%, at the time of writing, the trust offers a market-beating level of income. 

It seeks to invest in companies that can provide a steady stream of income as well as capital growth. The largest holding in its portfolio is pharmaceutical group AstraZeneca. As well as a selection of blue-chips, managers have also acquired several mid-cap stocks including Pets At Home. There are also income and growth stocks such as Burberry.

This approach could be risky because it involves trying to pick growth stocks. Growth stocks are likely to be more volatile than income investments. Therefore, Schroders’ offering may not be suitable for all investors. 

Still, I like the combination of income and the potential for capital growth offered by the trust. That’s why I’d buy the shares for my portfolio today as an income and growth investment. 

International investing

As well as the Schroder, I’d also buy Troy Income & Growth (LSE: TIGT). Some investors might think that just because both of these investment trusts have the words income and growth in the title, they follow the same strategy. That’s not the case. There’s some overlap in the portfolios, but not much. 

The biggest difference is the fact that nearly a fifth of Troy’s portfolio is allocated to US securities. This gives the trust a level of diversification. It also has less exposure to resource stocks, which some investors may be more comfortable with. The Schroder fund’s second-largest holding is Rio Tinto. Troy’s is Unilever. 

That said, some investors may not be comfortable with a trust investing overseas. It also targets growth companies over income investments, so dividend yield is lower than the trust above. Troy’s offering currently supports a dividend yield of 3.6%. 

Despite these risks, I’d buy Troy alongside Schroder in my portfolio for a blend of international and domestic growth as well as income from these two investment trusts.