Selecting investment companies for income portfolios Nick Britton Head of Training AIC
What s most important to you? Value for money Speed Comfort 2
What s most important to you? Attractive yield Infrastructure, debt, property Dividend heroes Strong income growth Smaller companies Consistent income growth 3
Dividend yield (%) Source: AIC using Morningstar (6/10/16) Yield vs dividend growth rate 6 5 4 3 2 1 0 City of London Edinburgh Merchants Temple Bar Alliance Trust Scottish Mortgage Murray International PIGIT Bankers Foreign & Colonial Lowland Witan 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Dividend growth over last five years (%pa) Standard Life UK Smaller Cos Blackrock Smaller Cos F&C Global Smaller Cos 4
Tools for boosting yield Gearing Use of illiquid assets Converting capital to income 5
Assessing gearing Current gearing (borrowings/net assets) Highest and lowest gearing over past three years From AIC website Minimum and maximum gearing expected in future 6
Dividend yield (%) Source: AIC using Morningstar (6/10/16) Yield and gearing Above-average yields supported by gearing 6 5 4 3 2 Murray International Murray Income City of London Schroder Inc Growth Edinburgh PIGIT Merchants Scottish American Value & Income 1 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Current gearing (%) 7
Source: AIC (6/10/16) Enhancing income via illiquid assets Investment company (Sector) Nature of illiquid assets Yield Law Debenture Corporation (Global) Fiduciary services business (c40% of income generated) 3.1% Scottish American (Global Equity Income) UK commercial property portfolio (c12% of assets) 3.6% Value and Income (UK Equity Income) UK commercial property portfolio (c30% of assets) 4.2% 8
Paying dividends from capital Mainly private equity/vcts, with a few exceptions: Investment company Sector Yield European Assets European Smaller Cos 7.3% Invesco Perpetual UK Smaller Companies UK Smaller Companies 3.5% Personal Assets Flexible Investment 1.4% RIT Capital Partners Flexible Investment 1.7% Securities Trust of Scotland Global Equity Income 3.7% Utilico Emerging Markets Global Emerging Markets 3.2% Source: AIC (10/10/16). Note that these yields include all dividends regardless of whether they were paid from capital or income. Yields shown on the AIC website currently include only dividends from income. 9
Source: AIC (6/10/16) Dividend heroes in detail Investment company City of London Investment Trust Sector Dividend raises Yield / 5yr divi growth UK Equity Income 50 years 3.9% / 3.0% Bankers Global 49 years 2.3% / 4.5% Alliance Trust Global 49 years 1.9% / 3.9% Caledonia Investments F&C Global Smaller Companies Global 49 years 2.2% / 4.2% Global 46 years 0.9% / 13.7% Foreign & Colonial Global 45 years 1.9% / 6.5% Brunner Global 44 years 2.6% / 3.6% 10
Source: AIC (6/10/16) Dividend heroes in detail (2) Investment company JPMorgan Claverhouse Sector Dividend raises Yield / 5yr divi growth UK Equity Income 43 years 3.6% / 3.3% Murray Income UK Equity Income 43 years 4.4% / 1.6% Witan Global 41 years 2.2% / 8.7% Scottish American Global Equity Income 36 years 3.6% / 3.0% Merchants Trust UK Equity Income 34 years 5.5% / 1.0% Scottish Mortgage Global 33 years 0.9% / 2.6% Temple Bar UK Equity Income 32 years 3.6% / 2.6% 11
Source: AIC (6/10/16) Next generation of dividend heroes Investment company Perpetual Income & Growth BlackRock Smaller Companies Henderson Smaller Companies Aberdeen New Dawn Sector Dividend raises Yield / 5yr divi growth UK Equity Income 17 years 3.3% / 4.2% UK Smaller Companies UK Smaller Companies Asia Pacific ex Japan 13 years 1.9% / 15.8% 13 years 2.3% / 22.2% 12 years 2.0% / 3.4% Murray International Global Eq Income 11 years 4.0% / 4.7% Henderson EuroTrust Europe 11 years 2.0% / 2.3% 12
Revenue reserves: now on AIC website 13
Dividend cover (years) 3 2 1 0 Source: AIC using Morningstar (30/9/16) 14
Dividend cover (years) 3 2 UK equities Global equities 1 0 Source: AIC using Morningstar (30/9/16) 15
Dividend frequency 5 49 95 94 Monthly Quarterly Triannual Biannual Annual 2 Source: AIC, ex VCTs and splits (15/2/16) 16
Source: AIC using Morningstar (6/10/16) * ex VCTs Current (discount)/premium 5 0-5 -10-15 -20-25 Investment company average* 17
Effect of discounts/premiums on yield Discount/premium you buy at Yield of underlying portfolio 10% disc No discount 10% prem 3% 3.33% 3.00% 2.73% 4% 4.44% 4.00% 3.64% 5% 5.55% 5.00% 4.55% Yield you get 18
Key points for research and selection Gearing Income from capital? Yield Use of illiquid assets Size bias? Growth bias? Historic income growth Premium/ discount Total returns Dividend hero? Revenue reserves Consistency of income Dividend history 19
NAV outperformance over 5 yrs (% p.a.) Source: Canaccord Genuity (five years to 31/12/15) Sister funds 3 Fund outperforming investment company Investment company outperforming fund 2 1 0-1 -2 20
Combining income-paying investment companies into portfolios
Example portfolio Investment company Sector Gearing 5-year dividend growth Dividend yield City of London UK Eq Inc 8% 3.0% 3.9% Henderson Smaller Cos Murray International UK Smaller Cos 5% 22.2% 2.3% Global Eq Inc 11% 4.7% 4.1% Average 8% 10.0% 3.4% Source: AIC (10/10/16) 22
Example portfolio 2 (higher yield) Investment company Sector Gearing 5-year dividend growth Dividend yield Merchants UK Eq Inc 17% 1.0% 5.6% Murray International Global Eq Inc 11% 4.7% 4.1% Scottish American Global Eq Inc 18% 3.0% 3.5% Average 15% 2.9% 4.4% Source: AIC (10/10/16) 23
Example portfolio 3 (highest yield) Investment company Sector Gearing 5-year dividend growth Dividend yield Merchants UK Eq Inc 17% 1.0% 5.6% Henderson Far East Income Standard Life Invts Property Income Asia Pacific ex Japan Property Direct - UK 4% 4.6% 5.6% 44% 1.3% 5.8% Average 22% 2.3% 5.7% Source: AIC (10/10/16) 24
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Refreshments 26
Alternative income sources
Diversifying income sources Infrastructure Specialist debt VCTs Commercial property 28
Purchases of investment companies on adviser platforms ( m) 0 100 200 300 400 500 2013 2014 Equities Property Other 2015 Source: Matrix Financial Clarity (ex VCTs) 29
Source: AIC (30/9/16) Attractive yields VCT Generalist Sector Specialist: Debt Sector Specialist: Leasing Infrastructure: Renewables Property Direct UK Property Specialist Infrastructure UK Equity Income 0 1 2 3 4 5 6 7 8 9 10 30
Low correlation with equities Correlation of AIC sectors with FTSE All Share, past 5 years 0 0.2 0.4 0.6 0.8 1 Infrastructure Property Direct - UK Debt UK Equity Income Source: AIC using Morningstar (five years to 31/8/16, based on monthly share price total returns) 31