Watch the presentations from Kepler Trust Intelligence’s events focused on trusts delivering income via a diverse range of strategies…by Thomas McMahon

Last week we were joined by five investment trust teams for our event focussed on income, as we heard from managers pursuing a steady income stream via a diverse array of strategies. On one level, generating an income is easier than ever, with ten-year gilts offering yields of around 4% and some cash accounts available offering even more, albeit with a lock-up. But in real terms, this is actually a difficult time to be generating an income. With UK CPI hovering around double digits on a backwards-looking basis, the chances of those government bonds delivering a real return of 4% over the next 12 months are slim. While that doesn’t necessarily matter if you intend to simply spend that cash, it implies the running down of capital and a lower income, year-on-year – i.e. if you are looking for a sustainable, long-term income stream, gilts and cash are possibly as unattractive as they have ever been.
All the managers we heard from last week manage trusts which could help with this quandary, with strategies that included direct linkage to inflation or to interest rates, or the opportunity for long-term real dividend growth. Investors’ reluctance to put money to work over the past year or so is understandable, as rising interest rates put pressure on the valuations of risk assets. But, increasingly, it seems we are at or near the peak of the rate cycle. As such, it could be a good time to be thinking about putting money to work in asset classes which can offer a source of income growth, rather than the inevitable real-terms decline offered in the bolthole of cash.

M&G Credit Income (MGCI)

On Monday, we heard from Adam English, manager of M&G Credit Income (MGCI). MGCI invests mostly in floating-rate debt, which means the income it earns rises as interest rates do. The dividend target is SONIA (an interest rate benchmark similar to LIBOR) plus 4% for the current financial year, which would amount to more than 8%, with SONIA where it is currently. However, it is important to note that each quarterly dividend is calculated based on the average of SONIA over that period, so the dividends will vary.

Importantly, Adam does not have to take much credit risk to be able to offer this high yield, and he explained how this is so (see the video below). He noted that investment-grade debt, in particular, looks good value versus likely default risks. Elsewhere, however, he was expecting further volatility in the coming months, which might allow him to put some of his currently undrawn gearing facility to work. More on Adam’s positioning is available in our recently updated note on the trust.

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Edinburgh Investment Trust (EDIN)

Our Tuesday session was with James de Uphaugh, manager of Edinburgh Investment Trust (EDIN). EDIN is an equity income trust and James looks for companies which can show healthy cash flow and earnings growth, which can support long-term dividend growth. James and his colleague, Chris Field, took over EDIN in March 2020 and have generated healthy outperformance of their sector and benchmark since then. As well as the successful manager change, the board has also refinanced some costly long-term debt and locked in long-term borrowings at attractive levels. This should prove to be particularly appealing in the next cyclical rally for markets.

The upshot of James’ analysis is – without wanting to put words in his mouth – that this upswing could come sooner, rather than later. He argues that media-driven pessimism surrounding the UK’s market and economy is exaggerated and, quietly, evidence has been building that shows the UK is in a much better position than often recognised. The Bank of England’s recent upgrade of its economic expectations from a severe recession to gentle growth is just one prominent piece of optimistic news. James ran us through the current themes in the portfolio in the presentation below.

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BBGI Global Infrastructure (BBGI)

EDIN offers dividend growth potential, thanks to the potential for earnings growth in portfolio companies. This provides some indirect potential for dividends to grow with inflation. However, BBGI Global Infrastructure (BBGI) has direct, contractual inflation-linkage in many of its cash flows, which has allowed healthy dividend growth and positive upgrades to the board’s 2023 and 2024 dividend targets. On Wednesday, co-CEO Duncan Ball talked us through how the portfolio is put together. BBGI owns a portfolio of social infrastructure assets in countries with AA or AAA credit ratings. Key points to bear in mind are that BBGI invests only in assets with availability-based contracts. This means that, as long as the assets are available for use, BBGI receives revenues. This contrasts with demand-based assets, for which income is linked to how much they are used. BBGI is managed internally, which helps the managers to achieve the lowest OCF in the peer group

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Middlefield Canadian Income (MCT)

Our Thursday presentation was from by Dean Orrico, manager of Middlefield Canadian Income (MCT). MCT raised its dividend last year, as its portfolio benefitted from interest-rate dynamics. One of the key themes in it is energy, and these companies prospered as global energy prices rose. The financials theme also benefitted from rising interest rates, as did REITs to some extent. Dean argues that Canada is in a strong position, given the current global political and economic environment. Energy, and energy security in particular, are among the key drivers here according to Dean – as Canada provides a stable source of energy for its hyperpower neighbour, now supplying over 50% of US oil and gas imports.

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UK Commercial Property REIT (UKCM)

Our final speaker was Will Fulton, manager of UK Commercial Property REIT (UKCM). Regular readers will have seen us argue in recent months that property may be looking interesting once again, after capital values took a hit in light of rising interest rates last year. UKCM has reported a positive quarter for portfolio values in the three months to the end of March, during which the benchmark fell 1.2%. UKCM’s shares trade at a wide discount to NAV, which contributes to a healthy dividend yield of more than 6%, with the potential for growth. UKCM is conservatively-geared, which has helped it in a falling market, and means Will has resources to bring to bear on new investments, if he wishes.

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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

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