Based on basic supply and demand dynamics, several reasons have been proposed for the sell-off in the sector: the FTSE 100 reaching all-time highs recently, leading to investors taking profits; many trusts in the sector being underweight oils and miners – helping relative performance in 2014/15, but may have held back returns as these sectors pick up this year; and rising yield concerns around the impact of rising interest rates on income generating stocks.
Further, even if interest rates do hit dividend yields, Stifel believes many trusts in the space are trading on a 4% dividend yield, which is attractive compared with bank deposit rates.
Authors of the sector report Iain Scouller and Maarten Freeriks, said: “Many of these trusts also have significant revenue reserves, which can be used to maintain and smooth dividends from the trusts at times of dividend cuts in the equity market. We also view this as an advantage over open-ended income funds.”
While the sector may have fallen out of favour against an uncertain political backdrop, Stifel believes certain trusts offer good value with widening discounts yet still offering dividend yields of 3%-5%.
Schroder Income Growth, JPM Claverhouse and Invesco Income Growth are all currently trading on an 11% discount, compared with respective one-year discount ranges of 3%-12%, 11%-0% and 12-3%. The three trusts are generating dividend yields of 4.2%, 3.7% and 3.8%, respectively.