3 Investment Trusts for Global Income

07/26/2011 9:14 am EST


Andrew McHattie

Editor, Investment Trust Newsletter

There are still opportunities to get some solid yields without paying premiums in select investment trusts, observes Andrew McHattie of the Investment Trust Newsletter.

The Tokyo market has been motoring…up by 5%-plus since the end of May, to surpass the 10,000 mark that it last saw immediately before the earthquake in March.

The Bank of Japan’s regional economic report for July helped the tone, as seven out of nine regions in Japan—including the area directly hit by the earthquake and tsunami—upgraded their assessments of local economic conditions in July compared with three months earlier, suggesting the domestic economy is quickly recovering from the impact of the disaster.

“Something always seems to have gone wrong with Japan,” noted Andrew Rose, wryly. The manager of Schroder Japan Growth (London: SJG) since 2007, Andrew gave us an up-to-date assessment of Japan’s prospects after the earthquake, tsunami, and nuclear disaster.

In March, we reported on a conference call with Andrew, when he was philosophical in the immediate aftermath of the disaster, choosing at that point to buy a few stocks. Four months on, he remains fairly sanguine. SJG is a buy.

Two other opportunities in the investment trust sector now:

Saltus European Debt Strategies (London: SED)
Also on the list of risers, SED is not a trust we have covered very often. It hasn’t spent much time on our radar screen, partly because it is rather esoteric.

The trust seeks to exploit opportunities predominantly in European corporate-credit markets, with a focus on distressed debt. It does this by investing in a portfolio of absolute return and hedge funds, whose principal focus is debt-oriented, event driven, and relative value strategies.

Partly as well, we haven’t paid it too much attention because it was launched with unfortunate timing in mid-2007—and very quickly set off on a downward trend, falling from its 100p issue price to a low of just 21p (34 cents) in April 2009.

Since then, it has recovered reasonably well to above 51p, but this share price is still well behind the net asset value, last reported on June 10 as 63.92p.

This 19.8% discount is perhaps what has attracted Laxey Partners, now holders of 13% of the equity. The trust has also been buying back its own shares, so one way or another, we might now expect that discount to narrow.

F&C Commercial Property Trust (London: FCPT)
You could be forgiven for thinking that the mass launches of high-yield property trusts around 2005 were a bad idea. Issued on a wave of marketing hype, several trusts were undone in the credit crunch, as a combination of high levels of gearing with sharply falling property prices proved toxic.

There is a counter-argument though—the survivors have proven their strength, and now offer enticing yields. The yield from the 6p monthly dividend on FCPT is currently 5.7%.

Richard Kirby has been the manager of FCPT since launch, and gave us a detailed update on the UK commercial property market. First though, we’ll delve into the trust’s historic performance.

Launched at 100p in March 2005, the shares initially rose well as investors looked for yield. After peaking at 137p at the start of 2007, the shares started to fall away, diving to a low of 54.75p in February 2009.

They have since recovered well, in conditions that Richard describes with some relief as being “back to normal.”

He does say that the bounce back in capital values may have ended now, but he sees the market as being driven by income growth and “a little bit of capital growth.” Richard reckons a lot of property is fairly priced now, with some strong demand for prime properties in central London.

Consensus market forecasts are suggesting that commercial property as an asset class should provide a total return of around 6.3% in 2011, rising to 7.6% in 2012 and 8.8% in 2013. That sounds reasonable, if unexciting.

Richard has no expectation of a double-dip recession, which is good news, but he doesn’t particularly see great scope for property to beat expectations either. He poured cold water on the idea that property can act as an inflation hedge, saying there is no correlation between total property returns and inflation over the last 40 years.

“Some professionals overplay the hedging attributes of property,” he says.

Outperformance might come from skillful management, though, and Richard suggested that returns could become more differentiated in the current environment, where leases are shorter and re-letting is far from straightforward. Property asset managers need to manage their properties well to maximize returns, and also choose their sectors carefully.

Richard is positive on central London offices—considering this the key outperforming sector—and negative on shops, for obvious reasons. More than 40% of the trust’s portfolio is currently in central London, with a similar proportion in offices.

If you want high-yield exposure to property, then this trust is probably as good as any, with modest levels of gearing, a large asset base, and a competent manager who outperforms property indices. Just don’t expect much too much beyond the regular tick of those monthly dividend payments.

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