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Dividends from UK investment trusts have dropped this year for the first time in a decade as the Covid-19 crisis caught up with a sector that has been resilient to tumbling shareholder payouts across global markets.
The amount of cash returned to shareholders from equity investment trusts dipped 3.1 per cent in the first half of 2021, compared with the year before, the first sector-wide cut since 2010 in the aftermath of the global financial crisis, according to research by the funds group Link. The group predicts that investors will see a similar drop over 2021 as a whole.
The relatively moderate decline following the Covid-19 crisis has shown the merits of investment trusts for income-focused investors, according to trust advocates.
“The investment trust structure is ideal for weathering market dislocations caused by events such as Covid or the Great Financial Crisis,” said David Horner, managing director at Chelverton, the £2.5bn London asset manager, which runs a dividend-focused investment trust.
The slippage in investment trust dividends comes after companies slashed payouts to shareholders by a fifth worldwide at the height of the Covid-19 economic crisis last year, reducing a key source of income for pensions, charities and retirees.
These cuts have now filtered through to investors who held company shares through investment trusts, a type of investment vehicle structured as a listed company and popular on the London market.
Despite the dip, payouts from UK-listed investment trusts have held up well compared to the wider market. Dividends from UK companies dropped 34 per cent in the 18 months to June, while global payouts fell 6 per cent, according to Link and Janus Henderson, an asset management group. In contrast, investment trusts boosted their dividends by 2 per cent over the same period.
Ian Stokes, managing director at Link, said investment trusts benefit from the ability to build cash buffers and to use capital gains to sustain their dividends. “[Trusts] can smooth out the peaks and troughs in dividend income caused by the economic cycle or big one-off shocks,” he said.
Trusts’ close-ended structure also means that they do not face pressure to sell shares at depressed prices in the midst of a crisis if investors head for the exit, which Horner said can be an advantage over open-ended funds.
Horner said he had added to the cash cushion at Chelverton’s dividend trust each year since the financial crisis, which allowed the trust to boost its dividend by 7 per cent last year, despite Covid. More than half of investment trust managers dipped into reserves in the past year, with a fifth of the cash paid out to shareholders coming from rainy day funds, according to Link.
“One of the unique benefits of investment trusts is their ability to hold back a proportion of the income they receive in good times,” said Simon Crinage, head of investment trusts at JPMorgan Asset Management.
While Link’s data shows a dip in payouts for trusts that invest in stocks, analysis from the trade body for investment trusts shows that trusts backing alternative assets such as infrastructure continued to increase their payout through the pandemic. “This demonstrates the importance of having a balanced income portfolio,” said Ian Sayers, chief executive of the Association of Investment Companies.
Link forecasts that investment trust dividends in its index will end the year 3.2 per cent lower than 2020 as last year’s cuts by companies continue to show up in trusts’ results.