Some of the most popular income investment trusts have failed to bounce back from the coronavirus crash – and experts reckon it could be time to sell them.
Merchants Investment Trust is down 39 per cent this year and Murray International is down 25 per cent. Yet the FTSE 100 is down by just 20 per cent, having recovered from its low of 4,994 back to 6,032 by the end of last week.
The question for many investors who have money in these giant funds will be whether to hang on for the income they pay or offload now for a rival with better prospects.
Some of the most popular income investment trusts have failed to bounce back from the coronavirus crash
Merchants, for instance, is still paying a very healthy 7.39 per cent yield – or £7.39 a year for every £100 in the fund. Murray International’s yield is now 5.63 per cent.
Even though these payouts are being made to look more generous – you are getting a larger percentage of a smaller pot – they are not to be sniffed at.
Yet Ben Yearsley, director of Shore Financial Planning, points out that capital growth is vital in the longer term to deliver increasing payouts. In other words, if the funds keep struggling, the income paid out may fail to grow or even face a cut.
‘You need your capital to grow in order for your income to grow over time,’ Yearsley says. ‘So therefore would look seriously at alternatives for your income if your capital is doing poorly.’
Chris Salih, investment analyst at FundCalibre, adds: ‘Whether you should keep trusts just for income if they’re underperforming in capital growth terms is a very subjective question and very much depends on the type of investor you are.
‘Ideally, you’d want both. But if you are at or approaching retirement, it is understandable that you may want to prioritise the income – especially as dividends are being cut left, right and centre at the moment – provided your initial investment is not being heavily eroded by capital losses.’
Merchants and Murray International are favourites among income seekers. Murray International, managed by Aberdeen Standard Investments, is a £1.4billion trust which has been around for more than 100 years – meaning it has weathered its fair share of catastrophes. But it has recently underperformed markets such as the FTSE World and MSCI World indices.
So far this year the trust has lost almost 24 per cent compared to a broadly flat performance from the FTSE All World index. Over the past year, the trust has lost 15 per cent against a near 4 per cent rise for the index.
Laura Suter, personal finance analyst at AJ Bell, says: ‘Murray International has been hit harder this year than some of its peers due to its ‘value’ investing approach.
‘This means it invests in companies that it thinks have been unfairly priced down by the market and are primed for the rebound.’
Unfortunately for investors, many of those stocks were among those hit the hardest in the market falls earlier this year – for example, Mexican airport operator Grupo Aeroportuario del Sureste. ‘In addition,’ says Suter, ‘the trust didn’t have much exposure to the technology stocks that have led a lot of the recovery around the world.
Murray International has recently underperformed markets such as the FTSE World and MSCI World indices
‘The fund has switched out of UK stock markets, dropping its allocation to the UK to a 40-year low, and instead is betting its fortunes on Asia and the emerging markets rebounding faster than other areas of the world. Considering these are some of the areas currently most affected by the pandemic, investors will likely need to be patient and ride out more volatility in the months to come.’
It isn’t all doom and gloom though, adds Suter. ‘Income seekers will be comforted that the trust has said that it plans to maintain its dividend growth policy and the trust has enough reserves to cover a year’s worth of dividends if needed.’
Investment trust Merchants, a £700million fund investing in UK shares, was enjoying something of a purple patch for growth at the start of this year.
However, AJ Bell’s Suter says: ‘The trust has a high level of gearing (borrowing money to invest in the market) meaning that any rises and falls in the value of its underlying assets will be amplified. On average, gearing has been shown to boost returns on investment trusts over the long term but adds to volatility in the short term – meaning investors need to be prepared for a wilder ride along the way.’
The good news is Merchants has committed to at least maintain its dividend this year. Suter thinks it is likely it will dip into its cash reserves this year rather than cut its payout.
However, Ben Yearsley thinks that’s a bad sign. ‘Dipping into cash reserves means the trust can artificially keep dividends higher in the short term,’ he says. ‘But Merchants, for example, has Imperial Brands, Shell and lots of financial firms among its biggest holdings. Those types of business haven’t recovered at all – and have in fact carried on falling in some cases.’
Merchants is down 39 per cent this year, but has committed to maintain its dividend
FundCalibre’s Salih says both the Merchants Trust and the Murray International Trust have a focus on value investing – a type of investing strategy which has been out of fashion for a number of years. ‘Quantitative easing (or money printing) and low interest rates have favoured the growth style of investing,’ he says.
Growth investing is where a fund manager will pick stocks on the up, as opposed to ones that could rebound from a tough time.
Salih adds: ‘The recent stock market sell-off saw central banks across the globe introduce yet more quantitative easing into the markets, while interest rates have fallen even further, making the backdrop even more challenging for value investing, as these companies are often more in debt.’
In contrast to Merchants and Murray International, Finsbury Growth and Income Trust only fell 8 per cent in value since the start of the year, but has a smaller yield than either at 1.99 per cent.
Scottish Mortgage, the largest investment trust, started the year at £5.86 but after a small Covid dip has now shot up to £9.03 thanks to tech holdings in Tesla, Amazon, Tencent and Alibaba. That means investors have seen £1,000 turned into £1,536. However, the trust provides a dividend yield of just 0.36 per cent.
Yearsley recommends Finsbury Growth and Income, which he says ‘has a lower initial income but with better prospects for growth’.
Other alternatives tipped by Salih, at FundCalibre, include Murray Income, which still provides a strong yield of 4.52 per cent. ‘The manager is very experienced and his long-term track record still good,’ he adds.
However, he warns against making knee-jerk decisions. He points out that coronavirus has, and will continue to have, a massively adverse effect on the economy and the wider market – so any false moves driven by short-term price movements could prove costly.
Suter agrees: ‘Clearly in times of market volatility and falls, investors who are tempted to sell for better opportunities elsewhere have to be careful not to lock in a loss that might be hard to recover from.
‘If the fund has indicated that the cut to capital growth is temporary and they are still finding income opportunities, it might be better for investors to hold tight and ride out the bump in the road.’
Murray International manager Bruce Stout says: ‘We will not chase short-term returns. Instead we will continue to emphasise financially strong companies in regions of the world where long-term growth prospects remain superior.’
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Fund tech revolution, Bank chief tells Chancellor
Britain’s top economist has called on the Government to spearhead a tech revolution for millions of firms, creating a ‘faster and smarter’ economy as the country fights its way back from the Covid-19 crisis.
Bank of England chief economist Andy Haldane – writing in his capacity as chairman of the Industrial Strategy Council – said a new blueprint must be drawn up with a raft of measures, including tax incentives and access to finance to feed an ‘appetite’ among firms to adopt new technology.
The surprise intervention – in a joint document prepared for The Mail on Sunday by Haldane and former John Lewis Partnership chairman Sir Charlie Mayfield – comes just weeks ahead of an expected Spending Review by Chancellor Rishi Sunak.
Plea: Andy Haldane is calling on Rishi Sunak to draft a new blueprint for the economy
It is unusual for a senior official who also holds a high-ranking position at the Bank of England to make such broad-reaching policy recommendations.
Haldane, who sits on the Bank’s Monetary Policy Committee, and Mayfield want small and medium-sized companies to urgently adopt or update software across key areas such as accounting, HR, customer relationship management and marketing.
The paper says the economic recovery in July was ‘further and faster than anyone expected’ after the collapse in the second quarter.
But the writers say it is vital to seize ‘the opportunities, as well as the obvious challenges, of Covid’ and ‘technologically upgrade our businesses and our economy’.
UK business has been a ‘laggard’ in adopting new technology despite playing ‘a leading role’ in developing it, the paper says. ‘That is particularly true among the smaller and mid-sized businesses which employ nearly two thirds of people working in the UK. This explains why, despite rapid innovation, aggregate productivity among UK companies has flat lined for more than a decade.’ Haldane and Mayfield add: ‘Technology adoption needs to be at the heart of industrial policy. Levelling up the UK’s companies, through improved tech adoption, is an essential element of levelling up our regions.’
The paper – which the MoS has made available in full at thisismoney.co.uk – calls for ‘incentives for companies to make the right investment choices’ and to make it easier for them ‘to access finance to fund this investment’.
It also calls for support through advice shared by large corporations with smaller firms, through local ‘tech hubs’ and online. A survey of 500 small and medium firms released alongside the paper reveals one in eight are using systems more than a decade old and another third using systems six to ten years old. A third said they have acquired technology that has barely been used.
But the paper says the Covid crisis has presented a major opportunity because ‘rapid and radical technological adoption has been essential to the survival of many firms’.
Mayfield chairs Be The Business, a Government-backed organisation set up to solve Britain’s sluggish productivity largely by encouraging wider use of technology.
Its research has revealed adoption of new technology among businesses rose four times faster during the crisis than it did for the entirety of 2019. In many cases, firms were forced to act as they switched to working from home. Mayfield said last night: ‘Business technology has not kept pace with consumer technology. It’s not just about Zoom and it’s not about AI and advanced technology.
‘It’s about wider adoption of pretty well-established tools that have been proven to improve growth of businesses that use them – accounting and HR software, CRM [customer relationship management] systems, online trading, export tools and really getting to grips with social media and marketing.’
But there had been resistance in the past from firms fearful of the disruption that implementing new technology can cause. ‘It’s hard work and it’s difficult,’ he said.
Referring to John Lewis’s experiences implementing new IT systems since 2014, Mayfield said: ‘I have the scars on my back from a well-resourced business that has found tech adoption difficult. It costs a lot, took longer than planned and at the end of it all the benefits weren’t quite as clear as they were at the beginning.’
‘But I’ve no doubt we did the right thing. If we hadn’t, the business would be in a far worse position than if it hadn’t,’ added Mayfield, who left John Lewis earlier this year.
He said Be The Business was piloting ‘tech adoption labs’ across the country and large companies had offered ‘chief technology officers on demand’ to help firms cope.
‘We’ve got the template, we’ve got the playbook, we’ve got Britain’s best businesses and access to expertise – Cisco, Openreach, Amazon, Google. We are asking the Government to make this a priority for rebuilding the UK.’
He added: ‘Eat Out to Help Out has had a pretty dramatic impact on restaurants. What we need is a similar message for business leaders, something along the lines of ‘Tech Up to Grow Out’. It should become a fundamental part of the recovery.’
HOW DO GOVERNMENTS AND BUSINESSES ENSURE BOUNCE-BACK CONTINUES?
By Andy Haldane, chair of the Industrial Strategy Council, and Sir Charlie Mayfield, chair of Be The Business
UK GDP had, by July, recovered around half of its Covid-related losses, rebounding further and faster than anyone expected. That’s the good news. The bad is that the economy remains 12 per cent smaller than at the start of the year. So how do Governments and businesses ensure this bounce-back continues and that the opportunities, as well as the obvious challenges, of Covid are seized?
A large part of the answer lies in improving levels of technology adoption among businesses. While the UK plays a leading role in developing new technology and innovation, it is a laggard when it comes to its wider adoption across companies. That is particularly true among the smaller and mid-sized businesses which employ nearly two thirds of people working in the UK. This explains why, despite rapid innovation, aggregate productivity among UK companies has flat-lined for more than a decade.
Yet, for all its challenges, Covid has shown what is possible on this front. With their normal business models disrupted so significantly, rapid and radical technological adoption has been essential to the survival of many firms. Even among the more mature aspects of technology, such as e-commerce, the pace of adoption has been rapid. Data from Be the Business shows tech adoption was four times faster during the crisis than the whole of 2019.
It is good news that many more businesses now have the appetite and experience to upgrade their technologies. The less good news is that many of the barriers to that wider adoption are long-standing and remain deep-seated. Understanding those barriers, and removing them, is crucial if the benefits of technology – for productivity, skills and jobs across every region – are to be unleashed.
Be the Business, with support from McKinsey, has just completed the largest-ever study of these barriers and opportunities to widespread adoption of technologies. Some of these blockages sit in firms themselves, through a lack of information or appetite for change. Others exist among the suppliers of technology, in particular to smaller companies. Both the demand and supply sides need fixing, at source and at speed, if the opportunity is to be seized.
To do so, we believe three things are essential.
First, businesses need access to independent advice and resources to guide them towards the right technology choices. At present, in particular for smaller companies, this is daunting. There are mountains of information and training available on how to use specific software and tools. But there is no one-stop-shop for this information and no clear guidance to help businesses understand what kit would best meet their needs – until now.
On the new website, Be the Business Digital, businesses have all the answers they need. It is full of real world experience of business leaders who have learnt the hard way about tech adoption – where they went wrong, why they persevered, and what it did for their businesses. It’s constantly being updated and developed, providing a guide to the many business leaders up and down the country who know they need more tech but aren’t sure where to start.
Second, business leaders themselves need access to expertise and training. Only big firms have Chief Technology Officers. Most businesses can’t afford them and nor can they afford the fees of professional service firms who might fill the gap. We need, in every region and major town or city, a place where businesses can come for help when they need it – local hubs for business support. This should not just be government provided support. The private sector must play a role here. More than 100 of the UK’s best firms, including our best tech companies, have already committed to supporting Be the Business’ efforts.
Finally, there is the role of policy. Technology adoption needs to be at the heart of industrial policy. Levelling-up the UK’s companies, through improved tech adoption, is an essential element of levelling-up our regions. That means creating incentives for companies to make the right investment choices – for example, with a level playing field between investing in machinery versus software.
It also means making it easier for businesses to access finance to fund this investment. The UK has led the world with its Open Banking initiative to make personal bank account data portable, enabling people to switch their accounts cheaply and easily to improve innovation and competition. There is a strong case for doing the same with business data, making this fully portable and thereby enabling companies to switch vendors easily and cheaply to unleash finance and innovation.
The Nobel Prize winning economist Robert Solow famously asked: if technology is so ubiquitous, why doesn’t it show up in productivity statistics? We now know why: much of that technology simply isn’t found in many British businesses. Now is the time to technologically upgrade our businesses and our economy, building back not just better, but faster and smarter.
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Rolls-Royce set to tap investors for £2.5bn cash boost
Rolls-Royce is on the cusp of launching an emergency fundraising to tap shareholders for between £2billion and £2.5billion.
City sources said the FTSE100-listed jet engine maker is close to securing the funds from investors, possibly through a rights issue and placing.
Goldman Sachs and Morgan Stanley are believed to be among the investment banks working on the fundraising deal for Rolls-Royce.
Emergency: City sources said the FTSE100-listed jet engine maker is close to securing the funds from investors
It had been thought Rolls-Royce may look to raise £1.5billion from investors. But sources claimed the blue chip firm is now seeking an extra £500million to £1billion, possibly from sovereign wealth funds.
The move to launch such a large rescue fundraising comes as Rolls-Royce shares – which closed last week at £1.80 – flirt with a 16-year low amid concerns about the company’s financial position.
Investment bankers last month told The Mail on Sunday that they had heard rumours the Government was ‘starting to get worried’, raising the possibility of state intervention.
Rolls-Royce – in which the Government has a ‘golden share’ that gives it the right to block a takeover – has been hit hard by the pandemic. In part that has been because the company operates a power-by-the hour model, where it sells engines at a loss and later receives payments according to how much they fly. This arrangement has left the company bleeding cash.
The firm is also particularly exposed to the collapse in long-haul travel because it makes engines for bigger planes such as Boeing’s 787 Dreamliner and Airbus’s A350.
Rolls-Royce’s debt has been downgraded to junk status and major long-term shareholders, such as American activist ValueAct Capital, have been selling out of the company.
In a note to clients several weeks ago, David Perry, an analyst at JP Morgan, said: ‘An £8billion hole will need much more than a £1.5billion rights issue. We believe RollsRoyce needs to raise at least £6billion [through equity raise sales and disposals] to put itself on a sound financial footing.’
Perry added that the company’s debt pile will be almost £19billion by the end of the year. He believes that £1.5billion may not be enough to save the firm.
The analyst suggested that Rolls-Royce needs to issue £6billion of equity and this might not be possible by just relying on institutional investors. ‘We think there is a high chance of Government intervention,’ he added.
Aside from tapping stock market investors for fresh cash, Rolls-Royce is also seeking to generate about £2billion from selling divisions – including ITP Aero – over the next 18 months.
ITP Aero is Rolls-Royce’s Spanish engineering division that makes turbine blades for engines.
A spokesman for Rolls-Royce said: ‘We continue to review a range of funding options to further strengthen our balance sheet.
‘These could include debt and equity, but no final decisions have been taken. We have already taken swift action to strengthen our liquidity with £6.1billion at the end of the first half of the year and a further £2billion term loan agreed in the second half.
‘We have also announced £1billion of cost mitigation activity in 2020 and launched a re-organisation of our Civil Aerospace business to save £1.3billion annually.’
Last month, the firm’s woes were compounded by the announcement that finance chief Stephen Daintith was leaving the business for online delivery firm Ocado.
Daintith has said he will stay for a transition period.
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Casino boss: 10pm curfew will hit night-time industries
The boss of Britain’s biggest casino complex has warned that a 10pm curfew would be ‘disastrous’ for night-time industries.
Simon Thomas, chief executive of the Hippodrome in London’s West End, said casinos make half their revenue after 10pm, and a national curfew would force him to make ‘substantial redundancies’ among his 700 staff.
He already expects to make a ‘significant loss’ this year, after losing £1million a month during the five months the business was closed, and said the situation remains ‘fragile’.
Losing streak: Visitor numbers are down 80 per cent at the Hippodrome
Visitor numbers are down by about 80 per cent since the Hippodrome reopened last month.
‘The curfew poses an existential threat to theatres, hotels, bars and clubs,’ said Thomas.
‘It is an unnecessary over-reaction to Covid and it would be a disaster for London.’
Thomas owns about half of the Hippodrome, which has casinos, restaurants and bars on six floors of a 19th Century former music hall and circus. His 86-year-old father Jimmy owns 20 per cent.
He said he had worked hard to make the casinos safe, with gaming positions separated by flexi-glass walls, and the 80,000 sq ft premises prepared to receive just 400 people, down from 1,600.
He has raised £10million of Government loans and bank debt. A consultation on redundancies has started, but the number of job cuts has not been confirmed while 300 staff remain on furlough.
Thomas said: ‘It’s frustrating as the core business is excellent – the building is beautiful and a huge asset to London. We are very happy to pay tax, to provide jobs and entertain people – but we have to be allowed to do it.’
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