Among conventional investment companies with a dividend, some 49% are yielding 3% or more – almost half of the sector, according to a research by the Association of Investment Companies (AIC).
AIC communications director Annabel Brodie-Smith said, "The investment company sector’s strong dividend track record is the jewel in the industry’s crown, but these figures illustrate the extent of the investment company sector’s income offering. Nearly half of the sector paying a dividend is yielding 3% or more, and not necessarily in those sectors traditionally associated with yield. So it is well worth considering investment companies as part of a well-balanced ISA or pension portfolio."
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Investment company discounts are at near historic lows, driven in part by the higher yielding investment companies which have been in huge demand.
AIC data shows that 50% of the higher yielding investment companies are trading on a premium to net asset value per share.
In other words, the shares cost more than the value of the underlying assets. This is particularly the case amongst some of the higher yielding, alternative assets sectors.
Brodie-Smith added, "At a time when demand for income remains strong, some higher yielding investment companies, although by no means all, are trading on premiums. Investors need to weigh up the options: is the level of premium worth paying for given the attractiveness of the yield, or, in the alternative assets space, the hard-to-replicate-elsewhere investment strategy? There are no hard and fast rules, but if you buy an investment company on a premium, you have to have a good reason for doing so. And be aware that, if a premium falls to a discount, your losses may be increased."
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By GlobalDataAIC research shows that the higher yielding investment companies trading on discounts are, in a number of cases, in higher risk or out of favour sectors.
These include companies in the European Emerging Markets, Latin America, Sector Specialist: Environmental and Commodities and Natural Resources sectors.
But higher yielding investment companies in the more mainstream sectors are also in some cases trading on discounts, for example in the Global, Europe and European Smaller Companies sectors.
It is also interesting to note that the UK Equity Income sector has moved from trading close to par (0.3% at 31 December 2014) to a -2.1% discount at the end of January 2015.
Winterflood Securities head of research Simon Elliott said, "The closed-ended structure lends itself well to income mandates and the ability to use revenue reserves or make distributions out of capital profits enables boards to provide shareholders with greater dividend certainty at times when dividends from underlying investments may be coming under pressure. It can also prove valuable during periods when foreign exchange movements adversely impact on a fund’s revenue earnings."
Brodie-Smith continued, "As the pension changes draw nearer we wanted to highlight the income advantages of investment companies. Of course annuities will remain the right choice for some but, for those that can accept the risks, investment companies are an obvious candidate for part of a long-term income portfolio in retirement."
