Investing for income and growth with investment trusts

The investment trust sector is large and diverse. It comprises over 300 trusts¹ , each with its own goals and objectives. When finding the right trust, or trusts, for you, it helps to have a clear understanding of the type of investor you are, and what you need your investments to do for you. Deciding whether you need income, growth, or a combination of the two is a good place to start. 

Investing for income

Investment trusts have built a well-deserved reputation as a dependable investment option for income seekers. Over two-thirds of the Investment Trust sector are currently paying dividends to shareholders and many investment trusts have a commitment to paying a long-term, growing income to their investors. This can help the income from your investments grow ahead of inflation over time. 

Investment trust structure

The investment trust structure naturally supports income investment. Investment trusts have the ability to reserve 15% of the income they receive in dividends and interest income from the underlying investments and set it to one side, ready to pay out in tougher times. This was particularly useful at moments when companies reduce  dividend payments, as seen during the Covid era. By drawing on their revenue reserves, investment trusts were able to keep paying dividends to shareholders². It is also possible to take income from capital growth if necessary, though this can erode capital if  done at the wrong moment.

In this way, the investment trust structure has the potential to create more stability and flexibility of income for investors. Investment trust boards and managers understand that investors rely on the income they receive and would like it to beat inflation over time. 

Investing for growth

The investment trust structure also supports long-term growth. Investment trusts are ‘closed-ended’, which means the investment manager has a fixed pool of capital. The managers don’t have to deal with inflows and outflows of money from the trust. The price of the trust is determined by demand for the shares, like it is for a normal company. This gives investment trust managers the flexibility to manage the investments in the trust with a long term perspective. In contrast, open-ended funds may  need to buy new investments with any capital coming into their funds, or sell assets to meet any redemptions. 

Why might this be better? It allows a broader range of assets to be considered. An open-ended fund manager, for example, may not be able to invest in a small, - but potentially high growth, company that doesn’t trade as frequently, because they know they wouldn’t be able to sell the shares quickly enough if they were to have redemptions in their fund. The same might be true for large assets such as commercial property or infrastructure, where it takes time to buy and sell. 

Investment flexibility

It also gives the manager more investment flexibility. Rather than having to keep a watch over the money coming in and out of the fund, an investment trust manager can base their judgement on investment considerations alone. They are not forced to buy into a rising market or forced to sell in a declining market. They can go against prevailing market trends and be agile, making decisions based on their skill and judgement. In this way, investment trust managers can avoid having to make market timing decisions, which may not add value to investors. 

Investing for income and growth

Many investors will want a combination of growth and income in their portfolio. This may be particularly the case in retirement, where investors need some income to supplement their other sources, but need their capital to keep pace with inflation over time. Investing for income and growth may also be a good option for investors who want a core holding in their portfolio. 

Targeting income and growth can bring balance to a portfolio. As part of finding companies that pay a reliable, growing dividend, fund managers have to look closely at metrics such as cash flow and balance sheet strength. It can help focus on companies with long-term strength. Income and growth are often complementary, with income a natural by-product of growth. If a company is growing strongly, it is often in a good position to pay dividends.  

The Invesco Global Equity Income Trust plc is an example of a trust that aims to deliver income and growth. Managed by a skilled and experienced team, the trust is focused on finding high quality companies at attractive prices. It targets companies that can grow their cash flows over time, which helps deliver an annual dividend target of at least 4%. The dividend policy involves paying at least 4% calculated on the unaudited year end net asset value of the trust, paid quarterly in equal amounts. This is not guaranteed. It is a high-conviction, high active share, globally diversified portfolio of around 40-60 holdings spread across sectors, geographies and market capitalisation. 

Invesco also manages the Invesco Asia Dragon Trust plc, which aims to generate long-term capital growth through investments in a diversified portfolio of Asian and Australasian companies. From semiconductor leaders to consumer giants, Asia is home to some of the world’s largest, most competitive and exciting companies. The trust has the flexibility to pick from the best ideas across the region, looking to uncover exciting Asian companies that trade below their long-term growth potential.

At Invesco, we also manage the Invesco Bond Income Plus Limited, which aims to deliver a high income and capital growth. The investment managers on the trust focus on fixed income securities, particularly higher yield bonds. They employ careful selection of individual corporate bonds and analysis to uncover the most compelling opportunities and mitigate risk. 

Different investors will have different needs and investment trusts offer real breadth of choice. Identifying what you want from your investment – income, growth, or a combination of the two - can help steer you to the right option.