Investing in stock markets is not without risk. We saw it leading up to the first lockdown in 2020 as stocks slipped; endured when Liz Truss’ government committed hara-kiri late last year; and again experience it as a mix of governments and central banks trying to prevent a large-scale banking crisis.
These are challenging times for investors in some of the country’s most high-profile mutual funds. For example, Scottish Mortgage, our largest investment company with a market capitalization of £9.4bn, has lost its reputation as the retail investor’s moneymaker of choice.
The FTSE 100-listed fund, managed by Edinburgh-based investment house Baillie Gifford, has been on a tailspin since late 2021 as its technology leanings have fallen out of favor in response to higher interest rates, rising inflation and economic malaise.
Sixteen months ago, the trust’s shares traded above £15. Today they are just over £6.50 and the future looks uncertain as the managers grapple with a portfolio heavily invested in privately held companies, many of which are money hungry and ripe for depreciation. Boardroom layoffs have added to the swirl of uncertainty.
Volatile stock markets have even affected mutual funds that market themselves as conservatively managed. Investment fund RIT Capital Partners, a £2.9 billion fund, says preserving investors’ capital is a priority, but its share price has fallen 27 per cent over the past year.
The poor performance of the trust – along with the risky nature of some of the underlying assets – has prompted Investec Bank to advise investors to sell their shares.
Alan Brierley, an investment trust analyst at the bank, describes the trust’s management approach as a move from “fly fishing to dynamite fishing.”
He told The Mail on Sunday: “For more than two decades, we’ve viewed RIT Capital as a classic, low-risk, safe haven investment with a core position in a diversified portfolio.
“However, this has changed. The risk profile has changed radically in recent years. Given the objective of preserving shareholders’ capital, the past year was very disappointing.’
Like Scottish Mortgage, which never hid its high-risk, high-return investment strategy, RIT Capital Partners has a large amount of assets in unlisted companies – or, as Brierley puts it, “higher-risk late-stage venture capital.” . The value of these assets could well be written off.
ARE THERE RAYS OF INVESTMENT SUNSHINE?
So all rather bleak – especially in the short term. But are there comfort blankets for investors to cling to as stock markets remain volatile? By far the largest is the income that many mutual funds continue to dish out to investors. While Thursday’s interest rate hike to 4.25 percent has made cash increasingly attractive, there are still a number of mutual funds that can improve on this – as well as offering the opportunity for both long-term income and capital appreciation.
Based on Morningstar data, The Mail on Sunday identified ten income-friendly mutual funds (see table). They all pay quarterly dividends, which can either be considered regular income (to boost income in retirement) or reinvested to buy more stocks (a great strategy for long-term wealth building).
All but one (Murray International) are primarily invested in the UK stock market.
All ten pass two major income tests that should reassure both existing shareholders and those looking to invest.
First, their stocks are currently yielding more than 4.25 percent annual income — some much more.
Second, and more importantly given the tough economic conditions, their ability to sustain growth in dividend payments is enhanced by the “rainy day” income they’ve been stashing away.
These revenue reserves, built up during periods when companies made profits and paid large dividends, are used when needed to supplement dividend payments to investors.
All ten trusts have at least half a year of income in reserve, ready to use in difficult times.
It’s reassuring that eight out of 10 shareholders have delivered growing income going back at least a decade – ranging from Dunedin Income Growth (11 years) to JP Morgan Claverhouse (50).
Annabel Brodie-Smith, communications director for the Association of Investment Companies (AIC), says a cocktail of geopolitical tensions, rising prices and the banking crisis are a challenging backdrop for equity investors.
She adds: “During these trying times, dividends are a priority for many investors who rely on earnings to help them cover rising bills and living expenses.
Even investors who don’t need income now can benefit from reinvesting their dividends.
“This makes them buy more shares, which improves their returns in the long term.”
The AIC website (www.theaic.co.uk) offers a lot of useful information about income investing.
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