Alternative investments drive investment trust dividends to a new high – Link Group Investment Trust Dividend Monitor

Investment trusts paid record dividends to their shareholders in the twelve months to the end of March, according to the latest Investment Trust Dividend Monitor, a special supplement to Link Group’s UK Dividend Monitor. Between them, the trusts paid out £5.5bn, up 15.4% year on year.

Trusts that invest only in listed shares kept payouts exactly flat at £1.85bn. These trusts distribute the dividends they receive from listed companies in the UK and around the world, so they have been hit by the reduction in global payouts, and the even harsher one in the UK, which accompanied the first pandemic year. Even so, dividends from equity investment trusts fell just 1.9% from peak to trough as trusts dipped into their reserves and took advantage of special rules allowing them to distribute some of their earnings. in realized capital.

The use of reserves continued in the second half of 2021 but at a very reduced rate. Reserves have been needed as the pool of dividend income that funds investment trust dividends itself continues to recover.

The first quarter of 2022 saw equity investment trust dividends 4.0% higher than the first quarter of 2021 (when they reached their nadir), a total of £437m.

Over the next twelve months, Link Group expects dividends from these investment fund categories to increase by 4% to a total of £1.92 billion. This is slower than expected dividend growth in the UK or globally, but reflects the fact that investment trust payouts have been protected from deeper dividend cuts in 2020/2021 and that trusts are now replenishing reserves.

Rapid dividend growth over the past year has come from alternative investments, not traditional stocks

The rapid increase in payouts was not driven by these “traditional” investment funds, but by those investing in alternative assets, whose payouts collectively rose 25.1% to $3.65 billion. pound sterling.

The biggest increase came from venture capital trusts (VCT). VCTs distributed £556m between April 2021 and March 2022, up 65.7%, while renewable energy infrastructure funds paid out £583m to shareholders, up 38 .3%. Along with real estate, the largest dividend-paying sector in the alternatives segment, these categories accounted for four-fifths of the overall dividend increase of all types of investment trusts in the twelve months ending March 2022. .

In 2010, alternative categories of investment funds contributed less than a third of the dividends paid by the sector as a whole. In 2021, they contributed two-thirds. Their payouts were nine times greater in 2021 than in 2010.

Ian Stokes, Managing Director, Corporate Markets UK and Europe said: “10 years ago, alternatives represented a much smaller segment of the investment trust market, but they have grown rapidly as new investment opportunities have opened up in response to investor demand. Since many of the assets of alternative trusts are relatively illiquid, they are very suitable for the closed structure.

“In recent years, VCTs have proven to be very popular with investors who have been attracted by the generous tax breaks. A reduction in the lifetime allowance on pension funds is catching more and more savers with a punitive tax on their pension pots. The measure has deterred retirement savings for wealthier people who have looked elsewhere for tax-efficient options for their capital. With a 30% tax credit on subscribed capital in a VCT share issue and all income and capital gains tax exempt, VCTs are now the first port of call for many investors. As a result, VCTs have been very large equity issuers in recent years.

Ian Stokes concluded “Investment trusts are an attractive proposition for investors. First, they can invest almost anywhere in the world. Second, they can invest in different asset classes beyond just listed stocks, providing access to hard-to-reach opportunities like private equity or venture capital.

Third, they are able to borrow modestly, using debt to buy more of the underlying assets, thereby improving returns for shareholders in the long run (this is called leverage). And finally, many of them have reserves that they can draw on in a crisis to protect their shareholders when the dividends of the companies in which they invest fall.

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “This report demonstrates that investment firms are delivering an abundance of benefits to income investors and have continued to do so in difficult market conditions.

“Many investment companies have a long track record of distributing dividends during crises and this has proven true during the Covid pandemic. Investment companies are able to withhold a portion of the income they receive from their portfolios and use these reserves to maintain dividends when times get tough. This helps explain why there are seven investment companies that have increased their dividends every year for 50 years or more, and 17 in total that have increased their dividends every year for more than 20 years – known as the heroes of dividends.

“Investment companies are also perfectly suited to invest in alternative assets that can generate attractive returns, such as renewable energy infrastructure, real estate and debt. Indeed, they have a permanent capital structure and are listed on the stock exchange, which makes it easy for investors to buy and sell their shares. Meanwhile, managers can take a long-term view of their portfolio and be fully invested without ever being forced to sell.

“In the current inflationary environment, certain alternative assets like infrastructure and certain types of goods generate income that is contractually linked to inflation, which provides some comfort to income seekers when the cost of living is high.

“Investment companies also have independent boards that look out for shareholder interests, another important feature in difficult market conditions.”

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