Breaking the glass ceiling: gender diversity in investment trust boards
The investment trust industry may historically have been the home of tweed suits and City lunches...
Income investors are likely to lose out on billions of pounds in dividends this year, as a cessation of economic activity due to an enforced lockdown has forced companies to cancel, cut or suspend their pay outs.
With some estimates going as far as a 50% drop in dividends in the UK and 20%-35% in most other regions, the cuts look brutal. And while stock markets may bounce back relatively quickly from their bear market, it is feared that dividend payments may not. This is because share prices react in advance of economic improvement, whereas dividends don’t pick up until after companies’ financials improve.
But it’s at times like these that investment trusts can really come into their own.
In good years, investment trusts are able to keep back up to 15% of their income to put into what is called a ‘revenue reserve’. This money builds up and becomes a buffer for leaner periods – such as we are experiencing today – so that it can be used to make up any shortfalls in the future.
This makes investment trust dividends a more reliable source of income for investors. And a number of trusts have already pledged to use this revenue reserve to maintain payouts this year.
Philip Remnant, Chairman of City of London investment trust, has promised shareholders the trust will increase its dividend for the 54th consecutive year in July, by calling on its revenue reserves if necessary.
He said: “We continue to recognise the importance of dividend income to our shareholders. Over the last ten years, we have set aside over £30 million into revenue reserves to underpin future dividends in circumstances such as we face now. Those reserves stood at £58.3 million at 30 June 2019, our last financial year end. If in July we need to draw on those reserves to maintain our unique record of annual dividend growth, then it is our intention to do so.”
In his recent podcast, Marcus Phayre-Mudge, manager of TR Property Investment Trust, told us: “The investment trust board has decided to pay out for the full year: 14 pence per share in total. So the dividend yield of today’s share price is just under 4%.
“Now, bear in mind that lots of property companies have announced that they are cutting or withholding dividends some investors might be surprised that the board was so robust and positive about that. And the answer is they have revenue reserves, and our revenue reserves total approximately 14 pence per share. So, if we receive no income for the whole of the year to March 2021, technically the board could use those reserves to pay the dividend.
“That’s what they’re there for. They’re there to help top up in periods where dividend levels fall. But very importantly, given that our exposure to healthcare, to supermarkets, to residential, to industrial logistics… these are all sectors we think are going to continue to pay and pay full dividends. So not all of it would need to be used.”
The board of Schroder Oriental Income has said that it is “receiving regular information from the Manager on the portfolio, and the income that it is expected to generate, over the next few quarters. We take comfort from the fact that the Company’s revenue reserves are equivalent to nearly nine months’ dividends. This could enable us to weather any medium term shortfall in dividends received without jeopardising our payments to shareholders”.
“So, while COVID-19 is a serious challenge, we are optimistic that, for the present, we are well-positioned to maintain our approach to payment of dividends and return to generating long term capital gains in due course.”
In a recent video interview, Bruce Stout, manager of Murray International, told us: “We’re not dependent on one market or one region or one industry – it’s a diversified global trust and also has positions in bonds, which helps in terms of income.
“We were also relatively defensively positioned and own 17% of telcos. Those businesses are not being interrupted as much as others, as people are using more data etc, so cash flow dynamics are good, as it is in our healthcare and consumer staples positions. But we’re not immune to dividend cuts and have had a couple ourselves: Auckland airport in New Zealand and Shell, for example.
“But the trust has been building reserves for the past 10 years and we have about 58.5p per share saved. Last year we paid out 53.5per share, so we have a lot put away for rainy day and this is the rainy day.”
Britain’s biggest investment trust, Scottish Mortgage, is primarily focused on capital growth but also recognises the importance of income. Its chair, Fiona McBain, explained: “The Board recognises that at the current time many other UK companies are having to cut or postpone their dividends to retain more cash to help support their businesses and so the income upon which many UK investors rely from other FTSE100 companies may not be available in the coming months.
“Fortunately, Scottish Mortgage does not face the same challenges. In such difficult times, the small income yielded by holding the shares of this Company may therefore be of greater importance for many individuals than might ordinarily be expected to be the case.
“The Board believes that the level of the long run total return generated for Scottish Mortgage continues to justify supporting those of its shareholders who do value the Company’s modest but progressive distribution policy. The Board is therefore recommending that this year, the total dividend be increased by 4% on the level of the previous year to a total of 3.25p (3.13p in 2019).
“Just under half of the dividend will be funded from the portfolio’s earnings, with the rest to be paid from the Company’s significant distributable capital reserves which have built up as a result of realised gains achieved over the long term in the portfolio.”