Tuesday 21 August 2012

A Question Of Trust...

I don't invest in funds, primarily because I don't want to pay someone to do something I can do myself (and possibly do it better); the fees charged can be quite high and would eat up a lot of the potential gains of any underlying investments. So, no funds for the DIY Income Investor.

But investment trusts (which are closed-end funds constituted as public limited companies) are not quite as bad, fees-wise - and they have the flexibility to borrow to improve their performance. So, when The Merchants Trust came up on my yield radar I thought it might be worth a look.

At first glance it looked good;
  • a strategy based on investing in UK high-yield blue chip companies (where much of my share portfolio sits)
  • diversified by sector with no more than 15% in any one company
  • current yield of over 6%
  • increasing dividends over the past 30 years
  • no premium on Net Asset Value
  • an increase in long-term debt to £111m (over 25% gearing) 
  • TER (Total Expense Ratio) of 0.45% (making it one of the 20 cheapest UK ITs)

But then I took a closer look at the Annual Reports and Accounts for 2012:
  • Net Asset Value fell by 5.9%
  • total return for 2011 was 1.9% (compared with 0.4% on the FTSE100 index) - this was actually better than the DIY Income Investor portfolio (which had a total return of -2.5%)
  • although the dividend was increased by 0.9%, this was only possible by transferring over £1m from the reserves (accounting for about 4% of the total dividend payout) - the dividend payment exceeded the income

So not a bad performance overall, except that paying out more dividend than was earned seems a bit unsustainable (although the reserves stand at around £20m) and increasing the dividend by a tiny amou nt, to maintain the 30-year run of increases was PR rather than reality.

You can watch a video from their investment manager here, courtesy of The Telegraph.

Of course, the alternative is to look at their main portfolio constituents and buy them directly but I do recognise that that requires effort and attention. The 'smoothing effect' of occasionally dipping into reserves and also the flexibility of borrowing (for example to purchase units when the NAV has a discount) have attractions.

So, possibly of interest for some income investors? What do you think?

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. I currently have this in my SIPP, As someone who currently does not have much money in my SIPP this allows me technically buy more of the market without the funds.

    I looked into other trusts but plumped for this in the end. Nice yield and it seems to be run well from what I can see too.

  2. Bought this las month in my isa. No comments yet but initial research compared to other trusts suggested it would be a good long term hold.