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Inflation-busting investment trusts
Having bumped along at negligible levels for much of 2020 as the UK economy struggled under months of lockdown, consumer inflation is back, with big implications for your savings and investment portfolio.
UK CPI jumped to a four-month high of 0.7% in January, up from 0.6% in December 2020. Admittedly this rate of inflation remains modest by historical standards, yet CPI now stands at four times what it was in August 2020.
Commodity prices have been creeping up, and the market seems to be buying into a global economic recovery, with cyclical stocks performing well. Combined with the huge amount of monetary and fiscal stimulus pumped into the economy, inflationary pressures may be brewing.
TRUST IN TRUSTS
Inflation erodes the purchasing power of savings, so investors alarmed by its onset should look to the investment trusts sector for some protection.
Because these vehicles can invest in a broad range of asset classes, be patient backers of their holdings, use debt to potentially boost returns and keep cash on hand to help smooth dividend payments they have a number of tools at their disposal to help combat the impact of inflation on returns.
One band of companies that are well placed to mitigate the effects of rising prices are the AIC’s ‘Dividend Heroes’, trusts that have increased their dividends every year for at least 20 years in a row. Although this list reveals the trusts with the most formidable long-run dividend growth records, it doesn’t tell you the level of dividend growth and what it would be in real terms when adjusted for inflation.
This is important, because if a trust’s dividend growth fails to keep pace with the cost of living, then the ‘real’ value of these dividends will be eroded.
However, certain ‘heroes’ have the stated objective of keeping inflation at bay. With 54 years of unbroken dividend growth under its belt, global trust Bankers (BNKR) seeks to achieve capital growth ahead of the FTSE World Index and dividend growth greater than UK CPI inflation.
Witan (WTAN) aims to deliver a benchmark-beating total
return twinned with dividend growth ahead of inflation, while The Scottish Investment Trust (SCIN), which has increased its regular dividend for 37 years, has the stated aim of achieving dividend growth ahead of UK inflation.
Another hero with an inflation-busting mandate is The Scottish American Investment Trust (SAIN) or ‘SAINTS’, the Baillie Gifford-managed fund focused on delivering real dividend growth by increasing capital and growing income.
In its 2020 results (11 Feb), SAINTS declared a 12p total dividend, 1.1% higher than the 2019 dividend, above the 0.6% rate of UK CPI inflation over the same period and extending the trust’s record of dividend increases to 41 consecutive years.
Focused predominantly on equities, with leading holdings including TSMC, Microsoft and Procter & Gamble, SAINTS has a high active share of 90%, meaning the managers run a portfolio that looks different to the index, and the trust is also free to invest in income-generating assets including bonds and property.
The operational performance of SAINTS’ holdings has proved remarkably resilient during the pandemic, while the portfolio’s dividend income held up much better than that of the market as a whole.
Investors can also find inflation-busting strategies in AIC sectors including Renewable Energy, Infrastructure, Flexible Investment and Property. For instance, Greencoat UK Wind (UKW) seeks to deliver an annual dividend that increases in line with RPI, while preserving the capital value of its clean energy portfolio, and infrastructure fund International Public Partnerships (INPP) looks to deliver inflation-linked returns by growing dividends and capital appreciation.
Within the Flexible Investment sector, Capital Gearing Trust’s (CGT) dual objectives are to preserve shareholders’ real wealth and achieve absolute total return over the medium to longer term.
Net asset value (NAV) total return performance has outstripped UK RPI since January 2000 underpinned by a multi-asset portfolio that holds everything from conventional and index-linked government bonds to equities, commodities, cash and other funds.
Sector peer Seneca Global Income & Growth (SIGT) is a multi-asset value trust that seeks to achieve a total return of ‘at least CPI plus 6% per annum after costs with low volatility’ and aims to grow aggregate annual dividends ‘at least in line with inflation’.
And in the property sector, Civitas Social Housing (CSH) offers income from a UK portfolio of long-term, inflation-linked leases. The bulk of the portfolio is invested in housing for vulnerable adults with special needs, meaning the fund achieves a positive social impact by improving outcomes for residents while demonstrating value for money for the government.
INFLATION-BUSTING TRUSTS TO BUY
The Scottish American Investment Trust (SAIN) 470.3p
Dividend yield: 2.54%
We think it is worth paying a modest premium to access the acumen of the Toby Ross and James Dow-managed Scottish American Investment, which remains the best performing fund in its Global Equity Income peer group in NAV total return terms over the past five years.
SAINTS, as it’s otherwise known, delivered a net asset value total return (capital and income) of 14.5% for 2020, ahead of the total return from global equities of 13%, thanks to the resilience of many of its companies during the pandemic and a positive return from property investments with a high proportion of RPI-linked rents.
Over the last 10 years, SAINTS’ dividends have increased above the rate of inflation and though the portfolio was not completely immune from the Covid dividend crisis, its global mandate and focus on resilient businesses has proved its worth. ‘Every one of our 10 largest holdings increased their dividends in 2020,’ said SAINTS in its results statement.
Blackrock World Mining (BRWM) 591.5p
Historically, the mining sector has performed well on an absolute basis and relative to broader equity markets during periods of rising inflation and with a potential commodities super-cycle underway, BlackRock World Mining (BRWM) looks a good portfolio hedge against inflation. A diversified total return-focused trust, BlackRock World Mining invests in mining and metals assets worldwide.
Co-managers Evy Hambro and Olivia Markham point out that miners’ balance sheets are strong, earnings and dividends are rising while mined commodity supply has been impacted by Covid-related disruptions and inventories are low relative to history for most commodities. They expect commodity supply to be constrained by the underinvestment of recent years.
Meanwhile, commodity demand should continue to be buoyed by increased global infrastructure spend as governments seek to kick-start their economies. Longer term the transition to a lower carbon global economy should support demand for mined commodities used in industries such as electric vehicles.
Tritax Eurobox (EBOX) 103.5p
Logistics property investor Tritax EuroBox (BOXE) is a beneficiary of the acceleration of the adoption of e-commerce and the supply chain onshoring engendered by the pandemic. The Nick Preston-managed fund’s updated dividend policy now aims to deliver progressive, covered payments with the vast majority of rents either inflation-linked or subject to fixed uplifts.
And Tritax EuroBox recently reported a significant gain on the sale of one of its Polish assets, which impressed investors and sent its shares towards fresh highs. The divestment of the site in Lodz, to Savills Investment Management, saw Liberum Capital comment: ‘EuroBox trades at a considerable discount to European logistics peers and we expect a strong re-rating in the shares over 2021’.
This may be supported by a recently announced £173 million fundraise to buy big box warehouses in Germany and Italy. One drawback to consider is relatively high fees, despite a recent reduction, of 1.3% on the first €500 million of assets.
Primary Health Properties (PHP) 149.9p
Dividend yield: 4.2%
Investors seeking a secure, inflation-proofed yield underpinned by a government-backed income stream should buy Primary Health Properties (PHP). While the shares trade on a big premium they still offer generous dividends backed by investments in the structurally attractive health care facilities market. The portfolio, made up of 513 properties valued at £2.6 billion, is now managed internally after a restructuring in January 2021, reducing costs and complexity for investors. It has a strong pipeline of development and acquisition opportunities with 90% of its income funded by government bodies and the Covid-19 pandemic reinforcing the importance of providing health care outside of a hospital setting in order to ease capacity constraints. UK leases have effectively upward only rent reviews and leases in its Irish portfolio are linked to inflation.