Twin-track approach yields results

Peter Hewitt runs the F&C Managed Portfolio, which has delivered yields as a result of its structure - separate growth and income portfolios - and a bias towards emerging markets.

Discounts among UK Growth & Income investment trusts remain tighter than in any other sector, according to Winterflood Securities. The ability of older funds to draw on their revenue reserves to bolster dividend payments to shareholders has attracted investors to the peer group. The facility – which is not available to unit trusts and Oeics – allowed some funds to maintain their yields this year, despite lower payments from their underlying holdings and the temporary suspension of dividends by BP.

F&C Managed Portfolio offers an added attraction for yield-starved investors. Not only has the fund – an investment trust of investment trusts – benefited from the robust dividend stream of its underlying trust holdings, its structure enables it to boost its yield further. The portfolio has separate growth and income portfolios of about 30 holdings, both of which are run by Peter Hewitt, and dividends generated by the growth portion of the fund are transferred to the income portfolio.

”I’m trying to get exposure to interesting trusts with decent records and decent growth prospects”

In exchange, the growth portfolio receives a capital contribution for the same amount. The structure aims to boost yield distributions for income investors while enhancing capital returns for growth investors, by providing a cost and tax efficient means of reinvesting income. Hewitt says the fund, launched in April 2008, tidied up several F&C investment trust share plans and the 3,000 investors in the defunct plans largely supported the concept – about 95% of them rolled over into the new portfolios. (article continues below)

Hewitt says the structure is working well, boosting the yield of the income portfolio by about one percentage point, to over 4%. An indirect benefit, he adds, is that the income portfolio does not have to go “too far up the yield spectrum” and can include trusts with prospects for capital growth. Hewitt highlights Aberdeen Asian Income, Henderson Far East Income, Schroder Oriental Income and Utilico Emerging Markets as funds with yields of just 3-4%, but which have contributed to capital returns.

Emerging market strategies featured prominently in both portfolios at the end of September – the Aberdeen and Schroder trusts were among Hewitt’s top 10 income allocations, while Templeton Emerging Markets was the biggest holding in the growth portfolio. Hewitt says the holdings are part of a broader long-term theme of allocating overseas, and both portfolios hold most of their assets outside Britain. “In the long run sterling will be a weak currency,” he adds.

Five funds appear in both portfolios: British Assets, Lowland, Mercantile, Murray International and Perpetual Income & Growth, while BlackRock World Mining and BlackRock Commodities Income are run by the same team. Hewitt says James Henderson and Mark Barnett, who run Lowland and Perpetual Income & Growth respectively, are core managers in F&C Managed Portfolio – the fund also holds stakes in Henderson’s Law Debenture trust and Barnett’s Keystone vehicle.

Looking ahead, Hewitt is largely upbeat on stocks, relative to other asset classes. “Equities are better value than bonds,” he says. “There’s some mileage in high yield corporates but sovereign debt is not attractive. Property is very moderately attractive. With equities, because there’s some good earnings and dividend growth, valuations are not too stretched. So, in a volatile manner, I could easily see markets go through 6,000 and even a bit beyond that in 2011. It could be easily derailed by one crisis or another. But while there’s such uncertainty, it’s not a bad time to invest.”

Hewitt is also encouraged by demand for the trust. The board had to counterbalance initial selling from shareholders with an aggressive buyback policy. But the trust has been selling shares out of treasury this year, and on September 29 it announced that it had exhausted its reserves of income and growth shares. Hewitt says demand comes from F&C retail plans, and the consolidation of another share plan could increase the size of the trust “markedly” in 2011. The number of shareholders in the trust has risen to 6,000 over the past two years, with the biggest investor holding no more than 1%.

Despite this demand, Hewitt says a substantial fundraising to expand the trust’s investor base is unlikely. “Our shareholders are individuals or IFAs who’ve come on board,” he adds. “We’ll get steady demand, but not lumpy demand in £1m blocks.”