With an average yield of 4%, performing marginally ahead of its open-ended counterpart, and currently trading on an average discount of 2.9%, the unloved AIC UK Equity Income sector is now looking an attractive option for income investors.
Riding the volatility
Meanwhile, trusts also have the tools to be able to save in revenue reserves during more positive years, and the ability to utilise this in moments of market weakness.
This allows managers to top up their dividend pay-outs when necessary, leading to a consistent pace of growth from the sector, unlike their open-ended equivalents, many of which
were removed from the sector for not meeting the yield requirements.
In their latest Equity Investment Companies update released last month, investment trust analysts at Numis Securities said: "Over the past couple of years, the sector's dividends have risen around 6% per year, which is a healthy pace of growth."
The team, headed by Charles Cade, highlighted names in the sector that are on its recommendations list for the year, including the £1.2bn Edinburgh Investment Trust, which is managed by Invesco's Mark Barnett and James Goldstone.
Cade said some investors had "inevitably lost faith with the team" as it is trading on a discount of 7.7%, but warned they should not "throw in the towel yet".
He added: "Barnett believes valuations of many stocks are pricing in a hard Brexit and a UK recession [which he feels is] extreme and so has been increasing domestic exposure.
"Just 27% of the FTSE All-Share's revenues come from the UK whereas the figure is closer to 50% for Edinburgh IT. This is encouraging as it shows the manager is willing to stick to his investment approach rather than move back towards the index. Some form of resolution to Brexit would probably see significant outperformance."
