Which general IT to choose?

[bluedonkey]

bluedonkey

That exercise in itself has no doubt helped you refine your thoughts. Given the parameters you have set, from your list I would choose Temple Bar and Murray International. The first gives you exposure to the UK market, but better I think than say City of London, which is a sort of HYP in a wrapper, the second gives you international exposure from a very conservative manager in Bruce Stout. Not on your list but also worth looking at to meet your objectives, would be Henderson Far East. As the name implies less international than Murray International but a decent performer in a dynamic part of the world.

The premium/discount you will need to decide on but I think choice of vehicle is more important.

I may say that I hold all three.

Dod

I was quite taken aback when I looked up Henderson Far East Income. At first, pleasantly surprised to see a 6.2% yield combined with annual 5yr dividend growth rate of 4.2%. Then I noticed that the dividend cover is 0.79 years: presumably in individual share terms we would say that the dividend is not covered.

[Itsallaguess]

I was quite taken aback when I looked up Henderson Far East Income.

At first, pleasantly surprised to see a 6.2% yield combined with annual 5yr dividend growth rate of 4.2%.

Then I noticed that the dividend cover is 0.79 years: presumably in individual share terms we would say that the dividend is not covered.

I think this issue might be partially explained in the last half-yearly report from Henderson Far East Income, where they say this -

Revenue and Dividends

The portfolio’s dividend stream was very strong over the period with income from the stocks held rising 16.4% over the same period last year. This elevated performance was partly due to an increase in the number of special dividends received and is reflective of the amount of excess cash which is held on company balance sheets. Although these one off distributions may not be maintained at such a high level going forward this is a phenomenon which is likely to be repeated as companies reflect their strong capital positions and ongoing cash flow generation in their distributions to shareholders.

https://cdn.janushenderson.com/webdocs/ ... rt2019.pdf

Reading the above, I'm not sure HFEL can be blamed too much, as it seems that their current yield might include a number of potentially non-repeating specials from some of their underlying holdings, which might then explain the potential disparity between the underlying earnings of those holdings when compared to the historical dividends from them, including those specials, and perhaps resulting in that relatively low dividend-cover....

Is this simply a case of those specials being included in the 6.2% 'yield'?

If it is, this is why I would always prefer to ignore special dividends when considering income-investments, unless there is a specific reason why some repeated special payouts are likely to continue for many years.

I'd be interested in the views of any holders of Henderson Far East Income as to the legitimacy of the above explanation to the relatively low dividend cover?

Cheers,

Itsallaguess

[Dod101]

I was quite taken aback when I looked up Henderson Far East Income. At first, pleasantly surprised to see a 6.2% yield combined with annual 5yr dividend growth rate of 4.2%. Then I noticed that the dividend cover is 0.79 years: presumably in individual share terms we would say that the dividend is not covered.

I do not think we should say that. For the year to 31 August 2018, the Revenue was £26.9 million and the dividends paid was £26 million. There are in addition to the Revenue Reserves, Distributable Reserves from Realised Capital of £180.5 million, not that they look any where near having to draw on these.

Just relax and enjoy the dividend.

Dod

[mc2fool]

I was quite taken aback when I looked up Henderson Far East Income. At first, pleasantly surprised to see a 6.2% yield combined with annual 5yr dividend growth rate of 4.2%. Then I noticed that the dividend cover is 0.79 years: presumably in individual share terms we would say that the dividend is not covered.

No, it doesn't mean that at all. For "normal" companies, as you know, dividend cover is simply the ratio of the current year's earnings to dividends, so, anything more than 1 indicates that the dividend was covered by earnings and anything less that it wasn't. It is always simply expressed as just a numbner, without any units.

However, as ITs are required, by law, to pay out at least 85% of the earnings each year, that measure of dividend cover is (normally) never more than 1.176, and so is of limited use.

Instead, dividend cover for ITs is "the number of years that the current revenue reserves can provide the current financial year of dividends". https://www.theaic.co.uk/aic/glossary/d

In other words it's a measure of how much they've got stashed under the mattress in reserve that they can use to prop up future dividends in case they are uncovered by earnings. You can spot the difference 'cos the IT way of looking at dividend cover is expressed in years.

[bluedonkey]

It's all a little bit unclear.

The dividend cover figure of 0.79 came from the AIC website. This doesn't appear to cross check with either Dod's or mc2fool's definition. I'm stumped.

Specials: the dividends paid out by the IT in y/e 31.8.19 are consistent with previous years, allowing for some growth. It appears that the IT hasn't allowed the specials to flow through to dividend payouts therefore, and yet they are required by law to distribute at least 85% I'm told. Perhaps specials are excluded from the definition though I doubt that the legal requirement is that subtle.

Curiouser and curiouser. But yes,I would like to relax and enjoy the dividends!

[mc2fool]

It's all a little bit unclear.

The dividend cover figure of 0.79 came from the AIC website. This doesn't appear to cross check with either Dod's or mc2fool's definition.

My definition?!? Perhaps you missed (or didn't follow) the link to the AIC's website, which is where I copied their definition from!

Dod's post didn't include a £ figure for revenue reserves, so there's no cross check with his post that can be done.

If you look at where you found the figure on the AIC website, https://www.theaic.co.uk/companydata/0P00008ZSY, you will see that it's in a table that has Dividend cover (years) 0.79 and Revenue reserves (m) 23.58, and if you hover the mouse over Dividend cover you will get the full definition from their glossary, being:

The number of years that the current revenue reserves can provide the current financial year of dividends, including estimates or forecasts. Where companies publish retained earnings in place of revenue reserves, we cannot always publish this information. Please be aware that revenue reserves are taken from the company's annual accounts and this may not include the final dividend payment (if applicable), therefore the revenue reserves and dividend cover published may be higher than the actual cover following payment of the final dividend. https://www.theaic.co.uk/aic/glossary/d

[Villa]

I too bought Murray International (MYI) many years ago on a discount, but today I find the Capital value a little bit below what I paid, even though dividends have been good.

I’m not sure I want to pay the MYI fees anymore. I hold a Vanguard emerging markets sovereign debt fund (ticker VEMT) and I’m thinking of just combining that with an emerging markets ETF and ditching MYI.

I hold Bankers as my ‘core’ generalist international IT but the yield might be insufficient for the original poster.

[bluedonkey]

Perhaps you missed (or didn't follow) the link to the AIC's website, which is where I copied their definition from!

Dod's post didn't include a £ figure for revenue reserves, so there's no cross check with his post that can be done.

If you look at where you found the figure on the AIC website, https://www.theaic.co.uk/companydata/0P00008ZSY, you will see that it's in a table that has Dividend cover (years) 0.79 and Revenue reserves (m) 23.58, and if you hover the mouse over Dividend cover you will get the full definition from their glossary, being:

The number of years that the current revenue reserves can provide the current financial year of dividends, including estimates or forecasts. Where companies publish retained earnings in place of revenue reserves, we cannot always publish this information. Please be aware that revenue reserves are taken from the company's annual accounts and this may not include the final dividend payment (if applicable), therefore the revenue reserves and dividend cover published may be higher than the actual cover following payment of the final dividend. https://www.theaic.co.uk/aic/glossary/d

Thanks. I've now looked some more at the financials. The dps is less than the eps so I'm happy.

[bluedonkey]

I too bought Murray International (MYI) many years ago on a discount, but today I find the Capital value a little bit below what I paid, even though dividends have been good.

I’m not sure I want to pay the MYI fees anymore. I hold a Vanguard emerging markets sovereign debt fund (ticker VEMT) and I’m thinking of just combining that with an emerging markets ETF and ditching MYI.

I hold Bankers as my ‘core’ generalist international IT but the yield might be insufficient for the original poster.

Yes, ETFs. I'm attracted to ETFs as I have a lingering suspicion that fund managers have a veneer of cleverness that really just disguises what equities generally can do anyway without a manager. And the fees are low.

[Villa]

I hold Mercantile for FTSE250 exposure. It has not had a good time in the last couple of years (Brexit related uncertainty?), although now seems to be recovering...

However, I am thinking of just swapping it out for Vanguard’s FTSE 250 ETF (VMID) for the lower fees.

(My one spectacular IT has been Scottish Mortgage (SMT) but it’s not really an income proposition and has concentrated risks....)

[tjh290633]

However, I am thinking of just swapping it out for Vanguard’s FTSE 250 ETF (VMID) for the lower fees.

It's worth pointing out that you need to look at the performance of the two funds after fees, not just the level of fees.

TJH

[scotia]

However, I am thinking of just swapping it out for Vanguard’s FTSE 250 ETF (VMID) for the lower fees.

It's worth pointing out that you need to look at the performance of the two funds after fees, not just the level of fees.
TJH

I hold both - Mercantile is the more volatile, but is the better performer over an extended period. It has shot up suddenly over the past couple of months - helped by a decrease in its discount (from around 10% to 5%) . This (low) discount level is highly unusual for Mercantile - over the past 5 years its discount has averaged around the 10% level, and has only occasionally dropped to 7.5% for short periods. So I would be wary at the moment in adding to Mercantile.

[Lootman]

However, I am thinking of just swapping it out for Vanguard’s FTSE 250 ETF (VMID) for the lower fees.

It's worth pointing out that you need to look at the performance of the two funds after fees, not just the level of fees.

It's not just a matter of looking at performance either. You need to understand why, if the IT out-performed its benchmark index, how it did so.

So for instance was it because of gearing? If so expect it to go down faster if the market goes down.

Was it because its discount declined, as suggested? Again, that is a two-sided coin.

Did the manager take certain risks, that happened to work out but might not in the future?

The ETF's performance should be very close to the underlying index, since Vanguard ETFs have very low expenses and tracking errors. You can take a gamble on an individual manager beating that index, but understand that it is a gamble. Most of the return from any equity investment is beta, not alpha. so why not buy that beta for free (almost) with ETFs and then have a flutter on the side if you feel like it?

[Dod101]

However, I am thinking of just swapping it out for Vanguard’s FTSE 250 ETF (VMID) for the lower fees.

It's worth pointing out that you need to look at the performance of the two funds after fees, not just the level of fees.

It's not just a matter of looking at performance either. You need to understand why, if the IT out-performed its benchmark index, how it did so.

So for instance was it because of gearing? If so expect it to go down faster if the market goes down.

Was it because its discount declined, as suggested? Again, that is a two-sided coin.

Did the manager take certain risks, that happened to work out but might not in the future?

The ETF's performance should be very close to the underlying index, since Vanguard ETFs have very low expenses and tracking errors. You can take a gamble on an individual manager beating that index, but understand that it is a gamble. Most of the return from any equity investment is beta, not alpha. so why not buy that beta for free (almost) with ETFs and then have a flutter on the side if you feel like it?

OK so what you are saying is time in the market not timing the market is what is important and it really matters not much what you buy. I agree more or less, but I do think that at the stock selection level we can eliminate at least some of the obvious problems. A gamble on an individual manager may be what it is but sometimes it is an informed gamble, not with inside information, but just because he is ahead of the pack, or has some sort of intuition. It happens.

OTOH, of course reversion to the mean and all that that implies...........

Dod

[kempiejon]

Yes, ETFs. I'm attracted to ETFs as I have a lingering suspicion that fund managers have a veneer of cleverness that really just disguises what equities generally can do anyway without a manager. And the fees are low.

You said well up thread that you have a HYP, I guess mostly FTSE100 picks? With a mind to diversify away, Vanguard do an all world VWRL yielding about 2%, or an all world high yield VHYL offering 3.5%, the vanguard offering for the FTSE100 VUKE offers 4.8% yield (which might be too like your HYP) and the 250 version VMID on 3.14% a selection from some of that lot could give you 3%. Some ITs will out perform the market and ETFs will lag it after fees. Unlike ITs which can hold reserves of income to smooth returns in lean years I think ETFs distribute all their income.

I hold/held a few ITs like Murray's MYI & MUT, and Scotish Mortgage SMT and IAPD iShares Asia Pacific Dividend. I now prefer vanguard ETFs for my collectives.

[johnstevens77]

I hold several of the above including Dunedin since 2003. Dunedin was a dog for many years, flat dividend and of course no growth. Last year though the manager changed tack ditching high yielding mega caps in favour of FTSE250 Co's with better growth and prospects of dividend growth. The tactic seems to be paying off and I topped up for the first time ever this year with proceeds from top slicing Halma. 0.9% yield to 4.7% yield. Seems to have been a wise move so far.

john

[LooseCannon101]

I only hold F&C Investment Trust, starting around 20 years ago. The current director, Simon Fraser, said at the AGM a few years ago that its predominant characteristic is that it is 'One-Stop Shop'. I agree wholeheartedly.

Looking under the bonnet you will find a highly diversified world equity portfolio(450 companies) including some private equity and moderate gearing e.g. 10%. Their ISA savings plan is also cheap - £72 per annum

Any investment trust should be bought for the long term e.g. 10 years+, with a great deal of care taken in choosing the right one(s).

[DavidM13]

It's all a little bit unclear.

The dividend cover figure of 0.79 came from the AIC website. This doesn't appear to cross check with either Dod's or mc2fool's definition. I'm stumped.

Specials: the dividends paid out by the IT in y/e 31.8.19 are consistent with previous years, allowing for some growth. It appears that the IT hasn't allowed the specials to flow through to dividend payouts therefore, and yet they are required by law to distribute at least 85% I'm told. Perhaps specials are excluded from the definition though I doubt that the legal requirement is that subtle.

Curiouser and curiouser. But yes,I would like to relax and enjoy the dividends!

I can confirm that special dividends are excluded from the following calculations on the AIC site

1) 5y dividend growth rate
2) Dividend yield
3) Dividend cover (years)

Special dividends do of course form part of any price and NAV total return calculations.

Hope this helps.

[Avantegarde]

Any such IT should be better than investing in a cheap world tracker of some sort. By way of example, the 5-year total return on F&C and Bankers has been 97% and 91% respectively. Henderson International Income and Murray International have returned 75% and 44% respectively. By contrast, the L&G International Index tracker (which tracks a world index excluding the UK) has returned 84% in the past five years. So some general ITs have be a better investment than a tracker and some (many) have not. To add a bit more to the picture, the 5-year total return for City and Merchants has been comparatively rotten at 40% and 39% respectively.

[richfool]

Any such IT should be better than investing in a cheap world tracker of some sort. By way of example, the 5-year total return on F&C and Bankers has been 97% and 91% respectively. Henderson International Income and Murray International have returned 75% and 44% respectively. By contrast, the L&G International Index tracker (which tracks a world index excluding the UK) has returned 84% in the past five years. So some general ITs have be a better investment than a tracker and some (many) have not. To add a bit more to the picture, the 5-year total return for City and Merchants has been comparatively rotten at 40% and 39% respectively.

It's important to be sure, or at least aware whether you are comparing like with like (i.e. being careful that you aren't comparing apples with bananas scenario). (You are comparing the tracker with IT's in two different sectors).

Although noted you are looking at total return, it should be borne in mind, in the above examples, that F&C (FCIT) (1.5% yield) and Bankers (2.09% yield) are in the Global Growth sector, targeting growth more than income, and so have low yields. Whereas HINT and MYI are in the Global Growth & Income sector and thus pay higher dividend yields, - HINT (3.37% yield) and MYI (4.18% yield). Some investors may prefer to have the dividend income, some may be happy with the growth or total return.